Q1 2023 Align Technology Inc Earnings Call
Speaker 1: Replay will be available today by approximately 5.30 p.m. Eastern time through 5.30 p.m. Eastern time on May 10th. To access the telephone replay, domestic caller should dial 833-470-1428 with access code 635629.
Speaker 1: International callers should dial 44204-525-0658 using the same access code. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Alliance future events, products, and outlooks.
Speaker 1: 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 a line expressly assumes no obligation to update any forward-looking statements. We have posted historical financial statements, including the corresponding reconciliations, including principal explorer IslandNavajo, his di players and COMD questions, including his Sw Cole, his
Speaker 2: On our call today, I'll provide an overview of our first quarter results and discuss a few highlights from our two operating segments, systems and services and clear aligners. John will provide more detail on our 2-1 financial performance and comment on our views for the second quarter in 2023.
Speaker 2: Following that, I'll come back and summarize a few key points and open the call to questions.
Speaker 2: Overall, I'm pleased to report better than expected first quarter revenues and earnings. The sequential increase in first quarter revenues of $943 million reflects stability across all regions for our clear liner business and favorable average selling price for the clear liner and systems and services segments.
Speaker 2: Q1 sequential growth reflects an increase in non-case revenues, which also increase year over year driven by continued growth from our Invisalign doctor subscription program and Vivera retainers. In the teen segment, which represents the largest portion of the 21 million annual orthodontic case starts, 182,000 teens and kids started treatment with Invisalign clear aligners.
Speaker 2: doctors transform smiles and change lives for millions of people.
Speaker 2: For systems and services in Q1, revenues of $153.3 million were down 9.7% sequentially and 6.2% year over year. As expected, Q1 systems and services revenues decreased sequentially, consistent with seasonal capital equipment cycles compared to Q4.
Speaker 2: For Q1, system and services revenues were sequentially lower primarily in the Americas and APAC regions offset somewhat by an increase in AMEA.
Speaker 2: For non-system scanner revenues, Q1 was up sequentially.
Speaker 2: and year over year reflecting increased scanner rentals, upgrades, and certified pre-owned or CPO leasing programs. Q1 CPO sales include initial shipments of leasing units to desktop metal who supply ITERO element flex scanners to desktop labs.
Speaker 2: one of the largest lab networks in the United States serving general dentists. On a year-over-year basis, Q1 services revenues increased primarily due to higher subscription revenues, resulting from a large number of ITEROS scanners in the field. We also had higher non-systems revenues related to our scanner leasing and rental programs previously mentioned.
Speaker 2: The Q1 total clear liner revenues of 789.8 million was up sequentially and down year over year. Q1 sequential revenue growth reflects increases across the region driven by price increases, favorable foreign exchange, and more additional liners.
Speaker 2: Q1 non-case revenues were up sequentially in year over year, reflecting continued growth from DSP, Vivaera retainers, and commerce sales, which include everything from aligner cases to whitening and cleaning problems.
Speaker 2: DSP has been very successful in enabling doctors to purchase aligners on a subscription basis, giving them flexibility to treat simple touch-up cases or offer their patients a superior, flexible and convenient retention solution. We introduced DSP in North America during the pandemic and are continuing to expand DSP offerings in the May region.
Speaker 2: The contribution of DSP to non-case revenues is important to understand, especially the impact of overall clear aligner volumes. While we don't report the number of DSP clear aligners shipped and we don't include them in our total clear aligner volumes, if we were to calculate an equivalent case shipment for touch-up patients, we would have to calculate the number of cases that were shipped.
Speaker 2: using our DSP aligners, we estimate those cases would increase approximately 25% sequentially.
Speaker 2: Q1, total clear liner volumes of 575.4,000 were down slightly sequentially reflecting stability across regions and improvements in consumer confidence as well as the easing of COVID restrictions recently in China.
Speaker 2: For the Americas, Q1 clear liner volumes rub slightly sequentially reflecting higher worth adonic cases, especially teen case starts with growth in both Invisalign teen case packs and Invisalign first treatment for kids as young as six. Offset primarily by a decreased in adult patients from the GP dental channel. Based on the most recent gauge practice analysis tool that collects
Speaker 2: In Visalign cases, outpace other clear aligner brands.
Speaker 2: The GAGE report also included a few data points regarding no-shows and future exam schedules, which we believe may provide insight into consumer sentiment and macro conditions.
Speaker 2: Regarding no shows, over the last 12 months, there's been a large increase in the number of patient no shows. However, that rate appears to be stabilized. Conversely, over the last 12 months, future exams scheduled were negative year over year, but the rate has steadily improved in the most recent months, covered by the report, which we believe may be a good gauge for consumer optimism.
Speaker 2: For May, Q1 Clear Aligner volumes include strong adoption of Invisalign Moderate across the region in both the adult and teen segments.
Speaker 2: Invisalign moderate package is a 20-stage treatment option designed for patients whose treatment goals fall between the existing Invisalign light and Invisalign comprehensive packages.
Speaker 2: For A-PAC, Q1 clear liner volumes reflect improvement in China and continued growth in markets like Japan, Korean, India, with positive year over year growth, including teens. Teen orthodontic treatment is the largest segment of the orthodontic market worldwide and represents our largest opportunity for clear liner sales to orthos.
Speaker 2: We continue to focus on gaining share from traditional metal braces through team specific sales and marketing programs and Product features including a visline first for kids as young as six which is up sequentially across all markets
Speaker 2: For Q1, total clear aligner, cases for teenagers, were up sequentially in year over year, reflecting improving trends across the region.
