Q2 2022 Align Technology Inc Earnings Call
Greetings welcome to the Hawaiian Q2, 'twenty two earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note. This conference is being recorded.
I will now turn the conference over to your host Shirley Stacy with align technology you may begin.
Good afternoon, and thank you for joining us I'm, Shirley Stacy Vice President of corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO and John Morici CFO , We issued second quarter 2022 financial results today via business wire, which is available on our website at investor data line check Dot com.
Today's conference call is being audio webcast and will be archived on our website for approximately one month.
A phone replay will be available today by approximately 530 P. M. Eastern time through 530 P. M. Eastern time on August 10, Jack.
To access the telephone replay domestic callers should dial 8668139403 with access code 1378 to nine international callers should dial nine to 94586194 using the same access code as a reminder, the information provided and discussed today will.
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 available on our website and at SEC Gov actual results may vary significantly.
And align expressly assumes no obligation to update any forward looking statement.
We have posted historical financial statements, including the corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable and our second quarter 2022 conference call slides on our website under quarterly results. Please refer to these files for more detailed information and with that I'd like to turn the call over to align technology's president and see.
Joe Hogan Joe.
Thanks, Shirley good afternoon, and thanks for joining us on our call today I'll provide an overview of our Q2 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 questions.
<unk>.
I'm pleased to report solid second quarter results with top line revenue is relatively unchanged from Q1 and operating margin of approximately 20% despite unfavorable foreign exchange.
The underlying market for <unk> continues to be impacted by macroeconomic environment factors and lingering effects of COVID-19 variance in certain markets.
Withstanding these headwinds we remain focused on achieving our strategic initiatives, including opening new offices in the middle East and Africa, and our new manufacturing facility in Poland, launching new solutions to better support the way our customers want to do business such as the Doctor So subscription program.
And tnk's packs and announcing new products and innovation to help our doctors and their patients. These new innovations are revolutionizing the digital treatment planning and helping to drive the evolution of digital orthodontics and comprehensive dentistry.
Your line is well positioned to withstand the current market conditions to lead a digital revolution in orthodontics and dentistry as the environment and good growth trends improve.
For systems and services Q2 revenues were up four 7% sequentially and up slightly year over year compared to Q2 21 year over year growth of 215%.
Q2 services and systems revenues increased sequentially, driven by scanner volume growth in the Americas, and APAC, partially offset by lower volume in EMEA and unfavorable impact of foreign exchange.
<unk> element Fived imaging system continues to represent the majority of our scanner volume as doctors recognize the benefits of going digital.
In APAC, the <unk> entry level flex scanner offering was up sequentially in Q2, reflecting increased adoption.
I'm also pleased with sequentially increasing services revenues in Q2, reflecting growth from the installed base services revenues represent approximately 40% of our systems and services business.
For our clear Aligner segment, Q2 revenues were down slightly sequentially and down five 1% year over year compared to our Q2 'twenty one record year over year revenue growth of 182%.
For the quarter Q2, clear aligner volumes reflect sequential growth across the Americas and parts of EMEA, partially offset by China and U K.
Q2, Invisalign case starts for teens and younger patients was 177, 3000 and up slightly sequentially and down two 1% year over year compared to Q2 last year. When our 10-K shipments growth rate was an all time high for.
For Q2, Invisalign first for kids as young as six years old grew year over year and was strong across all regions.
During Q2, we introduced Invisalign teen packs in the U S and Canada, and France, the impacts of our new subscription program, which enables orthodontists to buy clear liners and packs in advance.
Similar to the way they buy wires and brackets today are tnk's back simplify the ordering process and make the billing more predictable for doctors Tnk's packs also include exclusive practice development benefits with the Invisalign brand and requires an incremental volume commitment from doctors to date enrollment has been encouraging with early adoption.
Highest among doctors, who have not historically used invisalign of liners to treat <unk> patients.
For other non case revenues, which include retention products, such as the Werra retainers clinical training and education accessories, ecommerce and our new subscription programs such as our DSP revenues were up both sequentially and year over year for retainers Q2 shipments you had strong momentum with sequential and year over year growth across all regions.
Driven by both submitters and utilization.
Momentum in our Doctor subscription program continued in Q2 revenues increased over 60% sequentially.
Now, let's turn to the specifics around our second quarter results starting with the Americas.
For the Americas region, Q2, Invisalign case volumes were up sequentially, reflecting increased submissions from the orthodontic channel and increased utilization from the GP channel.
From a productive sand from a product standpoint, Q2 sequential Invisalign case growth reflects increases in both comprehensive and non comprehensive products, including Invisalign first and Invisalign moderate Q2 also benefited from increased utilization and the DSO channel.
For our international clear liners Q2, Invisalign case volumes were down one 7% sequentially, primarily as a result of the headwinds described previously.
For EMEA, our Q2, Invisalign case volumes were down slightly primarily reflecting a slight increase in Iberia, and Italy, offset primarily by slightly lower sequential volumes in the UK and France.
For Q2 expansion market shipments declined sequentially.
Q2, Invisalign teen patients increased sequentially driven by an increase in the number of doctors submitting teen cases.
Turning to APAC Invisalign case volumes were down slightly reflecting a full quarter effect of continued lockdowns in China for.
For Q2, Taiwan, Hong Kong, Japan, and India performed well during the quarter on.
On a year over year basis, Invisalign case shipments growth was strong in Japan, India, Taiwan, Thailand, and Korea. The APAC Teen case volume increased year over year, primarily driven by increased Doctor Submitters.
Turning to new innovations the ally in digital platform is an integrated suite of proprietary technologies and services delivered as a seamless end to end solution to customers that connects all users doctors labs patients and consumers to transfer of smiles and change lives our technology advancements help our doctor customers.
<unk> deliver superior clinical outcomes treatment efficiency and also superior patient experience.
In Q2, we introduced Invisalign outcome simulator pro and con being computed tomography systems integration for clean check software building on several new innovations announced last quarter that we'll begin rolling out across the regions in August .
Invisalign outcome simulator pro the next generation patient communication tool that empowers doctors to help patients visualize their potential new smile. After invisalign treatment use in face visualization and three D. Dentition view all done chair side in minutes.
