Align Technology, Inc. (ALGN) Earnings Call Transcript & Summary

And he will, I can tell you. He will.

He already does, Regina.

And please try to be polite when I do it, Sam.

Thank you.

Thanks. Thank you, Simon. Thank you, Dr. Blevins and Dr. Dyer. That was fantastic. Now I'd like to invite the entire EMC to open their cameras, and we're going to turn it over to the Q&A session. We'll just give you 1 minute to get on camera. And we've got a fair amount of questions, and I want to try and get to as many as possible. So we will be fairly succinct. And I'm going to kick it off with, there's a fair amount of questions, I think, just around the investments and the comments that both Joe and John made about significant investments, and you really kind of really driving the growth and continuing to support the business. So Joe and John, could you comment on that a little bit more, please?

Yes, Shirley, I'll kick it off is -- first of all, I mean we made a comment because we continue to invest in this business to drive demand and to create the kind of digital platform and capability that was just described by Regina and Sam. They did a great job. But we'll always be responsible. We know we'll halter 25%, 30% operating profit piece that we've been reiterating over the years, and we keep that in our mind also. But I'll let John give you some more specifics.

Yes. To add to that. And like you said, we're respectable of the -- of our model. We have to invest in advance with manufacturing, these long lead times, R&D, marketing and sales, and it's a reflection of volume and demand that we see. So just like we've done in the past, we make those investments because we see good return on those investments, but it's not a difference in terms of our long-term model. Still that same model, just a reflection of the demand that we see.

Thanks. Next question. There is lots of questions around the brand investments. And how does this compare to prior years when you think about how much you're spending now versus prior years? Is it a significant difference? Can you give any additional color?

Yes. I'd just start to answer that question by -- look, when we make investments, we look at returns. We just don't invest because we think it's good to have our name on TV. We look at the investment of those kind of communications to drive consumer demand versus technology versus other aspects of the business. Again, John and I are always together on that. And John, any comments you have. Appreciate it.

Yes. And I think what you see us doing is finding different ways to be able to invest. So partnership with NFL, investments that we make with influencers, media investments that we have, online and so on. So not a change in terms of percent in terms of how we're -- how much we're spending. It just differences in terms of how we see those investments and ultimately comes back to getting those return on investments.

Yes. I think it'd be good to hear from Raj too because Raj really has a good conceptual understanding of the strategy that we have right now and how we've been spreading that around the world. Raj, any comments you have. Appreciate it.

Yes, just one thought to add to what you and John said, Joe. I think the important concept here is that of ROI, right? When we go above a certain threshold, and we have really reach-based and science-based media plans, then we're able to achieve the ROI that we need to achieve to deliver business results. So, even as we kind of go ahead with media investments, country by country, we are looking at is their sufficiency on reach, is their sufficiency on media, and hence, can we actually prove ROI, right? And our job is pretty tough on that. Can we prove ROI before we can actually go invest and that's how we've kind of go ahead and do it.

All right. Next question. If you look at what the Street's modeling, looks like they're using a 2-year CAGR of -- off of 29 revenues of about 18%. So almost as if COVID had never happened. Do you think it's fair conceptually to think about 2021 revenues being at or nearly the same levels as if COVID did not happen in 2020?

I think that's a pretty intelligent question to have is predict where the 2021 will be. We necessarily want to do that. But John, I'll let you handle that question.

Yes. What I would say and what we talk about internally a lot is investments that we're making to continue momentum that we have. So everything about COVID was an impact to that time. And then what you saw us do in the third quarter and what we're expecting is that we're going to continue that momentum, continue those investments that are driving that return. So everything we talk about internally is exit speed, the investments that we're making to be able to drive volume and that's how we're looking at things. Just to really make sure that we come out of this in a very healthy way and drive as much demand as we can.

Couple of questions on Asia Pacific. One, can you talk about the tremendous turnaround in Japan that drove that NPS performance? And then a question on China. Can you talk about having gone through the COVID exposure first there and obviously, through the recovery efforts, what are the kind of the key learnings? And are we on a trajectory in China where things are starting to normalize?

Julie is on. She can handle those questions. Julie Tay?

So with Japan, the NPS turnaround, I think, there's a combination of factors. One is, I mentioned a couple of years ago, we have a segmented sales team. So we're very targeted. We're able to offer specific programs for each of those segments, whether you're auto or GP. When we launched iTero, we were able to really help doctors to bring the digital workflow into their clinics, and that made a huge difference. The third piece is when we launched TREAT. Now we are able to speak the language at the same time, in the same time zone. And I think the Japanese doctors really appreciate it. So I think a combination of all these factors, not necessarily these 3 that I mentioned, there are other factors as well, but this will be the top 3 factors that made the turnaround for Japan's NPS.