Speaker 2: On a sequential basis, growth was driven by increased submitters in the APAC and Americas region.
Speaker 2: On a year-over-year basis, 10K starts were up in a Maya region, simply reflecting increased utilization.
Speaker 2: and the recent introduction of a visline moderate across the region, which outpaced the year over year growth rate of a visline first, which also continues to form very well across markets. In visline first was also up sequentially and year over year across all regions.
Speaker 2: In this line first, it's designed to treat a broad range of teeth straightening issues and growing children from simple to complex.
Speaker 2: And because in vis-line first is removable, it's easier for kids to brush from floss. There's also no discomfort from rubbing braces or poking wires from metal braces.
Speaker 2: These benefits, along with positive compliance experience.
Speaker 2: They also contribute to continue momentum for a visline first. In fact, the majority of surveyed in visline worth of don is to agree that their young patients are highly compliant with the visline first treatment.
Speaker 2: Understanding that younger kids are highly compliant and Invisalign first provides an opportunity to support overall practice growth.
Speaker 2: The Q1 clear liner volume from dental service organizations or DSO customers continued to outpace non-DSO customers.
Speaker 2: Q1 clear liner volume from DSO customers increased sequentially, reflecting growth in the America's region. DSOs make up approximately 20% of the dental market and represent one of the most important channels for digital orthodontics and restore to dentistry.
Speaker 2: through their network of doctors.
Speaker 2: In systematic approach to clinic education and practice management, DSOs are uniquely positioned to drive adoption of new technologies and tools that increase practice efficiency and profitability and deliver a better patient experience.
Speaker 2: We have well-established relationships with many DSOs, especially the United States, with DSOs such as Smile Docs and Hartland Dental. And we are continuously exploring collaboration with others that drive adoption of digital industry.
Speaker 2: Each DSO has a different strategy and business model, and our focus is working with them and encouraging DSOs, aligned with our vision strategy and business model goals.
Speaker 2: One of the most digitally minded DSOs is Heartland Dental. And today we announced the 75 million equity investment in Heartland. Heartland is a multidisciplinary DSO with GEP and ortho practices across the US. Their growth strategy includes Heartland's Lenovo dental practices which feature modern technology.
Speaker 2: are located in areas with strong, community need for dentistry, where heartily provides practices with opportunities for mentorship, leadership training, and continually education.
Speaker 2: In the last three years, Hartland opened 188th State of the Art of the Novel Practices across the United States and are planning to continue investing.
Speaker 2: through more dope than oval openings.
Speaker 2: We have a shared sense of purpose with Hartland. Their mission is to help doctors and their team deliver the highest quality digital dental care to the communities they serve. We have a shared sense of purpose with our community.
Speaker 2: The man creation remains an important strategic growth driver and we continue to invest in consumer marketing programs that create awareness of the Invisalign system and that drive demand to Invisalign practices.
Speaker 2: In Q123 we delivered 7.8 billion impressions and had 22.1 million visits to our websites and continue to invest in top media platforms such as TikTok, Snapchat, Instagram, and YouTube across markets.
Speaker 2: For more details on our programs and key Q1 performance metrics, please see our presentation slides on our website.
Speaker 2: We're also developing digital tools and apps for consumers, patients and whose own job needs to happen now, operating in these fields using 65-000,SNOE to shoot these apps.???????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????
Speaker 2: For Q1 adoption of the My and Visline consumer and patient app, continue to increase with 3.1 million plus downloads to date and over 350,000 monthly active users representing 28% year-over-year growth.
Speaker 2: Usage of our other digital tools includes ClinCheck Live Update, which is used by 38,000 doctors to reduce time, spent modifying treatment plants with up to 13%. And in Visalign Practice tab, with 58,000 doctors, actively using this feature and uploading more than 5.1 million photos to date.
Speaker 2: Finally, in addition to our focus on consumer marketing and digital tools, we're committed to driving excellent treatment and align innovation.
Speaker 2: Finally, in addition to our focus on consumer marketing and digital tools, we're committed to driving excellent treatment and align innovation through industry and align hosted clinical education events.
Speaker 2: Our team is just participated in the annual AAU conference which took place in Chicago where we engage with a broad range of worth of doneness.
Speaker 2: In March, we participated in IDF in Cologne, Germany, when the largest dental shows in the world focused on digital dentistry and the technology shaping the industry.
Speaker 2: Earlier in the quarter, we hosted the second Alliance symposium on the digital practice, a smaller align event for the most engaging experience in Visline, Orthodox and the world. It was an amazing opportunity to come together with long-term global partners and thought leaders in Orthodoxy to see how we are driving the digital transformation of dentistry together. By our participation in each of these events and opportunities,
Speaker 2: we continue to reinforce the importance of peer-to-peer clinical education in our investments in the orthodontic specialty.
Speaker 2: We are grateful for all of our customers, GP, orthodontist, corporate practices, but we know that the orthodontic specialty leads the way in adoption of visual orthodontics. We are excited about the future we see them in the orthodontic profession.
Speaker 2: Align Abelie supports the orthodontic profession through education, grants, and continuing innovation. Our educational pathway was created to support recent graduates and early career doctors at critical career transition points.
Speaker 2: As a result of schooling and early career initiatives, graduates will be educated on digital dentistry and digital orthodontics.
Speaker 2: connected with and supported by colleagues more experienced ortho experts in the aligned team and engaged with aligned digital platform.
Speaker 2: Align support doctors throughout all stages of their career, from educating facility at dental schools and orthodontic programs to education for residents.
Speaker 2: early to mid-career providers and more seasoned professionals looking to expand their clinical capabilities and practices.
