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

Hi, everybody. Good morning. Thanks for joining us today. I'm Elizabeth Anderson, the health care technology and distribution analyst here at Evercore. Very pleased to be joined by Align Technology today with 3 members of the team here: John Morici, CFO, who many of you know; Simon Beard, who is Head of Americas and EMEA now and also Madelyn Valente, who is at IR.

So maybe today, I think with the current environment, that's was always a big question. Can you help us understand the puts and takes of like the current environment right? We have -- we've been talking about sort of weaker equipment demand and also just sort of the visits, can you just sort of give us a lay of the land and how you're seeing things? I don't know which one of you wants to take that first.

Good morning, thank you. I think when you look at the overall environment, you have -- as we went through the third quarter and kind of came out of the third quarter, you see the seasonality from the summer where things were -- people go on vacation, holidays and so on. And we definitely saw that July and August. But the expectation is that you would see more people coming back, especially on the adult side coming back for the orthodontists or dentists for treatment. And what we saw related to that, especially in September, was less people coming to the dental offices, people traffic was down at orthodontists and so on. So you saw that. And what we also saw and what we hear from our customers that people -- even the people that came back, they were taking longer to decide to go into treatment, making those decisions. And when you look at the overall economy, they're making decisions based on a treatment that could be $5,000, $6,000, $7,000, and they're just taking longer to decide. So it's not necessarily a no but it's one where people are judging whether they go into treatment based on that. So that was on the adult side. So adults really was slower than what we would have expected in September and that carried on into October. On the teen side, teen side was a good quarter for us as we -- teen seasons is big in the U.S., North America, in China as well. We were up 8.5% year-over-year, 10% quarter-over-quarter. It was actually our highest volume of teen cases that we've ever done. So we felt really good about that. And when you think about the overall environment, I think teen becomes a little bit less discretionary, adult is just more discretionary in that environment. So that's what we saw, but it doesn't stop us from all the things that we're trying to do to drive conversion. And I know how we get into that as we go through, whether it's related to products or some of the go-to-market activities or other things that we're doing.

Yes. I mean, maybe that's a good place to start. And as we think about this current environment and things that could help like obviously, dentists and orthodontists from that patient traffic perspective are under a bit of pressure. What are some things that you guys are offering? I know you've changed obviously the DSP cases and sort of how the equipment is. Like where are you seeing the most traction in terms of people saying like, "Oh, this would be an interesting way to sort of tweak what I'm getting from a line in order to better respond to patient conversion or uptake or what have you."

Well, there's a number of things, as you know, that we do. I think on the financial side, within a number of our programs, we offer doctors kind of extended credit. So -- and hopefully, most of those pass on to the patient so they can lower down payment or spread the costs. And we know that, that works with consumers. The other things we do, we do a lot of activity around kind of local marketing these, what we call Invisalign practice days where they tend to market Invisalign and have a special day or afternoon where they bring patients in with a special offer. And so we do a lot of work around that. We do literally thousands of those. So make it into an event for them. And some customers are amazing at it, right? They'll bring in 30, 40, 50 patients in a single day and then the other things we do, we're also -- we're working with some external financing companies. You probably had a lending point although PHY and also HFD is a kind of a new one, which we are working with a number of our larger customers with because that's 100% approval which you think about from a workflow perspective is really good. So yes, so there's a kind of a number of things that we do. The other one that's probably less visible externally is we've also invested a lot of time recently to staff training because customers invest in our technology and they don't necessarily use that technology to an optimal level. And we know that when they use the IOSimPro, the in-face visualization on the iTero, conversion increases, patients can see what's going to happen through treatment and they're more likely to buy as well. So yes, we're really zeroing in on all of those areas. And then we spend a lot of money on consumer so we're constantly looking what is our kind of consumer advertising mix, how do we put in new assets out there, what are we spending on social, what do we spend in on search. And then how we can link our customers through that -- through doc locator and concierge as well.

That makes sense. Maybe touching upon the consumer advertising portion of it. Obviously, one, I don't know, not really called a competitor, but market participant has no longer with us. And so...