<unk> being computed tomography systems or what we call <unk> integration for clinics to software is designed to deliver a complete view of a patient's routes crown and job one <unk> integration for <unk> software enables doctors to confidently deliver a more informed invisalign clear aligner treatment plan for a wide range of cases.
The user friendly interface makes it easy for doctors to see their patients route crown in jawbone and one automatically digitally fused <unk> model. This allows doctors to tailor the treatment plan based on their experience and their patients' needs <unk> integration for <unk> software gives doctors to control and confidence to expand treatment planning.
To a broad range of Mal inclusions, including surgical restorative expansion extraction as well as teen cases with impacted our uninterrupted teeth.
While it is still early in the commercialization of these new products initial feedback from doctors is encouraging we're excited to begin scaling them across our customer base in the second half of 2022.
Also during the quarter, we awarded 11, new research grants totaling $275000 to universities around the world.
Our annual research rewards program.
We help advance orthodontic and dental research furthering our commitment to the future of digital orthodontics and restorative dentistry.
Our consumer marketing focus on educating consumers about the invisalign system and driving that demand for Invisalign doctors offices.
Ultimately capitalizing on the massive market opportunity to transform 500.
500 million smiles.
For Q2, we had over $16 2 million visits to our websites a 15% year over year increase and delivered over $6 3 billion impressions. Both metrics were lower versus Q1, as we chose to right size our size of media spend in Q2, given the macroeconomic environment.
During the quarter, we built on our successful and this is multimedia campaign and launched in the U S. The next evolution with two new campaigns envisage drama free targeted teens and this is when everything clicks targeted at adults.
Our envisaged drama free campaign highlights the benefits of Invisalign treatment, while Humerous League juxtaposing teens with a significant hassles involved with using braces Arens is is when everything clicks campaign showcases invisalign treatment transforming smiles and the resulting confidence it gives to young adults both campaigns will be rolled out to <unk>.
It's around the world in Q3.
At Boston up our consumer patient at my Invisalign continued increase with $1 8 million downloads to date.
Usage of our four digital tools continues to increase for example in.
This line virtual appointment tool was used over 12000 times and our insurance verification feature was used 36000 tonnes in Q2.
Further we received more than 91000 pay.
Patient photos and our virtual care feature globally, which continues to provide us with rich data to leverage.
Artificial intelligence capabilities and improve our services for doctors and patients additional consumer demand metrics are included in our Q2 earnings slides posted on our website.
We are pleased with our Q2 systems and services revenues, which were up 5% sequentially and up 1% year over year Q2 sequential growth primarily reflects higher scanner volumes in the Americas, and APAC and increased subscriptions.
Year over year results primarily reflect.
Reflect increased scanner revenues in the Americas offset by lower volume in APAC. It.
And in EMEA.
Growth of our <unk> scanner installed base is driving an increase in services revenue on a year over year basis systems and services growth reflects increased service revenues from our largest scanner installed base higher subscription revenues and increased sales of scanner once leaves.
The number of inner World digital scans use for Invisalign case submissions in Q2 reflect continued adoption of our digital scanners and our larger installed base.
It'll worldwide inner World digital scans submitted to start an Invisalign case in Q2 increased 88, 4% from 82, 2% in Q2 of last year.
International in a rural digital scanners for Invisalign case submissions increased 84, 4% up from 76, 2% in Q2 of last year.
For the Americas 91, 4% of Invisalign cases were submitted using an oral digital scan compared to 87% in Q2 last year.
Cumulatively over 64 million orthodontic scans and over $12 6 million restorative scans have been performed with <unk> scanners.
Our Q2, XO CAD Cadcam products and services, which include restorative dentistry implantology guided surgery and Smile design offerings are included in our systems and services revenue extra CAD products and services are helping extend our digital dental solutions and broaden the align digital platform towards fully.
<unk> interdisciplinary end to end workflows during.
During the quarter extra category these dental CAD three.
Three one <unk>.
And the new powerful lab software with which saves design time that offers more intuitive workflows, along the designs or any from CAD. Cam. In addition, the release the extra CAD released launched the new my ex cat portal, introducing mandatory end user software used registration that for the first time allows extra CAD to collect information.
About who and how customers are using our software.
This expands the opportunities for future product improvements also during the quarter, we signed a new long term contract with <unk> largest customer arming gearbox.
Strengthening our relationship.
Finally, we continue to execute our strategy of geographic expansion.
In June our European manufacturing facility in Warsaw, Poland, again manufacturing clear liners for the EMEA region locally for the first time. We also continued our operational expansion in Poland with our latest treatment planning facility.
Our expanded operation in Poland supports Invisalign doctors in local languages increases, our flexibility and timeliness and supporting our doctor customers across the region and we expect will positively influence the quality and time of preparation of the <unk> treatment plans and provide our doctor customers with benefits of digital orthodontics with the Invisalign system.
We are uniquely positioned with manufacturing and treatment planning in all three regions and no. Other clear aligner manufacturer has a global footprint and capabilities with that I'll now turn the call over to John .
Thanks, Joe now for our Q2 financial results total revenues for the second quarter were 969 6 million DAU.
<unk>, 4% from the prior quarter and down four 1% from the corresponding quarter a year ago. This is compared to Q2 'twenty one revenues of $1 billion, which had a year over year growth rate of 186, 9% for.
But clear liners Q2 revenues of $798 $4 million were down one 4% sequentially.
Due primarily to product mix and unfavorable foreign exchange, partially offset by higher noncash revenues and down by 1% year over year, primarily reflecting lower volumes unfavorable impact from foreign exchange and product mix shift, partially offset by higher additional liners per order processing fees.
At a high and higher non case revenues.
Q2, 'twenty two clear lighter revenues were unfavorably impacted by foreign exchange of approximately $12 3 million or approximately one 5% sequentially and approximately $32 9 million or.
<unk>, 4% year over year for.
For Q2, Invisalign comprehensive asps decreased sequentially and increased year over year on a sequential basis. The decline in comprehensive asps reflect higher discounts and unfavorable impact from foreign exchange, partially offset by higher additional liners on a year over year basis higher comprehensive asps.
To reflect the impact of higher additional liners and per order processing fees, partially offset by the impact of unfavorable foreign exchange and higher discounts Q.