Thanks, Julie.

And then with respect to China, having gone through COVID, any learnings, any feedback there from a competitive perspective and market dynamics?

Shirley -- I know COVID, it's kind of an episode that we went through. But if we look at China, I think the basic fundamentals of what we need to do remains. One is the case complexity is complex. And Invisalign has all the innovations to be able to help the doctors. With COVID, and when we launched iTero, we really were able to help the doctors to digitalize their practice more and you've heard Prof. Joe and I talking about that. I think the other point, we continue to put feet on the street in China and really to support the organization and the business there. So we're very well positioned in that sense to go after those opportunities.

Thanks, Julie.

Regarding exocad and enabling digital dentistry, especially with a focus on GPs and DSOs. Is there a strategic shift in all moving away from your core competency in clear aligners and orthodontics to dental therapies? Or are you planning to stay purely a digital tool-based company focused on clear aligners?

It's a good question. You remember exocad, and Zelko can articulate this better than me, but obviously exocad with iTero and Invisalign, and we just worked on that incredibly important workflow between what you have with labs and what you have GPs and really all around the world. And you can see from Zelko's presentation today, just how intricate that is and how important exocad is to us. We are a digital company. We're focused on aligners. And so what exocad was about, that's what iTero is about, and that's our portfolio, and we feel comfortable with it, and we'll continue to invest in driving that. But Zelko, anything you'd add to that or your thoughts?

I would just add that this is really about interdisciplinary. So it's not shifting away or 2. It's really bringing all the disciplines together. And as we said, 3 out of 4 people, 75% need ortho would benefit. So every patient should get the best outcome that they get, and it's going to be a combination. So our platform is to bring all the disciplines so that doctors can work together. And we believe that ortho will be a big part of the majority on that.

Thanks, Zelko. The last thing I'll just mention in the whole series of questions is, remember, this market, we're so under-penetrated in this marketplace. And that's how we started, obviously, our investor discussion and how we ended it, too. And then plus our digital platform and the complexity of it. We just have so much room to grow in what we do. So the idea of becoming a diversified dental company, the way I think your question is framed, it's just something that's not in our mind. It's something we feel we don't need. We feel we have a huge runway here for growth, and we'll continue to focus on that.

Yes. What are your views on 3D printing? And how far are we away from office technology capable of producing it for doctors' offices?

I have to be careful because I could talk about that 1 all day. But right now, there are some docs that do 3D print molds. No one is 3D printing an aligner, but 3D prints molds and then vacuum forms in their office. But I don't think I have to say like, why in the world would you ever want to do that? I mean, everybody is on Align and he can tell you exactly how hard this is to do. Every business has resource constraints. And when you in a business to think, I think orthodontics, these are 60%, 65% gross margin businesses. Backward integration and putting real estate and time and people and money into printing aligners and often substandard at times versus out in the marketplace, advertising and pulling in patients with that kind of gross margin, it's just no comparison. So I know people get excited about 3D printing in offices and things like that. I just don't think it makes sense. And it sounds kind of self-serving. I mean, we certainly can ship STL files to doctors and have them work through that or whatever. But I do think -- I think it's just a holdover from being in more control with wires and brackets and not really embracing the partnership that the digital era really presents. Simon, I know you face this in the United States more than Markus does and Julie does. Any thoughts on that on what you're seeing out there?

Yes. Well, I'd agree with John, I agree with what you said. I think the one area where we do see an opportunity around the STL side is with same-day starts, yes. I think sometimes for a doctor, if the patient is in the office and they can put them into some kind of appliance, it prevents them from disappearing into the orthodontic desert. So I think that's one area. But I completely agree with you. I think it's down to us to really partner with doctors to see that they don't really need to put in this massive infrastructure to support printing of their own aligners. But as far as the long-term, I think I'll leave it to the experts to say how long that's going to take before maybe that happens.

Shifting gears a little bit. How should we be thinking about the iTero business and growth going forward? Can placements grow at similar rates of clear aligners? Or should we be thinking about overall scanner plus CAD/CAM growing similar to clear aligners?

Well, I think we've said -- we frame this between 20% and 30% revenue growth within business in both iTero and Invisalign, exocad included in that. And so I think long-term, you can continue to model iTero and exocad within the framework. Yuval, any thoughts on that?