Hope it's still there.

Well, they are still -- financially they are no longer with us. How do we think about the -- and they were a huge advertiser in the market and what's just awareness and that kind of thing. How is your advertising strategy changed in light of that?

I don't think it's changed because I know everybody is kind of waiting for maybe the impending doom or whatever but they still have their advertising, they are still transacting as an organization. So I think we've always run our own play. We have a very clear messaging around, we work through doctors and so we partner with doctors. There are -- I think there are some opportunities within our portfolio where doctors can respond to maybe that profile of patient and using all the things I've talked about. A lot of the consumer research we do is -- patients are necessarily looking at a list price of a product, looking at how much they have to pay on a monthly basis. So you don't have to really match the direct-to-consumer kind of ticket price, you just need to make sure that you keep a lower down payment and then you have the low monthly cost to the patient. So, no, obviously, we're keeping abreast of what's happening there. But John, you can comment...

I don't see change -- not short term, I think long term, you might have different spends that you have because you might not have to spend as much as you are competing for certain words, ad words and so on. But I think when we look at marketing, we're always trying to get that return on investment. And they have been in certain markets. Obviously, we're there. There's additional markets that we look to spend advertising, even in tougher times, we can get that response as to certain countries where you're not spending that much and now you can spend just a little bit more, and it makes a big difference. So it's just that right combination. This is -- this is part of the investments that we make to drive conversion. And consumer advertising and also working locally with doctors is a place to do that.

Yes, no, that makes sense. Can you update us on teen. I know, obviously, you had a nice step-up in the third quarter. And I think that's like the long-term opportunity that I and I'm sure you guys, too, are excited about. So how do you kind of see where are practices now? We've seen that penetration sort of be around the 10%-ish mark. So like how do we get that? I mean, if we don't get it to 50%, where sort of adults is, like 30% is still a huge amount of growth from now. So like what are the levers we need to look for now?

Yes. So when you look at teen, obviously, maybe even to take a step back and say, the opportunity, we look at the orthodontic case starts that you have every year. It's 22 million worldwide. Of those 15 million or 16 million of them are teen. So it's a massive market, that's new teens or even preteens come in every year looking for treatment. They get to a certain age. So the way we've looked at this, we've got -- the market is built based on wires and brackets or 90 -- 85-plus percent of the teen market is wires and brackets. And then we are busy making up the rest of -- the majority of the rest of the other non wires and brackets. And to go after that market, we've had to invest into products to be able to give those doctors the confidence and the understanding on how to move teeth with our products. So the product sets that we've just launched in Canada, soon to be in the U.S. like mandibular advancement where now it's a product that instead of that metal device that goes on the top of a child's mouth because of 6- or 7-year-old to expand that upper pallet to be able to make room for those permanent teeth. We have a 3D direct fab printed product that snaps to the top of a child's mouth every day, slowly moves that upper pallet and gets replaced that next day with a slightly larger one and slowly moves in 30 or 40 days, you've created this space. Those are breakthroughs that we have to be able to give doctors the ability to treat 100% of the cases. And many doctors now that we work with, with the product portfolio we have and with some of the new products that we have are going to be able to treat 100% of the cases that they see. And when you look at the product capability compared to, let's just say, we're 10% or 12% of the teen market, there's a huge, huge opportunity to ramp up. So some of it's product. Some of it is just the advertising that we talked about being able to make sure you reach teenagers or preteens, being able to reach their parents, giving them the understanding that there's an alternative, giving the parents an understanding that you might need to bring your child in for treatment to create that upper -- in this case, the upper pallet space that they might not know of. And so you're educating them, educating parents that our product moves faster, your treatment is faster than one as a bracket, there's less visits. There's really no emergencies. You get into the better hygiene. There's just so many other benefits that you have. So some of it is just that education to be able to. And then lastly, it's working with doctors to make sure with our direct sales team to be able to get them to understand that there's a -- there might be a difference in upfront price on our products versus wires and brackets, but the time that it takes within your practice, that not having to staff for urgencies, the productivity that you generate at a practice can turn into more profitability when you couple that with additional patients coming through and really make that a part of your practice. So we have many doctors who treat majority of their cases, teen cases. There's still many doctors who -- they might give us the adults that come through their practice but not necessarily the teens so through all those things, whether it's product or some of the advertising that we do or the direct selling that we'll do to those -- with those doctors, that's the way that you can try to unlock this and get to some higher percentage. And even before the pandemic, we were seeing teens grow faster than adults, it's just that market opportunity is there. I think now as we've invested more and more with products and kind of the go-to-market capabilities that we're providing our doctors, we could keep that volume and keep that acceleration going.

