ALGN - NASDAQ

Greetings, welcome to the Align First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I'll now turn the conference over to your host, Shirley Stacy, with Align Technology. You may begin.

Good afternoon and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO; and John Morici, CFO. We issued first quarter 2023 financial results today via Business Wire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately one month. A telephone replay will be available by approximately 5:30 p.m. Eastern time through 5:30 p.m. Eastern time on May 10. To access the telephone replay, domestic callers should dial 833-470-1428 with access code 635629. International callers should dial 44-204-525-0658 using the same access code. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statements. We have posted historical financial statements, including the corresponding reconciliations, including our GAAP to non-GAAP reconciliation if applicable. And our first quarter 2023 conference call slides on our website under Align quarterly results. Please refer to these files for more detailed information. With that, I'd like to turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide an overview of our first quarter results and discuss a few highlights from our two operating segments, Systems and Services and Clear Aligners. John will provide more detail on our Q1 financial performance and comment on our views for the second quarter in 2023. Following that, I'll come back and summarize a few key points and open the call to questions. Overall, I'm please report better than expected first quarter revenues and earnings. The sequential increase in first quarter revenues of 943 million reflects stability across all regions for Clear Aligner business and favorable average selling price for the Clear Aligner and Systems and Services segments. Q1 sequential growth reflects an increase in non-case revenues, which also increased year-over-year driven by continued growth from our Invisalign Doctor subscription program the Vivera Retainers. And the team segment, which represents the largest portion of the 21 million annual orthodontic case starts 182,000 teens and kids started treatment with Invisalign Clear Aligners during the first quarter, increasing both sequentially and year-over-year, which is encouraging as we head into the important summer season for teens and kids. Overall, remain confident in our large underpenetrated market opportunity globally. And our ability to deliver digital products and technology that are helping doctors transform smiles and change lives for millions of people. Processes and services in Q1 revenues of 153.3 million were down 9.7% sequentially, and 6.2% year-over-year. As expected Q1 systems and services revenues decreased sequentially consistent with seasonal capital equipment cycles compared to Q4. For Q1 system and services revenues were sequentially lower primarily in the Americas and APAC regions, offset somewhat by an increase in EMEA. For non-system scanner revenues Q1 was up sequentially in year-over-year, reflecting increased scanner rentals, upgrades and certified pre-owned or CPO leasing programs to one CPO sales and food initial shipments of leasing units to desktop metal, who's supplying iTero element flex scanners to desktop labs. One of the largest lab networks in the United States serving general dentists. On a year-over-year basis Q1 services revenues increased primarily due to higher subscription revenues resulting from the large number of iTero scanners in the field. We also had higher non-systems revenues related to our scanner leasing and rental programs previously mentioned. The Q1 total Clear Aligner of revenues of 789.8 million was up sequentially and down year-over-year. Q1 sequential revenue growth reflects increases across the regions driven by price increases favorable foreign exchange and more additional liners. Q1 non-case revenues were up sequentially and year-over-year, reflecting continued growth from DSP, Vivera Retainers in commerce sales, which include everything from a liner cases to whitening and cleaning products. DSP has been very successful and enabling doctors to purchase aligners on a subscription basis, giving them flexibility to treat simple touch up cases, or offer their patients a superior flexible and convenient retention solution. We introduce DSP in North America during the pandemic, and are continuing to expand DSP offerings in the main region. The contribution of DSP to non-case revenues is important to understand, especially the impact overall Clear Aligner volumes. While we don't report the number of DSP, Clear Aligners shipped, and we don't include them in our total Clear Aligner volumes, if we were to calculate an equivalent case shipment for touch up patients, using our DSP aligners, we estimate those cases would increase approximately 25% sequentially. Q1 call total Clear Aligner volumes of 575.4,000 were down slightly sequentially reflecting stability across regions, and improvements in consumer confidence, as well as the easing of COVID restrictions recently in China. For the Americas Q1 Clear Aligner volumes were up slightly sequentially reflecting higher orthodontic cases, especially teen case starts with growth in both Invisalign Teen case packs and Invisalign First treatment for kids as young as six, offset primarily by a decrease in adult patients from the GP dental channel. Based on the most recent gauge practice analysis tool that collects and consolidates data from approximately 700 ortho practices in North America, overall, new patient flow and adult exams were lower this period while teens outpaced adults. During this period, wires and brackets cases continue to grow ahead of Clear Aligners, although at a slower rate than in recent quarters. And Invisalign cases outpaced other Clear Aligner brands. The gauge report also included a few data points regarding no shows which are exam schedule, which we believe may provide insight into consumer sentiment and macro conditions. Regarding no shows, over the last 12 months, there's been a large increase in the number of patient no shows. However, that rate appears to be stabilized. Conversely, over the last 12 months, future exams scheduled were negative year-over-year, but the rate has steadily improved in the most recent months covered by the report, which we believe may be a good gauge for consumer optimism. For EMEA, Q1 Clear Aligner volumes include strong adoption of Invisalign moderate across the region in both the adult and team segments. Invisalign Moderate Package's a 20-stage treatment option designed for patients whose treatment goals fall between the existing Invisalign Light and Invisalign comprehensive packages. For APAC, Q1 Clear Aligner volumes reflect improvement in China and continued growth in markets like Japan, Korea and India with positive year-over-year growth, including teams. Teen orthodontic treatment is the largest segment of the orthodontic market worldwide and represents our largest opportunity for Clear Aligner sales to orthos. We continue to focus on gaining share from traditional metal prices through teen specific sales and marketing programs and product features, including Invisalign First for kids as young as six, which is up sequentially across all markets. For Q1, total Clear Aligner cases for teenagers were up sequentially and year-over-year, reflecting