No. I think we are excited about the growth we see moving forward. I talked about the key drivers. And yes, we should see it in the 20% to 30%.

And John, anything from your end?

Yes. I think you noted it. I mean, look, both on the scanner side and with exocad as well and on the Invisalign side, they're both under-penetrated markets, huge opportunities to continue to digitize. And really, they go hand-in-hand together as part of our digital ecosystem. So when we think about the growth in both on the scanner and services side as well as on the Invisalign side, we look to them to be within our long-term growth model, and that's how we're investing.

A few follow-up questions on the comments around strong momentum continuing into November. Most of the questions are looking for characterization between October and November. And if there's any additional color by region, by product, particularly as COVID cases have increased week after week, how do you think about the momentum you're seeing relative to COVID cases increasing?

Well, I'll just start off by saying we're seeing -- we're afraid about this as we're seeing consistent momentum around the globe. We can just specific point out one region. But John, do you throw more light on that?

That's exactly. We see consistent growth on a global basis, similar to what we saw in Q3. We see it with GP and orthos, and we see it across tiers. So a lot of that growth that we saw, the broad growth that we saw in Q3 has continued, and that's the momentum that we spoke about. And that's why we're making the investments that we continue to make to reflect that demand that we're seeing.

So on the DSO side, the market's created significant growth opportunity, but it's also attracted a fair amount of competition. How do you continue to make Invisalign preferred partner in that channel? And for a DSO customer like Heartland, who's always almost nearly all Invisalign, how does their utilization compare to average?

It's a tough question, utilization versus the average. I'll let Simon really address that. But from a DSO standpoint, remember, they have to educate and have a number of doctors, hundreds of thousands of doctors to really understand how to do clear aligner treatment, and it's not something they were taught in dental school. And so having a digital platform like we have, a product like iGo, products like the [Gower] templates and things that we use, it just helps to fit us in GP workflow in a way it's very difficult from a competitive standpoint. So I know there's a lot of questions in a sense of the challenges and tough stuff that are out there. But I think Sam and Regina's comment that you just heard apply just as well from a GP segment standpoint. But Simon, you work with those relationships every day, what would you think?

I think if you look at it kind of comparing utilization, I think the profile is probably -- well, it's not probably, it's very similar to what we see across the rest of the GP business, which is exciting in a way because there's still room to grow within those DSOs and also increase the number of doctors who are actually submitting cases. So people like Aspen and Harland and Smile Doctors, they're work-in-progress for us, key partners, and we continue to support them. But I think one thing I'd pick up on Shirley about all the noise that's going on in DSOs, I think I made it pretty clear in my presentation this morning, which is there are very different types of DSOs out there and as a company, we're really focused on working with organizations who see the value of a digital platform, and they see the value and consistency that it brings to what they can deliver from a consumer experience and patient experience side. So where we're at the moment is we focus on resources around those DSOs, you see that value. And the partnership really works out great when we can work together and really drive value for them as organizations.

A couple of questions for Emory. Emory, your operation model is changing with respect to treatment planning, it sounds like you're adding tremendous amount of AI and ability to faster treatment plan. How will that change your operations, especially from a centralized perspective in Costa Rica and elsewhere? And then the second follow-up on operations is, as you continue to decentralize your planning and fabrication facilities, will that make the company more or less efficient from a gross margin perspective?

So on the first -- on the treatment planning side, our strategy is actually to -- is to no longer centralize on purpose, and that's to get our resources closer to the customer. We'll have 3 hubs that will support the regions, and then we'll have a smaller satellite offices in our major markets. That's kind of what I mentioned in the presentation this morning. The AI that goes into this and a lot of the automation we have will essentially allow us to continue to support more customers and more volume from those customers without having to add a bunch of additional headcount. We're already seeing some efficiencies out of that today. And so that will help not only in general, but it will help in our expansion. Our people will start to become less involved with doing the busy work of putting a treatment plan together and more time supporting doctors and helping to solve clinical problems. That will be the transition that our employees will make over time. On the aligner fab side, we're getting to a point now in the regions where the volume is sufficient that freight becomes one of the largest -- one of our largest cost drivers. And so as we put factories closer to those -- in those regions, for instance, in EMEA, we can reduce a substantial amount of freight cost. We'll pick up a little bit of labor cost, but when you net that out, it's actually positive for us. So over the long haul, we see these moves as being -- will add efficiency.

