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

Great. Thank you. Thanks for joining us. My name is Mike Ryskin. I'm on the life science tools and diagnostics team here at Bank of America. With us here from the team is Ivy Ma. And for our next session, we're hosting Align Technology. We have John Morici, CFO; and Simon Beard, Senior VP and Managing Director of the Americas region. John, Simon, thank you for joining us.

Thank you.

Hi, Michael. Thank you.

Great. And to all investors, I want to make sure you're aware that throughout the presentation, if you have any questions, feel free to submit them through the Vericast portal. You should have a chat box right there or you can hop over and chat us or email us, and we'll incorporate your questions to the fireside chat.

But I guess, just to get started, John, maybe -- you just reported 1Q results, another very strong quarter. And maybe you could just recap it for us, with some of the key pieces that you saw sort of as the quarter developed, and sort of your outlook for the rest of the year, you obviously raised guidance. So what are some of the puts and takes that go into that?

Yes, it's good question, Michael. As we went through kind of the crisis from last year, we continue to make investments, as we've talked about to help with our -- the marketing and drive awareness, sales investments, a lot of go-to-market investments. While keeping our technology and our capacity investments going so that we could continue to generate the growth that we have. And so really, those continue to pay off. We saw as we went into last year from the recovery. We continue to see kind of the month-over-month improvements. We talked a lot about that. We certainly saw that as the quarter progressed. It's just a continuation of those investments. And the quarter is very strong. Great growth, upwards of 60% growth year-over-year. We saw good sequential growth from Q4. iTero business was very strong as well. We saw good growth on our scanner and services, actually sequential growth improvement from Q4, which is typically a strong equipment month that we -- or quarter that we have. So very, very good growth. And then the margins came in at a good rate as well. Gross margin, close to 76% margin, very strong as well. And that was a continuation of some of the investments that we had made and seeing those returns on those investments. And therefore, as we look at our guidance and really feeling comfortable to be able to give a full year outlook, we wanted to provide some context to what we're seeing for the full year. So we guided to $3.7 billion to $3.9 billion in revenue. And we talked a little bit about the second half. We wanted to make sure that the investment community understands kind of how we're seeing that growth and make sure they understand what it means for the second half. So we guided to about the midpoint of our long-term model, which would imply about 25% in the second half on a year-over-year basis. And we also wanted to make sure that we understand the investments that it takes. It still takes investments to be able to drive growth, the marketing and the sales technology investments that we continue to make. So we talked about on an over year basis talking about the 23.5% to 24.5% from an OP margin standpoint. So continuation of investments and opportunities that we see and applied that to forward-looking guidance.

Great. And the 23% to 24.5%, that's GAAP, right? Non-GAAP is 300 basis points above that, right?

That's right.

So thanks for that intro. That's -- I mean, there's a lot to unpack there. And there's a lot I want to follow up on. I guess, first one would be, and this has sort of been the overarching question for the last couple of months or quarters, sort of what's going on in terms of the underlying market conditions and demand. How much of what you're seeing on any given day or any given quarter is catch-up from what was missed in 2Q, 3Q dental procedures or pull forward, pent-up demand? There's all these sort of timing dynamics, so it'd be great to dig in just a little bit deeper, sort of what's your view on where we are in the market now? I mean, some other dental companies presented earlier this morning, so we had some updates from Dentsply Sirona and things like that. So just curious where you are in terms of reopening. Has it sort of flatlined there and sort of your expectations going forward a little bit?

