Q1 2022 Align Technology Inc Earnings Call
Gardini welcomed.
Welcome to the <unk> Q1, 'twenty two earnings calls at this time all participants are in a listen only mode.
<unk> and answer session will follow the former presentation. Please note. This conference will be recorded I will now turn the conference over to your host Shirley Stacy would align technology you may begin.
Thank you. Good afternoon. Thank you for joining us I'm, Shirley Stacy Vice President of corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO and John Morici CFO , We issued first quarter 2022 financial results today via Globe Newswire, which is available on our website at Investor day, the 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 available today by approximately 530 P. M. Eastern time through 530 P. M. Eastern time on May 11th to access the telephone replay domestic callers should dial 866813940.
Three with access code 335004 international callers should dial nine to 94586194 using the same access code as.
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 form in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and at SEC Gov. Actual results may vary significantly and align expressly assumes no obligation to update any forward looking statements.
Posted historical financial statements, including the corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable and our first quarter 2022 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 an overview of our Q1 results and discuss the performance of our two operating segments systems and services and clear liners, John will provide more detail on our financial performance and our view for the remainder of the year following that I'll come back and summarize a few key points and open the call to question.
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Overall, the first quarter proved to be a tougher than expected operating environment globally, and we believe our results primarily reflect three key factors. The continued impact of COVID-19 weighs in every region and especially in China with its restrictions and lockdowns under their zero Covid policy.
A weaker economic environment, and waning consumer confidence driven by increasing inflationary pressures and supply chain disruptions.
And the military conflict in Ukraine, and fallout across Europe .
In addition, with approximately half of our business occurring outside the United States unfavorable foreign exchange rates negatively impacting our revenues margins and EPS.
Notwithstanding these headwinds Q1 dollars 22 to 122 total revenues of $973 2 million were up eight 8% year over year compared to Q1, 'twenty, one revenues of $894 million with a growth rate of 62% year over year, our Q1 'twenty two.
<unk> income was 198 million and operating margin was 24%.
In Q1 systems and service revenues were up 15, 6% year over year, but down 24% sequentially coming off our sixth consecutive quarter of sequential growth and record scanner and services revenue.
Sequential results, primarily reflect lower volumes from our aforementioned headwinds from seasonality is Q4 is historically, a stronger capital equipment sales quarter.
For Q1 clear Aligner revenues were up seven 5% year over year, reflecting revenue growth across regions and products were down slightly sequentially from Q4 and minus <unk>, 7%.
In the teens segment 175000 teens started treatment with Invisalign aligner is.
Up 6% year over year Invisalign first for kids as young as six years old grew sequentially year over year and was strong across all regions.
Q1, non case revenues, which include Doctor prescribed retention products clinical training and education and other dental consumables performed well and grew both year over year and sequentially.
Our Doctor subscription plan or DSP pilot was launched last year in the United States and Canada and it continues to ramp nicely driving strong revenue growth DSP is a monthly subscription program designed for a segment of experienced Invisalign doctors, who are not regularly using our retainers or low stage of liners were very.
Cited about the feedback and uptake, we're seeing and we will expand the program into other markets. This year.
Here are just a few things from doctors are saying about DSP, Dr. Zhu ferrous in Santa Barbara, California, We have shifted our retention model and workflow, we really like the material the fit and the precision of the product and having everything in alliance systems versus printing in house and having to maintain it ourselves.
Dr. Sandra tie in Vancouver, Canada. This program fits my business model very well unable to pass savings to patients now.
Now, let's turn to the specifics around the first quarter results starting with the Americas.
For Q1, Invisalign case volumes were down one 5% year over year on a sequential basis Americas case volumes were down four 3%, primarily reflecting the impact from the COVID-19, what are ways.
First experienced in North America, beginning in Q4, 'twenty, one and continue into Q1 and later in Latin America.
I think consumers customers staffing shortages in practice closures as well as decreased patient traffic and increased appointment cancellations.
The latest data from the gauge practice analysis tool that collection consolidates data from about 700, ortho practices covering more than a thousand orthodontists across 1600 locations in the United States and Canada showed weakening underlying patient demand trends in the first quarter for both adult and teens and across wires and brackets.
That's in clear aligner products, new patient visits were down seven 6% year over year and ortho starts were down seven 2% year over year.
And the DSO channel in Q1, 'twenty, two DSO practices grew faster than non DSO practices with utilization led by Heartland and smiled doctors earn.
Earlier this month, we announced the new DSO partnership with Dental Corp, Canada's largest and fastest growing network of dental practices dental CT plans to extend this offering of Invisalign brand clear aligner treatment to Canadians nationwide through its ortho acceleration program.
This strategic collaboration also provide dental corp's network of doctors across nearly 460 practices with access to enhanced benefits dedicated learning opportunities and treatment planning support for the Invisalign system.
Also this month, we launched a new Invisalign teen subscription program in the United States and Canada to help unlock the massive opportunity from teens orthodontics, which makes up approximately 75% of the 5 million annual case starts in North America.
Teens subscription program enables orthodontists to buy clear liners in case packs in advance.
Much like the way they buy wires and brackets today offering simpler and more predictable building for doctors.
It also includes exclusive practice development benefits with the Invisalign brand and requires an incremental volume commitment from doctors.
Timing of the new Teen program coincides with the beginning of the summer teen season, and we're excited to continue partnering with doctors to grow their practice with invisalign treatment with less than 10% share of <unk> of teen case starts the teens subscription program has the potential to help accelerate invisalign adoption in the largest segment of the orthodontic market.
Teens.
For our international business Q1, Invisalign case volumes were up 3% year over year.
On a sequential basis international case volumes were down six 1%, primarily reflecting the headwinds described earlier, especially the impact of COVID-19 restrictions and Lockdowns in China, and the fallout across Europe , when the military conflict in Ukraine.
For EMEA Q1, Invisalign case volumes were up two 1% year over year with core growth in our in.
In our core markets led by Italy, and in Germany, and dock, along with the growth expansion markets led by Turkey and MAA for.
For Q1 year over year Invisalign case volume in EMEA was driven by increased submissions primarily from the orthodontist channel, especially in the teen market.