Q2, Invisalign non comprehensive asps increased sequentially and year over year.
On a sequential basis invisalign non comprehensive asps were favorably impacted by lower discounts, partially offset by product mix and unfavorable foreign exchange.
On a year over year basis.
Higher invisalign non comprehensive asps reflect lower discounts per order processing fees and higher additional liners, partially offset by the impact of unfavorable foreign exchange and product mix shift.
Clear aligner deferred revenues on the balance sheet increased $25 $4 million or two 3% sequentially and $231 million or up 25, 5% year over year and will be recognized as the additional liners are shipped.
Q2, 'twenty two systems at services revenue of $171 $2 million were up four 7% sequentially, primarily due to higher scanner volume and ASP.
Were up slightly by <unk>, 8% year over year, primarily for.
Higher services revenues from our larger installed base, partially offset by lower scatter volume at lower Asps.
Systems and services revenue were unfavorably impacted by foreign exchange of approximately $2 9 million or approximately one 7% sequentially.
On a year over year basis system and services revenue were unfavorably impacted by foreign exchange of approximately $7 million or approximately three 9%.
Systems and services deferred revenues on the balance sheet was $13 3 million or five 4% sequentially and up $99 $6 million.
Or 62, 3% year over year, primarily due to the increase in scanner sales and the deferral of service revenues included with the scanner purchase which will be recognized ratably over the service period.
Moving onto gross margin second quarter overall gross margin was 79% down two points sequentially and down four one points year over year overall gross margin was unfavorably impacted by approximately 0.5 points sequentially and one one points on a year over base year over year basis due to foreign exchange.
Change clear.
Clear Aligner gross margin for the second quarter was 73, 3% down one five points sequentially due to lower asps and higher freight costs.
<unk> gross margin was down three six points year over year due to a higher mix of additional aligner volume higher freight and manufacturing spend partially offset by higher asp's.
Systems and services gross margin for the second quarter was 59, 8% down three six points sequentially due to higher manufacturing variances and freight costs, partially offset by higher asps.
Systems and services gross margin was down six one points year over year due to lower asps and higher manufacturing variances, partially offset by higher service mix.
Q2, operating expenses were $499 $4 million down sequentially to 3% and up 2% year over year on a sequential basis operating expenses were down by $11 $9 million, mainly due to lower incentive compensation and controlled spend on advertising.
Marketing as part of our efforts to proactively manage costs year over year operating expenses increased by $9 $7 million, reflecting our continued investment in marketing sales and R&D activities and investments commensurate with business growth.
On a non-GAAP basis, excluding stock based compensation amortization of acquired intangibles related to certain acquisitions and acquisition costs operating expenses were $466 million down sequentially, 3% and up 1% year over year.
Our second quarter operating income of $188 2 million resulted in an operating margin of 19, 4% down <unk> nine points sequentially and down seven two points year over year operating margin was unfavorably impacted by approximately $1 one point sequentially due to foreign exchange.
<unk>.
The year over year.
Decrease in operating margin is primarily attributable to lower gross margin investments in our go to market teams and technology as well as unfavorable impact from foreign exchange by approximately two four points on a non-GAAP basis, which excludes stock based compensation amortization of intangibles related to <unk>.
Acquisitions and acquisition cost operating margin for the second quarter was 23, 3% down <unk> seven points sequentially and down six five points.
Year over year.
Interest and other income expense net for the second quarter was a loss of $14 $6 million down sequentially by $4 million and down year over year by $14 $5 million, primarily due to larger net foreign exchange losses from the weakening of certain foreign currencies against the U S dollar.
The GAAP effective tax rate in the second quarter was 35% compared to 28, 4% in the first quarter and 25, 7% in the second quarter of the prior year, our non-GAAP effective tax rate was 25, 6% in the second quarter compared to 24, 2% in.
First quarter and 19, 5% in the second quarter of the prior year.
Second quarter GAAP effective tax rate was higher than the first quarter effective tax rate, primarily due to foreign income tax at different rates and lower excess excess tax benefits from stock based compensation.
Second quarter net income per diluted share was $1 44.
Down sequentially, 26, and down $1 seven compared to the prior year. Our EPS was unfavorably impacted by 26 cents on a sequential basis and 42 said on a year over year basis due to foreign exchange.
On a non-GAAP basis net income per share was $2 for the second quarter down 13 said sequentially and down $1.04 year over year.
Moving onto the balance sheet as of June 32022, cash cash equivalents and short and long term marketable securities were $977 $2 million down.
<unk> $143 $4 million and down $109 $2 million year over year.
Of our 977 two <unk>.
Balance $251 $4 million was held in the U S and $725 8 million was held by our international entities.
Q2 accounts receivable balance was $931 $9 million down approximately 2% sequentially. Our overall deal days sales outstanding was 85 days down approximately two days sequentially and up approximately 30 13 days as compared to Q2 last year cash.
<unk> from operations for the second quarter was $127 million.
Capital expenditures for the second quarter were $76 million, primarily related to our continued investments to increase our lighter manufacturing capacity and facilities free.
Free cash flow defined as cash flow from operations less capital expenditures amounted to $51 million.
In Q2, we purchased $200 million of our common stock through an accelerated stock repurchase program, receiving approximately 757000 shares at an average price of $264.37 per share.
We are over halfway through our May 2021, $1 billion repurchase program and have approximately $450 million remaining available for purchase.
Now turning to full year 2022, and the factors that influence our views on our business outlook. Overall, our Q2 results were solid and we feel good about the execution across the business, especially in an increasingly challenging global economic environment, delivering revenues and volumes relatively unchanged from.
Q1, and down only slightly year over year, despite unfavorable impacts from foreign exchange speak to the strength of our underlying products and services and the size of our market opportunity. We remain confident in the huge underpenetrated market for digital orthodontics, and restorative dentistry, our technology and our <unk>.
History leadership, and our ability to execute and make progress toward our long term model of 20% to 30% revenue growth.
We also remain committed to our goal for fiscal 2022 to deliver GAAP operating margins above 20%, while making strategic investments in sales marketing R&D and operations.
Notwithstanding the impact from unfavorable foreign exchange, which was not factored into our operating margin guidance for the full year.
Capital expenditures.