Yes. I think -- and that's a good question. When we talk about the -- as we get further away from kind of the epicenter of the shutdowns, which really was Q2 of last year. So that was April, May, offices were actually closed. When offices are closed, our volume is impacted like everybody's volume. Those offices have broadly opened up. We're at a point now where it's hard to say in any kind of various country and almost region by region, but broadly, those offices are opened. They're running 95-ish maybe percent capacity or at least from an openness standpoint as they've been running. And really, as we look at further away from Q2, there's less that we hear about as pent-up demand, much more about the traffic that's been driving, more and more people coming to the dental office, either to get cleanups, checkups, cleaning done and things like that or orthodontic care as you come into teen season and so on. There's more of a scheduled visits that go on. So we're very aware of it. But what we hear from our doctors is that things are returning more and more to normal. Of course, there's procedures and concerns that have to be in place to make sure that -- with PPE or other considerations that we have, but broadly open. There are certain countries, obviously, that are still impacted. India and other parts of the world where the impact is still going on, and we're actually very mindful of that. But broadly as those offices open up, things start to return back to normal from a traffic standpoint. And we -- as we said at the beginning, making investments to continue to grow in the marketplace. And that's what we did throughout the pandemic and what we're doing in the recovery.

Great. That's helpful. I mean you touched on some of the geographic differences. I was going to focus on that as well, but just maybe if you could make a quick comment on Latin America, Brazil, specifically. I know that Brazil has been really one of your sort of major growth drivers the last couple of years. So is that -- has that sort of bounced back? Is it back to sort of pre-COVID, firing on all cylinders? Or sort of what's the landscape down there?

Simon, maybe it might be for you to take that, that one.

Yes. I think what we saw with Brazil specifically is during COVID, we didn't quite see the dip that we saw in other markets. There are a number of offices that stayed open. But clearly, demand was affected. And then things returned to the kind of the usual cadence that we've seen over the last couple of years. And then clearly, they got hit by a fairly substantial second wave at the beginning of Q1. But interestingly, as we've seen in other markets around the globe and to John's point, when we see offices stay open, it doesn't matter if a country is in lockdown or not, we still see kind of a non-interrupted kind of demand pattern. So yes, we've got good momentum in Brazil as well as over the rest of LatAm.

Okay. That's helpful. That's great. I guess, Simon, maybe sticking with you, switching to the U.S. on the GP channel, DSOs, in particular, sort of been a focus area for a while and saw some nice acceleration, again, leading into COVID and even during it. Are you seeing that acceleration coming out of the pandemic? Do you think that maybe -- has COVID changed the way some of these DSOs approach orthodontics and clear aligners. Do you think they're potentially more open and more embracing of digital dentistry than you would have seen before, just sort of again, trying to do that before and after, compare and contrast?

Yes. It's a great question. I think what I'd say, just to kind of bridge into GPs is that we've actually seen growth in both channels, right? So very strong growth in ortho, and a similar strength within GP and DSO. I think, generally, I think more DSOs are embracing digital dentistry. Not specifically just clear aligners, but you've seen from our scanner sales in Q3, Q4 and Q1, a pretty healthy demand pattern there. So yes, I think they clearly see some of those benefits through COVID and the types of consumers that are coming into their offices, looking for treatment, clearly respond better when they have a digital experience. And then, I think, just overall from the GP channel, pretty similar to the ortho channel. We've seen strong growth not only new doctors that have come in and started kind of on their Invisalign journey, but we've seen it in all of our tiers. So low volume doctors as well as high-volume doctors have increased their utilization. When you think about GPs, Michael, it's predominantly adults. So when you look at our adult results, that's probably kind of 90% of what GPs will treat. Whereas in ortho, it's probably -- there's a little bit more balanced across teen and adult when it comes to that franchise. So we're pretty happy with the momentum we're seeing in all the channels and across all geographies. So I think coming out of COVID that's been consistent to the business.

Okay. That's helpful. I was actually -- I was going to talk about utilization next, so maybe we'll just pivot to that because you kind of ended on that point. If we look at your data on cases per doc, both for orthos and GPs, is sort of -- it took a really nice leg up in 3Q, 4Q and then again in 1Q. If we look at historically, orthos are sort of in the high teens and grinding higher. But in the last 3 quarters, you're suddenly in the mid-20s. You look at GPs, you're steadily in that 3.5-ish range. Broke for -- each of the last 3 quarters, you're 4.9 in 1Q. So I guess what I'm asking is the point you just touched on is that you're seeing an uplift in both new doctors coming -- docs and orthos coming on the platform, but also higher utilization per -- just parsing through the data, I'm getting the sense you're getting more uplift from the already Align provider, just really pushing more through the system. So I guess my question is, one, is that a fair way of saying that, of analyzing data? And then two is what's sort of preventing more people from adopting the platform? This has always been the argument that despite being on the market for such a long time and having such good penetration, there's still some orthos and some GPs that are resistant. So even in this environment, where digital makes perfect sense in sort of the best way to go out after it, there's still some that are resistant. So what's the hold back? What's the challenge? And where are you seeing the breakthroughs?

