Align Technology, Inc. ($ALGN)

Good morning, everyone. Thank you. Why don't we get started. Thank you for joining us today. For those of you who don't know me, I'm Glen Santangelo, I'm the analyst at Barclays that covers Align technology. We're very excited to have from a line with us, John Morici. He's the Executive Vice President of Global Finance and the Chief Financial Officer for the company. I think many of you have probably known John for some time. So, we're obviously very excited to host the presentation here this morning. So, John, welcome. Why don't we get started? All right. Excellent. So, I think a good place to start the conversation, might back up to the recent 4Q results. I mean it was a pretty extraordinary result, right? 5% sort of revenue growth on a sequential basis and year-over-year. And it just sort of feels like to us -- well, I'll let you start and sort of give your take on '25 and how it sort of progressed and how you closed the year and set the table for '26, and then we'll jump right in.

Yes. That's fine. So, as we went through last year and really, as you said, into third and then fourth quarter, we saw stability broadly across the markets. And that allowed us to be able to operate in that stability, to be able to deliver the results that we said we had some of the volume -- year-over-year volume growth close to 8%, revenue at 5%. And getting some of that growth back. We saw it across the board, really, when we saw North America stability. We saw DSOs growing double digits. We saw some of the international growth with Latin America, double digits and APAC and Europe at double digits. So, that was really good to see. Our DSOs, the Dental Service Organization, is growing double digits even in North America. So, it was really broad-based that we saw. Teens up 7%, adults up 8%. So, that was good results that we finished the year with. And it really reflected some of the operating environment that we're in with some of that stability. But then a lot of initiatives that we have to be able to drive that conversion. Some of it's new products that were introduced with the pallet expander and some of the touch-up cases that we have in various regions, that went well for us. And then we saw good execution across the business to be able to drive that growth. So, we exited in the year that started out more challenging. But as the year progressed, we felt better and better about our results and left year in a good position.

Yes. Certainly a strong exit. And I would also point to -- and I'm sure this is not lost on you, but if I look at all your publicly traded sort of dental peers, all of your reported better results in that fourth quarter. And it certainly felt like something changed or evolved from where we were in September to where we sort of closed out the year in December. And so, for whatever reason, it feels like the end market certainly got healthier and Align sort of executed well. But how do you sort of characterize that transition and maybe where we are today sitting here in the first quarter. Does it feel like we did see some improvement and that we continue to be stable at these levels?

I think the stability is key. I think when you're -- for our products, in the end, there's a need, especially on the teen side, where at that certain time, people want to go into treatment. You want to have that stability there so that people looking for treatment can afford it. I mean there's a certain amount of reimbursement, but in many cases, it's out of pocket. So, people have to realize, okay, I've got to either save up for this or I finance it and so on. So, people have to make those decisions. But I think what we're trying to do is help our doctors really drive what we call more active conversion. And I think we saw more of that in the second half where, when a patient comes in, making sure that they get iTero Scan, they could help utilize what their treatment would look like before and after, get them excited about it. The customers that we have that are very good about that active conversion at a good price for those potential patients and then usually followed up with some type of financing to get them into treatment. We're seeing more and more of that. DSOs are doing that at scale. They're able to do that in a way to drive this conversion, what we would call more active conversion. And that's why they're growing like they are. They're in the double-digit growth. Pretty much across the globe, we're seeing that. We need to be able to apply that to the one-off doctors that we have that maybe aren't so used to that type of selling, and when we do that more and more, we see them getting good results.

Okay. Maybe you just indulge me, I just have one more question on the macro, and then we'll sort of dive into the businesses. I think sort of coming into the year, I think a lot of investors, we're sort of focused on the tax refunds and maybe the benefit that, that would have to the consumer. Then we've seen this AI trend maybe starting to manifest itself in some corporate layoffs and maybe that's an offset to some of the benefit. And 2 weeks ago, I don't think 90% of us could have pointed to the Strait of Hormuz on a map, and now that seems to be starting to dampen sentiment. Like how would you sort of assess kind of where the consumer maybe is today with some benefits on the tax side versus maybe some of the other macroeconomic offsets and how they're thinking?

Broadly, we still see that stability. There's going to be things that come up in this dynamic environment where something is happening in the world, people get nervous about or talk about and so on. But for the most part, it really -- that stability continues across the globe. We're able to navigate even from a supply chain standpoint, out of the Middle East and beta, things might get delayed a little bit, but we're able to navigate and make sure that we keep our people safe and we can supply where we need to across the globe. So, we've got that managed I think when you look at the overall environment for this year, we didn't plan for a benefit of, as you mentioned, tax refunds. I think that does help in the end, you get some early indication that people are getting potentially a higher amount of refund, which, in general, is good for us being somewhat discretionary, especially on the adult side, when people have more money in their pocket, we certainly saw that going back to the days of COVID where people had stimulus money, they had time as well, but they wanted to get something done for themselves. We think that's a good thing, not baked in. I think that would be a tailwind. But we'll see how that plays out. But overall, we want to maintain and see that stability and be able to build off of that. And some economies, it's better than stable. It's -- they're actually growing very nicely. So, we want to be able to manage that in this changing environment.