During the quarter, we launched our first ever directed gene campaign in EMEA focused on educating teens about the benefits of invisalign treatment over traditional wires and brackets, increasing consumer demand as part of our wider teen growth plan combined with our parent of teen campaign.
And to help give teens critical influence in the parent decision by driving peer word of mouth.
More recently, we launched Invisalign go Express system. The latest addition to the Invisalign go portfolio for general dentists.
First launched in EMEA in 2016, as a 20 stage aligner treatment offering Invisalign go portfolio system is designed for general dentists to treat mild or moderate mile inclusions.
Trying to integrate tooth alignment into restorative and comprehensive dental care.
Additionally, building of our European manufacturing facility in Warsaw, Poland remains on track to go live this quarter, increasing our flexibility and timeliness and supporting our valued doctor customers across the EMEA region.
Turning to APAC for Q1, APAC Invisalign case volumes were up four 7% year over year with strength in the GP dentist channel primarily through increased Invisalign submissions with Invisalign go product and in the teen market with increased submissions from the orthodontic channel.
On a sequential basis APAC was down two 6%, reflecting a larger impact from surges in new COVID-19 cases that led to significant lockdowns in China, Alternatively, despite headwinds, Japan, and Taiwan performed well, we got strong growth in emerging markets like Korea, India, and Thailand on a year over year basis.
Earlier this month, we expanded the invisalign clear aligner product portfolio with new offerings that better serve the expanding market in China.
The two new products Invisalign adult and Invisalign standard clear liners are designed for more specific types of Mt inclusion cases, and private doctors and their patients with a more clinical and affordable options for moderate to complex cases.
Invisalign adult and Invisalign standard clear liners built on our proven technology for a wider range and scope of metal inclusion.
During the quarter, we announced new Invisalign and innovations for the align digital platform proprietary.
Combination of software systems and services designed to provide a seamless experience and workflow that integrates and connects all users doctors labs patients and consumers.
These new Invisalign innovations include clean check live update the Invisalign practice, App invisalign personalized plan or I P P and <unk>.
<unk> smile architect in the cone beam computed tomography see DCT integration feature for clean check digital treatment planning software.
These innovations will revolutionize digital treatment planning for orthodontics, and restorative dentistry by providing doctors with greater flexibility and real time treatment plant access and modification capabilities. Each of these innovations are designed to enhance invisalign treatment planning quality.
Efficiency and scale and contribute to a better doctor patient experience.
More recently, we introduced a new enhancement for the Invisalign system with Mandibular advancement feature.
The Invisalign system with Mandibular advancement is the only clinically proven clear aligner product in the world today that addresses class II correction with simultaneous alignment using.
Using feedback from customers, we've enhanced the original design with new enhanced precision wings that provide increased durability and comfort as well as great overlap to help ensure the aligner has remained seated and properly engaged to more effectively address class II inclusions and growing pre teen and teen patients.
Our consumer marketing focus on educating consumers about the invisalign system and driving that demand to invisalign doctor's offices, ultimately capitalizing on the massive market opportunity to transform 500 million smiles.
In Q1, we built on our successful and this is multimedia campaign across the Americas, EMEA and APAC driving awareness and interest in Invisalign treatment with adult gene and parent consumer segments.
Globally, we delivered strong impression volume.
With over $23 7 million visits to our websites 11, with a 1100, 13% year over year increase.
And over $7 8 billion impressions delivered representing a 32% year over year increase.
In the U S. We continue to amplify our campaigns across the top social platforms, such as Tictoc, Snapchat, Instagram and Youtube to increased awareness of Invisalign brand with young adults and teens.
Our campaign featured collaborations with some of the largest influencers and social media, including Charlie Damelio Lena <unk> Dev on key Michael Weil and Josh Richards.
Each of these creators shared their personal experiences with invisalign treatment and why they chose to transform their smiles with Invisalign aligner.
To continue growing our young adult business across the Americas, EMEA and APAC, we built upon our successful envisage the powerful thing campaign, which highlights how powerful this smile transformation with invisalign treatment can be for even young adults self confidence.
We leveraged top in fluor's like Liana Green, Atlanta, Candor and integrated media campaigns.
Further we are expanding our collaboration with Influencers globally and are excited to welcome Olympic Gold medalist SUNY, Lee and creators, Josh Richard I am rehab role and scar that serve as who have chosen to shape their smiles with invisalign treatment.
In the EMEA region, we accelerated our media investments across digital media platforms, including Youtube Tictoc meta and stopped yet and expanded our Invisalign smile squad roster with new Influencers.
We launched a pilot in the UK to reach teens with special campaigns to create awareness of the unique benefits of Invisalign treatment, our consumer campaigns delivered more than $8 8 million unique visitors to our website, representing 170% increase year over year with over $2 5 billion media impressions.
We continue to expand our investment in consumer advertising across the APAC region.
Excluding including China.
Resulting in a 278% increase year over year and unique visitors and a 265% year over year increase in impressions, we continue to strengthen our investments in Australia by expanding our reach via social media platforms, such as Tictoc net on Youtube in Japan, we.
We built upon our successful consumer campaigns by expanding into Twitter and continuing to see strong response from consumers as evidenced by a 373% increase in unique visitors to our site.
For our systems and services business Q1 revenues were up 15, 6% year over year, reflecting strong scanner shipments and services and down 24, 2% sequentially, primarily reflecting lower volumes from the previous mentioned headwinds in capital equipment seasonality.
During the quarter. We saw continued adoption of the <unk> element Fived D plus imaging system, we launched last year that features innovative technology like near infrared technology that we call <unk>.
Which agent the detection and monitoring of <unk>, it'll carry lesions or cavities without above the gingiva without harmful radiation.
A strong indicator of the digital adoption within dental offices is a number of intra oral scanners used for Invisalign case submissions total worldwide in oral digital scans submitted to start an invisalign case in Q1 increased to 87, 1% from 89% in Q1 last year.
International Innerwear digital scans for Invisalign case submissions increased to 83% up from 75% in Q1 last year.
For the Americas, 91% of Invisalign cases were submitted using an interval world digital scan compared to 85, 5% in Q1 of last year cumulatively over $54 9 million orthodontic scans and over $11 4 million restorative scans performed.