I think I'll just add. To us kind of star way jump finished is, first of all, we've got a very large direct sales force. And that is one of our kind of jewels really. So if you think about a practice where there's a mixture of wires and brackets and Invisalign being used, then we have to be constantly touching those customers and their staff because they can swing between both, right? There's an habitual nature to try and break with clear aligners. So that's where we star. And then we've invested a lot of time over the last few years in really defining just a better programmatic approach to supporting practices. So some of the newer things we've done this year, they're built on a number of things that we've done over the last couple of years. One of them, we introduced -- John was talking about the interaction with the parents. And while some kids are very independent and can make their own decisions, parents still have a big say in what the kid gets. So we introduced a program called Teen Guarantee. Now historically, we've had that program...

You've had it in bits before, yes.

Yes, it was like -- so if for some reason, there was a concern about compliance, they used to get a $300 credit promos so that they could pay for the wires and brackets.

The provider got the $300, yes.

And then if they wanted to pass on to bearing they could do. What we introduced in Q2 was a property and guarantee, which said within 100 days of starting treatment if the patient -- the teenager or the kid wasn't compliant, then we would credit a full case. Now, doctors really love that because we really had their back and they were able to then use that in conversations with parents and say, look, I think this is the best to be your child if you got a concern about them wearing the aligners, then we can -- we'll credit it back.

Right. And that just take that risk, sort of off the table and -- yes...

Fully enough, we've had very few.

Well, that was my follow-up question, yes.

By ones or twos, across thousands of cases. So it kind of also reinforces our belief, and also doctors who have used Invisalign in that age group for a number of years is compliance is not an issue. Most kids are actually more responsible than adults.

Well, I've always heard that the worst is like 30 to 40-year olds.

Yes. And personal experience, I've seen that as well. So throwing the aligners away, I've done that. But anyway, so that's one thing. The other thing we really zeroed in on clinical support is whatever you say about the financial piece and the habitual side, doctors go -- particularly orthodontists, they've got to be confident in the treatment. And obviously, there's a bit more complexity when you are treating teenagers. So we've really done a lot of work, more peer to peer, more structured learning. So that actually, when that -- when they almost sell Invisalign to parents and children, they're confident in doing that and makes a difference in the whole verbiage. And then the third thing, which was different this year is we've really invested around staff training. Because if you go into any orthodontic office, the staff that run the office, not the doctor. And so if they believe in the treatment, they're talking to the patient, they're actually having the financial discussions with the patients. They're the ones who are scanning, et cetera. So those -- I think those 3 elements are helping and we'll continue to build on that as across, not only just U.S., Canada, but also across Europe as well.

Okay. Maybe just two follow-up questions from what you just said. The Teen Guarantee is out in the U.S. is it...

And Europe and Canada.

And Europe and Canada. Okay. Great. That was one question. And then secondarily, on the palate expander, when are we expecting U.S.?

Well it's in Canada now. We got Health Canada approval about a month ago. So we start small, obviously, with a smaller group and then we'll ramp that up. And then, hopefully, early next year, we're waiting for FDA approval. But early next year, we'll launch in the U.S. and then we'll sequentially launch. I think we've got some MDR to get through in Europe. So later next year in Europe as well.

Got it. And the revenue that will come from the palate expanders will go into non-case revenue? Does that count as the case? How does that?