improving trends across the regions. On a sequential basis, growth was driven by increased submitters in the APAC and Americas region. On a year-over-year basis, teen case starts were up in EMEA region by reflecting increased utilization and the recent introduction of Invisalign moderate across the region, which outpaced the year-over-year growth rate of Invisalign First, which also continues to perform very well across markets. Invisalign First was also up sequentially and year-over-year across all regions. Invisalign First is designed to treat a broad range of -- issues in growing children from simple to complex. And because Invisalign First is removable, it's easier for kids to brush and flows. There's also no discomfort from rubbing braces or poking fires for metal braces. These benefits, along with positive compliance experience, may also contribute to continued momentum for Invisalign First. In fact, the majority of surveyed Invisalign orthodontists agreed that their young patients are highly compliant with Invisalign First treatment. Understanding that younger kids are highly compliant and Invisalign First provides an opportunity to sort of overall practice growth. The Q1 Clear Aligner volume from dental service organizations, or DSO customers continue to outpace non-DSO customers. Q1 Clear Aligner volume from DSO customers increased sequentially, reflecting growth in the Americas region. DSOs make up approximately 20% of the dental market and represent one of the most important channels for digital orthodontics and restorative dentistry. Through their network of doctors and systematic approach to clinical education and practice management, DSOs are uniquely positioned to drive adoption of new technologies and tools that increase practice efficiency and profitability and deliver a better patient experience. We have well-established relationships with many DSOs, especially in the United States, with DSOs such as Smile Docs and Heartland Dental. And we are continuously exploring collaboration with others that drive adoption of digital dentistry. Each DSO has a different strategy and business model. And our focus is working with them and encouraging DSOs align with our vision, strategy and business model goals. One of the most digitally minded DSOs is Heartland Dental. And today, we announced a $75 million equity investment in Heartland. Heartland is a multidisciplinary DSO with GDP and ortho practices across the U.S. Their growth strategy includes Heartland's de novo dental practices, which feature modern technology, are located in areas with strong community need for dentistry, where Heartland provides practices with opportunities for mentorship, leadership training and continuing education. In the last three years, Heartland opened 188 state-of-the-art de novo practices across the United States and are planning to continue investing through more de novo openings. We have a shared sense of purpose with Heartland. Their mission is to help doctors and their teams deliver the highest quality digital dental care to the communities they serve. The ban creation remains an important strategic growth driver, and we continue to invest in consumer marketing programs that create awareness of the Invisalign system and that drive demand to Invisalign practices. In Q1 '23, we delivered 7.8 billion impressions and had 22.1 million visits to our websites and continue to invest in top media platforms such as TikTok, Snapchat, Instagram and YouTube across markets. For more details on our programs and key Q1 performance metrics, please see our presentation slides on our website. We're also developing digital tools and apps for consumers, patients and for doctors. The Q1 adoption of the My Invisalign consumer and patient app continue to increase with 3.1 million plus downloads to date and over 350,000 monthly active users, representing 28% year-over-year growth. Usage of our other digital tools includes ClinCheck, Live Update, which is used by 38,000 doctors to reduce time, spent modifying treatment plans of up to 13% and Invisalign practice app with 58,000 doctors actively using this feature and uploading more than 5.1 million photos to date. Finally, in addition to our focus on consumer marketing and digital tools, we're committed to driving excellent treatment and align innovation through industry and align hosted clinical education events. Our team has just participated in the annual AAO conference, which took place in Chicago, where we engaged with a broad range of orthodontists. In March, we participated in IDS in Cologne, Germany, one of the largest dental shows in the world focused on digital dentistry and the technologies shaping the industry. Earlier in the quarter, we hosted the second align's symposium on the digital practice, a smaller align event from the most engaged in experience Invisalign orthodontists in the world. It was an amazing opportunity to come together with long-term global partners and thought leaders in orthodontics to see how we are driving the digital transformation of dentistry together. By our participation in each of these events and opportunities, we continue to reinforce the importance of peer-to-peer clinical education and our investments in the orthodontic specialty. We are grateful for all of our customers, GP, orthodontists, corporate practices but we know that the orthodontic specialty leads the way in adoption of digital orthodontics. We are excited about the future we see them in the orthodontic profession. Align abruptly supports the orthodontic profession through education, grants and continued innovation. Our educational pathway was created to support recent graduates, and we career doctors at critical career transition points. As a result of schooling and early career initiatives, graduates will be educated on digital dentistry and digital orthodontics, connected with and supported by colleagues more experienced ortho experts in the Align team and engaged with Align Digital Platform. Align supports doctors throughout all stages of their career, from educating facilities at dental schools and orthodontic programs to education for residents. Early to mid-career providers and more seasoned professionals looking to expand their clinical capabilities and practices. Align is expanding its global footprint of education centers to provide a forum for hands-on learning and continued development in key cities across our regions. We are also focused on continuing to innovate in digital dentistry, scaling capacity to manage the millions of digital requests, patient scans and orders flowing through our systems, while also using technologies like AI and machine learning to increase efficiencies, speed treatment planning and quickly deliver products so patients can begin to pass to transforming their smiles. In the next one to two or three years, Align believes our newest technologies and innovations will revolutionize our existing offerings in the ways in which doctors and their patients experience orthodontic treatment. Together with our customers, we are developing the future of digital dentistry and digital orthodontics not just the technology that drive treatment, but the models reshaping how we interact with customers and deliver treatment experiences for their patients. We look forward to sharing more with you in the coming months. With that, I'll now turn it over to John.