Okay. Sort of diving into the aligner market. When I go back to the fourth quarter results, I mean, 7.7% growth year-over-year, and that was very impressive. But I thought it was even maybe just as impressive was the balance, 8.9% growth in ortho; 5.3% in GP; 8% in adults; and 6.9% in teens. So, you're seeing balance across all the different quadrants of your business. I mean is that what you expected? Or did that surprise you? Anything you'd point out related to that? That balance?

We want to -- look, we want to grow adult and teen. It's an underpenetrated market that we have. It's really even more on the teen side. Typically, teen goes faster for us because you've got millions of case starts that happen on a regular basis that most of them are done with wires and brackets. And we're the biggest share of the clear aligner, but majority of cases for adult and teen are done with wires and brackets. So, we have a huge opportunity. And I think what we're doing is with the product portfolio that we have to be able to suit the needs of our customers. This active conversion that I talked about, where you're advertising locally and getting those patients in and then driving some of the visualization and the right financing to be able to drive that conversion. We saw more of that in the second half of last year and as we exited. And like I said, it was broad. I mean, we've seen some growth in areas that we haven't seen in a while, like I would say, Western Europe maybe better than we've seen. We've seen some areas where in China, double-digit growth. And some of these markets that have been kind of challenged and you hear things happening, we're able to work our way through. And it fundamentally comes down to the fact that it's an underpenetrated market, and we've got a way to go after that market to be able to drive growth.

Competition is always an issue in your business now. And I think we get a lot of those questions around ASP and how that competition will impact that ASP number. Could you talk about the growth that you your recent growth and maybe the impact that ASP sort of had on those growth numbers?

I think overall, the competition, as we've said before and what I said just earlier is our competition is wires and brackets. The vast majority of cases are still wires and brackets. You see some competition in the clear aligner side. They mostly compete on price. They try to come in, maybe at a lower price. What we've seen across the industry pretty much across those companies is they've had to increase price because we knew those prices aren't sustainable and they've increased. And I think that will play out as it is. I think when we look at our ASP, there's two factors that impact our ASP as we grow. We're growing in many countries that have a lower list price. You grow faster in India, you grow faster in Brazil, you grow faster in Turkey than your average, those list prices are lower. That's what it is in that market. The second is we see an ASP impact on some of the products that we have. If we grow faster in, let's just say, touch-up cases that we're doing where it might only be five sets of aligners, that might only be $500 from an ASP standpoint. But the key is we're growing, getting new doctors. We sold to more doctors than we ever had in the fourth quarter. We're driving utilization. That's a great thing for them. And many times, you have new doctors, they don't start with the most complicated cases. They're studying with what they know or what they can get into initially. So, that's the dynamics that we have. I would say this, when we sell to those doctors, especially those lower acuity type of cases that don't have a lot of refinements they're at a very high gross margin for us. So, we see the gross margin rate. You saw that in the fourth quarter. It also translated to op margin well. So, that's the dynamics that we have from op.

And so, when we think about the 3-year growth algorithm, we should expect that to continue. Some of these emerging markets may be growing faster at a lower price and the mix. So, we should maybe expect some continued modest headwind on the ASP side due from the geographic and mix issues.

The geographic and product mix are the ASP drivers. There is not -- if I look like-for-like in markets there's not anything abnormal in terms of the pricing that we're doing. In some cases, we've increased price, but it's mostly due to some of the currency changes. But others is just we have that stability and price, our customers expect that. And then as they choose products that have maybe a lower list price, that's their discretion as we offer.

Can we just talk about the competitive landscape? And I know you believe your primary competition is brackets and wires. We get a lot of questions around Angel Aligner and some of the other players. And so, could you maybe -- and I think you sort of commented that you're maybe happen to see some of that competition happen to raise their prices, right, for probably a host of different reasons. But could you just give us an assessment of the clear aligner competitive market and any trends that are worth calling out?