Speaker 2: Alliance expanding its global footprint of education centers to provide a form for hands-on learning and continued development in key cities across our region.
Speaker 2: We are also focused on continuing to innovate in digital demonstrate.
Speaker 2: Scaling capacity to manage the millions of digital requests, patient scans, and orders flowing through our systems.
Speaker 2: while also using technologies like AI machine learning to increase efficiencies, speed treatment planning, and quickly deliver products so patients can begin their paths to transforming their smiles.
Speaker 2: And in the next one to two or three years, align believes our newest technologies and innovations will revolutionize our existing offerings and the ways in which doctors and their patients experience orthodontic treatment.
Speaker 2: Together with our customers, we're developing the future of digital dentistry and digital orthodontics Not just a technology to drive treatment, but the models reshaping how we interact with customers and deliver treatment experiences For their patients. We look forward to sharing more with you in the coming months with that. I'll now turn it over to John
Speaker 3: Thanks, Joe. Now for our Q1 financial results. Total revenues for the first quarter were $943.1 million, a 4.6% from the prior quarter and down 3.1% from the corresponding quarter a year ago. On a constant currency basis, Q1 23 revenues were $923.1 million.
Speaker 3: impacted by favorable foreign exchange of approximately $25.8 million or approximately 2.8% sequentially and unfavorably impacted by approximately $34.9 million a year over year or approximately 3.6%.
Speaker 3: For clearer liners, Q1 revenues of $789.8 million were up 7.9% sequentially, primarily from higher ASPs and higher non-case revenues, partially offset by lower volumes. On a year-of-year basis, Q1 clearer liner revenues were down 2.5%, primarily due to lower volumes. Lower ASPs.
Speaker 3: including unfavorable foreign exchange.
Speaker 3: partially offset by higher non-case revenues. For Q1, in Visalign ASPs for comprehensive treatment, we're up sequentially and decreased slightly year-over-year. On a sequential basis, ASPs reflect price increases, favorable foreign exchange, and higher additional liners.
Speaker 3: Parsley upset by product mix in larger discounts. On a year of year basis, the ASPs for our comprehensive treatment were almost classed, primarily due to product mix shift, unfavorable foreign exchange in higher discounts.
Speaker 3: Mostly offset by price increases in higher additional liners.
Speaker 3: For Q1, in Visalign ASPs for non-comprehensive treatment were up sequentially and year-over-year. On a sequential basis, the increase in ASPs reflect price increases bare before and exchange in higher additional liners, partially upset by higher discounts.
Speaker 3: On a year of year basis, the increase in ASPs reflect price increases in higher additional liners, partially offset by product makeshift, unfavorable foreign exchange, and higher discounts.
Speaker 3: During the quarter we launch in business line comprehensive 3 and 3 product in most markets.
Speaker 3: The three and three configuration offers our doctor, customers are in vis-line comprehensive treatment with three additional liners included within three years of treatment and date.
Speaker 3: instead of unlimited additional liners within five years of the treatment end date.
Speaker 3: 2022 in Visalign Comprehensive Product Price. Over time, we have come to learn that on average, in Visalign Doctors, complete a comprehensive in Visalign Treatment with less than two additional liners. We are pleased with the initial adoption of the Invisalign Comprehensive 3-3 product and anticipate that it will...
Speaker 3: that its impact will be more meaningful, providing doctors the flexibility they desire, and allowing us to recognize more revenue up front.
Speaker 3: with deferred revenue being recognized over a shorter period of time compared to our traditional and Disneyland comprehensive product.
Speaker 3: As revenues from subscription retainers and other ANSELA products continue to grow globally, some of the historical metrics that only focus on case shipments are expected to account for a lesser percentage of our overall growth. In our earnings release and financial slides, you will see that we have added
Speaker 3: our total clear line of revenue per case shipment, which we believe to be more indicative measure of our overall growth strategy.
Speaker 3: Clear aligner deferred revenues on the balance sheet increase $32 million or up 2.6% sequentially and $150.9 million or up 13.6% year-over-year and will be recognized as the additional aligners are shipped.
Speaker 3: Q123 systems and services revenue of $153.3 million were down 9.7% sequentially, primarily due to the seasonally lower scanner volume, partially upset by higher services revenues from our larger base of scanners sold.
Speaker 3: Higher revenues from our CPO and leasing mental programs and favorable ASPs, down 6.2% year-to-year, primarily for the reasons just stated.
Speaker 3: Q123 systems and services revenue was impacted from favorable foreign exchange of approximately $4 million or approximately 2.7% sequentially. On a year-over-year basis, system and services revenues were unfavorably impacted by foreign exchange of approximately $5.8 million.
Speaker 3: approximately 3.6%.
Speaker 3: Systems and services deferred revenues on the balance sheet was down $2.2 million or 0.8% sequentially primarily due to the decrease in scanners sales and deferred deferral of service revenues included with the scanner purchase and up $24.2 million or 9.8% year per year primarily due to the increase in scanners sales.
Speaker 3: As such, our model has changed. We expect it to continue to roll out programs such as our Certified Pre-owned Leasing and Rental Offerings to customers by possibly leveraging our balance.
Speaker 3: and selling the way our customers desire.
Speaker 3: Developing new capital equipment opportunities to meet the digital transformation needs of our customers and DSO partners is a natural progression for our equipment business with a large and growing base of scanners sold.
Speaker 3: Moving on to gross margin. First quarter overall gross margin was 70%, up 1.5 points sequentially and down 2.9 points year-over-year. Overall gross margin was favorably impacted by foreign exchange by approximately 0.8 points sequentially.