Thanks, Joe. Now for our Q1 financial results. Total revenues for the first quarter were $943.1 million, up 4.6% from the prior quarter and down 3.1% from the corresponding quarter a year ago. On a constant currency basis, Q1 '23 revenues were impacted by favorable foreign exchange of approximately $25.8 million or approximately 2.8% sequentially and unfavorably impacted by approximately $34.9 million year-over-year or approximately 3.6%. For Clear Aligners, Q1 revenues of $789.8 million were up 7.9% sequentially primarily from higher ASPs and higher non-case revenues, partially offset by lower volumes. On a year-over-year basis, Q1 Clear Aligner revenues were down 2.5%, primarily due to lower volumes, lower ASPs, including unfavorable foreign exchange, partially offset by higher non-case revenues. For Q1, Invisalign ASPs for comprehensive treatment were up sequentially and decreased slightly year-over-year. On a sequential basis, ASPs reflect price increases, favorable foreign exchange and higher additional liners, partially offset by product mix and larger discounts. On a year-over-year basis, the ASPs for our comprehensive treatment were almost flat, primarily due to product mix shift, unfavorable foreign exchange and higher discounts, mostly offset by price increases and higher additional aligners. For Q1, Invisalign ASPs for non-comprehensive treatment were up sequentially and year-over-year. On a sequential basis, the increase in ASPs reflect price increases, favorable foreign exchange and higher additional aligners, partially offset by higher discounts. On a year-over-year basis, the increase in ASPs reflects price increases and higher additional aligners, partially offset by product mix shift, unfavorable foreign exchange and higher discounts. During the quarter, we launched Invisalign Comprehensive three and three product in most markets. The three and three configuration offers our doctor customers our Invisalign comprehensive treatment with three additional aligners included within three years of treatment end date. Instead of unlimited additional aligners within five years of the treatment end date. At the 2022 Invisalign comprehensive product price, over time, we have come to learn that on average, Invisalign doctors complete a comprehensive Invisalign treatment with less than two additional aligners. We are pleased with the initial adoption of the Invisalign comprehensive -- and anticipate that its impact will be more meaningful, providing doctors the flexibility they desire and allowing us to recognize more revenue upfront with deferred revenue being recognized over a shorter period of time compared to our traditional Invisalign comprehensive product. As revenues from subscription retainers and other ancillary products continue to grow globally, some of the historical metrics that only focus on case shipments are expected to account for a lesser percentage of our overall growth. In our earnings release and financial slides, you will see that we have added our total Clear Aligner revenue per case shipment, which we believe to be more indicative measure of our overall growth strategy. Clear Aligner deferred revenues on the balance sheet increased $32 million or up 2.6% sequentially and $150.9 million or up 13.6% year-over-year and will be recognized as the additional aligners per shipping. Q1 23 systems and services revenue of $153.3 million were down 9.7% sequentially primarily due to the seasonally lower scanner volume, partially offset by higher services revenues from our larger base of scanners sold, higher revenues from our CPO and leasing rental programs and favorable ASPs, down 6.2% year-over-year primarily for the reasons just stated. Q1 '23 systems and services revenue was impacted from favorable foreign exchange of approximately $4 million or approximately 2.7% sequentially. On a year-over-year basis, System and Services revenues were unfavorably impacted by foreign exchange of approximately $5.8 million or approximately 3.6%. Systems and Services deferred revenues on the balance sheet was down $2.2 million or 0.8% sequentially, primarily due to the decrease in scanners sales and deferral of service revenues included with the scanner purchase and up $24.2 million or 9.8% year-over-year, primarily due to the increase in scanner sales and the deferral of service revenues included with the scanner purchase, which will be recognized ratably over the service period. As our scanner portfolio expands and we introduce new products, we increased the opportunities for customers to upgrade, make trade-ins and provide refurbished scanners for certain markets. As such, our model is changing. We expect to continue to roll out programs such as our certified pre-owned leasing and rental offerings -- by possibly leveraging our balance sheet and selling the way our customers desire. Developing new capital equipment opportunities to meet the digital transformation needs of our customers and DSO partners is a natural progression for our equipment business with a large and growing scanner sold. Moving on to gross margin, first quarter overall gross margin of 70%, up 1.5 points sequentially and down 2.9 points year-over-year. Overall gross margin was favorably impacted by foreign exchange by approximately 0.8 points sequentially and unfavorably impacted by approximately 1.1 points on a year-over-year basis. Clear Aligner gross margin for the first quarter was 71.7%, up 0.9 points sequentially due to higher ASPs, partially offset by higher manufacturing absorption. Clear Aligner gross margin for the first quarter was down 3.1 points year-over-year, primarily to lower ASPs, increased manufacturing spend as we continue to ramp up operations at our new manufacturing facility in Poland and a higher mix of additional aligner volume. Systems and Services gross margin for the first quarter was 61.6%, up 2.8 points sequentially primarily from increased manufacturing efficiencies. Systems and Services gross margin for the first quarter was down 1.8 points year-over-year due to lower volumes, partially offset by higher services revenues and ASPs. Q1 operating expenses were $527.1 million, up sequentially 4.4% and up 3.1% year-over-year. On a sequential basis, operating expenses were up $22.1 million, primarily from higher incentive compensation and consumer marketing spend partially offset by restructuring and other charges not recurring in Q1. Year-over-year, operating expenses increased by $15.9 