It will count as a case. Think of it more as --

Part of Invisalign First?

It's -- it won't be Invisalign First, Invisalign First is comprehensive. This would be more noncomprehensive because it's really 30 to maybe 45 days of treatment. But we'll come to this case revenue.

You'll see a lot of bundling as well, right?

Yes. Yes, I would imagine, yes.

They'll do Rapid, and then they'll do Invisalign First to do -- to fully form the arch.

And when you think about that opportunity in terms of the need that we're trying to have. So you think of, like I was mentioning, 15 million, 16 million teen cases every year globally. About 10% of those cases need some -- those children need some type of a palate expansion, upper palate expansion. Sometimes they -- the doctors get it with Invisalign First to kind of widen the arch or so on. But if you need to break that suture and move that open, the only way to do it now is with that metal device that gets put in the top and it's cranked open every day.

Better to say, 0% of parents enjoy doing that.

Yes 0% unless you -- And it's painful, It's not a good experience for kids. So this will give us an opportunity to go after, say, 1.5 million different opportunities per year, that we touch almost 0 right now. So -- and this is the type where you could start with a product like this. And as Simon said, you could then build that on to maybe Invisalign First and you bundle that together or maybe full Invisalign. But it gets the child, it gets the parent used to this type of technology, lets people know that there's an alternative and the doctors that have used it so far love it. It works. And it's one where it lends itself to other types of treatment in the future.

Right. Because -- just to maybe level set with people. Usually good, if you do Invisalign First with or without the palate expander, then you come back a few years later, right, as a later teenage usually to do...

We try to match those up. Sometimes you try to get that Phase 1 and then and get the Phase 2. But we want to be a part of the treatment from early on to finish, including retention and so on. So we want to be a part of the overall treatment. And this is a way to get in early.

Right. It seems like if you're accepting of it here, then their accepting of it later is probably much higher, right?

We think that, that's a benefit. It's a product that no one else has. But it's a direct printed product, directed printed product, and it's the first of many. So -- and I know we'll maybe talk a little bit about the Cubicure or the acquisitions we have but to be able to help scale this up and do some of that work, really, that 3D direct fab printing is going to be critical.

And does that sort of make it -- because it's direct printed to like gross margin and accretive to your core business?

As we scale this, yes, it will. And really, anything that we direct fab print at scale is going to be margin accretive. Because it's 80% to 90% less material. You don't have to bring -- print the mold first, the model first, and then put the plastic on top, you just actually print [indiscernible].

Yes. I appreciate your comments when I saw you in Las Vegas about what you do with all of those, like teeth models afterwards. They burn them or crush them into floor tiling or whatever, it's just like a huge waste, yes. It's a waste.

We don't want [indiscernible]. And then it's also less labor, there's less processing and others. So having the direct fab printing gives us a lot of flexibility, not only just in the product itself. Here, you can make something thicker, stiffer, whatever. When you get into making actual aligners with the direct fab printed product, you can -- the doctor has a lot of flexibility as what he or she wants to make with the product. So that gives a lot of flexibility there. We do get that cost savings, the material as well as labor. And then you also have some flexibility as to where you put your manufacture, you'd start in some of the hubs that we have, the main manufacturer in Mexico or Poland and so on but you could get it other places that are closer to the customers. So it gives us a lot of flexibility to be able to really provide great products that -- for our customers but then ultimately be able to manage the cost profile within our company that we think is a game changer. And no one has that. I mean, that plastic has been created, the process has been created. Cubicure company that we've been partnering with for years is really going to help us scale because they can outmake the machines, they make the machines for us. And as we scale that up, we'll close that acquisition, hopefully early next year, and that will really help us scale, not only -- all these other new products that we have, but what just came out with the palate expander.