Well, I think your second question is the 100-million-dollar question, right? So I can talk a little bit about that. But I think when you look at the profile of our growth, as John said, it's been very broad and deep across channel and geography. In GP, we've grown both submitters and utilization. So we have not only trained new doctors, but maybe doctors who we [ term had ] lapsed in their usage also kind of comeback as well. So that's been really pleasing to see, expanding our base as well as going deeper with these customers. And we've seen up being particularly strong on the ortho side as well, really strong utilization growth. When you talk specifically about GPs and what are sort of growth areas, and why aren't the 150,000 GPs, more of them, doing it across North America. I think a lot of it comes down to how we kind of changed our approach as a company in recent years. We've now got a very channel-focused organization, so we have salespeople and marketing people who -- all they think about on a day-to-day basis is GPs, and we've got a similar organization set up on the ortho side. So that's kind of helping us. But I think it comes down to really putting the kind of the package together for the different segments of GPs that we see. So -- and I think we're getting better at that. But I think historically, we've not maybe trained them well enough. We'd not maybe have the right product for them. And then historically, we -- this scanner wasn't as prevalent. What we're seeing now is, as you -- the GP play is very much driven by iTero. And once the doctor embraces iTero, not only do they see benefits within their restorative practice and workflows, but it becomes a lot easier. It's an easier step for them to take to embrace Invisalign. And recently, a couple of years ago, we introduced the Invisalign Go product, which is really a system that is designed to support our GPs through that journey. It selects the right cases for them, enables them to track those cases. So they feel very supported. And then we're also making great strides in really understanding how do we support a GP through the kind of their first year of embracing Invisalign. So I think it's a combination of factors. I think we've learned a lot in the last few years. I think we're better set up for success and hence, I think we're seeing good growth across that channel coming out of COVID. But to be fair, we were always seeing good momentum before we went in there as well.

Great. Again, really, really thorough answer, and there's a couple of things I want to follow up there. Again, you commented on somewhere around 30,000 GPs out of 150,000. The steady progression over time, steady progression of -- I guess, I should ask, how much of it is a factor of older dentists, GPs, orthos just sort of phasing out? Is it -- are you noticing any trends that newly trained dentists, they're more used to digital dentistry. They're more used to the technology. They're more used to these approaches being taught in dental schools more. So they're more willing to embrace that. And this is just a matter of time, sort of like a generational shift in approach to dentistry?

Yes. Without sounding too ageist, I think people in their late 20s, early 40s, into late 30s, I think, are a lot more open to embracing digital technology. It's not to say that we write people off as soon as they kind of pass forty, but they've just kind of grown up in that environment. And it's more of a natural kind of transition for them. But I just think if you look at some of the trends in dentistry, where a kind of a more holistic approach to smile design is becoming kind of more recognized as the right way to treat patients, naturally kind of an orthodontic procedure before they do restoration is becoming now really what people expect, create the right foundations and then restore the teeth. So I think that younger generation is probably growing up with that. Maybe the technologies is at such a good level now that it's more intuitive and easier for them to access. And then I think philosophies are starting to change, which really embrace more of an orthodontic mindset before they get into full restoration. They want to minimize the loss of enamel even when they're kind of putting crowns or bridges or veneers on. So we're seeing more and more, or we'd say cosmetic, aesthetic dentists actually use Invisalign before they actually get to the full restoration. So it's quite an exciting time. And then I think we -- as we kind of load more technology to the scanner, more tools, whether it's kind of like a diagnostic approach that we've introduced with the 5D, the NIRI technology. It just -- it enables doctors to do a kind of a more kind of thorough analysis of what they're facing on a day-to-day basis, and then they can use the other software applications to both communicate with our lab, but also to communicating with the patient. So all of these things is, I think, are starting to build as more and more people kind of embrace that into their daily clinical practice.