Performed with <unk> scanners.
During the quarter, the <unk> element Fived, plus when the best new imaging or Cadcam product from Dr. Bicuspid Dotcom.
Our cost of the award the award reflects our commitment to develop innovative solutions that help doctors transform lives by improving patient's journey to a healthy beautiful smile.
We are pleased to share that the <unk> element scanner receipts and Ortho town 2021 County Choice Award, which seeks to recognize the top peer recommended products and services in dentistry, we're proud that the <unk> element Fived plus imaging system provides dental practices with our latest in imaging technology cutting.
Hedge enhanced tier side, Visualizations and applications that can drive practice growth in treatment acceptance.
Growth in the <unk> scanner installed base is driving increased services revenues as well as XO CAD CAD Cam software solutions that integrate workflows to the dental labs and dental practices.
Our Q1, XO CAD Cadcam products and services, which include restorative dentistry implantology guided surgery and Smile design offerings are included and scanner and services revenues are helping extend our digital dental solutions and broaden the lines digital platform towards fully integrated interdisciplinary and Dan workflows.
As we continue to lead the evolution of digital worth of Donington restorative dentistry. Our goal is to make orthodontics a pillar of dentistry.
April 2nd marked our second anniversary since welcoming XO cat into the Aligner family together, we're working to ensure that every dental technician in every dentist planning restorative treatment considers a benefits of digital orthodontics first.
We're continuing to focus on integration and roadmap development to strengthen the align digital platform by addressing restorative needs to facilitate both ortho restorative and comprehensive dentistry.
Two years after extra CAD joined the line, we are more excited than ever about the opportunities ahead to shape, the dental industry and with technology and expertise that complement the many benefits of the line digital platform and bringing all key stakeholders together doctor customers Labs partners and users as we continue transforming smiles and changing.
Lives.
During the quarter ex Okay I participated in the 2022 dental South China show in Guangzhou, China showcasing its newest software release dental CAD three point O Galloway.
Other open software solutions like innovative smell design program called smell creator the show allowed the XO CAD team to deepen their relationships with the dental community discover new trends emerging in the growing dental market in China.
<unk> at both the experienced firsthand, how XO cads Wizard guided workflows and easy online communication programs streamlined the treatment journey from consultation to final restoration.
Finally, this quarter ex cat is opening its new headquarters in Seoul, South Korea, which provides a robust high tech infrastructure to a key region of our business extra cat has been working with a growing number of Korean manufacturers for many years and this location will help facilitate strategic relationships in the region with that I'll now turn over the call to John .
Thanks, Joe now for our Q1 financial results total revenues for the first quarter were $973 $2 million down five 6% from the prior quarter and up eight 8% from the corresponding quarter a year ago.
We're clear liners Q1 revenues of $809 $7 million were down 0.7% sequentially due to lower Invisalign case volumes, partially offset by higher asp's.
And up seven 5% year over year, reflecting higher asps and non case revenues.
Q1, Invisalign case volume were down five 1% sequentially and up 0.5% year over year. In addition, we shipped clear Aligner is 282 4000 Invisalign doctors worldwide.
Which over 5000 were first time customers.
Q1 comprehensive volume increased two 4% year over year and decreased 5% sequentially Q1, non comprehensive volume decreased 4% year over year and decreased five 4% sequentially Q1 adult patients decreased one 6% year over year and decreased five seven.
Sent sequentially in Q1 teens or younger patients increased 6% year over year and decreased three 6% sequentially.
Clear aligner.
Revenues were unfavorably impacted by foreign exchange of approximately $6 $5 million or approximately 0.8 points sequentially on a year over year basis clear aligner revenues were unfavorably impacted by foreign exchange of approximately $24 million or approximately 3.2 points.
For Q1, Invisalign comprehensive asp's increased sequentially and year over year.
On a sequential basis Invisalign comprehensive asps reflect.
Her order processing fees charged on most clear aligner shipments lower discounts and higher additional liners, partially offset by unfavorable foreign exchange on a year over year basis comprehensive asps reflect higher additional liners and per order processing fees.
The offset by unfavorable foreign exchange.
Q1, Invisalign non comprehensive asps increased sequentially.
Year over year on a sequential basis invisalign non comprehensive asps were favorably impacted by per order processing fees and lower discounts.
Partially offset by unfavorable foreign exchange.
On a year over year basis, Invisalign non comprehensive asps reflect per order processing fees higher additional liners, partially offset by foreign exchange.
They're aligner deferred revenues on the balance sheet increased $53 million or 5% sequentially and $307 $1 million or 38, 1% year over year and will be recognized as the additional liners are shipped.
Our systems and services revenue for the first quarter were $163 $5 million down 24, 2% sequentially and up 15, 6% year over year. The decrease sequentially can be attributed to lower ski scanner volume following a strong Q4 and consistent with seasonality in the capital equipment.
Business.
Coupled with the headwinds described earlier.
The increase year over year can be attributed to <unk>.
Increased services revenue from our larger installed base as well as slightly higher scanner volume.
Our systems and services deferred revenues on the balance sheet was up $16 $5 million or seven 2% sequentially and up $114 $9 million or 87, 6% year over year, primarily due to the increase in scanner Sears sales ended differed.
Deferral of service revenue included with our with the scanner purchase which will be recognized ratably over the service period.
Moving onto gross margin first quarter overall gross margin was 72, 9% up 0.7 points sequentially and down two eight points year over year.
On a non-GAAP basis, excluding stock based compensation expense and amortization of intangibles related to acquisitions. Overall gross margin was 73, 3% for the first quarter up 0.7 points sequentially and down two eight points year over year overall gross margin was unfavorably impacted by Approx.
<unk> 0.8 points on a year over year basis and by approximately.
0.2 points sequentially due to foreign exchange.
<unk> gross margin for the first quarter was.
74, 8% up <unk> six points sequentially due to higher asps, partially upset by higher mix of additional aligner volume and higher freight costs.
Gross margin was down two eight points year over year due to higher mix of additional aligner volume and higher freight costs, partially offset by higher asp's.
Systems and services gross margin for the first quarter was 63, 4% down 1.3 points sequentially due to lower volume and lower asps, partially offset by lower freight cost.
