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

Well, the demand funnel and how we generate that is very important for us. Obviously -- and we made the decision really as one of the companies throughout the pandemic and recovery to continue making investments to create that consumer awareness. We knew people would be on their phones or on their computers or watching TV. And we wanted to be top of mind. We wanted to make sure people were aware. It's kind of the -- it's kind of the Zoom effect in some ways where like people see themselves on the computer. Well, now they think, okay, where can I go to try to straighten my teeth and improve my smile, and we wanted Invisalign to be a part of that. And so certainly, we start with that. We see what people do with that advertising. Do they come to our website? Do they search on Invisalign? Do they talk to our concierge team? How do they interact and become aware? And traditionally, we had been -- U.S. has been a predominant market where we spent. And what we've been able to see as we've gone through the pandemic and now we've seen some of the volume come back and so on, it's given us opportunities to make investments in other places that we haven't done as much consumer advertising and marketing on. So the U.K. and France and Germany and then trying things down in South America and Japan and ANZ, places where we haven't traditionally spent as much. Where we're able to, we're actually seeing tremendous responses from -- just an awareness standpoint, consumers excited about our products. They want to know more. They want to -- we want to ultimately get them to a doctor, orthodontist or general dentist to be able to talk about treatment. And then if that doctor sells Invisalign, they can take them down that journey and try to get that conversion. So we're looking at all parts of this from the top of the funnel all the way down. But in the end, when we spend on whatever type of top of the funnel spend that we have: regular marketing, media, influencers or whatever, we have to be able to see that return. And that return on investment is ultimately volume. And we like what we see. We like trying different things. COVID has given us the opportunity to try different things, and we've seen really good responses.

So where are you seeing the best return on investment these days?

It varies. I mean you still see great return in the U.S., where it's such a big market, and we're coming from a low market share. But you see it in other places. We've seen great EMEA growth by trying some of these investments. We've seen it in ANZ and Japan and across APAC, really good responses. And so in success, we're going to continue to make the investments that make sense and drive the volume. But it really comes from, John, every place that we sell-in is just an underpenetrated market. So we have this huge market opportunity. If we can drive a little bit more awareness and drive that top of the funnel, as we -- as that works its way through our doctors, and we sell to those doctors with the best products and the best service and the best scanner, it really just works its way together to find the right equation.

And can you remind us when your visibility drops off? Is it just fairly stable and linear as we go out in time? Or is there a drop-off? Do you have good visibility in the second half of the year at this point, for example?

It's a best visibility as we can. We look a lot at -- the first half of this year, it's tough to look at the year-over-year comparisons, as we've talked about, because of such of an impact from last year. We look at this year. And really, as we've gone through the recovery is making decisions, making investments and understanding our growth opportunity based on what's happened previously? What does the past month look like? What does the past 3 months look like? And then make investments in the future and say, "Okay, here's what we expect some of those returns to be." So really, your question kind of gets to why -- essentially, why did we guide and why did we give some of that information? We guided at the last earnings call, the $3.7 billion to $3.9 billion in revenue. We wanted to give -- after 3 record quarters, we wanted to give some guidance so that the street could understand kind of where we're projecting. We also wanted, to your point, to understand and talk a little bit about the second half. So we talked about what that meant from a second half standpoint. So people would understand how that progressed through the year. But also, we want to talk about and make sure people understand, and it's what's been highlighted on this call is, we continue to have to make investments. We have to make investments to drive growth. And in an underutilized and underpenetrated market, we know that we have to continue to make investments. Some of the marketing ones that we talked about, still adding sales to drive that conversion. And of course, we need the best products and process to be able to help bring that all together. So we have to keep investing. And that's why we talked about kind of for the year, think of it 23.5% to 24.5% op margin. So people would understand that we still need to drive this growth.

Great. A typical question that we get, and I'm sure you get it a lot too, is, we're going on 4 years since some of the IP opened up and the competitors -- competitive barriers came down. What are you seeing in terms of what's really enabled you to so far not be impacted by that? Because I think pricing erosion is probably the biggest investor concern out there. But it doesn't seem like you've really had any evidence of that yet. How does that play out in your view? And how do you sort of prevent that cheaper DTC option from resulting in some erosion in your offering?

