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

I think it's mixed. I can start and maybe Raj can talk about specifics that he's seen as well. But I think there are some doctors that they told us they raise price. They're in an environment where they're not just products that they're using, but the staff that they have, the locations that they're in, they're under price pressure. Some of that gets passed on. Others are maybe more price sensitive to things where they don't want to show a price increase and have just tried to manage some of the cost within their practices and so on, and that's something that they've been able to manage. But overall, I think doctors, they are -- as you go through this environment, this is where you get into kind of the overall consumer sentiment. Some might not as a potential patient you don't go to the dentist or the orthodontists as much. You maybe -- or maybe you delay some of the treatments. And so there's some traffic that adjust based on what they're seeing in their locations. But -- and that shows up in some of the data that we see some of the gauge data, which says people are coming back, and it's more, but there's still some uncertainty. And many of the doctors talk about that it's not that people are unwilling to go to treatment, it's more -- I want to go into treatment, but I'm going to wait. It's not a no, it's a maybe or it's maybe a wait and see. And I think some of that is part of what happens. And they have to work through that just like we work through it. And that's maybe some of the uncertainty that you have in terms of the overall economy -- is recession, severe, not severe, interest rates maybe stabilize a little bit now, maybe inflation stabilize a little bit now. So I think as we see it in the economic environment, they're seeing it in the practices that they have and they're managing through that.

So what is your expectation in a recession? I mean we have the numbers from 2008, 2009, not every recession is the same. Obviously, I'm not an economist, but our -- I think our BofA internal macro team is still sort of has their base call as a mild U.S. recession in 3Q. I mean I'm not in sure I know what that means exactly, but sort of what's your expectation? What happens to the business in that scenario?

I think with our business -- if I -- if we look at the changes that -- if you go back to 2008, 2009, a much different business than we were then. I mean we didn't have iTero. We didn't even have this kind of device business that we have, which has now become a significant part of our overall business on this equipment business. . We are much more of a U.S.-centric business back then, much more tied into adult cases versus even teens and so on. So I think as you think about what's going to happen into overall economy, it's going to vary by various geographies that we have are much bigger outside the U.S. than we were back then, different in terms of -- we've developed a digital platform and with iTero and just kind of the whole digital ecosystem that we've been able to create much more outside the U.S. We've grown our team business, which look, our products become discretionary as you go through maybe a tougher operating environment with recession or so on. But then in the end, there are products that could use where if you're a teenager and you have teeth that now become permanent teeth and your jaw is needing to be adjusted. So there are points in time that you need that to happen. And I think with teenagers, it's a little bit less discretionary or maybe if you're a child that you're 7 or 8 and you need -- as you get mix dentition coming in, but your palate needs to be kind of enlarge and expanded a bit with Invisalign First, that happens at a point in time. And so we see some of those products like when you go back to your question about we felt good about the first quarter. Our teen business was up on a year-over-year basis. We saw that improvement there. We think that puts us in a good situation as we head into Q2 and Q3 when it's really more of a teen season, especially in the U.S. and in China. So those are things that are happening now that give us some confidence as we go through some of the uncertainty, whether a recession or not. But we feel like we have the products in the portfolio to be a go-to-market to solve solutions. We've got a global team that even back in 2008, 2009, we had a lot of distributors, a lot of just not direct sales force teams. Now we basically have gone direct where we're close to the customers and being able to drive solutions for them to go forward and we'll manage in that way as we go through some of the economic uncertainty.

Let me build up that, John. Look, last week when we met right doctors here in the U.S., but also globally over the last few weeks, the first thing doctors said really like to your point is, consumers are a little bit more reluctant in just now, given the operating environment, right? But what we also said is when they get into the practice, teams actually prefer in this line. Much more than several years ago to John's point, right? So everything that we've done in terms of marketing, in terms of creating this platform, making it easy for doctors and moms to kind of use Invisalign, I think it's helped, right? So if you take that as a whole, saying that, look, you've built a brand -- and by the way, most doctors last week recognized that. Usually, kind of being in marketing, I get inputs from pretty much everybody on how we can do better, right? Last week, doctors actually were very complementary. They said, look, pretty much all moms and teens and, frankly, adults know about Invisalign. And when they come to a practice, many teams frankly prefer Invisalign to brackets. So now the question really is, how do we leverage that and continue to convince them in the context of whatever the economic environment is.

Okay. Maybe just on the context of economic environment and how the business has changed in the last 10 years. Let's talk about DSP a little bit. That's something that's relatively novel, relatively new for you and is playing a bigger and bigger role in the business. You spend a lot of time talking about in the first quarter. So maybe just talk about what are the trends you're seeing there? And where do you think that could go over time?