Speaker 3: and unfavorably impacted by approximately 1.1 points on a year-over-year basis. Clear aligner gross margin for the first quarter was 71.7 percent, up 0.9 points sequentially due to higher ASBs partially offset by higher manufacturing of brinks.
Speaker 3: Clear aligner gross margin for the first quarter was down 3.1 points year-over-year, primarily due to lower ASPs. Increased manufacturing spend as we continue to ramp up operations at our new manufacturing facility in Poland and a higher mix of additional aligner volume.
Speaker 3: Systems and Services Gross Margin for the first quarter was 61.6% up to point eight points sequentially primarily from increased manufacturing efficiencies. Systems and Services Gross Margin for the first quarter was down 1.8 points year-to-year due to lower volumes partially upset by higher services revenues and ASPs.
Speaker 3: Q1 operating expenses were $527.1 million, up sequentially 4.4%, and up 3.1% year-over-year. On a sequential basis, operating expenses were up $22.1 million, primarily from higher incentive compensation and consumer marketing spend.
Speaker 3: partially offset by restructuring and other charges not recurring in Q1.
Speaker 3: Year-over-year, operating expenses increased by $15.9 million, primarily due to higher incentive compensation and our continued investments in sales and R&D activities, partially upset by controlled spending on advertising and marketing as part of our efforts to proactively manage costs.
Speaker 3: On a non-GAAP basis, excluding stock-based compensation and amortization of acquired intangibles related to certain acquisitions, partially offset by restructuring and other charges, operating expenses were $490.5 million, up 6.7% sequentially and up 2.1% year-over-year.
Speaker 3: Our first quarter operating income of $133.5 million resulted in an operating margin of 14.2% up 1.7 points sequentially and down 6.2 points year-to-year. Operating margin was favorably impacted by approximately 1.5 points sequentially.
Speaker 3: primarily due to foreign exchange and higher gross margins. The year-over-year decrease in operating margins primarily attributed to lower growth margins.
Speaker 3: investments in go-to-market teams and technology, as well as unfavorable impact from foreign exchange by approximately two points. On a non-Gap basis, which excludes stock-based compensation, amortization of intangibles related to certain acquisitions, offset by restructuring and other charges, operating margin for the first quarter was 18.5 percent, up 0.2 points sequentially and down 5.5 points year-to-year. Interest in other income and expense, net for the first quarter was an income of 1.1 million dollars.
Speaker 3: compared to an income of $2.7 million in the fourth quarter and a loss of $10.6 million in the first quarter a year ago, primarily due to net foreign exchange gains from the strengthening of certain foreign currencies against the US dollar.
Speaker 3: The GAAP effective tax rate in the first quarter was 34.8% compared to 63.8% in the fourth quarter and 28.4% in the first quarter.
Speaker 3: The GAAP effective tax rate in the first quarter was 34.8% compared to 63.8% in the fourth quarter and 28.4% in the first quarter of the prior year.
Speaker 3: The first quarter gap effective tax rate was lower than the fourth quarter effective tax rate, primarily due to increased earnings in low tax jurisdictions in Q1, 2023 and an audit settlement in Q4, 2022. As a reminder, in Q4, 2022, we changed our methodology for the computation of our non-gap effective tax rate to a long-term projected tax rate.
Speaker 3: and a enhanced given effect to the new methodology from January 1st, 2022, and recast previously reported quarterly periods in 2022. Our non-GAP effective tax rate for the first quarter was 20%, we've selected the change in our methodology.
Speaker 3: First quarter net income per diluted share was $1.14, up sequentially 60 cents and down 56 cents compared to the prior year. Our EPS was favorably impacted by 14 cents on a sequential basis and unfavorably impacted by 21 cents.
Speaker 3: on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $1.82 for the first quarter, up 9 cents sequentially and down 43 cents year-over-year.
Speaker 3: 2022 non-GAAP net income per diluted share in our prior year 2022 non-GAAP EPS reflects the Q4 2022 change in our methodology for the computation of
Speaker 3: the non-GAAP effective tax rate. Moving on to the balance sheet. As of March 31, 2023, cash, cash equivalents, in short,
and long-term marketable securities was $921.4 million, down sequentially 120.
$1.2 million and down $199.2 million year over year. Of the $921.4 million balance, $310.5 million was held in the U.S. and $610.9 million was held by our international entities. 8 Jazz go Tuolistics Centerioned 9 Define 10 19
We purchased approximately 942,000 shares of our common stock and an average price of $307.74 per share for a total purchase price of $290 million, completing a $200 million accelerated share repurchase from Q4 2022.
a $250 million ASR from Q1 2023 in our May 2021.
$1 billion stock repurchase program. During Q1 2023, we announced that our board of directors authorized a new $1 billion stock repurchase program to succeed the $2,221 $1 billion program. Currently $1 billion remains available for repurchase under the $2,223 $1 billion.
Q1 last year. Cash flow from operations for the first quarter was $199.9 million. Capital expenditures for the first quarter were $64.1 million primarily related to our continued investments to increase aligner manufacturing capacity and facilities. Pre-cash flow defined as cash flow from operations less capital expenses.
as we move through the year. However, the macroeconomic environment remains uncertain and given continued domestic and global challenges and unpredictability, we're not providing full-year revenue guidance. We would like to see consistent improvements in the operating environment and consumer demand signals before revisiting our approach.
We remain focused on making investments to drive growth and penetration into a huge untapped market opportunity, including our strategic investments in sales, marketing, technology, and innovation. We are confident in our ability to address the massive opportunity for digital orthodontics and restorative dentistry.
with our execution centered on our strategic initiatives. With this as a backdrop for Q2 2023, we anticipate clear aligner volume and ASBs to be up sequentially. We also anticipate systems and services revenue to be up sequentially.