Yes. It's a good question. And really, as you said, there's always questions about competition and how do we grow in spite of competition and so on. And look, we've been able to grow like the numbers that we have growing on big numbers and then growing them even more. I think it comes down to having the best products. We've invested $2-plus billion in our portfolio of products that we have, both in terms of the systems and software that we have as well as the actual product and being able to develop the best scanner, develop the best platform, to be able to have an alternative that is so important for doctors. Because in the end, doctors want to have products that are predictable and reliable, help them be able to finish cases in a predictable, reliable way. And having competition come in that can't provide that, it just lends itself for those doctors to stay with Invisalign. Or if they try, many times coming back because they realize that some of the products that we have with Invisalign first, being able to treat cases down to kids that are 6 or 7 years old to expand the arches to be able create space for their teeth -- permanent teeth to come in or mandibular advancement, which will align your jaw as well as straighten your teeth, competition doesn't have products like that. And it stands the reason why they wouldn't because it's -- we've been in the market for 25 years. And to have so many cases and understanding of how to move teeth in a predictable, reliable, safe way isn't easy. And I think, to start with your products and the investments that we've made around those products, the brand that we have, Invisalign is so well-known in the industry. Everybody, whether you're in this business or not has probably seen something about Invisalign and knows that it moves your teeth with clear aligner. So the brand is unique. We're driving patients to those doctors with the investments that we're making, no one else is doing that. And then I think when you think about the scale that it takes, this is not -- this is a mass customized business. This is one where we're producing upwards of 750,000 unique aligners a day. And no company does this. No company in the world does this, let alone in the dental space. So I think when you factor all that together, kind of the brand, the product, the process, the investments we've made, the capacity that you need, very difficult for companies to come in into the space. Although they want to, and we get that why some competitors have gotten out of their wires and brackets business and went into clear aligner because they understand where the future is. It's clear where the future is going. And it's not an if, it's a when. But it still takes investment. And I think other companies, as they get into it, start to realize this. But we don't worry about some of the competitors and some of the things that they'll talk about. We focus on what we can control. And that's been our focus as a company, that's what got us through the crisis and the recovery, focus on what we control, which is providing the best product and services to our customers, doing things in a way that gives them the best outcome for their patients. Doing it in a way that advertises and lets consumers know that there's alternatives. And the last thing I'd leave you with, too, is really when you look at competition in the end, John, you heard me say this before, our competition started with and still is wires and brackets. Let's face it. 80-plus percent of the worldwide cases are still done with wires and brackets. We're quickly moving with Invisalign to become more and more part of the other. But still the majority of cases, especially teens, maybe 90% of the cases, so it's less about competition in the clear aligner space. While it's good from the standpoint that there's never been in a time in our history that there's more awareness in clear aligner than there is right now. Everybody knows something about clear aligners, consumers as well as doctors. But I think when you look at it, it's less about share shifting across clear aligner companies and more about less and less wires and brackets and all the things that we can do as a company to try to get it to be more Invisalign.

Okay. Follow-up on price. Do you have pretty good mechanism to monitor and market pricing for clear aligners, not what you're charging the orthodontists, but what they are effectively charging their customers? And if so, is that an upward or downward trend?

I would say we do have good mechanism to understand through our sales team and surveys and other work that we see. So we see some of that pricing that they charge. And I would say on balance, there's probably a downward pressure on that pricing. I think especially for more of the moderate-to-mild cases, some of the pricing that doctors maybe were charging, they've had to come down and get to maybe be more competitive. On the comprehensive cases, the more challenging teen cases and so on, the price to the end consumer hasn't changed all that much. But we're very aware. And we also work with our doctors to make sure that we understand that equation, that even at a lower price for some of those less complicated cases, to work through the process that we have to digitize their workflow, drive productivity within those practices. And if they get more potential patients to their practice, they can actually see growth and profitability. So it's not a loose situation for doctors. Doctors that are willing to change and really adopt this digital platform that we're talking about, even in cases where they might charge less on those lower -- those less challenging cases, they can still be very profitable, in fact, increase the profitability for their practice, handling it that way.

Okay. We only have a few more minutes, but there's a couple of questions I wanted to make sure we get to. Another mix question for you. How should we think about comprehensive versus noncomprehensive? Obviously, that's a different ASP. But from your standpoint, is there a sort of a dollar contribution difference between those 2 different categories?

Yes. I mean from a comprehensive standpoint, higher ASP, you're going to see more or less more dollars that you get from a contribution standpoint. But from a rate standpoint, some of our -- the best margin rate that we get are from our non-comprehensive products. Those products don't have additional aligners, in many cases, just the cost to serve is less. And we actually see a margin benefit from things like that. So that's really been our focus as we think about and what we try to provide that financial context is ASP, yes, maybe a starting point, but it's really what's the gross margin dollars and rate that it provides.

Okay. All right. Maybe the last one, since Joe and you joined, you've really changed the sort of international operating model quite a bit from our perspective to a very centralized model to much more decentralized. Can you just remind us why did you do that? And what's the sort of logical progression of that? Should we be thinking about a lot more fabrication and treatment planning operations all around the world longer term? Or have you kind of built it out the way you want it now?

I think what we saw -- and both Joe and I came from like a GE Healthcare world, where that was a large part of the strategy is decentralizing, getting closer to customers. And so we've taken that opportunity that we saw within this space and kind of used that same logic. So I think you'll see more of us trying to get closer to our customers, reduce cycle time. You can reduce freight costs, doing things that are in their own language. I think, treatment planning, getting closer to our doctors, same time zone helps from an NPS standpoint and really helps that interaction with doctors, especially in the language category. And then I think when you look at manufacturing, we know how to manufacture and manufacture at scale. We grew up with kind of one plant. We've added several plants within Mexico. Now expanded into China. We've now talked about expanding into Poland. We know how to grow in this marketplace and do it in a way that provides the right profitability, while meeting our customer demand. So I think you'll see more of that. It's getting closer to our customers, more decentralized, but doing things that still hold the brand, holds the process, holds the controls the right way with utmost quality and utmost satisfaction that we want to be able to provide our customers. But do it in a way that's much more local to their needs. And we think that combination is the right combination going forward, and it's allowed us to grow and still one of our first growth priorities is growing international, and I think this lends itself to that growth.

Got it. Okay. Well, we're right at time. Let's cut it off there. Congrats again on all the success. Thank you, John. Thank you, Shirley, for the time, and thank you all for listening in. Have a great day, everyone.

Have a good day.