Okay. And you touched on scanner a couple times on the iTero a couple of times in your recent answers. I want to touch on that as well. Again, steady stream of new product introductions, most recently, Element Plus, sort of how much uplift are you seeing from these products? How -- to your earlier point, is it really driving penetration to new offices and GPs because one of some of the factors we've seen driving iTero and scanner revenues in general has been some international expansion. So I'm sure that's a component of it as well. You've also had some new competitive entrants over the last couple of years there. So a lot of moving pieces on the scanner front. I was just wondering, John, Simon, if you could touch on what you're feeling in that segment, sort of how much uplift are you getting there, especially with the new products you've launched?

Michael, when we talk about scanners, we talk about the growth of scanners to be very similar to Invisalign. And it really fundamentally comes down to a very under-penetrated market from a scanner standpoint. And you'll see, and you saw our results and some of our numbers that we've seen from Q3 on where even during kind of the crisis and kind of post-crisis last year and now the recovery -- our scanner sales have increased sequentially since Q3. And really, that's a reflection of the digital adoption that we're seeing. That's a reflection of doctors who want to get into, being able to use Invisalign and be able to tie that in with a scanner. So new doctors are trained. They come in and buy a scanner, and then they can utilize a scanner with Invisalign. We see other doctors that we have, orthodontists that their case volume is increasing, they need more scanners. And we see more adoption from them in terms of going from 2 to 3 or 3 to 4 scanners within their practice to be able to kind of maintain the digital practice that they're building to. So it's a really good leading indicator. We know that the scanner leads to more Invisalign cases. And we've been very pleased with the sequential growth that we've seen because that's a capital investment that doctors are making. And in times of uncertainty or times of hanging on to cash more or whatever to make those investments, it's really good, and it's good for our business. And like I said, it's kind of that front-end of the digital ecosystem that Simon was talking about where they're using it for restoration, they're using it for more diagnostics. They're using it for Invisalign, when it's really become more of an everyday scanner that can be used for a lot of different capabilities that they have.

Yes, you're absolutely right. I agree with you on that, John, that the Scanner and Services segment in the second half of last year. And like you said 4Q to 1Q seasonality, you didn't see that at all this year, saw a nice sequential growth, but you would normally never see 4Q to 1Q. So really, really impressive gains there. I want to -- we're getting towards the end of the session, so I want to make sure we cover a couple more topics that we keep getting questions on. One is, I want to touch on the competitive landscape. It's obviously an area you field the questions on for some time now. I know there was a burst of activity and burst of product launches a few years ago from some of your competitors. A lot of them are still sort of in the very, very early stage in terms of product, in terms of market penetration. And then COVID hit probably affected them even worse than it affected you because it's -- I imagine it's hard to build out a new product in an environment like last year. But still, maybe we could touch on the competitive landscape, both DTC and sort of the doc and ortho-directed channels. What are you seeing from some of these newer entrants from a product perspective, from a -- how aggressively are they pushing the market? Is this something you're running into to the marketplace?

Yes, I would say broadly, Michael, when you look at competition, it's not unlike what we've seen. There's no breakthrough technologies or new products that we look at is different than what we've seen. It's a vastly under-penetrated market that we talk a lot about. That was true prior to COVID. It's true post-COVID. And when we look at the cases that are being done, the vast majority of cases are done with wires and brackets. And when you look at some of these markets, especially on the teen side, when you look at the 15 million orthodontic case starts every year, majority of them are teen, 75%, 80% of those are teen. And the majority of those -- vast majority are done with wires and brackets. So you look at the opportunity that we have in this marketplace. There's never been a time where there's not been more awareness of clear aligners than there is right now and the opportunities that we have. And when we look at the growth opportunities that we have in the marketplace. It starts with that vastly under-penetrated market. That's why we, as a company, continue to make investments all through last year and into this year to grow in this under-penetrated market. And it's really given us a lot of opportunity and momentum as we've talked about, as we've gone through this crisis and now into the recovery. So it's really less about competition. It's more about how do we grow into this marketplace. It's really more about going from analog to digital, and how we can enable that with our doctors, with the products and services and technology that we can bring to those doctors. So when you look at competition, and don't think of it as share shifting, think of it as growth in this marketplace from an analog to digital and think of it as less wires and brackets and more clear aligners and for us, more Invisalign.