For Q2 2023, we anticipate revenues to be in a range of $980 million to $1 billion. We expect our Q2 2023 non-gap gross margins to be flat to slightly up from Q1 23. And our Q2 2023 non-gap operating margin to be up by approximately one point sequentially.
as we continue to strategically prioritize our investments and go to market activities and R&D to drive growth.
for full year 2023 and assuming no circumstances beyond our control we reiterate our 2023 non-GAB operating margin to be slightly above 20%.
For 2023, we expect our investments in capital expenditures to exceed $200 million. Capital expenditures primarily relate to building construction and improvements, as well as additional manufacturing capacity to support our international expansion.
Finally, as it relates to the $75 million equity investment in Hartland Dental that you'll discuss, our investment is less than 5% of the company and the line has no oversight or involvement in management of Hartland Dental or its affiliates.
With that, I'll turn it back over to Joe from Final Pommets. Joe. Thanks, John . In closing, we're pleased with our first quarter results that reflected in an environment of continued stability for our doctor customers. However, degrees of uncertainty remain from market to market. We're pleased with our first quarter results that reflected in an environment of continued stability for our doctor customers.
We're confident in our durable competitive advantage as we continue to transform the orthodontic industry, bringing digital dentistry and clear-liner treatment to more doctors and the patients they serve. Driven by our strategic initiatives of international expansion, orthodontic utilization, general dentistry treatment, and patient demand in conversion. We will continue to focus on the next phase of new platform innovations in scanning understanding.
software and direct 3D printing while prioritizing the needs of our customers for the ultimate benefit of their patients.
We are a purpose-driven organization with the TARDOS commitment to transform more smiles and change more lives. We're the only digital orthodontic company in the world today with a scale in reach to address the 500 million potential people that could benefit from teeth straightening within this line system.
Thank you for your time today. We look forward to updating you on our next earnings call. Now I'll turn the call over to the operator for questions. Thank you.
Thank you. At this time we will be conducting a question and non-succession. If you would like to ask a question please press star followed by number one on your telephone keypad.
The confirmation tone will indicate your line is in the question queue. You may press start two, and if you would like to remove your question from queue, and participants using speaker equipment, it may be necessary to pick up your hands that before pressing the start is. One moment please while we pull the questions.
My first question today, Constra Jackson Bednar from Pythasam, your line is open.
Hi, Jay. Good afternoon, everyone. Hey, there. Thanks for taking the questions. I wanted to start first maybe with the 2Q outlook. You're pointing to a sequential uplift in cases in the quarter. I think that's consistent with what we typically see in a normal year from first quarter to second quarter. I think it's normally a 5 to 10% uplift.
So maybe a good sign if we're continuing to move back towards normal. I'm not sure if you're willing to touch that typical pattern there, Joe or John , just to comment on the second quarter. But regardless, can you elaborate maybe on the rhythm of activity you're seeing in the U.S. or international markets that's contributing to the visibility today and calling for those improved case volumes in the second quarter?
Jason, so you know, first of all, I just described, you know, what we have is stability right now. I mean, you talk about the quarter over quarter seasonality of the business, you know, we haven't really seen that for a long period of time. Obviously, that's embedded in, you know, our forecast right now. But I characterise again what we're seeing right now is stability, which, you know, I feel good in this.
and the right kind of focus.
Okay, all right, understood. Maybe to follow up and press a little bit more on maybe on the utilization side. Could you talk about maybe the puts and takes around some of the utilization metrics you're putting up here in the corner and as we think forward in the future. It seems like that ortho channel is seen some good uplift.
The first sequential improvement we've seen in over a year, international utilization did take lower, but I'm wondering if there's a dynamic plan out there where some of your China doctors are coming back online and you have started to do cases but not yet fully back up to normal. So maybe just curious to get unpack what you're seeing with utilization in those two channels, the North American Orthodox channels here at National Customer Base.
Yeah, utilization statistic is, you know, Jason, you know, obviously important to us. Remember, it often gets somewhat muddled in the sense of DSO aggregation and different things in different areas that, you know, we've had reported in the investment community at times. Your point on China is a good one. You know, China was somewhat dark for us for, you know.
outperformed, you know, on a clear aligner segment on that piece too. So, you know, we're seeing good doctor engagement and that's them on both the GP side and work those side. I think the overall piece here is you have to look at, you know, a continued challenge from an adult standpoint when you look at our numbers across the globe. And I think that's more reflective of the consumer index and confidence things that we've talked about in the past and the teens.
in that certain window of treatment or more certain from this seek treatment than some of the adults in those cases. And I hope that addresses your question, Jason. Yeah, yeah, definitely. Thanks, guys. I'll hop back in. Thanks, Jason. Thanks, Jason. Yeah.
Now, the next question comes from Elizabeth Anderson from Evercore ISI. Your line is open.
Hi Elizabeth. Hi guys, thanks so much. Hi, Kai, how are you? So, my first question would be, I know you said China is coming back. Are you seeing that continue to sort of improve as we think about the second quarter? I mean, obviously you're lapping some of the shutdowns last year, but I'd be curious about how new
I think Elizabeth, I'll take the kind of the margin piece of this is John , you know, we'll see, you know, improvement as we produce more product sell more product. We talked about that being sequentially up from a volume standpoint and utilize our facilities, whether it's clear liner or or on the systems and services side. So that's definitely a help.
in Poland as that plant continues to ramp up, we see improvements in gross margin that way.