Primarily relate to building construction and improvement as well as a digital manufacturing capacity to support our international expansion for 2022, we expect our investment in capital expenditures to exceed $300 million. This includes our investment in our aligner fabrication facility and more club Poland.
In times like these our strong fundamental.
Is this differentiates our line and we are grateful to have a profitable underlying business model that generates strong cash flow as well as a healthy balance sheet that provides flexibility to invest in our growth, while supporting our employees customers and shareholders as.
As we move into the second half of the year, we will continue to manage our investments to account for headwinds and uncertainty while focusing on successful successfully delivering on our strategic growth drivers with that I'll turn it back over to Joe for final comments Joe.
Thanks, John closing Q2 in the first half of 2022 has proved to be tougher than we expected.
We continue to navigate macroeconomic uncertainty and weaker consumer confidence and.
And impacts related to COVID-19 variance, we cannot lose sight of the strong fundamentals of our business and the enormous market opportunity for digital orthodontics and restorative dentistry.
The decisions we make this year will have lasting strategic implications for the future of our industry and the competitive landscape. We are holding true to our business strategy and making good progress in a very difficult operating environment, we remain committed to balancing investments to drive growth and long term strategic priorities with near term headwinds.
While acting with a sense of urgency to ensure that we are ready to capitalize and extend our global innovation leadership as growth resumes. Thanks for your time today, we look forward to updating you on our next earning call with that I'll turn it over to the operator.
Operator, thank you.
At this time, we will be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is any question you May press star two if you would 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, while we poll for questions.
The first question is from Nathan Rich with Goldman Sachs. Please proceed.
Thank you good afternoon, Hey, Joe and John I guess I wanted to start high level.
Joe you kind of highlighted the consistent kind of case and revenue trends in the second quarter relative to the first but within.
Within the context of a challenging macro environment I guess.
How does how does that influence your thinking on the trajectory of the business and have you seen an impact on patient traffic to dental practices are treatment acceptance rates.
That's kind of driving driving that commentary.
Yeah David.
If you look at this from a domestic standpoint, you can pull out some signal, but I think you have to when you are asking the demand question like that you have to look at this globally and I think like John and I were just clearer in our introduction.
Basically if you took Asia COVID-19 impacted us pretty tremendously in Asia, Japan for a little bit in the first part of the quarter in China almost throughout the quarter. So it was really a COVID-19 discussion there it's hard to pull demand signal out.
In the United States I mean, if you look at the data that we do you will see from a general practitioner standpoint, or whatever some stability in patient visits of what's going on.
Our concern here is obviously this is a product where like a cap or crown or cleaning or something that needs to be done it's somewhat discretionary and.
We see that from an adult standpoint, more variability in adult selection than teens teens have been pretty stable in that way, if we talked about before.
Moving over to Europe , we're working off a 300% growth rates in Europe last year, Okay, which you kind of have to internalize that it's a pretty big comparison year on year.
And there Werent standard vacations being taken in Europe to the beginning of the end of the second quarter and third quarter. So overall I'd say as you look around the globe.
I feel like I felt good as we mentioned in the script about Q1 versus Q2 and pretty much the same kind of demand pattern, but right now I can't really give you a trajectory in the third quarter and the fourth quarter because of the macro environment concerns again in China from another COVID-19 shutdown and those types of things.
I hope that I hope that makes sense.
Yes, definitely and then maybe just a quick follow up.
Where are you I guess able to size kind of the headwind from the lockdowns in China and with that in that market specifically have.
Have you started to see those volumes recover as you know, we're starting to see those lockdowns ease.
Oh for sure let me direct correlation there as soon as they let Shanghai opened again.
We saw it reflected in our order rates there.
But we continue to feel good about China in a stable market.
Just as a dramatic way that China continues to address Covid cases by major cities.
Is it just creates a huge amount of uncertainty is when the next lockdown will be.
Thank you.
Thank you.
Thank you Mr. Rich. The next question is from the line of Elizabeth Anderson with Evercore. Please proceed.
Hi, guys.
For the question.
I was wondering is if you could comment about.
I know in the third or fourth quarter of last year and into the first quarter you did increase the sales hiring.
Sequentially and year over year could you just talk through sort of the impact those salespeople where are they in the ramp process and how do you should we think about their potential for contributing in the back half of the year.
That's a good question Elizabeth obviously, our sales force.
Direct from Salesforce is really important to us in that way and so.
The way we do this obviously as you indicated we hire a lot of salespeople upfront we have sales training programs to that helped to initiate them as they come into the corporation, but I would tell you depending on where you are around the globe. There is a six months or nine months burn in period before you really feel that they are up to speed. They understand the invisalign system, the digital platform and those types of.
So I would say in some some simpler kinds of situations geographically it could be six months, but in general it's nine months or so before we have confidence that they're going to be really good on their feet.
They talk to our doctors.
Got it that's helpful and then one thing.
The surprise me in the corner, a little bit with about that number I know that sometimes this quarter, it's been off because of COVID-19 in terms of seasonality and it's not necessarily always the strongest quarter for teens, but how are we thinking about it how are you thinking about that versus the economic sensitivity of adult cases and sort of how do.
Do you expect that to sort of trend in the sort of near term.
Yes.
Keep in mind, we see a lot more.
Concern from an adult standpoint, when you look year over year in the sense of order growth in adults I mean, it's been affected Elizabeth and there's a lot of data that we produce will show you that on the team side. It's.
It's hard to pull this thing a lot of the second quarter, because it really starts in the third quarter, but I feel overall, good about it but again not surprised because we've always felt that.
Teams have a certain window of time from a treatment standpoint, and so it's not necessarily an emotional purchase in a way, it's usually planned for and anticipated.
What we saw between the second quarter and beginning of the third quarter, it really bears that out.
Got it okay. Thank you very much.
Youre welcome thank.
Thank you. Thank you Mr. Anderson.
Our next question is from the line of Jon Block with Stifel. Please proceed.
Great. Thanks, guys. Good afternoon, I'll follow up on <unk>, maybe just to go there I think worldwide team was down year over year and I believe Joe you mentioned that <unk> and APAC was up year over year, which sort of implies that north American team was down.
Maybe a decent amount so anything to call out there why do we see that maybe specific to North America and then more importantly, you did have some positive commentary around teen case packs.