Yes. Like I said, most of the competition comes in on price. They'll go to certain doctors and try to try to look at price to -- as a way to make a change. Like we said, some of the reasoning for switching, I think, has changed many times as a doctor, you don't know if a product is going to get you to what you need. Is it going to finish the case properly? That might take 6, 10, 12 months to be able to understand. I think that's cycling through. Maybe some customers are not happy with the results that they're getting after they switch. And now they're compounding that with some of the price increases that they're taking from that competition. But in this business to be able to make money. And really, we're one of the only -- really the only company that I see that makes money in this business. You've got to make money by having a scaled business being able to produce what we produce over 1 million unique parts a day and do that day in and day out and drive the scale and benefits of that. Be able to bring technology like we do, we spend a lot on R&D, but it benefits our customers and their patients. And you have to be able to bring that. And we're the only one who's trying to expand the category from a marketing standpoint. And I think once you bring those three together, many doctors realize the benefits of it. And I would say why we're growing so fast with our DSOs, they recognize that. They recognize they come to us because we bring scale, we bring technology and we bring a brand and all of those intersect with that business.

Can you give us an update on any sort of legal -- outstanding legal issues? I think in September, the company filed a complaint with the International Trade Commission aiming to sort of block imports of Angel Aligner and they bound you citing patent infringement, they bound to sort of defend themselves. Is there any other sort of litigation that's outstanding that's even worth talking about?

It's what we put out. It's going through the process now from a litigation standpoint against Angel. It's multi-jurisdictions. So, you see this in U.S. and Europe we won a preliminary start in Europe, where they had to pull back on some of the live updates, some of the software changes that they have. It's also in China as well. But look, we feel that from a technology standpoint, for what we spend and the intellectual property that we have thousands of patents on our technology, the clear leader in this space. There's going to be companies that find their way into using our technology that we think we've created. In Angel's case, it looks like they created their product based on our road map and our technology, and that will become clear as it plays out.

Okay. All right. Can we shift gears maybe and talk about the DSO partnerships. I think the company has sort of commented that it represents 25% of your business on a volume basis. For DSOs that aren't working with you, is there anything specific that's holding them back? Or you think it's just a matter of time? Or is there anything contractual? Like how should we think about the company's ability to grow that business within DSOs?

Well, it's a growing trend within the dental space. There's consolidation that's happening where you have practices that are by themselves, maybe they want to change in their career or how they practice and so on, and they're looking to perhaps sell or sell part of their business and kind of become part of the DSO. So, that's happening as it stands. We're being able to capitalize on that consolidation by bringing the three things that I spoke about that give us the benefit with them. We bring scale. We can we can turn around cases and the getting cases because we're so regional, you can get that turnaround in days from a manufacturing standpoint, and they appreciate that. They want technology. They want to be able to have technology that helps them finish cases and do it efficiently. So, a lot of productivity around software and updating things so that they can really standardize their operations with our technology. And then when they advertise and bring people, especially on a local basis, they're using our brand or leveraging our brand. And so, there's a lot of co-marketing and other benefits that we could bring with those DSOs. So, I would say DSOs, what -- we're pleased with the growth. I think there's a lot more growth. I think there's growth that's going to happen within the industry in the consolidation. And I think there's a lot of ways that we can partner with. And I think DSOs are -- we call them kind of a force multiplier in terms of taking our technology and taking our brand and bringing things together and partnerships that we have like with the Smile Docs or Heartland and now a growing amount of DSOs that are consolidated within Europe and also Asia. Is it really a way for us to extend some of the growth that we see there and be able to grow that channel, while still recognizing that the vast majority of doctors are still on the independent and we have to grow those as well. But we're seeing a good blueprint of how to do it through those DSOs.

Okay. Can we shift gears maybe and talk about the Systems & Services businesses. We get questions around the Lumina upgrade cycle. It feels like we're a fair way into that sort of upgrade cycle. Maybe if you can just give us a sense for where we are in that adoption curve and maybe how much more opportunity do you see as far as that's concerned?

There's a continued -- we introduced that scan a couple of years ago and then modifications to it about a year ago. And there's upgrades that are happening in the industry to be able to upgrade that technology to the latest scanner. It's going from what was confocal to now a camera-based imaging, and it gives a lot more flexibility. It's a smaller one, faster gives a lot more data to those practitioners. So, it's a really good upgrade, we're continuing to evolve this, making some of them more portable and different options that give different pricing flexibility and so on. We still have the Confocal, the 5D that we have that's kind of now become more the midpoint if doctors don't want to buy the most recent. And then we also have scanners that have come in that have been traded in that now go back out from a certified preowned. So, we have a product portfolio that has the latest technology with Lumina to the kind of the mid-tier that we have with Confocal to the certified pre-owned and then we offer a lot of financing options as well. Some might buy it straight out, great. Some might finance it, some might lease it and some might rent it. And some markets are really evolving very quickly. If you're in Brazil, you almost don't buy a scanner anymore, you rent it. You lease it, same in China. And I think we have the portfolio of products to be able to accommodate that, and we can offer a lot of the financing options. Because ultimately, we want those doctors to be able to use a scanner. And it's becoming more and more, it digitizes their practice, but we see the direct correlation. They have a scanner, we'll see more Invisalign cases. they add another scanner, we'll see even more Invisalign cases, and that's a good combination.