If this was with China, it was kind of a difficult quarter in the sense of how it started. We saw it, good unfolding as a quarter went forward. I'd say when I hear people say China returning, China is coming out of a COVID crisis. I think we see.
Obviously across different industries, China improving in that sense. But I'd say no way is China back in the sense of we envisioned China four years ago or so before we went into this mess. Right now I'd say what we've seen in China in the last few months is just stability. I'd say some stability and a more clear signal out of China that we've seen in the past, but nothing that we're ready to forecast through from an individual growth standpoint. Great. Thank you guys.
Thanks, Elizabeth. Our next question comes from John Block from Steve Hall. Your line is open.
Our next question comes from John Block from Steve Hall. Your line is open. Ann.
Hey John , thanks guys. Hey Joe, maybe someone of a similar line of questioning back, but I just want to stick to maybe the March quarter. So, you know, let's say most of the one Q2 0 revenue B is specific to ASP related if you would. So, I'm curious how in visual line cases trended throughout the March quarter.
And if there's anything to call out within the different regions, you know, and how that played out call it from a Jan to a March because when you do sort of some of the implied math based on John your commentary and when we're one to ASP was gonna land it seems like case falls were
maybe on your number prior, you know, not ahead. So again, just any color around case falls throughout the quarter of my region would be helpful. That day, China, this is John . So I would say in specific, as we said in China, we saw improvement in China. And I mean, it went from...
you know, January with a lot of the COVID cases and, and February was better than, than January and March was better than, than February . Um, we saw that. And then as Joe described, we've seen stability in a lot of the other markets where, you know, there's, there's puts and takes, but overall more stability, um, throughout the quarter. And that's what kind of,
China was supposed to be down Q over Q. Was China still down Q over Q, 4Q to 1Q based on your commentary or was that up and you gave it back a little bit somewhere else? That would just be the follow-up to the first question. The second question is just burning one on 2Q a little bit. When you say ASP up 2Q versus 1Q...
You know, is there a dark throw of maybe low single digits or one to two percent? I'm guessing you get the stub on the price increase. You get the full quarter and two queues that you didn't get the one queue. And maybe F-X as we sit here today is more favorable for the June quarter versus March. Thanks, guys.
Yeah, thanks, Sean. Yeah, on China, we didn't specifically guide for China in Q1 and, you know, it played out as we described there. But that's what we saw in China, which said what Joe was talking about, just that's the ability that we saw there.
that we haven't seen in three years or so. On ASPs, you're right. We expect it to be slightly up over Q1. It's getting that full quarter of price change and so on the price increase we have and kind of taking the FX where it's at right now. So slightly up compared to what we saw in Q1. Thank you.
Next question comes from Jeff Johnson from Bad. Your line is open.
Our next question comes from Geoff Johnson from Baird. Your line is open. Hi Geoff.
Oh, hold on, guys. Let's see if I can. Yeah, I'm off you. Sorry, I was a sure I was off you. Hey guys, are you? Yeah, I'm good. Following up on John's question, I think he was trying to get at the same thing. But look, I mean, when revenue and one two came in, clearly ahead of what you guys were talking about, two Q is at least being guided above the street, which is obviously encouraging. You're talking about the ability to.
that's a better revenue. I would just think even with fixed costs, leverage, maybe we would have seen a little bit better margin in the one queue and a little bit more optimistic outlook for the year.
I think, John , when you look at or sorry, Jeff, when you think of the total year, you know, there's still uncertainty in the second half. So we tried to give, you know, a good view of where we think Q2 will be based on that guidance, but there's still uncertainty in the second half. And that's why we, you know, stayed away from that revenue guide for the total year and kept our our op margin.
that we talked about the non-gap at 20% or slightly above kind of out there just for that uncertainty still in the second half. Okay, and then maybe a follow-up. I just want to make sure on DSP. I think I know the answer to this I don't want to expose my my naivete if it is that but
Different at all, it's been down 3% 4% year over year, being impacted at all by more things moving to GFP. Just want to understand the impact that has as we look at these reported global case volumes. Thanks.
No, you're right, Jeff. I mean, so as DSP grows, there are some non-comprehensive, typically cases that get caught in there. You know, those would be minor adjustments, minor movement cases that those doctors would want instead of going into a non-comprehensive case and ordering that, they're using DSP.
And so therefore DSP kind of includes it. It's great revenue for us, it's additional revenue. That's why when you think about that other revenue piece of it, it's growing faster as DSP grows and it's really fulfilling the way the doctors want to be sold to. But some of that case volume gets trapped within DSP.
But Jeff, just make sure we're talking, you know, kind of apples to apples. You asked if you stripped out those cases from our reported case volume. They're not counted in the case volumes is the point. And that was the comments that John made on the script about the implied impact of DSP revenue growth because those aren't counted in case shipments.
Right, and as they're growing, then I'm assuming the 4% year-over-year case volume contraction you reported this year in the first quarter looks a little worse than it actually would have been if DST wasn't out there. And that's what I'm trying to get at. Is there any way to quantify that with cases if not for DST been closer to flat year-over-year? Is there just any way to kind of guide us?
Roundabout you know what that impact of DSP growing nicely year over year, but then that's capturing You know DSP is capturing more cases this quarter this year in the first quarter than it did last year in the first quarter Yeah, we haven't broken that out it Jeff within DSP, but you're right the
the year of a year case volume change would not have been down by as much. It would have been, you know, it would have been more, you know, it would have been adjusted because DSP is growing and there's more cases that kind of get trapped within there. But as Shirley said, we don't report those DSP cases. They're not there. They just show up in our other revenue. Wonderful. Thank you. Yeah. Thank you.