Talked about enrollment so maybe just talk to us on how long it might take for the Teen case pack program in North America to give that segment a shot in the arm and then your plans to roll that out internationally I've got a follow up.
John on the team side.
Remember, we kind of lost.
Or are we had a muted signal on the teen side it needs to be very clear from quarter to quarter before Covid. If you remember last year. It was much more muted. This year, we're hoping to see less muted cycle and I think we're starting to feel that John So it's.
I don't think you can look too much between what we're doing in between the first quarter and second quarter and pull a clear teen signal out of there. The only thing on tier two is there's always competitive concern with other clear aligner, whatever but basically this is a wires and brackets competition with us it's always been and continues to be that way.
And new products that we're launching these teen packs, we feel good about them they've been as I've.
Mentioned in my script too they've been received well.
And.
It's been with a lower and orthodontics from our standpoint that haven't done a lot of teen cases in the past.
And that's the thing that we were fishing for to give them more confidence to be able to move in with teens. So we're not declaring victory, but we feel we have a good product, it's timed well and we're not seeing.
The cycles in the teen marketplace as we've seen in adult marketplace, and obviously, John as we get through the third quarter.
We will have a much better understanding of how we turn out that way, but I I didn't pull anything out between the first and the second quarter that concerns me.
Got it.
Thank you and then for my second one let me try to maybe jam 201, and hopefully not make a mess of it. So just first on the on the three Q versus to Q overall case volumes China's reopened China is a decent chunk of business for you guys. So im trying to snaps back you've talked about Shanghai, and maybe talk to us and why we wouldn't see.
See you guys resume some sequential growth <unk> versus <unk> I know, there's many other markets and then maybe just to stick with China and I just love your thoughts on what's going on over there maybe in terms of market share. Your main competitor had some quasi numbers out recently it looks like they were down mid single digits in cases.
<unk> 22 year over year, which quite honestly I actually thought that was a good number considering the environment. So would love your thoughts on just China and your ability to hold share or what's going on from a market share perspective. Thanks guys.
I'll start with China, and kind of move backwards target.
John involved here too.
But from the China side.
Obviously, we saw which you published there or whatever but I looked at angel align numbers and it basically same thing we experienced I mean, we experienced the shutdown of Shanghai slowdowns in some other regions and there was nothing in those numbers that really surprised me.
As I look at China, our ability to compete there I feel great about it and again.
Our investments we've made there in treatment planning and manufacturing, we've only added to that efficiency of those organizations have done well our product is great for that marketplace and some of the most difficult cases that we encounter exist there too. So I feel good about our ability to compete in that market against angel or anyone else who's there, we just need to stay.
Marketplace. So we can operate in and it hasnt been stable for.
Goodness, it's been what almost two years and I just read this morning. The Wuhan is looking to close down so I mean, John there's a lot of variability there.
I can start with Covid and shutdowns, particularly in the second half of this year in China, but I continue to be concerned about that can disrupt the marketplace, but if that stays clear.
Gonna have China in the second half that we can operate from to answer your question I feel good about our competitive position there our ability to compete with anyone and we should see some sequential.
History that we normally see in our visit it goes to what Joe said that Theres just some unforeseen variables that are still there. If there is a shutdown in China that will that will impact our numbers if theres no shutdown, we should see sequential improvement.
And then you have some of the other macro economics that we've talked about in terms of.
Potential recession or other things that people are concerned about that affects their decisions on whether they go into treatment, but we're watching closely to see how sequentially things are are behaving and making investments appropriate based on what we see.
And Jonathan.
Jumping question.
Uhm.
Sorry, Joe I was just going to say you know John and Joe maybe to follow up on that last comment just for clarity purposes, I think it's an important one.
Are you guys, saying sort of as you sit here today, who the heck knows what's going on with Wuhan iron.
Something worse incrementally with the kind of but as we sit here today and late July youre expecting the resumption of sequential growth off the <unk> number this evening.
Well I'd say, John expecting anything in this market might be a sign of a low Iq.
When you look at what's going on in China, I'm, not going to sit here and tell you I expect a stable market in the second half based on their COVID-19 policies. So.
From the 90 state standpoint, there's a lot going on.
I'm trying to explain to the teen market overall outside of China I feel is the most stable market, we have and the one that we're ready to compete with and we're moving into the seasonality. We're really makes a difference we have we're positioned well with products.
But as you know John as well as anybody Thats always been a wires and brackets marketplace, we've been taking share point and a half two points a year, we're hoping some moves we make can make that better.
But we'll know a lot more when the third quarter's over.
Okay very helpful. Thanks, guys.
Yeah C J.
Thank you Mr Bloch.
Our next question comes from the line of Jeff Johnson with Baird. Please proceed.
Thank you good afternoon guys.
Hey, Joe.
Just wanted to talk on maybe on the doctor's ship to that number this quarter you know, it's trended down each of the last couple of quarters. This quarter in the Americas. It did trend back up just a touch.
What are you what are your views on what that means is that is.
Is that a <unk>.
Market stabilized a little bit is that maybe the competitive positioning is.
<unk> a little bit just how do you view that number in the Americas is there room left in the Americas for that number over the next couple of years to keep moving higher or are you kind of at a point, where you have saturated kind of the Americas market with number of doctors, who are going to be.
Performing these cases.
Just to answer your last part of your question first Jeff we have a lot of room to grow in the Americas too.
States, Canada, but also throw in Latin America, and Brazil, and that there's a lot of growth in that sense, you know John and I are port over these numbers a lot what happens I feel good if you back these numbers up before really the big surge in orders that we had before we can draw a line through these things it doesn't upset US you have to split Orthos and GPS.
Remember you have some GPS that do like three cases a year.
As things kind of slow down.
There'll be out of the circulation for a while and then the order another one whatever and these numbers will go up 81000, 82000, we'll see them go up and down but.
Don't look at this in any way as it were saturated in this marketplace.
From an orthodontic standpoint, and a GP standpoint.
The other thing too I think.
People forget from an orthodontic standpoint is our orthodontist, who do teens.
These are these are orthodontists that are really committed to invisalign for the most part and they do a lot of teams, but we still have a significant amount of orthodontists do invisalign almost exclusively for adults and so youll see that that whole piece from a utilization standpoint.