Yes, just to build on what John said is that I think, sometimes it's difficult when you're on the outside to understand just the possibilities that this creates not only for us but also for customers. When you can directly print an aligner, all of a sudden, you can -- the doctor can customize the appliance, right? So the moment, when we talk about customization, it's the treatment plan, yes. So they can design the treatment plan and then there is a few features that can be added. But essentially, the appliances, what we make, right, is -- and you're restricted by the mold because it's the same thickness of plastic all the way around, et cetera. So with this, you can add any feature, you can change...

What will be the example of a feature that you...

Well, you can add hooks, you can add palatal coverage, you can change thickness, you can add different kind of ramps, et cetera on so their -- things that we're doing with the precision wings, we're going to do the occlusal next year. Those you can just directly print those rather than actually having to add them to the aligners. So from a -- like I say, from a design point of view, the customer -- and the other thing is retainers as well. You can design that retainer. So there's a specific form of retainer that a Phase 1 patient needs that we don't currently make. We make Vivera but -- so it just opens up a whole new world, not just to us from a cost perspective but just for a customer to be able to design the appliance in exactly the way. So when you start to think about all the really complex Class III cases, surgical cases about doing, they can really start to customize. So really exciting.

That makes sense. And sort of what's the time line? I mean, obviously, Cubicure hasn't even closed yet, but sort of how do we think about the time line to that like more exciting world?

I think what we'll do is we'll start with certain products and you start to use the direct 3D printing to help scale those products. So those products will start to build off of that retention, like Simon said, and then you'll start to get into the actual aligners themselves, the core that we have. So you're looking at starting to scale this next year. It will scale up in 2 or 3 years, you start to get more of a significant part of our production related to that. And like Simon was saying, you don't have products that really can be customized as a product themselves. We're still going to have core manufacturing that we have, which is what we do now, the mass production that we have of that. But think of it as almost 2 types of products, things that are more customized like we're saying that not only software, but the actual product can be customized and then you're going to have the core manufacturing. And that will scale up over time. But I would look at 2 or 3 years, you're going to start to see more and more of the direct fab printing and then we want to scale that up and continue to scale it up because like I said, there's a lot of intellectual property that we put down, a lot of technical know-how that we have in terms of how to manufacture this and scale is the plastic, it's all been created. It did exist. This process did not exist. And we think that it gives a lot of advantages to doctors and our customers and ultimately their patients. But it gives us a lot of advantages in terms of our company know-how and how we're going about this that will be unique in the industry.

That makes sense. Maybe talking to sort of other new products that you've launched. How -- what learnings have there been from the DSP rollout in North America that you can sort of apply to Europe? And sort of how are you thinking about that product now versus sort of the initial launch?

Yes. Well, it's -- so yes, it's been primarily U.S., Canada. We started off quite slow with that, and then we've ramped for the last kind of 18 months. I think the key learning has been, first and foremost, we started with our higher volume customers. Now the beauty of DSP is -- and it just fits in with the way that they run their practice. It essentially uses our platform, our manufacturing scale and then it gives doctors control and freedom to be able to use their allocations in whatever way they want. So we've kind of taken that principle of we start with our highest volume customers, many of which were previously either printing their own retainers or going to labs or going -- even using competitor products for like the lower stage level. Whereas with this, they can just do anything they want and use it in any way that they want as well. So that's kind of how we're starting. We've just -- we're kind of a few months into it with Iberia. Well, we started in June, but then they disappeared for 2 months during the summer. So we're kind of back up and running there and we're getting really good uptake in Iberia, a little bit in the Nordics. The second thing that's worked really well in U.S. and Canada is also DSOs. DSOs love it. That's once again, it's a really simple process for them to follow. They can buy larger bundles as well. So the economics and then it just gives the customers actually make a saving by using us instead of going to outsource into a lab where they don't get the same quality. They get a quick turnaround here. And it's all of the same platform again. So it's really nice and consistent for them. So we're starting to target some DSOs in Europe. And then we're progressively going country by country. In Europe, we talk about Europe, but it's made up of individual countries that have certain idiosyncrasies that we need to take into account but I think if you think about it is -- we start with our higher volume customers first, and then we work our way through the kind of our customer base, principally with orthos. There are some GPs that are starting to use as well, but principally with orthos. Yes, it's been a great program for us. It continues to be.