Our next question comes from Brandon Vasquez from William Blair. Your line is open. open.
Hi, everyone. Hi, thanks for taking the question. I think first I just wanted to focus kind of on the adult side. You know, the cases were down quarter to quarter. Those are the cases a little more exposed to macro side, but you are also guiding to sequential improvements in volumes going forward.
So just kind of curious if you can talk about that dynamic. Is team quarter over quarter growth enough to kind of offset that? Are you expecting adults to also improve? Just kind of any dynamics around that would be helpful. Hey, where's Joe? Look, I think when you look at adults, I look at that as, you know, really tied to the consumer confidence indices, you know, particularly in the Western world that we can track and
Look, we're not smart enough to predict where that's going. It looks like that's stable right now, too, when you look at the way those lines are trending in the United States in different parts of the Western world. On the teen side, a second quarter is a big teen season. In the Western world, third quarter is big teens for China. And so that's why, we talked about in my script, is that we came out of the first quarter with really positive signs on teens.
away from kind of the near term stuff and just talk a higher level strategy on the DSOs. It looks like you guys are having good progress there. Can you talk about other any kind of like fundamental differences of going to that market and any commercial strategy differences? Are there potential margin benefits because you're kind of dealing with one large organization that sells the bigger counts?
Anything you can call out there for us. Thanks Yeah, that's a good question. You know the DSOs you're right. There's some we call OpEx, you know some cost aspects You don't have to have You know as high as the number of salespeople calling that account you you organize resources differently to make sure you support you know a Team like Heartland the way they need to be supported
What's really great is the very synergistic effect too, in a sense of how they execute on their clinicals throughout their organization, from an efficiency standpoint, how they teach our doctors to use our product to enhance what their capability is in a digital dentistry side. And so, and then obviously we help to teach through their teachers in the sense of how we train their doctors and all. So.
We're really like about with Heartland and we have a good relationship with you know with other DSOs with Heartland is really good focus from a digital standpoint and good execution around how they want to move that to the marketplace to their doctors It's very professional and that's why we've seen growth in that channel and we see that with smile docs And you know also on the orthodontic side they were strong orthodontic DSO and
We're really, really happy to partner with them because we have the same vision and the same focus on expanding the marketplace for digital orthodontics. Great. Thank you. Thank you. Our next question comes from Nathan Rich from Goldman Sachs. Your line is open.
I think it's great. Good afternoon. Thanks for the questions. Maybe going back to China, if I could, Joe, is there any way to characterize kind of where key shipments were in March relative to maybe where the business was prior to the lockdowns? And could maybe just talk generally how you feel about the...
except for, you know, we had, you know, a reasonable quarter and you can see we're predicting that in the second quarter for China. That's kind of as far as I want to go. When you think about, you know, China itself, from a consumer standpoint, you have to look at the private institution, you have to look the public hospitals, and again that data isn't clear enough for us in the sense of what the sustainability is on that piece. So we're just being cautious.
I don't think China is going to revert back into a COVID kind of a shutdown. I think we all know that. But that economy is somewhat questionable right now in the sense of how fast it will rebound in what direction it rebounds in. We're just being cautious in the sense of how we're going to forecast that.
Okay, sounds good. And then, John , maybe a follow-up for you. Could you maybe help us get a sense of where the 3x3 case penetration was in one queue? And it sounds like you're expecting a pretty meaningful step up in two queue. I don't know if you can kind of put any numbers around that in terms of what that will do in terms of the revenue recognition.
that you'll get incrementally relative to the first quarter as that penetration increases? Well, I think first off, the three and three, it's a great product that our customers want and they're utilizing. And so we're happy to see in the markets that we've released good adoption. Started in January for us and we saw it progressively increase as we went through and through the quarter, so every month got better. And it really gives doctors more options in terms of how they want to purchase our product. As I said in my remarks, many of our doctors, most of our doctors don't.
are in the overall Q2 guide.
Thanks for the questions.
Next question comes from Michael Riskin from Bank of America. Your line is open. Great. Thanks for taking the question guys. I want to follow up on earlier question regarding what you saw in adult versus teens. Thank you.
You know, recognize your point on adult being a little bit more consumer exposed and maybe some of that a little bit more macro driven. But just wondering, anything you can comment on in terms of how that progressed.
through the quarter of any difference you're seeing, you know, US versus Europe versus the media, just given, you know, anything on progression there, I think of that. This is the sort of that back to your common functionality of the really helpful to bridge that. And Michael's show, I mean, if anything's been consistent.
We've had seen the pressure on adults during this whole downturn. Now, we have seen pressure on teens too, but not to the same extent. You know, these things vary by country in Europe . You know, there's no Europe . You have to look at by country or whatever in the United States. But in general, we see very similar trends from an adult and teen standpoint.
with more team demand, not saying positive team demand, but stronger team demand than we've seen with adults. So what we feel good about is that we're seeing decent stability in those numbers and adult creep up a little bit. We saw our DSOs in the United States execute really well around adults, which shows you that if you have the right kind of focus...
You can still have a good patient yield on the adult side if you're working that piece. But, you know, in general, I think until we see significant economic improvement, I don't know if that adult's team kind of ratio in the center we're seeing is going to change dramatically. I think we have to see a good upturn in consumer confidence before we see that reflected in the adult volume. It doesn't mean that confidence doesn't affect teens, but it doesn't affect it to the same degree.
Okay, all right, that's helpful. And then on the ASB front again, I know you guys talked about the price hike for a while and you've discussed the little factors that led to the ASBs and one Q and it will be an out-of-the-two Q. I'm just wondering, we've always heard that they did price elasticity, he or demand elasticity as it relates to price. I know there's a lot of that they don't know earlier this year.