million, primarily due to higher incentive compensation and our continued investments in sales and R&D activities, partially offset by controlled spending on advertising and marketing as part of our efforts to proactively manage costs. On a non-GAAP basis, excluding stock-based compensation and amortization of acquired intangibles related to certain acquisitions, partially offset by restructuring and other charges, operating expenses were $490.5 million, up 6.7% sequentially and up 2.1% year-over-year. Our first quarter operating income of $133.5 million resulted in an operating margin of 14.2%, up 1.7 points sequentially and down 6.2 points year-over-year. Operating margin was favorably impacted by approximately 1.5 points sequentially, primarily due to foreign exchange and higher gross margins. The year-over-year decrease in operating margin is primarily attributed to lower gross margin. Investments in go-to-market teams and technology as well as unfavorable impact from foreign exchange by approximately two points. On a non-GAAP basis, which excludes stock-based compensation, amortization of intangibles related to certain acquisitions, offset by restructuring and other charges. Operating margin for the first quarter was 18.5%, up 0.2 points sequentially and down 5.5 points year-over-year. Interest and other income and expense net for the first quarter was an income of $1.1 million compared to an income of $2.7 million in the fourth quarter and a loss of $10.6 million in the first quarter a year ago, primarily due to net foreign exchange gains from the strengthening of certain foreign currencies against the U.S. dollar. The GAAP effective tax rate in the first quarter was 34.8% compared to 63.8% in the fourth quarter and 28.4% in the first quarter of the prior year. The first quarter GAAP effective tax rate was lower than the fourth quarter effective tax rate, primarily due to increased earnings in low tax jurisdictions in Q1 2023 and an audit settlement in Q4 2022. As a reminder, in Q4 2022, we changed our methodology for the computation of our non-GAAP effective tax rate to a long-term projected tax rate and have given effect to the new methodology from January 1, 2022, and recast previously reported quarterly periods in 2022. Our non-GAAP effective tax rate for the first quarter was 20%, reflecting the change in our methodology. First quarter net income per diluted share was $1.14, up sequentially $0.60 and down $0.56 compared to the prior year. Our EPS was favorably impacted by $0.14 on a sequential basis and unfavorably impacted by $0.21 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $1.82 for the first quarter, up $0.09 sequentially and down $0.43 year-over-year. Note, the prior year 2022 non-GAAP net income for diluted share in our prior year 2022 non-GAAP EPS reflects the Q4 2022 change in our methodology for the computation of the non-GAAP effective tax rate. Moving on to the balance sheet. As of March 31, 2023, cash, cash equivalents and short-term and long-term marketable securities was $921.4 million, down sequentially $120.2 million and down $199.2 million year-over-year. Of the $921.4 million balance, $310.5 million was held in the U.S. and $610.9 million was held by our international entities. During Q1 2023, we purchased approximately 942,000 shares of our common stock at an average price of $307.74 per share for a total purchase price of $290 million, completing a $200 million accelerated share repurchase from Q4 2022, a $250 million ASR from Q1 2023 and in our May 2021, $1 billion stock repurchase program. During Q1 2023, we announced that our Board of Directors authorized a new $1 billion stock repurchase program to succeed the 2021 $1 billion program. Currently, $1 billion remains available for repurchase under the 2023 $1 billion stock repurchase program. Q1 accounts receivable balance was $884 million, up sequentially. Our overall days sales outstanding was $83, down approximately two days sequentially and down approximately four days as compared to Q1 last year. Cash flow from operations for the first quarter was $199.9 million. Capital expenditures for the first quarter were $64.1 million, primarily related to our continued investments to increase aligner manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $135.8 million. Now turning to our outlook, as Joe mentioned earlier, we are pleased with our Q1 results and what continues to be a more stable environment across all regions. We remain cautiously optimistic for continued stability, as we move through the year. However, the macroeconomic environment remains uncertain. And given continued domestic and global challenges and unpredictability, we are not providing full year revenue guidance. We would like to see consistent improvements in the operating environment and consumer demand signals before revisiting our approach. We remain focused on making investments to drive growth and penetration into a huge untapped market opportunity, including our strategic investments in sales, marketing, technology and innovation. We are confident in our ability to address the massive opportunity for digital orthodontics and restorative dentistry, with our execution centered on our strategic initiatives. With this as a backdrop for Q2 2023, we anticipate Clear Aligner volume and ASPs to be up sequentially. We also anticipate Systems and Services revenue to be up sequentially. For Q2 2023, we anticipate revenues to be in the range of $980 million to $1 billion. We expect our Q2 2023 non-GAAP gross margins to be flat to slightly up from Q1 '23, and our Q2 2023 non-GAAP operating margin to be up by approximately one point sequentially as we continue to strategically prioritize our investments in go-to-market activities and R&D to drive growth. For full year 2023, assuming no circumstances beyond our control, we reiterate our 2023 non-GAAP operating margin to be slightly above 20%. For 2023, we expect our investments in capital expenditures to exceed $200 million. Capital expenditures primarily relate to building construction and improvements as well as additional manufacturing capacity to support our international expansion. Finally, as it relates to the $75 million equity investment in Heartland Dental that Joe discussed, our investment is less than 5% of the Company and the line has no oversight or involvement in management of Heartland Dental or its affiliates. With that, I'll turn it back over to Joe for final comments. Joe?