And you sort of touched on this a little bit, but is there any sort of upcoming innovations or anything else on the imaging side that we should sort of be keeping our eye on that might continue to support the durability of the growth that you've seen?

We see innovations around better margins and better understanding of, especially on the restorative side, some improvements that you'll see. So, it's an everyday scanner. You'll see some more around diagnostics and other parts of that scanner that will just become an everyday scanner. What I spoke about earlier, especially with some of the DSOs, they're scanning every patient. We want to be able to use that scanner to be able to provide a lot of diagnostic and other restorative information back to those general dentists who majority of what general dentists do is restorative. And if we can make that scanner more part of what they're doing on a regular basis, it will lend itself into more business.

When you think about this equipment, like how do you assess sort of the practices willingness to spend in the current environment versus maybe a year or 2 or 3 years ago?

I think interest rates are a big deal for them. They want to keep -- they don't want to necessarily finance things or pay interest on it. I think once they feel a bit more comfortable about the demand equation that they have in their practice, are they getting patients in? Is there a continued flow and so on. That helps what people have. They might be in the past, more reluctant to upgrade some of the capital that we have. But like I said, I think our product portfolio is diverse enough that people can get some of these scanners at a relatively low price. And then they're looking for more certainty on a monthly basis. And I think that's all in price of -- like this is essentially how much it costs to rent a scanner. I think those choices have been well received, and we're seeing more and more doctors take us up on those choices even in tougher environments.

Maybe just a couple of financial questions as we're coming close on time. Anything macro related with respect to tariffs. I know it's been a little bit of a moving target over the last year. A current assessment of the recent Supreme Court decision, how that might evolve or change anything?

We'll see how that -- there's a lot of speculation on rebates or not rebates. We're essentially taking about $1 million a month from a tariff. It's really a product coming from Israel for the scanner with USMCA in between U.S. and Mexico, there's no tariff on products coming out of Mexico. So, we continue to operate in that environment, we're staying really active to make sure that we understand any impact, but it was manageable for all of last year, and we expect it to be manageable as we go forward.

Okay. All right. The balance sheet in great shape, we got $1.1 billion in cash. Obviously, a great position to be in. I think you have $831 million remaining on the $1 billion authorization. If I'm not mistaken, because you want maybe give people an assessment of your capital deployment priorities and maybe the appetite to be buying back stock and relative to that authorization?

Well, buying back our stock has been an important use of our cash. I mean, first and foremost, we want to use our cash to help fund the business and grow. So, as we go to market and want to try different things, we want to be able to fund in that. There's not really acquisitions. We've done some smaller ones. The biggest one that we did was back a few years ago with exocad. We've been able to use our cash for that, like you said, not having debt in this environment is helpful for us in being able to generate a lot of cash. Free cash flow has been excellent for us. So, we want to be able to maintain that buybacks then on excess cash. We've done -- we've been buying back over $0.5 billion of our shares over the last couple of years. That's important for us. You can only do it from a U.S. cash standpoint, as you know. So, being able to get that cash back efficiently is important for us. So, we're working strategies to make sure we have that. Of that $1.1 billion, 80 -- over 80% of it is OUS. So, being able to find the right efficient way to bring that cash back to be able to put that cash to work in an excess way to buy back shares has been useful for us.

Just really quickly, you want to touch on the guidance for 2026? I think you laid out 3% to 5% revenue growth in 1Q, 3% to 4% for the year and clear aligner volumes in mid-single digits. Sort of any high-level commentary around that? Or any sort of update or anything related to that, that's worth mentioning?

I think when we looked at the year, we said that this is a starting framework of what we expect to be able to operate in. We're assuming stability continues broadly stable. We expect some of the -- as I said, the international markets to grow faster. We expect that as our product adoption continues to grow, we drive more doctors and increase that number of customers we have as well as increase the utilization. That's a framework that we laid out for the year. We want to take it quarter-by-quarter in this dynamic environment, but we think we're well positioned to operate.

All right. That's great. Well, congrats on the recent progress. Listen, we're out of time, but I want to give you the final word. I don't know if there's anything that we didn't discuss that you think is worth mentioning. Any final words you want to leave with the investors. I'll give you the last word.

I think we're in a business where there are changes and challenges that you have. But I think the fundamental when we think of the company, it's a vastly underpenetrated market. Most cases are done with wires and brackets. We think we bring technology, we bring scale and we bring a brand to this space that helps us drive and helps our customers win from an active conversion standpoint. Sometimes potential patients are reluctant to spend money, that activity when you bring it all together, helps them drive conversion, and that's what we're focused on doing as we go through this year.

Okay. John Morici, CFO of Align. We'll leave it there. Thank you very much. Excellent.