We increased our teen penetration you should see the utilization rates are improved.
Yes, that's helpful. And then maybe kind of a follow up on all of that is a two parter just the international number.
Again kind of did tick down a little bit that number of doctors ship two internationally.
One I would assume you think there is a lot more room, even there to saturate that market over the next few years that would seem to make sense to me anyway.
Is there any way to look at what that number did in China.
Sequential decline largely driven by the shutdowns in China or ex China would that number have been up and that was a little surprised to hear cases down I think you said in U K year over year is that just a tough comp or what's going on in the UK.
We're all aware of China pressured in early Japan pressures early quarter, Japan pressures like UK caught me off guard a little bit there. Thanks.
I'll answer the UK piece first.
The UK was outstanding for US last year remember Europe grew 300% for us last year right. The UK led that so I'm sure that UK numbers higher than what that aggregate number is and so what youre seeing is kind of a.
Adult kind of a retrenchment in the UK from an order standpoint, but not an indication of a utilization issue, but I'd say across the doctor base that we have in the U K.
And just on the China piece or the APAC piece.
For international So that was certainly an impact.
In terms of the Lockdowns and doctors, just not being able to transact and therefore don't have shipped to so the international side of the Doctor shipped two was certainly impacted by Covid.
We won't break it out by kind of the sub regions, but that was that was an impact that look as those offices open up as those lockdowns.
Our our minimized we would expect that to increase ownership just standpoint.
Thanks, guys.
Yes, thanks chip.
Thank you Mr. Johnson.
Our next question is from the line of Justin Lin with William Blair. Please proceed.
Hi, good afternoon.
Can you just touch on your sales and marketing spending strategy, a little bit in the short term and longer term.
Yes.
When can you sort of decide to flip the switch.
When you flip the switch as far as up or down.
Yep Yep.
Yeah, well I mean, obviously as you know obviously we saw are adults.
Dramatically decrease and so the return on investment in some specific geographies, Jonathan I'd take a look at and we don't we don't eliminated, but we reduce it in accordance with what we think the demand pattern is and we spread it around into other countries that we feel we can get a higher return on it we just basically sizing our advertising to what we think the demand.
Ones are around the business in different areas and so.
I wouldn't look at this as any way that we will continue to advertise aggressively and promote our brand and to drive.
Drive value in the.
And our changes to bring customers to our Doctor base, but we're gonna be responsible to we can't advertise at the rate that we did last year. When we were growing at over 100% and a lot of these regions. We have modified somewhat in order to address that demand pattern and we adjust into the market. So keep the overall brand awareness keep that averages remember still sudden expanding even though.
As we rightsize things hundreds of millions of dollars in marketing and media to be able to go to market drive that awareness, but then in certain markets. If there's you know COVID-19 or if there is a economic concerns and software we're adjusting things to make sure that we right sized and continue to make sure that we make the right tradeoffs.
Between how we're investing in go to market and continued to rest and invest in the rest of the business like R&D and operations.
Got it Thats very helpful and I guess, just pivoting to a more sort of higher level question.
Update on commercial operations and sort of your emerging markets like Brazil, India Africa, what would you say current penetration levels are over there and I guess realistically how much revenue can you capture from those regions in the next I'd say five to 10 years.
The region that you mentioned were severe really underpenetrated.
Huge opportunity.
I mean, we've seen great.
Great progress in Brazil, we're seeing good progress in India reported.
<unk> it.
When we talk about this 500 million patients there are out there.
And the way to get them as we do we put salespeople in place we put the right kind of.
Capability on the ground. This is a direct sales force that you have to have in order to sell our product line.
But to answer your specific question the penetration rates aren't even close.
Again, you can see that in our script. That's why we remain so confident in a stable environment will continue to perform really well.
Built as a company to really expand into those markets. We've got that global footprint for manufacturing now and all three geographies. We've got treatment planning, we've got that go to market sales force direct sales force with great products. So we're built into all of those markets. We like the dynamics of these markets, where you have a growing middle class big population.
You've got people, who want to straighten their teeth, and we've got a great way for them to get to that so all of the markets. You described as well as many others. Those are where we think of some of the investments because it's a great return on those investments.
Got it thank you very much.
Thank you.
Okay.
Thank you Mr Lynn.
Our next question is from the line of Jason Bednar with Piper Sandler. Please proceed.
Jason Hey, good afternoon.
So Joe I'll go Big picture here in the U S market and maybe go back to clarifying point on John <unk> question earlier.
One hand demand in the category broadly just didn't seem to show some signs of moderation in the second half of last year really seem to be a bit of a leading indicator in other parts of high end dental and the health of the average consumer.
This means theyre going to be coming into some easier absolute comparisons as we head into the back half of this year, which I don't know maybe helps reverse this downturn in Invisalign case growth, but I guess, we're also in the early days of <unk>.
But still could be some more pain coming for the consumer so I guess, what dominates in your opinion to the easier comps dominate or does it more challenging consumer dominate and again just thinking about the domestic market here at ignoring against some of that China and predictability that's out there.
Yes.
John I'll take a shot at this too, but I would say I mean, obviously when you.
Talk about easier comps I mean, when you're pumping against 300% growth.
Like we just talked about it as one of the tougher comps on a large number I've had in my business career.
So obviously when you get some light onto that line it helps somewhat.
But if consumer confidence I'd say outside of the Covid the way I'd look at the business again as Covid affected Asia in a big way.
Some COVID-19 staffing issues or whatever but predominantly in the west it's consumer confidence when we look at and so those consumer confidence numbers start to equalize or starting to get better some of them. Once we look at Europe, all time lows I.
I feel that means a lot it means that means more to meet in those comparisons years from here.
We will report more confidence of consumers.
The trends were in that kind of environment. We think we'll see the Dol cases resume and at a pace that would be equal to or a long term growth rate.
Yes, it's consumer confidence so I guess just to start.
Hey, just real quick I guess I would.
Yes, I guess I was just focusing more on the U S market and I totally understand Europe , and China, and APAC and all the different dynamics, there, but just within the U S market I mean, the comps do get easier absolute comps did.
It did tick down starting in the second half of last year.
And that would be where I'd be focusing the question here sorry to interrupt.
You know Jason.
That's okay.