Thanks, John. In closing, we're pleased with our first quarter results that reflected an environment of continued stability for our doctor customers. However, degrees of uncertainty remain from market to market. We're confident in our durable competitive advantage as we continue to transform the orthodontic industry, bringing digital dentistry and clear line of treatment to more doctors and the patients they serve, driven by our strategic initiatives of international expansion, orthodontist utilization, general dentist treatment and patient demand and conversion. We will continue to focus on the next phase of new platform innovations in scanning, software and direct 3D printing while prioritizing the needs of our customers for the ultimate benefit of their patients. We are a purpose-driven organization with a tireless commitment to transform more smiles and change more lives. We're the only digital orthodontic company in the world today with the scale and reach to address the 500 million potential people that could benefit from teeth straightening within the line system. Thank you for your time today. We look forward to updating you on our next earnings call. Now, I'll turn the call over to the operator for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from Jason Bednar from Piper Sandler.

I wanted to start first maybe with the 2Q outlook. You're pointing to a sequential uplift in cases in the quarter. I think that's consistent with what we typically see in a normal year from first quarter to second quarter. I think it's normally a 5% to 10% uplift. So maybe a good sign if we're continuing to move back towards normal, I'm not sure if you're willing to touch a typical pattern there, Joe or John, just to comment on the second quarter. But regardless, can you elaborate maybe on the rhythm of activity you're seeing in the U.S. or international markets that contributing to the visibility today and calling for those improved case volumes in the second quarter?

Jason, it's Joe. First of all, I'd just describe what we have is stability right now. I mean you talk about the quarter-over-quarter seasonality of the business. We haven't really seen that for a long period of time. Obviously, that's embedded in our forecast right now. But I'd characterize again, what we're seeing right now is stability, which I feel is good in the sense that we've had such instability over the number of years. And from quarter-to-quarter, we're seeing some consistency in that sense. And I think -- in this economic environment right now with the uncertainty in different aspects going on out there, I think the stability piece and that's what we're leaning on as we move into Q2, is the right theme and the right kind of focus.

Okay. All right. Understood. Maybe to follow up and press a little bit more on maybe on the utilization side. Could you talk about maybe the puts and takes around some of the utilization metrics you're putting up here in the quarter and as we think forward in the future. It seems like that ortho channel is seeing some good uplift. The first sequential improvement we've seen in over a year. international utilization did tick lower, but I'm wondering if there's a dynamic plan out there where some of your China doctors are coming back online and starting to do cases, but not yet fully back up to normal. So maybe just curious if you could unpack what you're seeing with utilization in those two channels, the North American ortho channel, your international customer base.

Utilization statistic is, Jason, obviously, important to us. Remember, it often gets somewhat muddled in the sense of DSO aggregation and different things in different areas that we've had a report in an investment community at times. Your point on China is a good one. China was somewhat dark for us during the COVID piece, and we do see that coming back. The orthodontic piece is a good signal to. So overall, I feel good about those -- the utilization numbers. I felt obviously good about the gauge data. I hate to see the wires and brackets moving up, but you could see we outperformed on the Clear Aligner segment on that piece, too. So, we're seeing good doctor engagement and that's on both the GP side and the ortho side. I think the overall piece here is you have to look at a continued challenge from an adult standpoint, when you look at our numbers across the globe. And I think that's more reflective of the consumer index and confidence things that we've talked about in the past. And the teens in that certain window of treatment are more certain for this in treatment than some of the adults in those cases. And that addresses your question, Jason.

Our next question comes from Elizabeth Anderson from Evercore ISI. Your line is open.

So, my first question would be, I know you said China is coming back. Are you seeing that continue to sort of improve as we think about the second quarter? I mean, obviously, you're lapping some of these shutdowns last year, but I'd be curious about how that was improving. And then just to, I think you called out some broader utilization and improvements to help drive the margins higher in the second quarter and the guidance that you just gave, but could you go into a little bit more detail about what specifically is helping to push those up?

I think, Elizabeth, I'll take the kind of the margin piece. This is John. We'll see improvements as we produce more product, sell more product. We talked about that being sequentially up from a volume standpoint and utilize our facilities, whether it's clear liner or on the Systems and Services side. So that's definitely a help. And in particular, with some of the improvements that we're seeing with higher utilization in Poland, as that plant continues to ramp up, will -- we see improvements in gross margin that way.

Elizabeth on China, I could -- it was kind of a difficult quarter in a sense of how it started. But we saw good unfolding as the quarter went forward. I'd say when I hear people say China returning, China is coming out of a COVID crisis. I think we see, obviously, across different industries. China improving in that sense, but I'd say no way is China back in the sense of we envision China four years ago or so before we went into this mess. Right now, I'd say what we've seen in China the last few months is just stability, I'd say, some stability and a more clear signal out of China than we've seen in the past, but nothing that we're ready to forecast through individual growth standpoint.

Our next question comes from Jon Block from Stifel. Your line is open.

Maybe somewhat of a similar line of the question, but I just want to stick to maybe the March quarter. So let's say, most of the 1Q '20 revenue be is specific to ASP related, if you would. So I'm curious how Invisalign cases trended throughout the March quarter. And if there's anything to call out within the different regions and how that played out, call it, from a Jan to March -- because when you do start some of the implied math based on, John, your commentary where 1Q ASP was going to land, it seems like case falls were maybe on your number prior, not ahead. So again, just any color around case falls throughout the quarter and by region would be helpful.