And we look at it, as we said, it drives incremental volume. This is a volume that was going somewhere else. It's primarily retention, but we do have what we would call those touch-up cases. And now we've included those in our numbers, but it's incremental volume for us. It's a great margin for us. It's some of our highest gross margin. Lower ASP on those touch-up cases. But that's okay. You're getting 5-stage, 7-stage, 10-stage product that we weren't getting before and the cost to serve is very low for us. So the margin is good.

That makes sense. How do we think about the current demand environment in China? I know, obviously, last year, the comps are sort of crazy by quarter, but how do we think about that?

I think when you look at China, I think it was last year at this time that everybody was kind of free to move around and it would break out COVID and that impacted out of last year and into the beginning of this year. We're past that. And now with China, we had a good third quarter for us. A lot of teen patients. And teen cases they came to our doctors there, which was a good environment for us. But overall, China is still a challenge. I mean it is -- it faces some of the same macro conditions that everywhere else has. We'll work through that. We have a lot of our team having a direct sales force there. We've got treatment planning. We've got manufacturing. We've got a big presence within China to really help us go after that market and grow in that market. We've introduced new products there, adult and standard. That's been about 1.5 years. So really, when we were in China in the past, it was really just more of a high-end comprehensive strategy that we have Tier 1, maybe Tier 2 cities, but kind of that high-end market, we've recently introduced products that kind of bridge the gap between some of those high-end products that we have the comprehensive products between that and with adult and standard. It's maybe less features, but the price is better, so you have better adoption. So we've grown the number of doctors that we sell to within China, which is good to see. We've gone into cities that we haven't been in or tiers that we haven't been into and Tier 2, 3 and now into 4. And we're also selling to GPs as well as the orthos. They really have been an ortho strategy there.

Is that GP strategy this year? Or is that...

It's really this year. We've always had the intention to do more of that. COVID really shut a lot of things down for a few years. But here, we're actually seeing some of the traction related to that. So we're doing everything we can within China. It's a fragile market. But when you look at the opportunity with so many people, the market share is the dominant company or the dominant position there is wires and brackets. And especially on teen, when you look at teen cases there, 90-plus percent of the cases are done with wires and bracket. So for us to be able to be there with the product portfolio that we've talked about, to be their direct sales, to be there from a treatment planning to manufacturing center, we think we're properly positioned, you need that economy to stay more stable and we'll be in a good spot with that. But we feel that China has been a big market for us, and it will continue to be a big market and our positioning should help with that.

Yes. No, that makes sense. What about orthodontic VBP, I feel like that's been on sort of like this permafrost situation? Like have you -- what are the updates that you've...

It doesn't hit us. I mean it's more -- it's a public side. So in our market really...

But just in terms of the rollout.

Yes, I think it's been on the more public side. There are certain products that kind of play in there. It really hasn't hit us from a product standpoint. We've got this product portfolio that is a little bit insulated from that. The public it's less than 20% of our market that we sell to. The majority of China from an Invisalign standpoint, it's a cash market for us. It's not the private side of things. So I think they're still trying to kind of figure out how this rolls out and how the impact is because there's so many different types of product. It's not like a hip implant or something else that that's the product. We've got a wide portfolio of products here to sell within this. So right now, it hasn't really hit us. We'll watch it closely and make sure that we could still grow within this market, but...

So you haven't heard anything about expansion plans beyond the current provinces in terms of timing or anything like that?

Yes, we have not heard -- I've not heard the timing on that, and we'll see what -- look, I think at the end, what you have in China, unlike maybe some other places, for Invisalign the patient pays a premium for Invisalign instead of wires and bracket. In many places like in the U.S., it's roughly the same price that a patient will pay. So there, you pay more. And if this ultimately gets people to get more access to clear aligners or Invisalign in China, I don't think that's a bad thing. Our portfolio could play in that market. We've got a sales force that could sell to those doctors and be able to help drive that conversion. If this gets us to a price point that drives more adoption within China, we're coming from such a low base in terms of the market share. This might help us in the end. But as of right now, it really hasn't impacted our business.