Joe, you've talked about the sales process being a high-touch model, and that's driven ongoing investments in the business and to some extent, help keep out competitors. How do you -- how should the Street think about sales and marketing investments longer term? Is this always going to be a high-touch model? Or are there certain penetration rates were they move to a medium low touch?

Well, I think we're always -- it is a high-touch model. I mean, when you think about programs like ADAPT to Align digital and practice transformation and those things, they're not just salespeople. They're actually experts on business workflows and different things. So again, I'll just take us back to our penetration rates. Remember, we're less than 10% penetrated in the orthodontic community. As we work with orthodontists that aren't familiar with our kind of process, there's a lot of friction in that. And we need to spend money with salespeople in training and advisers and those kind of things to work through this. So I think that question is why I can't say forever that we're going to do that. But right now, since we're so under-penetrated, and the friction still exists in the marketplace, we still have to spend at a certain level to make sure that we have adequate sales support, we have adequate kind of teaming capabilities with doctors on both sides, GPs and Northcoast to make this work. But again, I just reemphasize, we're concentrating on that 25% to 30% operating profit side and our gross margins to make sure that we have the kind of gross margin that we can deliver that over time.

And on the restorative side, per Zelko's comments, it seems like there'll be an increasing focus on restorative in coming years. How does Align monetize that? Is it from increased clear aligner utilization, increased exocad users or another source?

I think it's another way of asking if we're going to expand our portfolio. And again, how we monetize that. We monetize that through iTero -- iTero sales, exocad sales and more sales of Invisalign. That's the way we look at it. That's the way we model those investments. And remember, we keep that in mind. But we're not looking for a broad dental platform that we think we're going to need to compete in that marketplace. We feel we can compete on that in technology, compete on that in workflow, compete on that in the entire digital platform that we talked about.

Joe, this entire weekend and your presentations are all about digital and clearly, we've seen the benefit of that in your business more recently. But what gives you confidence that this move to digital will persist once the vaccine is distributed and COVID is gone?

Well, I think the movement to digital has persisted, it's just at a different plane right now than what we had before. But if you -- I know we had a lot to do on the orthodontic conference that we just put together at the summit. But you could see that digital always wins. We talk about disruptive technologies and different things. Digital is our air. It's what works. And the idea that wires and brackets are going to hang around for a long time, I think, is somewhat naive, given what we see in other industries and the incredible advantages that you have for clear aligners in a digital kind of a format. So what gives us the confidence. Confidence has been our progress and momentum so far, analogies to other kinds of digital processes have been disruptive out there and the uptake that we're seeing from doctors, doctors on both the general dentistry side and also the orthodontic side.

2 questions for Simon. Simon, can you talk a little bit more about the opportunity? You talked about Brazil being the second largest or third largest opportunity. Can you talk about the size and growth of the Brazil market? And then is there anything from a key takeaway perspective from the Ortho Summit that you just wrapped up this weekend?

Let's start with Brazil. So yes, look, I think we're all incredibly excited about Brazil. I think you have to take a step back and think about the culture and the focus of the people there. People, if you ever visit to Brazil, they look after themselves, and they want to look the best. They absolutely want to be. So you add to that, the site and the population, and we've got what over 32,000 orthodontists in Brazil. It's is a market. And when we talk about being less than 10% penetrated, we're less than 1% penetrated there. So it is an absolutely stunning opportunity. The other great thing as well is we've got a fantastic team down there. Really intelligent, passionate, and they build incredible relationship. Our NPS in Brazil is 60 plus. So they're doing a great job down there. So very excited about Brazil. When you talk about the Ortho Summit, look, I suppose I'm looking at it from an Align perspective. It was the first time we did something on this scale. We're all, I think, very disappointed that we can do that event face-to-face is kind of the high point for us as a business every couple of years. We built up to that. But I think what I've heard -- well, I've heard great reviews from our customers, which I think is more important. But I just think the timing of it was just perfect because we had a number of customers who've learned so much as well as an organization over the last few months. And I think the theme of digital is the inciting. People have really started to see that it is the answer. And there are so many benefits to their business, to their patients. But the one thing we probably don't talk about is the benefit to the doctor, okay? And you had a few times from doctors talking about their quality of life. How they get to spend more time with their families. They're more flexible. And I just think that's a great thing as a company, not only can we bring them excitement from the technology point of view, but we can help them with their kind of quality of life and how they choose to live their life, which is fantastic. So really strong message, and we're looking forward to following up with the content.