John, this is John. So I would say in specific, as we said in China, we saw improvement in China. I mean it went from January with a lot of the COVID cases and February was better than January and March was better than February. We saw that. And then as Joe described, we've seen stability in a lot of the other markets where there's puts and takes, but overall, more stability throughout the quarter. And that's what kind of got us to our overall volume numbers.

Okay. So then I'll ask my follow-up and I'll ask my second question. I think on the initial guide, China was supposed to be down Q-over-Q, was China still down Q-over-Q, 4Q to 1Q based on your commentary? Or was that up and you gave it back a little bit somewhere else. That would just be the follow-up to the first question. The second question is just burning one on 2Q a little bit. When you say ASP up 2Q versus 1Q, is there a dart throw of maybe low single digits or 1% to 2%. I'm guessing you get the stub on the price increase. You get the full quarter in 2Q that you didn't get in 1Q. And maybe FX, as we sit here today is more favorable for the June quarter versus March.

Yes. Thanks, Jon. Yes, on China, we didn't specifically guide for China in Q1, and it played out as we described there, but that's what we saw in China, which adds to what Joe was talking about just that stability that we saw there that we haven't seen in three years or so. On ASPs, you're right. We expect it to be slightly up over Q1. It's getting that full quarter of price change and so on the price increase we have and kind of taking the FX where it's at right now so slightly up compared to what we saw in Q1.

Our next question comes from Jeff Johnson from Baird. Your line is open.

Following up on John's question, I think he was trying to get up the same thing. But look, I mean, revenue in 1Q came in clearly ahead of what you guys were talking about. 2Q is at least being guided above the street, which I say encouraging. You're talking about stability throughout the quarter. So I guess I'm trying to understand why isn't that translating to slightly better margins? I think your margin number in the 1Q was spot on with us. It was above the street right on what we were thinking, but your full year guidance is staying the same. And it sounds like you feel a little better about the end markets. You're definitely translating that to better revenue. I would just think even with fixed cost leverage, maybe we would have seen a little bit better margin in the 1Q and a little bit more optimistic outlook for the year.

I think, John, when you look at -- or sorry, Jeff, when you think of the total year, there's still uncertainty in the second half. So we tried to give a good view of where we think Q2 will be based on that guidance, but they're still uncertainty in the second half. And that's why we've stayed away from that revenue guide for the total year and kept our op margin that we talked about, the non-GAAP at or slightly above kind of out there just for that uncertainty still in the second half.

Okay. And then maybe a follow-up. I just want to make sure on DSP. I think I know the answer to this. I don't want to expose my -- pay if it is that. But I know there's commercial product in there. I know obviously, there's -- there do any cases get captured within DSP? Obviously, as DSP is growing nicely, the 575,000 cases you did this quarter, the 598,000 cases you did last year in the first quarter. If we subtracted out DSP or if that didn't exist, would those case volumes be different at all, is the down 3%, 4% year-over-year being impacted at all by more things moving to DSP? Just want to understand the impact that has as we look at these reported global case volumes.

No, you're right, Jeff. I mean, so as DSP grows, there are some non-comprehensive typically cases that get caught in there. Those would be minor adjustments, minor movement cases that those doctors would want instead of going into a non-comprehensive case, in ordering that, they're using DSP. And so therefore, DSP kind of includes it. It's great revenue for us. It's additional revenue. That's why when you think of that other revenue piece of it. It's growing faster as DSP grows, and it's really fulfilling the way the doctors want to be sold to. But some of that case volume gets trapped within DSP.

But Jeff, just to make sure we're talking kind of apples-to-apples, you asked if you stripped out those cases from our reported case volumes, they're not counted in the case volume is the point, and that was the comments that John made on the script about the implied impact of DSP revenue growth because those aren't counted in case shipments.

Right. And as they're growing, then I'm assuming the 4% year-over-year case volume contraction you reported this year in the first quarter looks a little worse than it actually would have been if DSP wasn't out there. And that's what I'm trying to get at. Is there any way to quantify that? Would cases, if not for DSP, been closer to flat year-over-year? Or is there just any way to kind of guide us round about what that impact of DSP growing nicely year-over-year, but then that's capturing -- DSP is capturing more cases this quarter -- this year in the first would have then did last year in the first quarter.

Yes. We haven't broken that out, Jeff, within DSP. But you're right. The year-over-year case volume change would not have been down by as much. It would have been more -- it would have been adjusted because DSP is growing, and there's more cases that kind of get trapped within there. But as Shirley said, we don't report those DSP cases. They're not there. They just show up in our other revenue.

Our next question comes from Brandon Vazquez from William Blair. Your line is open.

I think first, I just wanted to focus kind of on the adult side. The cases were down quarter-over-quarter. Those are the cases a little more exposed to the macro side. But you are also guiding to sequential improvements in volumes going forward. So just kind of curious if you can talk about that dynamic. Is team quarter-over-quarter growth enough to kind of offset that? Are you expecting adults to also improve -- just kind of any dynamics around that would be helpful?

It's Joe. Look, I think when you look at adults, I look at that as really tied to the consumer confidence indices, particularly in the western world that we can track. And look, I'm not -- we're not smart enough to project where that's going. It looks like that's stable right now, too, when you look at the way those lines are trending in the United States and different parts of the Western world. On the teen side, our second quarter is a big teen season. In the western world, third quarter is big teens for China. And so that's why we talked about it in my script is that we came out of the first quarter with really positive signs on teens. As we go into the quarter, we have some momentum in that sense. And so we stay focused on adults and we'll execute well around adults. But in teen season two, we keep a very sharp focus there because we think that demand equation is much more consistent.