Got it. And any sort of changes in the competitive environment over the last year or so?

Within China?

Yes.

There's -- there are competitors. We've been facing competition within China for a number of years so it's really not -- nothing new there. You hear something about outside the aligner side, on the scanner side, like lower-priced scanner companies. That is one thing that you see. But in terms of the functionality that they bring, what that actual value proposition is, it's not something that we necessarily compete with. There's a value scanner market, which is essentially taking digital impressions in many cases whereas our scanner is not just taking the view of the teeth, but it's also processing and doing a lot of other things that -- with the software that we have built in to be able to show doctors and patients a lot more of the outcomes and simulations and other things that their scanners just are doing. It's just -- it's different. So I would say, overall, from a market standpoint, we're not seeing anything new or breakthrough on the clear aligner side. Like I said, the majority of the shares, wires and brackets. And on the scanner side, it's more of the lower-priced scanners. But when we think about our portfolio and how we go after that market, if a doctor is looking for a low-price scanner, we'll have a trade-in where we take a scanner that's in the marketplace, it maybe an older scanner, it becomes what we call a certified preowned CPO. And then we could sell to that doctor who wants a lower price scanner, and it can compete with some of the other lower-priced scanners that are there in a better way because it's part of our ecosystem, software and so on that lends itself to our digital platform. So we feel we can compete in really any market, China as an example, but any market because of our product portfolio.

No, that makes sense. And maybe to talk about the sort of scanner demand more broadly. How are you sort of thinking about that now? I mean you've obviously launched certified preowned in many places, the leasing. How is it -- how should we sort of think about that growth trajectory in the current environment?

Well, I think there are some similar dynamics going on there. I think there's still -- like you say, we've got lots of different options now, having that portfolio really helps. So where there may be cost concerns, et cetera. We've now we've got CPO, which I think has been a good move, but we have also got different ways that customers can acquire a scanner. So we have leasing models. We have rental down in Brazil, which has been really successful. We have kind of fusion or DEP, as we call it in Europe as well which is where we not bundle but doctor [ can miss ] those number of Invisalign cases and we can lower the price of the scanner. So there's various ways we can do that. I think from a customer perspective, yes, people are a little bit concerned about the macro environment, particularly in Q3, I think where they saw traffic going down. So committing to a piece of capital can essentially make them maybe stop and think about that. But then there's also a group of customers that think, well, this is the time to invest, right? If I can increase my conversion through scanning a patient or use that to market my practice, then it's a good investment to make. So I think, yes, I think we see that there is a macro piece there, interest rates on leasing have increased. We've tried to do some things to obviously help customers with that as well. One of the big concerns is kind of around the DSO side of the business as well. They tend to manage that capital a lot tighter than an individual practice. But once again, I think a lot of them have seen the rationale for investing in latest technology because it's going to help that business kind of climb through this current environment. So no, I think we've seen actually a really strong mix around our premium range, the plus scanners, which has got kind of all the latest software on it. So we've got a kind of a healthy mix around that. It's not all suddenly gone to the lowest cost pile of our portfolio, which has been good to see.

And are you seeing any -- like we've been hearing sort of DSOs because of the higher cost of capital have just been a little slower to open offices, too. Is that sort of playing into the current demand environment above and beyond sort of the general macro fears?

Well, I don't think it's kind of necessarily affected them more. I think we get a better view of the market through our DSO partners because we clearly, we work with them on Invisalign and iTero, and we can get a good feel for how -- what is actually happening from a conversion perspective, what's happening from a kind of a patient traffic perspective. But I think they're dealing with the same dynamics, even retail customers are as well. So no, nothing, I don't think anything different there.

No. Okay. Makes sense. Maybe the last couple of minutes, John, just switching topics away from the demand environment. How do we think about the right level of R&D spend for the company? Because obviously, there's continued product innovation, obviously, so much on the software side. Like how do we think about like what the right sustainable spending rate is there?