Thanks, Simon. Can you talk about how you measure the ROI on influencer marketing that is what kind of impact has TikTok campaign had on teen starts in Q3?

Let John and Raj have it.

I can start with that, and then Raj can add. So when we look at our returns on investments like this, ultimately, it's comes down -- it's going to come down to volume, but it's a matter of how it gets to that volume. So you look at some of the investments. Are we getting the reach that we expect, the frequency? Are people coming to our website? Are we getting people that come to the concierge team and ask questions about things? So do you get that awareness? Do you get to that top of that funnel? And then ultimately driving it to volume. And is that an effective way for us to be able to grow our business, create this awareness. As you know, we've invested and continued to invest even during the crisis because we knew people would be on their phones, on their computer, at home looking for things to be able to consume from a media standpoint. So we were very targeted in terms of how we wanted to invest and -- but ultimately come down to the volume that we see. Raj, I'll turn it to you.

Thanks, John. I'd say, in quarter 3, teens start -- cases grew by 25.6%, you saw that. There are 2 or 3 different ways in which we look at, what's the impact of marketing, especially influencer marketing, right? So at a very simple level, if you take an influencer, like Charli D'Amelio, right, who's got about 95 million followers on TikTok, 35 million followers on Insta. So when she posts a video, that's actually liked, you're going to get to 100 million impressions very, very quickly. So in terms of total impressions that our campaign was able to kind of hit in quarter 3, we hit about 3.3 billion impressions, right? You start there and then say, okay, out of all the people who saw our marketing, how many went to our website? Out of the folks who went to our website, how many actually searched for a doctor and how many set up an appointment with the concierge, right? So the concierge leads data that you saw in quarter 3, it more than doubled versus a year ago, and that was an indication of the level of interest that teens had, right, from the campaign. The second thing I'd tell you, the second way we measure it is, we have a multivariate model that we use. It's a regression model. We put all the inputs in and we look at, okay, how much of each of these inputs is driving sales? And based on that, we figure out what the ROI is. It's kind of an industry standard. So if you go back to packaged goods industry, which has got much larger marketing budgets, the industry standard is really kind of like market mix modeling. So that's one tool that we have in our mix as well. And the last thing I'd tell you that we also know is the feedback that we get from our social and community channels, right? So if you look at community management and the comments that teens and adults are leaving for us, they've been incredibly positive. In terms of what we've heard back on them, specifically the idea, it's not your parents' braces. Teens seem to love that. And I'd have to say even moms and especially our orthos love it.

We're going to probably need to start to wrap up, but I want to try and get to just maybe a couple more questions. For iTero, what is scanner adoption right now? And where are you in terms of global market penetration?

Yuval?

Yes. As I mentioned in my presentation, overall, when you look at the Invisalign customers, we still see that more than 50% do not commit with iTero. We also had a lot of opportunity with the second scanner. So I think we still have a lot of opportunity in front of us. Obviously, we see markets like in North America that is -- we have higher penetration in the ortho, and then we have an opportunity for a second scanner with them and still a lot of opportunity with GPs and other markets that we started. So we have a deeper opportunity there.

Thanks. And it looks like we've got a couple more follow-ups. I'm going to try and just net it out with this question. Multiple questions on is November consistent with Q3 or has the October momentum continued into November? John has said both, but I think his statement denotes a different growth rate, especially when October was -- had the momentum. So can you clarify that, John?

Yes. I'll go to the -- our momentum continues into November. So we saw momentum coming out of the third quarter into October. We talked about that at earnings. And then latest statements are that momentum continuing into November.

Great. Thanks. I think with that, I'm going to turn it back to Joe for his closing comments.

Look, I'd like to thank you for your interest. I see we have 156 -- 157 participants, which is terrific. I just -- I guess I'll close with how I opened with the video is that 2 biggest things in these businesses to consider is, one is the incredible demand profile in front of us in the sense of the 500 million patients that we talk about that are out there that can be reached mostly through general dentistry. And then our just incredibly low penetration in the overall orthodontic statement, given our technology and capability we know what we can do. And I think, obviously, Sam and Regina really helped to reinforce that well. Then secondly is the digital platform, the operations piece, all the things we've been working at for almost 1/4 of the century, really hard to mimic, and we continue to spend a lot of rates and improve this because we get excited about the returns we see on those investments and what we can really help with our customer base out there. So look, thanks for your interest. We really appreciate your participation, and we look forward to engaging with you when we report the fourth quarter. Thank you.