Systems and services gross margin was down two points year over year due to higher manufacturing inefficiencies or she upset by higher mix of service revenues and increased asps.
Q1, operating expenses were $511 $3 million down sequentially to 4% and up 13, 2% year over year on a sequential basis operating expenses were down $12 $4 million year over year operating expenses increased by $59 6 million.
Reflecting increased head count and our continued investment in marketing sales and R&D activities, and an and investments commensurate with business growth on a non-GAAP basis, excluding stock based compensation amortization of acquired intangibles related to certain acquisitions and.
And acquisition costs.
Operating expenses were $482 million.
Sequentially to 9% and up 13, 1% year over year due to the reasons described above.
Our first quarter operating income of $198 $1 million resulted in an operating margin of 24% down 1.1 point.
0.1, 0.1 point sequentially and down four eight points year over year the year over year decrease in operating margin is primarily attributed to lower gross margin investments in our go to market teams and technology as well as unfavorable impact from foreign exchange on a non-GAAP basis, which.
Excluding stock based compensation amortization of intangibles related to certain acquisitions and acquisition costs.
Margin for the first quarter was 24% down 0.7 points sequentially and down four six points year over year.
Interest and other income and expense net for the first quarter was a loss of $10 $6 million down sequentially by $9 $7 million and down year over year by $46 $8 million.
Q1 of 2021 included the SDC Arbitration award gain of $43 4 million.
The GAAP effective tax rate for the first quarter was 28, 4% compared to 13, 2% in the fourth quarter and 23, 4% in the first quarter of the prior year, our non-GAAP effective tax rate was 24, 2% in the first quarter compared to 11, 5% in the fourth quarter and two.
Eight 2% in the first quarter of the prior year, the first quarter GAAP and non-GAAP effective tax rates were higher than fourth quarter effective tax rate, primarily due to tax benefits related to expiration of statutes of limitations for timely asserting claims and an out of period adjustments recorded last quarter.
First quarter net income per diluted share was $1 70 down sequentially 70 cents and down 81 cents compared to the prior year. Our EPS was unfavorably impacted by 13 cents on a sequential basis and 28 cents on a year over year basis due to foreign exchange.
non-GAAP basis net income per diluted share was $2 13 for the first quarter down 70 cents sequentially and down 36 cents year over year.
Moving onto the balance sheet as of March 31, 2022, cash cash equivalents and short term and long term marketable securities were $1 $1 billion down sequentially $176 $1 million and down $11 1 million year over year.
Our $1 1 billion dollar balance.
$453 million was held in the U S and $667 $6 million was held by our international entities.
Q1 accounts receivable balance was $959 million up approximately 6% sequentially. Our overall days sales outstanding was 87 days up approximately nine days sequentially and up approximately 15 days as compared to Q1 last year cash.
Cash flow from operations for the first quarter was $35 million capital expenditures for the first quarter were $87 $3 million, primarily related to our continued investment to increase aligner manufacturing capacity and facilities free cash flow defined as cash flow from operations.
Less capital expenditures amounted to negative $56 $8 million.
In February we repurchased $75 million of our common stock through open market repurchases of approximately $143 6000 shares at an average price of $522.61 per share.
We have approximately $650 million remaining available for repurchase under our May 13th 2021 $1 billion repurchase program.
As described during our Q4 2021 earnings call, we provided our fiscal year 2022 outlook with revenue growth in line with our long term revenue range of 20% to 30%. This revenue growth assume no significant new COVID-19 surges. After the current wave no meaningful pre.
This disruptions nor material supply chain issues throughout the year.
At that time, we were seeing some recovery has omicron headwinds began to ease and COVID-19 restrictions were relaxing. However, later in the quarter unfavorable impacts on our business occurred driven by China, Lockdowns weaker consumer confidence inflationary pressures and the Russia, Ukraine conflict.
For April we have not seen momentum return as the headwinds previously mentioned persist now.
Now turning to full year 2022, we remain confident in the huge underpenetrated market, our technology and industry leadership, and our ability to execute and make progress toward our long term model of 20%, 30% revenue growth at the same time the headwinds were experiencing which include increased COVID-19 .
Waves and significant China, lockdowns weaker consumer confidence inflation pressures and the Russia, Ukraine conflict have increased uncertainty across all markets. We also anticipate capital equipment sales will be increasingly constrained throughout the year as practices adjust to these headwinds.
Given less visibility and then increasing unpredictable operating environment, we are not providing revenue guidance for the year. However, assuming no additional material disruptions or circumstances beyond our control our Gulf for physical.
2022 is to deliver GAAP operating margin above 20%, while making strategic investments in sales marketing R&D and operations in.
In addition, during Q2 'twenty, two we expect to repurchase up to $200 million of our common stock through either a combination of open market repurchases or an accelerated stock repurchase agreement.
For 2022, we expect our investments in capital expenditures to exceed $300 million capital expenditures primarily rate relate to.
Two building construction and improvement as well as additional manufacturing capacity.
Support our international expansion. This includes our investment in Indiana.
In an aligner fabrication facility in World Cup, Poland, which is expected to begin serving doctors in the second quarter of 2022 as part of our strategy to bring operational facilities closer to customers as we continue grow and we intend to expand our investments in research and development manufacturing treatment planning.
Sales and marketing operations to meet the actual and anticipated local and regional demands with that I'll turn it back over to Joe for final comments Joe.
Thanks, John .
Excuse me Joe Hogan are you there.
Operator.
Thanks, John .
I'll run by this again okay.
Michael.
Over our first quarter results reflect a more challenging environment than expected, we know that COVID-19 lockdowns weaker consumer competence inflationary pressures and the Russia, Ukraine conflict have created headwinds, but we remain excited and committed to realizing the enormous opportunity in front of us to lead the evolution of digital orthodontics and comprehensive dentistry.
With less than 10% share of the 21 million orthodontic case starts each year with over 500 million people globally, who can benefit from a healthy beautiful smile or market is as large as ever no. Other company is as well positioned as us to take advantage of that potential as the environment improves and growth trends return.
We will continue to focus on the execution of our strategic growth drivers, while managing investments in the near term to account for the headwinds and uncertainty and we remain confident in our long term revenue growth model of 20% to 30%.