Just wondering if now that you've got a full quarter under your belt, any additional learnings on price sensitivity in the market, ability to take more price through another price hike, what are your thoughts on that a couple months in? I think price elasticity is a good question in this marketplace. Michael, I think we've always known it's been there. We see our competitors don't necessarily compete at all on technology, they compete on price.
And then we know that it's had a certain amount of success in a certain part of the marketplace, and that'll always be there. But when you look at our price increase here, and I think you're associating our price increase with price elasticity in our volume, is our 3x3, which we didn't increase, in obviously there's a limitation on additional liners. It was really well received by the marketplace, and varied from a GP standpoint and orthostampling too, and our increase on our comprehensive was seen as fair, and also the other parts. So I would say, you know,
Not everybody loves a price increase and we see our MPS score. But I've been here long enough to have enough data points to tell you that I think this price increase or pricing approach was received better by the marketplace than any other one that I've instituted since I've been here. So I feel good about it because I think it matched our customer expectations with what we need from a business.
Thank you, Michael. Our next question comes from Erin Wright from Morgan Stanley . Your line is open.
Great, thanks. I'll ask my question both up front here, but first on Heartland and the investment there and how does the relationship change now with the investment and with this constraint and any future relationships with DSO partners. Did you contemplate any sort of conflict of interest that could arise there? And then second question would be on the scanner business and...
how we should be thinking about the quarterly progression of the segment and and stability across the business and how we're just thinking about just equipment and the entrance in general overall with ITERO. Thanks.
Hey, Aaron, it's Joe. I'll take him. On a DSO side, I don't see a conflict at all. We have DSOs that really want to address digital dentistry through digital orthodontics. And they're excited about, obviously, our digital footprint and what we can offer from a platform standpoint. And so Heartland is helping to lead on the GP side in that sense. And I mentioned the SmileDocs on the ortho side is there too. So.
Again, I don't expect this to be an issue within any of our accounts because we will engage with them and to help them on a demand equation if they want to be as aggressive and inconsistent as, and this implementation is what Heartland's been and what Smildocks has been too. So, and I don't see a conflict of interest at all. When I hear that term, my hair goes up in the air.
I don't see anything that's conflicting at all. I think this is completely in line with what we believe in. We want to drive digital orthodontics as fast as we possibly can. And those DSOs, and frankly, not just DSOs, just we have several doctors that have multiple practices that we engage with too to try to expand those practices with them because we know they've committed to digital orthodontics and can drive those things forward. es
that business because we have such a broad install base that held up very well. So as I look at the scanner marketplace and where we stand today, I believe we have the largest installed base out there. We monetize that well from a services standpoint, we work with those accounts. When you look at our NPS scores of the customers that use iTero, we have a huge number of customers
significantly higher customer satisfaction than ones that don't and try to use you know pvs impressions or something else too so and when I look at our technology versus technology from competitors I feel we lead and we'll continue to lead in the marketplace so you know our itaro scanners is critical force going forward it's a key part of our digital platform don't look at the fourth quarter and first quarter any kind of a signal to say that we're losing momentum in that business
we always see that difference between fourth quarter and first quarter. John , you had anything? I mean, you'd live this with me. That's good. I mean, it's very consistent. All right, Aaron, thank you. Our final question today comes from Kevin Caliendo from UBS. Your line is open.
Hi, Kevin. Great. Thanks for getting me in. I just want to go back to Heartland. Can you tell me how much volume you did with Heartland in 22? Is this going to potentially impact that going forward? Is there any guarantees or any buy-ins or reduced control?
Maybe more contributes to their growth as they continue to grow. And I guess the follow up to there is how are you accounting for this? It says less than 5% ownership. I'm assuming that means whatever runs to the P&L would be a non-controlling interest, right? And, or is it somehow above the line and is this impacting margins in any way, shape or form?
I can't take the first one. John's are expert in accounting here. I'll let him take the next one. So on Hartland, I look, we don't give individual, you know, numbers like this, but you can, you can guess, you know, Hartland's the biggest DSO in the world. And they're very effective DSO in that sense. And this is a meaningful investment. We're seeing meaningful growth of those guys. And I think.
We're trying to model something, I think it's just a model. It's a good relationship and has a good trajectory from a growth standpoint. John account. Yeah, in terms of the investments, less than 5%, it doesn't show up in our, you know, up margin or anything of that nature. And, you know, it's an investment that we made and, you know, it stays on our books that way, but there's nothing that would show up in our up margin or anything else related to that investment. Hey Kevin, also it's just, you know, John's talking, I was thinking of my comment to you is, your comment might've inferred something like a good pro quo or something like that. There's nothing.
So do you expect US cases to grow year-over-year beginning in 2Q? Is that part of the assumption or how we should think about that? Can you get down to that kind of granularity? A US or America? I think it's the best. Yeah, we're not at the, we're just not giving that case growth numbers. We just kind of wanted to talk sequentially. But.
you would expect, as we've kind of said, from Q1 to Q2, we would expect overall volumes to increase sequentially. As you get into teen season, others, it's going to vary by region, but if you're talking specifically US, you start to get into more of a teen season basis, and that's the expectation for our volume numbers.
Thanks, Kevin. Appreciate the question. I had to try. Thank you. We know. We understand. Thanks, everyone. We appreciate your time today and thank you for joining us. We look forward to speaking to you at upcoming financial conferences and meetings. If you have any follow-up questions, please contact Investor Relations. Have a great day. Thank you. Thank you for joining us at this conference.