Yes. For those that don't know, DSP is our Doctor Subscription Program. And really what it was, it's really focused on driving incremental business to our company, and it really is focused in on -- many times these orthodontists that we have, they will give us these comprehensive cases. So give us the tough cases to move that they want is a teen patient, maybe a Mandibular Advancement or Invisalign First, some of these more complicated cases and our products are used for that. But you also have orthodontists that have minor movement cases. They may need 5 sets of aligners to like move some crowding that -- or some of that wear a retainer and now they have to do some what we would call a touch-up case. And they also have many patients that they provide retention to, retainers to. And what we found is many of these orthodontists who gave us a lot of these comprehensive cases we're doing their own from manufacturing some of the aligners that they would have, retention or minor movement and they'd be making them themselves. They make the 3D molds, they've kind of put the plastic on and create this for themselves. What DSP was really designed to go after these high-volume orthos who are doing just that. and that subscription program allows them to choose a certain amount of aligners that they want, and we let them choose to what they want to use it for. They could use it for minor movement cases. It would get too expensive for them to use it on a comprehensive case. So we've kind of priced it at the right level on a per aligner basis that once they commit to that, they can use it for other types of cases that they have. And many of what they use is for retention. So what we've seen is a really nice combination of continuing to get these comprehensive cases. And quite honestly, the 3 x 3, I keep going back to that, but the 3 and 3 which is the 3 years, 3 additional refinements, that marries well with the DSP so that they can the -- most of their cases, they can finish in 3 years and with 3 refinements. But it should have that more complicated case that kind of falls out, they use DSP to kind of use it for there's additional aligners that they could need and then they use it for retention. And we saw that meeting with customers. DSP was just taken up. Everybody seems to be doing more and more. And from our standpoint, it's a great product. We get -- it's great gross margin on it. It's per--we know now how much they're going to take in terms of we could set the capacity that we need to be able to supply. We've done a lot of things to make a very fast turnaround. So from a supply standpoint, especially like retainers and so we can get them to them in 48 hours, 72 hours. So there's very fast turnaround that we have to this. So it's a nice combination, and it's a way that doctors want to buy in a certain way, and we're able to sell them that way. And it's a good combination to some of the more comprehensive products that we have. And really, quite honestly, from a supply standpoint and being so close to the customers that we have and be able to turn it around that's what they told us over and over again that they don't have to wait weeks to get this turned around. It's down to days. And so what you see in our P&L, and we talked about it in the first quarter as we see this ramping up and more and more doctors, more and more usage of this it doesn't actually show up as case volume. Now the majority of it is still retention. So it's not really fallen out anyway. But there are some cases where a doctor in the past would have used 5 sets of aligners, and that would have been a case. Now it just shows up in DSP, shows up in other revenue. But that's why you see kind of that difference. And it's been showing up more and more. And that's why when we talk about kind of a total revenue standpoint compared to the cases that we ship, that's kind of the thought process that we want with that. But it's becoming more and more part of our business. It's selling the way the doctors want to buy. And we're also offering other solutions for them around where if we can have this dental doctor subscription program to those doctors, doctors are now finding that they can set up subscription programs for their patients with retainers and so on. So it's a really good mix of using our technology to help them. And that's a revenue stream that many doctors don't even have. do great work to move teeth and get your teeth as a teenager to where they should be and now they can help provide retention, and we make it easier for them.

And remind me, is it a quarterly subscription? Is it in the semi.

It's an annual really come up with and -- and so it's really been just in the U.S. that we've done this. We've tested with certain doctors and so on. like we do at our company, in success, we'll expand it to other areas. So we could see it in Europe. We could see it in Asia, in other places where we're seeing those benefits. And again, it shows up in our revenue, kind of the traditional way, just our case volume times ASP. There's still some of that, but there's so many other parts to our revenue stream, and this is one of them.

Right. And just to build off that comment right. Look, retention is such a huge opportunity for us. Think about it, right? So if we do we do close to 3 million primary cases. Of that, a very miniscule part actually goes into retention, right? Think about it as all the cases that we've done so far, more than 15 million patients. You want them to kind of have the beautiful team that they've achieved, the smile they've achieved, you want to protect that, right? And that they can do with our retailers. But so far, before this program, I don't think I took off the way we wanted it to John's point, the flexibility and also the choice of the doctor being able to kind of choose what they wanted to. And that really helps us get to that opportunity.

Any questions from the audience? Can tell someone stretching or -- is that a question? Okay. All right. You're right under the light second to -- all right. So we'll keep going. I have to ask the obligatory question about competition, right? You guys still have dominant market share in terms of total volume, dominant market share in terms of revenues among other clear aligners. But we are seeing some of your competitors, some of whom are here at this conference, report more and more on their liner numbers and align our growth. So are you -- where do you think they're having the most success? What part of the market are they attacking? Because it is -- there's an adult versus teens, there's a comprehensive non-comprehensive there's ortho GP, [USU], US, you can slice the market 5 different ways. So where do you think the competitors are able to sort of get their foot in the door a little bit better than others?