Before we open the call to questions I wanted to address the military conflict in Ukraine, and our operations in Russia.
It's a human tragedy for all people involved and our thoughts go out to everyone impacted and especially to those with personal connections, who undoubtedly concerned with their families and loved ones.
Our primary concern remains the safety and security of our employees and their families. Our doctors their staff and patients we have nothing to do with this conflict.
As a global medical device provider of Doctor prescribed products continuity of care is critical to the doctors and their patients and orthodontic treatment. We discontinued commercial activities in Russia that are non essential to providing continuity of care to patients are focused on only a central activities is consistent.
With our values and ethical responsibility to patients in treatment.
In the process. We are also adhering to the international sanctions that have been imposed our it infrastructure.
Trucks, including code intellectual property is hosted outside of Russia.
Prior to the conflict, we have begun expanding our R&D teams in Darmstadt, Germany, Madrid, Spain, Toronto, Canada in Austin, Texas, and we are prudently working with the team on the ground in Russia on work visas a number of our Russian employees have already transitioned and are in various stages of transitioning their families to Armenia, where we have set up in <unk>.
Decenter in Europe and to support those who choose to relocate at.
At the same time, it's humbling to see the tremendous outpouring of kindness and support throughout the company as our employees responded a minute monetary and needs of the crisis.
Our Polish team members as set up donation centers at our facilities, where employees are contributing food clothing supplies and human care.
Many are also taking Ukrainian referenced refugees into their homes.
And we're proud of the tremendous initiative by our colleagues and are grateful for their actions in.
In addition to our employees efforts align is donating $300000 to support humanitarian relief efforts through organization, providing shelter food medicines and vital supplies.
We can only hope that the conflict in the Ukraine will end soon.
The ongoing impact of the pandemic will lessen for good and then economic factors facing many customers and consumers will abate, but these things are beyond our control. So we will continue to prioritize the health and safety of employees customers and patients and will stay focused on strategic initiatives.
In closing April 3rd marked the 25th anniversary of the founding of align technology and shortly thereafter, the launch of the Invisalign system.
Over the past 25 years, we've transformed the orthodontic industry with a passion for innovation as we've evolved from leading the evolution from digital appliances to digital platform. We've created an incredible company. Unlike any other in.
Invisalign is unique mass customization business operating in real time with no inventory or distribution at the front end of our market consequence of fluctuations in the macroeconomic environment are felt faster at align and ive ever experienced anywhere in my career and we monitor these trends to make adjustments in our business when needed.
Our success is a result of our vision and purpose and resolve thanks to our employees and our doctor customers around the world, who took a chance on a silicon valley startup and risked everything.
Today align is the largest three D printing operation in the world producing 1 million customize the liners. Each day based on the learnings gained from nearly 13 million invisalign patients and $60 million of Taro digital scans, a global team of over 25000 employees support more than 250000 doctors in labs and more.
150 countries.
There are more than 500 million people in the world that can benefit from orthodontic procedures, it's huge.
And you can only address opportunities of that size with digital orthodontics it could never happen using old analog methods as we digitize that capability. It has opened up a market.
Broadly fourth adani treatment to the masses.
It's hard to believe but after 25 years, we're still in the early phases of transforming the orthodontic market. We look forward to sharing more milestones over the next 25 years as we continue to lead the digital evolution of orthodontics and dentistry deliver great treatment outcomes and treatment experiences to doctors and patients around the world. Thank you for your time today I'll now turn.
Over to the operator for questions operator.
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The first question is from the line of Jason <unk> with Piper Sandler you May proceed.
Hi, Jason Hey, good afternoon, everyone.
Hey, there it makes for taking the questions. So Joe I guess just to start with you I mean, you and John called out consumer confidence items and inflationary pressures impacting the business.
The wind shifting pretty abruptly on your I guess are there tools you have at your disposal to manage through these pressures.
Or is this a matter of just keeping your head down and waiting for the macro environment has settled down I guess really just trying to get a sense of how we should be moderating expectations from what's typical sequential growth, we would see from the business.
Yeah, just a quick question I'd say, you know being a global business, we talked about having 50% of our revenues outside it just gives us good scope and they sent to take advantage of our opportunities are and so I feel really good about the company in that sense and we've made great development over the last three years from an international standpoint, you know we also have a great portfolio.
Arterial scanners, we talked about some reluctance in the sense that we saw at the end of the first quarter of some doctors to really commit to it but I mean that demand is still out there. When you look at Antero scanners are so underpenetrated still when you look at digital dentistry, and what the future really brings and so pushing that and pushing it in the right places and also you can see the expansion of our <unk>.
Our Invisalign technology, and what we're doing in different areas too. So you know.
I feel like we have a lot of levers that we can pull but we aren't constrained by these headwinds that we've seen and then obviously you will respect those in and make the kind of adjustments needed to make sure. This business stays on track, but look I love our portfolio a lot of our position I see a great future.
We'll manage our way through this thing.
Okay, Alright, that's helpful and then maybe shifting over to the margin side.
You're not stepping off the gas with spending I wouldn't expect you to give them the opportunity that you're you're talking about here today and you've talked about for quite some time, but I guess, you're still comfortable with that long term model of 25% plus operating margins I know, we've seen that for some select periods for the business, but is that the right margin level to think about for the business when you're driving towards that 20%.
Topline growth just is.
Can you truly balanced entered you are you do you have to sacrifice one for the other again thinking longer term here.
Well you know I think you know Jason honestly, I think we've managed that well over the years.
You can see how well we did last year and a sense of that operating profit has been squarely on top of that piece and I think we've managed it within that bandwidth very well. That's the current situation is not going to change that.
Alright, thanks, guys.
Yeah. Thank you guys.
Okay.
Thank you.
The next question is from the line of Jeff Johnson with Baird. You May proceed.
Hi, Jeff. Thank you Hey, guys. How are you. So Joe let me just pick up on that last point I mean, you said you've managed day, you know opex well over the years and that I guess, let me just be direct on it I mean, if if end markets are cyclically slowing that's kind of out of your control do you put the gas pedal down to the accelerator or do you say look theres not a whole.