I look at the United States to Us I'd, just give you a consumer confidence.
More than anything that just saying that there is no big variant issue or something happens with Covid world.
Have PTSD in essence, what we've experienced the last two years, but yeah.
Yeah, I like the comparison year over year, that's going to be helpful.
Those consumer confidence numbers, whether I'm talking about Europe , our I'm talking about the states. Those are the ones that we stayed glued too that we think are really good indicator in the sense of our market.
The adult market that we appeal to both in the GP segment and the adult market in the orthodontic segment too.
Joining in the piece that I would add to the U S is just as we get into teen season now as we go from Q2 to Q3 teams will be important to see we've got great products, We've got great.
Go to market opportunities to be able to grow in those marketing yet.
More market share when we think of teens everywhere in the world. It's single digit in EBIT in the U S. So we look at.
Growth opportunities that will be.
Teens, maybe a little bit less of a.
Of.
More resistant to maybe some of that consumer concerns that they have consumer concern certainly show up on the adult side, but.
But we think teams can.
To help offset that just just a bit because it's less discretionary.
Yes.
Okay.
That's helpful. And then maybe just a quick follow up here.
Yes Lana.
She is out there right now from investors on the decremental margin impact for the business.
But with volumes in revenue doing what it's doing here.
You added a lot of head count is significantly expanded branding and advertising efforts during the pandemic really helped widen the competitive moat, so really impressive.
It sounds like some of that marketing, though has been recalibrated here are there further resets that with the opex structure that might be necessary.
In this environment and I guess, what's the trigger for you to decide that a further right sizing as necessary.
I mean, right sizing when I hear words like that it means that we are going to lay off some we haven't laid anything off remember we any one off in that sense, we normally higher to a 20% to 30% growth rate and so and our.
Our opex spend is in that range to it. So obviously, we didnt, we couldnt higher in that range and so as you called out a cut back it's a cut back from our normal Opex. What we do is we normally balance opex to revenue at about a 50% range and Theres a lot of variables in that line from an opex standpoint that we can go about remember our most.
Important areas that we want to make sure we take care of as our commercial team our engineering effort and also our marketing we know those are really key and we focus on those and we balanced the business around China.
It's a balance both short and long term so as we balance out our plans we.
We look to the growth opportunities, we have we want to make sure. We continue to invest in those growth opportunity, but obviously, we have to be mindful of the current conditions that we're in and we'll adjust as needed to still maximize the return on investments that we're making.
Alright, thanks, so much.
Thanks, Steve.
Yeah.
Thank you Mr. Byrd night.
Our next question is from the line of Erin Wright with Morgan Stanley . Please proceed.
Great. Thanks.
And I wanted to ask another <unk> question here, but just given the seasonality and given this is an area where you should have some better visibility I just wanted to clarify this is does.
Does this mean you're.
Youre going to see a meaningful sequential pick up in the coming quarter or why would that not happen for you and just given that to be an area more under your control here. Thanks.
Okay.
Our normal growth pattern between the second quarter and third quarter is flat to down a percentage point or so John can confirm that so the second quarter to third quarter is a big teen season, but there's other parts of our portfolio that kind of balance out with that is not traditionally a jump from second to third quarter, but again, we're focus.
On teens, because we field teams have a lot less elasticity than with adults have right now based on the consumer confidence level, so, but I just I.
I just caution you here remember this is a wires and brackets play it's something it's systemic that we've worked on for years, we have many new products like Invisalign first I mean, gibler advancement in several new team product that help us with this new team packs help also.
We think we're well positioned but.
Got to get into the quarter and be able to assess how well that market is actually holding up John you guys, but.
Specifically in the U S U S. <unk>, we should see you know.
Sequential improvement as we get into teen season go from Q2 to Q Q3, notwithstanding any any occurrences.
Occurrences that happened from an economic standpoint, but the expectation is given our product given the opportunity given the.
The utilization that we have we should be able to see growth.
That was there anything else that gets in their way.
Okay. Thanks, and then asps for the balance of the year, how should we be thinking about that and the FX impact.
Aaron if FX, obviously Q1 to Q2 was a big impact in FX, we see it in the numbers from revenue all the way down to our EPS.
I would think of it it's tough to forecast where FX is going to go certainly the dollar has strengthened.
He kind of take the numbers that they're at now and kind of play that forward for the rest of rest of the year as how we'd look at that I think from an overall asp's standpoint.
There's always going to be puts and takes but we're not doing anything different from a discounting standpoint, I will go into market and so what you might have some mix effects that come through but.
I'd take the FX rates kind of as they are now project those forward and then asp's shouldn't be too much different than what you see now.
Notwithstanding any FX.
Okay. Thank you.
Thank you Mr Wright.
The next question is from the line.
<unk> <unk> with Jefferies. Please proceed.
Thanks, John .
Follow up on that question I appreciate all the detail in the deck. It is very very helpful.
Just curious what is the estimated impact of currency on the operating margin for the year now ballpark.
Ballpark I would look at that it's about one point, maybe just over one point of impact we saw that $1. One point impact from Q1 to Q2 in op margin I would kind of look at the full year at about the same.
Thank you Joe.
Joe on the scanner business.
Any color between the North American segment and international in terms of growth rates and how would you sort of characterize the capital spending environment in those two regions.
Yeah.
Yes.
Start with I mean, obviously we had.
Trouble selling scanners in China, because China is shut down.
China is one of our bigger markets between China, and Japan and Asia. So.
And then look at that so much as.
And overall market problem I looked at that as more of a COVID-19 problem and so hopefully the hopeful.
Mentioned before Covid say, it's clear that will write itself United States.
Good job by the team strong demand there.
<unk> plus tends to be the really strong scatter out there on a restorative side Dennis liking the neary the near infrared technology for caries detection, an orthodontist continued like exactly how.
Our workflows and all from us.
From an overall <unk> standpoint, so I feel I feel good about the Americas and what their performance was in that piece.
As I mentioned in my script is 40% with a large installed base now 40% of service to which is really helpful.
And that business overall and look I feel good about again, our scanners in Europe .
Compare to get some pretty big numbers again last year, so I wouldn't be blinded by the year over year number in that sense.