Well, we know from a technology standpoint, the investments and the time that we've put in to get the technology. It's not easy to move teeth in a predictable and reliable way. I mean companies can come in. We see all different types that depending on their investments, it's -- they get move teeth, but the question is, can they finish to what they want? And can they give the doctor the confidence that they can move teeth in a predictable and reliable way. So some of these comprehensive cases, I see our technology and what we put in and understanding back to what Raj was saying 15 million-plus patients, but now being able to take the AI and the machine learning of those cases and actually get the preferences down to the individual doctor level. And I think as we move forward, it's much more about providing a solution to the doctor because what we see on the road and we hear from doctors so much is they want a solution. They want a company that comes in that can help them meet the needs of their practice. If you're an orthodontist, you're going to see all types of complicated cases, 75% of the cases that orthodontists sees are teenagers. That was our complicated. You've got mixed dentition, you've got jaw that needs to be aligned with mandibular advancement, you've got a product that we'll have soon, which will be a rapid palate expansion. So it will actually break the suit here on top. So if you need really upper palate expansion, the product that will do that. It would be the first fully 3D printed product that we have that will replace, we think, the metal device that goes up there now, that gets cranked every night. Those are innovations and technologies that take years to be able to produce and to be able to give that to doctors so that they could treat in a all these comprehensive cases. And to be able to provide solutions like DSP that we're talking about, to be able to do that, you need to have you need to have fast response times. You need to have the capacity to be able to. We'll produce upwards of 1 million unique aligners in a day. We're the largest mass customized product company in the world that the history -- in the history of manufactured, no company has been able to do this. And it's 26 years of being able to figure out how to be able to ultimately solve problems and solutions for doctors. So the long answer to that is there's a lot of technology that needs to go in. You've got competition, most of the condition will come in and talk about things and then ultimately, they'll talk about price. And it will be, I'll try these and it will be at a lower price or so on. That's not sustainable. And when you look at companies that talk about that you've got to be thinking that the gross margin is a lot lower than the rest of their business or their ASPs are lower. And maybe they can fly under the radar screen now because the business isn't as big. But ultimately, you've got to be serious about solving doctors problems. So providing solutions to doctors so they can provide better care to their patients. And that's been our focus and continues to be the focus. And it's why the investments that we're making hundreds of millions of dollars a year in innovation to provide technology to those. And then the last thing I would say just on competition, too, is, in the history of our business, there's never been more awareness about clear aligners than there is right now. So in some ways, that's come back to the marketing and other things that others have done to make clear aligners much more relevant. Because in the end, the competition goes back to wires and brackets. Ultimately, with all the changes and other things that have happened, 80-plus percent of the cases are still done with wires and brackets. And that awareness by other companies in could get consumers more aware of what alternatives are, we think that's a good thing.

I agree, John. And not just that, right? Look, the market is so underdeveloped, Mike. I think the real question to ask is not about who's growing. But how much can you grow? Because if 80% of the market is still wires and brackets. And you start with the notion that that's just of the orthodontic starts. That doesn't cover the 500 million potential patients who want to get their teeth straightened, right? And then you go on to, okay, so Invisalign is by far the best known product, the most trusted product across multiple geographies, the most adopted product with doctors, right? And the only company with an end-to-end digital system, whether you call it innovation, whether you call it removing friction or manufacturing. So the real conversation is not about look, kind of -- where are you seeing. The real conversation is how do you actually bring this incredible competitive advantage to bear on the vast majority of the wires and brackets market? And how do you grow from there?

Yes. Maybe just a little bit of time we have left, Raj, one for you on China and what you're seeing there. Some stabilization, some improvement as well, but still obviously, a lot of uncertainty, just what are your expectations? And how do you see that market turning?

Sure. Look, all of us know that China went through a pretty chaotic opening, right? You kind of think about last year, think about this January. And to go back to John's earlier point, none of us really knew how the opening would be, right? Kind of when the year started, there was so much uncertainty on China. There still continues to be uncertainty, really, Mike. If you're going to look at it, consumers, patients are slowly coming out, right, coming out of a very difficult time. And we said it during our earnings Feb was better than Jan, March was better than Feb. So we see sequential improvement in terms of how we see from a consumer attitude and openness to different things. But I think there's still a lot of uncertainty there. . Now one of the things that I tell you that we've done in China that helps us kind of we did this last year as we expanded our portfolio, right? Now John talked about comprehensive 3 and 3. Think about this as 90% of the cases can be done by the SKU. So it increases flexibility at a lower price. We did the same thing in China. We launched Invisalign Adult and Invisalign Standard, right? And the inside there was we wanted a broader portfolio to meet patient needs. That's actually getting very good adoption in China right now. Other thing I'd tell you is the Chinese cases tend to be complicated and small jaws lots of teeth. So skeletal changes are more important for doctors, right? We launched CBCT, which is Cone Beam Computed Tomography, helps you see the routes of the team integrated with the ground so that you could move them in unison. That's been accepted incredibly well in China again. Again, think about this as solving real problems doctors have to improve treatment plans for patients. The last thing I'd say to you that we are very encouraged with this China has got its own digital ecosystem. So when we talk about the Align Digital platform in China, going to if you think about their ecosystem with WeChat, Baidu and Weibo and everything else they have, our technology is probably one of the few companies that's got the infrastructure to kind of set up a manufacturing treatment planning as well as kind of infrastructure in the cloud to be able to treat patients there.

Great. Thank you. Thanks, Raj. Unfortunately, we're out of time, but I'd love to keep plenty more to discuss. But thank you so much for joining us, John, Raj, Shirley. And ballots are not open yet, but contractually obligated to ask you to keep us in mind. Thanks, everyone.