But that is going to accomplish so I kind of protect margins here in the short run just whats your opex outlook kind of in the near term near to intermediate term I guess, given some of those macro uncertainty.
Yeah, Jeff it's more of the latter of your question. It's just you take off the accelerator and we know John and I know where to just it won't hurt the business and we continue to invest in innovation in different areas too, but there are several areas of.
Short term investment that aren't going to help us in this current crisis that will obviously lead into and make sure that we preserve margins as much as we can but with those investments yes, it'll be you know when we talked about the 20 plus percent on a GAAP basis. That's the tradeoff that we'll have we'll invest where we can see a return.
And based on the volume that we that we expect but deliver 20 plus percent op margin.
Yeah got it thanks, John and then a follow up question I guess, just you know on the gauge data you talked about down 7% case starts at ortho year to date I'm here and that's through our through our April not just got through March are but you know I don't get the whole gauge dataset, but what I've seen is that the adult data is worse than the teen data.
Which would make sense to me everybody sitting at home all the adult sitting home last year with the zoom effect going on at this point and stimulus checks hitting in pockets and all that so that all makes sense, but just you know what's the tenor.
In North America or in those markets that arent impacted by China, and Russia, Ukraine and that what's the tenor of the teens business and is the core that part of the business still doing better than you've just got real tough comps because all those adults were coming in last year as they were sitting at home and had nothing better to do than go get clear aligner.
Hey, Jeff It's Joe look the teen market Youre good to focus on that I mean, that's we look at that as a fairly secure market. You know obviously, it can move up and down but it won't have a you know the volatility in it have you seen any adult market and you're comparing it against last year is a good way to look at it you know given the zoom, a fact and things we've talked about before so when Jeff.
That's why you see us launching these teen products right now and getting ready from a summertime standpoint wanted to take advantage of that demand as much as we possibly can.
Especially in times like this we know the adult market is going to be pressured and I'm talking about the U S. Right now, but you know that's that's leave China out because China has a unique position in the sense of a lockdown that theyre going through but we're going to you're going to see us take the same tact in Europe also and you saw our teen volume in Europe was actually pretty good in the first quarter.
Yeah.
What about that teen volume in the U S. Joe.
So we you know we expect that teen volume to be good summer seasonality is a is there and.
You know, it's funny as a window for teams to really have they're they're they're they're teeth treated and we've known that here for years and that's why we prepared for teen season. This year honestly, Jeff I feel better about our positioning for teens in the United States and also in Europe . They have any time since I've been here with these team packs that we just talked about and how we'll go about it I think.
We're well positioned to make further penetration in the in the teen market versus wires and brackets.
Okay got it thanks guys.
Yeah. Thank you.
Thank you.
The next question is from the line of Jonathan Block with Stifel. You May proceed.
Hey, guys. Thanks.
Hey, guys.
Good good segue I'll start with the teen case packs and yeah. We picked up on that program right. After April quite honestly, Unfortunately, I'm old enough to remember your case pack programs internationally from like a decade ago and if I remember this correctly. It was just hard to collect if you would if someone did below their threshold and hopefully.
I'm, making some sense. So maybe just talk to US here you are going after it and youre going after for teens not overall youre launching it what's going to be different. This go round when someone commits to a 50 case pack or 100 case pack, let's go with 100. So you do E and you've Gotta go out there and say Hey look it's a use it or lose it.
We got to collect for you and then also just keep the tenor of the relationship or the goodwill the relationship intact, because now arguably they even have more options to go somewhere else versus what they were staring down a decade ago. So maybe if you could talk to that and just the timing behind kicking off the program I would be a great place to start.
So do you like in the line historian that's a good question.
To tell you I wasn't here when that happened in Europe , but its legendary here, but if you go back in time I think our business in Europe is less than 10 million back then okay. Now it's over $1 billion and I think the whole world much more acquainted with clear aligner someone it was back then we were really really pioneers at that point in time. If you look at our DSP program. It's basically the same thing they make commitments of how many liners.
They're going to buy over certain period of time, we haven't had any issues in DSP with having our customers regress or not making those those those benchmark. So we feel pretty good about where we are I mean, what we run into a few situations I think we will I think there'll be outliers and we'll deal with them in time.
Okay fair enough and just.
This is Mike go back towards sort of word Jason started a little there's going to be a lot of questions on 2022, and you know pulling the topline guidance. So let me just throw in a couple of things and we can sort of work through it you know I look back the past five years to six years. The first quarter was about 22% of total revenue and if you run that exercise for this year, you get about 11 or 12% year over year.
Revenue growth and you've got an incremental FX headwind. So yeah should we throw a dart at 10% and what's wrong with that thought process in getting to you know call. It low double digit 10, 12% top line growth for 'twenty two thanks guys.
Okay.
I think yeah, Hey, John this is John .
As we as we talked about at the last earnings there's a lot of changes that have that have happened in the marketplace and in the world and as a result of that.
We pulled the topline guidance until we get further clarity as to how things are going to it's going to shake out what we have committed to is being able to grow in a in a profitable way in a way that you would expect us to be to be responsible being at 20 plus percent, but but we've pulled that guidance.
You know because of the uncertainty.
You know John just to add to John's comments to us as we look at April versus March we haven't seen any momentum from an April standpoint, too and we start from that standpoint also.
Okay. That's helpful color. Thanks, guys.
Okay.
Thank you. The next question is from the line of Erin Wright with Morgan Stanley You May proceed.
Great Thanks, and the Americas, Hi, good to hear from you and so in the Americas can you parse out a little bit about what youre seeing in terms of macro headwinds compared to maybe some of the lingering COVID-19 impact and does it seem like some of it I mean, it doesn't seem like some of these cases are coming back from China, maybe on the kind of delays, but what.
Are you seeing in terms of the dynamics there.
Just trying to kind of parse out and last quarter, you did break out kind of a COVID-19 impact, but could you do that this quarter.
Yes.
It's hard to be very discreet in the sense of what that impact is Aaron but I'd say, we are you know obviously faced a staffing shortages and things are different doctors in the first part of the first quarter that affected us.