Okay. And then maybe I'll take us a step away from kind of the near-term stuff and just talk a higher-level strategy on the DSOs. It looks like you guys are having good progress there. Can you talk about -- are there any kind of like fundamental differences of going to that market? Any commercial strategy differences? Are there potential margin benefits because you're kind of dealing with one large organization that sells to bigger accounts, anything you can call out there for us?

Yes, it's a good question. The DSOs, you're right, there's something we call OpEx, some cost aspects you don't have to have as high as the number of salespeople calling on that account, you organize resources differently to make sure you support a team like Heartland, the way they need to be supported. What's really great is a very synergistic effect, too, in the sense of how they execute on their clinicals throughout their organization from an efficiency standpoint, how to teach our doctors to use our product to enhance what their capability is in the digital dentistry side. And so -- and then obviously, we help to teach through their teachers in the sense of how we train the doctors and all. So what we really like about with Heartland, and we have a good relationship with other DSOs with Heartland is a really good focus from a digital standpoint and good execution around how they want to move that to the marketplace to their doctors. It's very professional, and that's why we've seen growth in that channel and -- we see that with Smile docs also on the orthodontic side, there are strong orthodontic DSO. And we're really, really happy to partner with them because we have the same vision and the same focus on expanding the marketplace for digital orthotics.

Our next question comes from Nathan Rich from Goldman Sachs. Your line is open.

Maybe going back to China, if I could. Joe, is there any way to characterize kind of where case shipments were March relative to maybe where the business was prior to the lockdowns? And can you maybe just talk generally how you feel about the consumer there and they're kind of coming out of these lockdowns willingness to spend on dental treatment.

Well, I think we're coming out of a complete blackness, okay, when you get it. So Nave's really hard to pull a signal out of all that noise, except for we had a reasonable quarter, and you can see we're predicting that in the second quarter for China. That's kind of as far as I want to go. When you think about China itself, from a consumer standpoint, you have to look at the private institution. You have to look at the public hospitals. And again, that data isn't clear enough for us in the sense of what the sustainability is on that piece. So we're just being cautious. I don't think China is going to revert back into a COVID kind of a shutdown. I think we all know that. But that economy is somewhat questionable right now in the sense of how fast it will rebound and what direction it rebounds in We're just being cautious in the sense of how we're going to forecast

Okay. Sounds good. And then, John, maybe a follow-up for you. Could you maybe just help us get a sense of where the 3x3 case penetration was in 1Q and it sounds like you're expecting a pretty meaningful step up in 2Q. I don't know if you can kind of put any numbers around that in terms of what that will do in terms of the revenue recognition that you'll get kind of incrementally relative to the first quarter as that penetration increases?

Well, I think first off, the three and three, it's a great product that our customers want and they're utilizing and so we're happy to see in the markets that we've released good adoption started in January for us, and we saw it progressively increase as we went through -- in through the quarter. So every month got better. And it really gives doctors more options in terms of how they want to purchase our product. As I said in my remarks, many of our doctors -- most of our doctors don't do more than two refinements. So this is a product that's perfect for them, allows them to treat patients the way they can. And then from a revenue recognition standpoint, it -- because we don't have -- we have pretty much a defined number of aligners only up to three refinement. And it's over a three-year period. So we're able to recognize revenue over a shorter period of time and the adoption of this as well as other factors are in the overall Q2 guide.

Our next question comes from Michael Ryskin from Bank of America. Your line is open.

I want to follow up on an earlier question regarding what you saw in adult versus teens, recognize your point on adults being a little bit more consumer exposed and maybe some of that is a little bit more macro driven. But just wondering, anything you can comment to in terms of how that progressed through the quarter? Or any difference you're seeing U.S. versus Europe versus EMEA, just given anything on progression there? I think with that? Just to sort of that back to your comments on stability, it would be really helpful to bridge that.

Michael, it's Joe. I mean if anything has been consistent, we have seen the pressure on adults during this whole downturn. Now we can see pressure on teens, too, but not to the same extent. These things vary by country in Europe. There's no Europe, you have to look at by country or whatever in the United States. But in general, we see very similar trends from an adult and team standpoint, with more teen demand, not saying positive team demand, but stronger teen demand than we've seen with adults. So what we feel good about is that we're seeing decent stability in those numbers. And adult creep up a little bit. We saw our DSOs in the United States execute really well around adults, which shows you that if you have the right kind of focus, you can still have a good patient yield on the adult side, if you're working that piece. But in general, I think until we see significant economic improvement, I don't know if that adult -- teen kind of ratio in the sense that we're seeing is going to change dramatically. I think we have to see a good upturn in consumer confidence before we see that reflected in the adult volume. Doesn't mean that confidence doesn't affect teens, but it doesn't affect it to the same degree.

Okay. All right. That's helpful. And then on the ASP front, again, I know you guys just talked about the price hike for a while and you discussed some of the factors that led to the ASPs in 1Q and sort of out for 2Q. I'm just wondering, we've always sort of debated price elasticity or demand elasticity as it relates to price. I know there's a lot of going on that earlier this year. Just wondering if now that you've got a full quarter under your belt any additional learnings on price sensitivity in the market, ability to take more price through another price hikes. So what are your thoughts on that a couple of months in.