That's a good question. And when you think about the R&D that we spend, and as you know, even during COVID, we committed to keeping those resources, spending on those resource. And now we're seeing the innovation come through. I mean, Invisalign Palate Expander, and some of the smaller architect and other products that have come to market are a result of that spend. So we don't necessarily target a spend. I look at the programs, and we, as a team, will look at what's the short-term long-term benefits? Is this breakthrough technology? Is this just some modification of what we have? And how do we spend these dollars to be able to generate the return that we'll have. So we'll spend $300 million this year. It's a big, big amount. It's more than, I would say, all the companies combined from the clear aligners standpoint. It's a huge amount, but it's centered around some of the products that are coming out with some of the inventions that we have on the 3D printing and the direct fab and some of the efforts around that. It centered around some of the software improvements, the visualization. As you know, we've put out virtual care and Smile Architect where a dentist can -- does a scan and then show that patient while they're in the chair, here's what your teeth with your dentition. Here's what your teeth would look like with ortho and it's clinical. And then here's what your teeth will like with Ortho plus restorative. And being able to show that and visualize, we think, helps with conversion. And so a lot of the spending that we've done has helped with some of that software improvements and so on and driving productivity there. And then on the scanner side, as we've said, we've got premium scanner. We're always looking to further develop that scanner to make sure that it works well within our digital ecosystem that we have. I think going forward, what you'll see is -- some of these products come to market, we don't have to spend on those products. And you will start to see some low leverage. IP is a great example. We've spent a lot to really have this be the first really 3 direct fab printed products to be able to solve a problem in a child's mouth. And once it's released, there's certain things that you'll spend on in whatever else, but it's really a lot of the products that we have are really moving from the R side of R&D to D. And that's the exciting to see. You're actually seeing these come to market. And I think what you'll end up seeing is some leverage on the R&D side, you'll see some benefits where we've been able to spend in the past, and now you don't have to spend as much in the future because these products are coming to market. But we always want to be the leader in this industry. So we will spend to be that leader, the gold standard within the industry and we'll just balance that. But it is nice to see a lot of those products come to market.

That makes sense. Maybe one more question -- two more questions for me. I won't say last question, it's not listed. One, how do you think, given the volatile macro environment, how are you thinking about setting up sort of guidance for next year, whether it's a annual, this continued on a quarterly basis? Like how do you think about that right now?

Well, right now, the way I think about it is we'll give an update when we get through the fourth quarter. And our philosophy, we want to be able to share the visibility that we have. So traditionally, it's been trying to give an overall view from on a year basis to be able to show where things are at from a revenue and margin standpoint and then get down to the quarterly view of some data or forecast and give revenue and margin, but then maybe some other metrics. That's the intention that we want to get into. We just haven't had as much stability in the marketplace to get the granularity that we'd like to be able to get. And hopefully, next year, we get more stability. If we have more of that, we'll give more of that detail when we forecast that around.

Great. And real last question. As we sit here, what do you think the most misunderstood part of a line is -- from investors?

I think the biggest is just the underpenetrated market that we have the huge opportunity. I think people lose sight of the fact that I'll do a blended rate between teens and adults, 80-plus percent of the worldwide cases are done with wires and brackets. And it's an old technology, it's how people have been trained, people get accustomed to a treatment that says, this is how it should be done. And when we develop new products, when we go to market and help doctors and train doctors to really understand digital technology that you don't have to use an analog way to solve a solution. There's a digital orthodontic way to solve solution -- to provide solutions for these doctors. I think people just -- if you didn't have the doctor in the middle, it would have -- digital always wins when it comes to digital versus analog. And we will get there. And I think people just don't necessarily realize that there's still such a market opportunity that if we can get further along in the adoption, we will tip the market. It's not a matter of if it will happen, it will happen. It's just the time that it's going to take.

Awesome. Thank you so much, John. Thanks, Simon. Thanks, Madelyn.

Thank you.