Say that drifted through to you know basically late February early March you know after that you can you know here if you watch the consumer confidence statistics in United States, they've gone down pretty dramatically and we started getting a lot of reports from our doctors is ah patients not saying no but patients thought is quick to say, yes, if they wanted treatment and we hear that both in the GP.
P segment North of Dawn excitement. So you could call out what you want to okay, but there will be some reticence in the marketplace to move forward with treatment and again, it's not binary side, everybody is saying no like in the heart of a deep recession or something we saw back in Oh seven of our Oh eight it's just more cautious this from people about their personal finances.
Okay, great. Thanks, and then on Asps for the balance of the year I guess, how should we be thinking about that and the levers I guess you can pull on that front.
Yeah. This is John from an overall ESP standpoint, we don't have any any you know anything unusual from a promotion standpoint or anything else that would affect us. Obviously, you know notwithstanding FX. We've seen you know unfavorable FX as we've gone through this year, so far but notwithstanding FX we want to.
Expect anything dramatically different from an ASP standpoint.
Okay, great. Thank you.
Thank you Sir.
Yeah.
Yeah.
Thank you.
The next question is from the line of Kevin Caliendo with UBS you May proceed.
Hi, Thanks for taking my call.
Hi.
So I guess the question I have is the first one is really why.
Why are the Doc add docks starts been so sluggish.
Is it demand driven is it.
Our competitive positioning is it.
I would just love to hear sort of why in the U S, especially the sort of Doc adds have been flattish for the last couple of quarters.
If theres anything if it's macro or micro or competitive.
Yeah.
Well I think I read your question I think you're asking if it's competitive because I've been pretty clear on what we'd been seeing around the globe in the United States from a macro standpoint, Kevin. So I'll just clean look from a competition standpoint, we don't see any major issue with competition in the sense of being a factor in this demand cycle when we're talking about.
Okay.
And.
When do we try to think about the impacts here that are driving.
All of this how much do you have you guys been able to ascertain how much of this is.
Economic driven.
We're talking about decision is taking longer than people being more hesitant and volumes being down how much of that is.
Economic versus Covid versus other.
Like have you been able to just parse out whats really driving it as a percentage is it mostly simply listen we're in an inflationary environment people don't have as much to spend consumers aren't spending as much broadly versus just an overall demand for.
Your product <unk> COVID-19 like those three things if you were to group them.
Yeah.
You know, Kevin our announcement and you know and the way we communicate to the marketplace. We talk about the huge market right. We're totally underpenetrated orthodontic segment less than 10% of 21 million case starts a year I'm talking about what we see through the 500 million patients. So there's not a lack of demand out there lack of opportunity there's not a competitive issue that we think is.
Affecting our our growth or our earnings and so you know obviously COVID-19 is part of this thing part of it we see an end.
And Europe was the Ukraine conflict Thats going on today.
I think you know significant amount of it is to is what we're seeing in our marketplaces to from a consumer standpoint, I can't put any weighted averages on these things to give you. An example, and I think.
If I compare to when we last talked to you at the first couple of days of February the way things have changed those those variables in that equation I think have changed pretty dramatically. So it's really hard to say going forward with what that might be.
Are there any goals that you have one last one for me are there any goals that you have for this year in terms of quantifiable goals in terms of.
Whether it would be Doc adds or.
Utilization uptick or I mean, I know those are the things you were focused on when you talked about increasing your spend.
Or what what could you what are you targeting at this point is there anything that we can sort of put put a stick in the ground and say, okay. Here's something that the company is hoping to achieve in 2022 in terms of a quantifiable number.
Okay.
Kevin You know this is a growth company and it never leaves our thought process. So what are we trying to do we're trying to run the play we always do we're running at these plays in a much more difficult market with more headwinds that's all and so it will move these plays around we'll look at them by country, we'll see what makes the most sense, but we still keep a good strong focus on how we can grow and where we can grow in.
We'll find those waste.
I appreciate it thanks guys.
Yeah. Thanks, Kevin.
Thank you.
The next question is from the line of Michael Weinstein.
And Bank of America, you May proceed.
Great. Thanks for taking the question guys.
Hum.
To me, Michael I wanted to touch on.
Hi, Jeremy.
Yep.
Okay great.
One is just sort of talking through some of the dynamics. We're talking to you you talked of for the quarter.
We can all kind of see that a lot of it or.
A lot of macro driven a lot of its global driven and each of these events that were falling whether it's in China walk downs of the conflict in Europe , or you know or even things like FX are going to be more temporary than others.
You know I know your long term outlook is still there for the 20 to 30, some volume growth and revenue growth.
But what about sort of catch up spend on these things is there is there an expectation somewhere and you kind of touched on this when you talked about your spend and your expectations on on investment this year.
As we go through the next couple of months next couple of quarters and some of these things start to fade are you expecting another bolus of catch up as these cases come back like we saw in 2020 in 2021 anything you can comment on that.
A follow up.
I think I bolus, you talked about I mean that was interesting is you know what we saw after the last downturn. It was first like Covid.
I look at that you know Mike overall is this just shows you the demand out there for are kind of procedures. So it's there and so on.
You know John and I are sitting here at predicting another bolus or a wave or whatever but I think it just shows you the demand that exists in this business and it can be pent up at times or this have to see how the headwinds that we see filter through the marketplace and how it affects consumers and doctors.
Okay I appreciate that and then the follow up you touched on this in an answer earlier when you sort of referenced the 2007 2008 downturn.
Hopefully, we're not going to something quite like that in the coming year or two but there is still a lot of talk about recession and sort of what the impact of prolonged inflation is going to be on the consumer could you talk us through your plans if things do continue to deteriorate on that front.
We're not there yet but six months from now a year from now if things are still heading in that direction sort of what are your internal internal plans for adjusting both on operations side, how we use sort of positioning yourself for growth and that kind of environment. Because if we look back at 2708 and I know there was it was a protracted period of essentially flat.
Growth.
So.
Could you compare hey, Mike It's Ed.
Yeah, It's Joe again.
We haven't really strong balance sheet to start with you know it's great to have a strong balance sheet and really no net debt from a company standpoint, So look I don't I'm, not an economist, but I'm not predicting a meltdown of our financial system like we saw in 2007 2008.
It depending on what you know federal reserve does or whatever you know probably going to see an adjustment as they try to attack inflation. So look you know this business is incredibly healthy it generates a lot of cash.