Yes. I think -- the other thing I'd add, Michael, is actually more competitors come into the category really does add credibility to the category. And so as John said, it's not about people taking our business for sales, it's about growing the overall category. And I think if you look at the results from ourselves versus whether the direct-to-consumer or traditional competitors, I think we've stacked up pretty well from a growth perspective. So I can certainly say that we're not seeing any good material across any of the markets that I cover. The other point that I've really learned over the last 5 or 6 years, is what we do is, it's not easy. And it's taken us a long time to really affect what we do. It's not about just producing a piece of plastic, right, it's integrating software into it. It's having a brand, right, that the consumers will go in there and request. It's about having manufacturing capability, then being able to make aligners high-quality that scanned. So I think whilst we respect all of our competitors, we also understand that doing what we've done over the last few years and the massive investment that's John's funded in the business so it's not going to be an easy climb for them. So...

Yes. John, you sort of led me to my very next question would be on investment and sort of the margin profile. As you said earlier, you are guiding for about 27% adjusted operating margin this year, that's already sort of squarely in the midpoint of your long-term guide, 25% to 30%. So is that an appropriate jumping off point for the next couple of years? Or is 2021 a little bit of an aberration? I guess I'm kind of asking about the road map from here, sort of balancing that investment that you're talking about to sustain the growth.

Yes, I could say this from a go-forward investment standpoint, we make investments with our long-term growth model in our minds. And we know we have an under-penetrated market. When we make investments, we think we can grow in the 20% to 30% revenue growth that we've seen and we've been able to show that we can do that. We also think about the margin return and think about op margin, 25-plus percent. That's what we think about when we make these investments. You're going to get tradeoffs that go on across certain regions, maybe by quarter and so on, but broadly, that's how we look at things. And Q1 was a good start. Q1 was a culmination of investments that we are making, some of the growth opportunities that we have, getting some leverage on those investments, and seeing that come through. And on a go-forward basis, we're going to continue to make those investments that drive volume, drive growth in this market and do it in a way that's respectful from a margin standpoint. So that we can bring earnings to our shareholders. So that's the balance that we have. I won't look at 2021 any different than other years. It's just a reflection of the go-forward business opportunities that we have. And like I said, and we've kind of said on this call, it starts with a huge under-penetrated market. And we're making investments to grow into that market.

Okay. Great. We're almost out of time, just a couple of minutes left. I think what we -- what I'd like to end with is sort of just open ended question to you is you've done a bunch of these meetings during our conference. I'm sure you get 20 conversation with investors elsewhere. What are the key questions you're getting? Sort of what's the biggest debate? What's the topic that keeps coming up over and over and over again that you think is most prevalent for you right now?

I think we get -- and it came up on this call, just talking about our guidance and kind of what that means and how do we fit, kind of win that guidance after we've seen Q1. And I think the message has been, it's a huge market opportunity. We're continuing to invest. We invested during COVID. We did things to help with our customers, our employees, driving results back to our shareholders. And that's the same approach that we're taking now. It's a -- Joe and I like to talk about it as a multivariable equation, and that's how we look at it. There's investments that we make on go-to-market and investments we make around marketing and awareness. And we'll continue to make those while adding newer and better technology and adding capacity to be able to support the volume. So that's the kind of the question that we get, but we look forward to future growth opportunities, and our guidance was a reflection of that.

Okay. Great. Thank you so much. John, Simon, appreciate you joining us. Everyone's on the line, thank you as well. I hope you found the conversation useful. Enjoy the rest of your day. Good luck in the rest of your meetings.

Okay. Thank you, guys.

Thank you.

Thank you.