I think price elasticity is a good question in this marketplace. Michael, I think we've always known it's been there. I mean we see -- our competitors don't necessarily compete at all on technology, they compete on price. And then we know that it's had a certain amount of success in a certain part of the marketplace, and that will always be there. But when you look at our price increase here, and I think you're associating our price increase with price elasticity and our volume is our 3x3, which we didn't increase. And obviously, there's a limitation on additional aligners. It was really well received by the marketplace and very from a GP standpoint and ortho standpoint too. And our increase on our comprehensive was seen as fair and also the other parts, I would say -- but everybody loves a price increase, and we see our NPS score. But if I've been here long enough to have enough data points to tell you that, I think this price increase -- our pricing approach was received better by the marketplace than any other one that I've instituted since I've been here. And so, I feel good about it because I think it matched our customer expectations with what we need from a business standpoint. And so I don't think that that elasticity was negative at all in the sense with the price increases here. And most of our competitors, they are truly competitors followed in that sense with price increases, too.

Our next question comes from Erin Wright from Morgan Stanley. Your line is open.

I'll ask my question both upfront here, but first on Heartland and the investment there. And how does the relationship change now with the investment? And would this constrain any future relationships with DSO partners. Did you contemplate any sort of conflict of interest that could arise there? And then second question would be on the scanner business and how we should be thinking about the quarterly progression of the segment and stability across the business? And how we're just thinking about just equipment demand trends in general overall with iTero?

Erin, it's Joe. I'll take them. On the DSO side, I don't see a conflict of all. We have DSOs that really want to address digital dentistry through digital orthodontics and we're excited about our -- obviously, our digital footprint and what we can offer from a platform standpoint. And so Heartland is helping the lead on the GP side in that sense, and I mentioned the Smile docs on the ortho side is there, too. So again, I don't expect this to be an issue within any of our accounts because we will engage with them and to help them on a demand equation if they want to be as aggressive and inconsistent and this implementation is what Heartland has been and which our docs have been, too. So -- and I don't see a conflict of interest at all. When I hear that term, my hair goes up in the year. I don't see anything that's conflicting at all. I think this is completely in line with what we believe in. We want to drive digital orthodontics as fast as we possibly can. And those DSOs and frankly, not just DSOs, just we have several doctors that have multiple practices that we engage with to try to expand those practices with them because we know they've committed to digital orthodontics and can drive those things forward. So I'd look at this as a positive statement that we're ready to engage and invest with our partners that share our vision. And then secondly, on the scanner business, I think you look at what happened between fourth quarter and first quarter. I think you have to take that in context. Fourth quarter is always a big capital equipment cycle. And first quarter is lower. This wasn't much different when you look at the numbers. When you look at our overall services business through that business because we have such a broad installed base that held up very well. So as I look at the scanner marketplace and where we stand today, I believe we have the largest installed base out there. We monetize that well from a services standpoint, we work with those accounts. When you look at our NPS scores of customers that use iTero, significantly higher customer satisfaction than ones that don't and try to use PVS impressions or something else, too. So when I look at our technology versus technology from competitors, I feel we lead, and we'll continue to lead in the marketplace. So our iTero scanner is critical for us going forward. It's a key part of our digital platform. Don't look at the fourth quarter and first quarter as any kind of a signal to say that we're losing momentum in that business. We always see that difference between fourth quarter and first quarter. John, you add anything? You...

That's good. I mean, it's very consistent.

Our final question today comes from Kevin Caliendo from UBS. Your line is open.

I just want to go back to Heartland. Can you tell me how much volume you did with Heartland in '22? Is this going to potentially impact that going forward? Like is there any guarantees or any buy-ins or do you maybe more contribute to their growth as they continue to grow? And I guess the follow-up to there is, how are you accounting for this? It says less than 5% ownership. I'm assuming that means whatever runs through the P&L would be a noncontrolling interest, right? And -- or is it somehow above the line? And is this impacting margins in any way, shape or form?

Kevin, I'll take the first one. John is our expert in accounting here. I'll let them take the next one. So on Heartland, look, we don't give individual numbers like this, but you can guess Heartland is the biggest DSO in the world, and they're very effective DSO in that sense. And this is a meaningful investment, and we're seeing meaningful growth with those guys. And I think we're trying to model something, I think, of us a model. It's a good relationship and has a good trajectory from a growth standpoint. John accounting?

Yes. In terms of the investment, less than 5%, it doesn't show up in our op margin or anything of that nature. And it's an investment that we made, and it stays on our books that way. But there's nothing that would show up in our op margin or anything else related to that investment.

Kevin, also just -- as John talking and thinking of my comment to you is your comment might have inferred something like a quid pro quo or something like that. There's nothing like that. There's no piece of that. We have a joint vision in the sense of how we can move digital orthodontics through the general dentistry, and we share that, and we're helping to invest in that so we can drive it forward. But there's no give and take in that sense. Appreciate your questions.

Hopefully, it's a good financial investment. You make money as well as advanced digital dentistry. If I can ask...

Follow up. Yes.

U.S. case growth, do you expect U.S. cases to grow year-over-year beginning in 2Q? Is that part of the assumption or how we should think about that? Can you get down to that kind of granularity, U.S. or Americas?

Yes. We're not at the -- we're just not giving that case growth numbers, we just kind of wanted to talk sequentially, but you would expect, as we've kind of said from Q1 to Q2, we would expect overall volumes to increase sequentially as you get into teens and others, it's going to vary by region. But if you're talking specifically the U.S., you start to get into more of a teen season basis, and that's the expectation for our overall numbers.

Yes. Thanks, everyone. We appreciate your time today, and thank you for joining us. We look forward to speaking to you at upcoming financial conferences and meetings. If you have any follow-up questions, please contact Investor Relations. Have a great day.