Extremely international now and we have a lot of levers to pull a lot of things to do to keep this business going so and but if something dire did happen and I feel we've got a balance sheet to be able to cover too and we'll manage the business responsibly that way. So I just thought you don't give up on us okay.
This business, we you know we love the position that it's in and we're confident about the future was going to see how these headwinds hit and how they subside and we'll be ready on either end of that to be able to position. This company to do well.
And I might add just we are a different business than we were.
Back in 2007, 2008, we didn't have I taro, we have vitaros much more of a global business.
Big better products.
Much further along in the teen market more consumer awareness all the things that we've done over this time period now being 25 years.
We've evolved over time and created a business, where we were very mindful of what is happening from a demand standpoint, and we can do a lot of things from a lever standpoint in order to drive that right amount of profitability.
Alright, thank you.
Thanks, Mike.
Okay.
Thank you.
The next question is from the line of Nathan Rich with Goldman Sachs. You May proceed.
Hi, Thanks for the questions.
Wanted to fault Hi, I wanted to follow up on your commentary on April and you know not seeing momentum return I was just wondering if theres any parameters you could put around that relative to maybe what you've seen in the first quarter. I guess like you know what would that sort of mean volumes along with more.
Flattish.
Anything that you could do to kind of help us think about how the business kind of exited the first quarter and where the current run rate is would be helpful.
Yeah, maybe I'll give you a quick quick rundown and John can give you specifics too as.
You know look we this is flattish to use your term when you look at between March and April was more flattish than anything but just remember you know we have China still our second biggest country in the world is locked down Shanghai Beijing is going into lock down and that's not the first lock down we've seen in China remember theres several provinces that were locked down before that too so that pause.
Our businesses is really been impacted in a big way and that's part of that flattish. This that we're talking about too so.
We're seeing an impact in every region of the world, but in different ways and on the APAC side, particularly with China.
Dramatic.
Right.
I don't have much if anything to add to it just you know a lot has changed as we've seen over the last couple of months and we're responding to that change.
Makes sense and I guess.
I'd be curious just to get your thoughts on sort of the the consumer environment I know, it's been touched on in other questions but.
Invisalign treatment has a higher ticket purchase and you know we've kind of always thought of it as catering to a more affluent consumer I guess is there anything that you've seen kind of between a higher end consumer versus lower end consumer and there are you know.
Going back to I think the way you framed it kind of the reticence to start treatment any difference that you've seen among maybe the different segments of the population that could be considering treatment.
I comment that it is back to the other question was asked about teens right. The team aspect and orthodontic segment is pretty resilient and that has a certain demographic that has always existed in the sense of the parents that he can afford that kind of treatment for young children. The adult segment, it's all over the place depending on some.
Times, its just teeth straightening summertime.
Broad orthodontic correction on what's going on we don't have any data in that adult segment to say that.
Got it.
Certain FICO score a certain much certain amount would be fewer people taking treatment or whatever.
You know I I I I don't have that data I don't know if John seen it either but you'd have to guess that the more your finances are impacted less youre going to sign up for $3500 to 7000 water treatment, depending on you know what you want or you know.
How are you going to contract for it so.
It's logical that certain demographics would be less willing at this point in time.
Thanks Nate.
Operator, we'll take one more question please.
Absolutely.
The next question is from the line of Elizabeth Anderson with Evercore ISI.
You May proceed.
Hi, guys. Thanks, so much for the question.
So we do one question on the I tunes scanner gross yeah, obviously, we saw deceleration quarter over quarter, but still year over year growth. There. When you sort of talk about how providers are looking at demand and I realized that not all of that is like pure like I Taro sales.
How do we think about sort of what's driving the purchases in the first quarter. Obviously, there is some seasonality, but if you like overall visits you know maybe ex clear liners are not quite hasn't maybe haven't been quite as impacted or are we seeing sort of a reticence to spend is it sort of interest rates going up and people worried about sort of.
Equipment financing could you walk us through some of the puts and takes of the demand drivers there.
Elizabeth It's show you know I'd start with you know there's still the market is broadly on you know on penetrated from a scanner standpoint, a GP side. The ortho side, you know an ortho that does a lot of invisalign. They can out 456 scanners you know overall, so you know.
Looking at G health care for years, ABB I understand the capital equipment cycle. There is a true cycle in capital equipment.
But you know when people get concerned they'll delay those kinds of purchases and I think you know obviously, we have what I would talk about 250000 doctors that we service today.
Some of them are going to be worried about what their cash flow is going to look like they're going to be reticent in the sense of saying they want to sign up for you know a scanner that can cost anywhere between 15 to $35000 right now and what we sell so I can't tell you by country or by region or whatever but we didn't see things shut off we just saw things as the quarter got through.
<unk>. They just didn't have as strong as demand for <unk> than we anticipated. So we'll have to obviously get into this quarter, we'll continue to watch it and see which way it goes but there's going to be some more scrutiny I think around capital investment if doctors are seeing less traffic through their practices.
The delays that they they put to not closed and this necessarily within the quarter, it's not going away, but it's just a delay and we have to work to try to get them to say yes.
Got it and you're not having any like supply chain issues on that side in terms of like you know.
Being able to manufacture the equipment.
We didn't have any in the first quarter, we won't have any in the second quarter either.
Okay, and one more quick follow up in terms of the gross margin impact of the new Poland facility can you remind us about the cadence of the gross margin pressure when you open a new facility as it scales I'm, just trying to be able to parse that out versus maybe some of the deleveraging impact of of some of the volume shifts versus not.
Yeah Elizabeth what we'll see is we'll go we'll go live in the second quarter here and that does have a gross margin impact it really comes down to trying to get as much utilization through the plant as possible converted move in those countries and doctors through the plant and then once that utilization increases then you start to see some of that productivity. So it hits about.
A quarter, maybe a little bit more than a quarter and then it subsides and then it gets more of a I'm not on a regular operating basis.
Got it thank you very much.
Thanks Elizabeth.
Well. Thank you everyone for joining us today. This concludes.
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Okay.
This concludes today's conference you May now disconnect. Your line at this time. Thank you for your participation.