Europe has the added pressure right now from our Ukraine standpoint is it just it wears on that consumer sentiment piece I think it makes a doctor is a little more reluctant.
But there as well.
I feel good about our position in Europe from a scanner standpoint is the market I hopefully starts to stabilize here, we'll see that business that we had return wells.
Great. Thanks.
Yeah.
Thank you.
Our next question is from the line of Kevin Caliendo with UBS. Please proceed.
Hi, Thanks for getting me in.
So I'm.
Just wanted to think about how.
Or what it would take for you guys to feel comfortable.
With providing guidance again or feeling comfortable that you can hit your longer term targets, rather than making progress towards it.
We need to see consumer confidence go back above 99, or something like that or.
I mean at the beginning of the year you caveat, it and said listen if theres no more COVID-19 outbreak, we'd still be able to do this.
What do you need to see before.
Before you can come to us and say Hey, we're back on track or we think we can do this or we feel comfortable we're going to be able to grow at X rate.
Going forward, even even be able to provide guidance for like a quarter going forward, even if it's not for the full year what needs to happen in your mind.
I'll turn it over to John .
First of all as you remember, we don't carry inventory in this business outside of scanners.
So it's a real time business, we don't have any inventory to reflect from or any.
Very little business from a week to week standpoint, so I'll move it over the Jamba keep that in mind that we kind of feel these trends early.
Both and as the economy picks up we will probably feel like first and as it turns down we feel it's just the nature of the business, but it really comes down to Kevin more just having more predictability on a macro basis understanding.
She'd COVID-19 thinking that we're through it then then you have China lockdowns or some of the consumer sentiment and things that come up that are outside of our control. We feel very good about being able to control what we can control, making the right investments as we go to market or we're adding.
Investments in R&D to better our products and so on and and drive that return and therefore like I said, we could we can manage to that 20% that's something that we can manage as we go through the quarter.
It really comes down to having more predictability on a macro basis and once we get caught but it's in that and we work our way to that understanding the economies are going to do what theyre going to do they're going to go up or down, but if I have more predictability in the direction that they are going and how theyre going to go. Then then we can give a good forecast.
Yes.
Alright, I appreciate that.
Yes.
Thank you Mr. Kelly Linda.
Our next question is from the line of Michael <unk> with Bank of America. Please proceed.
Great. Thanks for taking the question guys.
Kind of a follow up to one of the earlier ones and Kevin just sort of on the on.
On the moving pieces going forward I mean, we spent a lot of time talking about China, Lockdowns and the impact that had and there was some discussion on consumer confidence as well but.
It was sort of brought up in the sense of what happens when things improve.
Hate to be the pessimist here, but can we talk about the other side of things.
Inflation is one thing and consumer sentiment and consumer confidence is another thing, but recessionary impact.
Unemployment goes higher of job losses start to accelerate.
There was a scenario where things actually get worse for the next couple of quarters before they get better. So can you talk through sort of.
How you view the likelihood of that happening the impact you think it will have on the business and also sort of what's your response going to be what's the game plan, you talked a little bit about controlling costs in the quarter already.
What would be the other levers you would pull if things for the consumer.
In the Americas and in Europe get materially worse over the next three to six to nine months.
Okay.
Hey, guys its Joe.
Look I think you've seen that I feel we've been responsible in the sense of adjusting the business to lower demand signals in the business is used to having I think you saw.
US respond the same way when Covid hit in March of 2020, and how we ran the business.
If it gets worse it could get worse as the way I mean from a standpoint of whatever happens from an economic standpoint, I'd, just say that look John and I come from businesses, where we've been through these cycles, we know how to operate in a down cycle, we've run our business that way.
This is a growth business and we'll treat it as a growth business, but we're responsible from a standpoint of making sure that we adjust this business to whatever economic conditions that we see out there.
And as a result, we've been able to make these adjustments we're fortunate as a company to have the cash position the balance sheet that we have in all of these other.
And in the end you know the story, we have a huge opportunity to be able to grow you just have this in our way and like Joe said and met what many others say it could get worse, we have to be able to to be able to balance. So short term worse too with our long term goal of being able to make invisalign a standard of care and that.
What we're balancing right now and that could play out that will play out in the next whatever year to 18 months things will things will evolve we hope that the economies improve we hope that that you know a lot of this is just kind of short term and things get better and when things do get better we're well positioned to be able to grow into this market.
But we just have to be face the realities of what's happening short term.
Great and a quick follow up if I can.
On <unk>, you kind of give some comments on pacing through the quarter and give some comments on April as it relates to March.
Kind of get the sense that things probably slowed down at the end of <unk> would have been in June both between FX and China Lockdowns being worse any sense you can give on sort of the progression through the course of <unk> and just any early signs you've seen from July again realize the lockdowns in China and FX is playing a big role, but maybe if you could just focus on Americas trends through the <unk>.
In July that'll be helpful.
Yes, no. It's a good question.
So if you think like an overall picture you hit some of the FX and so on did you look everybody can look at FX rates and see the changes and so on you can project based on those when you talk about COVID-19 locked out or talk specifically in China. There was an impact for us and we see that the first quarter. We saw it in the second quarter, but it's it's happens in China. It happens at all.
A place that we see where there is a lockdown we have a reduction in volume without lockdown goes away. The volume starts to start to come back. So I would say when you think of China as you've as you go from locked down to not locked down that's favorable for US we start to see some of that volume come back and I think when you look at.
Part of your question is around the U S. I think what do you see with the U S is.
It's maybe if things stabilize it a little bit more youre not seeing.
You know, maybe it's pretty similar to what we exited Q2 into Q3 and I think when you look at the <unk> benefit that ideally come through with some of the products and programs that we have in <unk> in the U S and other places, but focus on the U S. We think that that's helpful for us.
As we got into Q2 to Q3.
Yeah.
Okay. Thanks.
Thank you Mr Raskin.
We haven't we have reached the end of our question and answer session. I will now turn the call back over to Shirley Stacy for closing remarks.
Thank you operator, and thank you everyone for joining US today, we look forward to speaking to you at upcoming financial conferences and industry meeting and if you have any follow up questions. Please contact our investor relations team have a great day.
Yeah.
Thank you. This concludes today's conference and you May now disconnect. Your lines at this time. Thank you for your participation.
Yeah.
Okay.