Greetings, and welcome to the Align Q1 '21 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Shirley Stacy, Vice President, Corporate Communications and Investor Relations. Please go ahead..

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 2021 financial results today via Globe Newswire, 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 1 month. A telephone replay will be available today by approximately 5:30 p.m. Eastern Time through 5:30 p.m. Eastern Time on May 12.

To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13718065 followed by pound. International callers should dial 201-612-7415 with the same conference number.

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 2021 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information.

Please note, as of Q1 '21, we are no longer including number of doctors trained, Clear Aligner shipment volume by region and total worldwide average selling price. We will continue to share information management uses to evaluate the business and metrics to help investors and analysts assess our financial performance.

With that, I'll turn the call over to Align Technology's President and CEO, Joe Hogan.

Joe?.

the U.K. GP Forum and Ortho Summit, French Ortho Summit and the iTero Element Plus launch media event. In addition, we just held the Italian and DACH or German Ortho Summits last week. International expansion remains one of our key strategic pillars.

Last week, we announced plans to open a new manufacturing facility in Poland, which will be our first Aligner plant in the EMEA region and our third plant worldwide joining Juarez, Mexico and Ziyang, China.

The new facility is expected to be supplying customers in the EMEA region in early 2022, helping address the large and relatively untapped market of more than 5 million annual orthodontic case starts and more than 150 million EMEA customers who could benefit from treatment.

The investment is part of our strategy to bring operational facilities closer to our customers and reflects our commitment to Invisalign-trained doctors and their patients in the EMEA region and extends our local operations in the region.

The state-of-the-art EMEA plant in Wroclaw is expected to have more than 2,500 jobs by the end of 2025, making it the company's largest investment in EMEA to date and the largest 3D printing operation in the region. For APAC, Q1 volumes were down sequentially 3.9% as expected, reflecting seasonality.

On a year-over-year basis, APAC was up 101.3% compared to the prior year, reflecting continued strong growth across the region, led by China, Japan and ANZ. Invisalign volume growth drivers were young adults, with young kids ramping faster than any other age group.

In the teen segment, Invisalign volumes accelerated during the quarter and were driven by increased Invisalign utilization and case submissions from Invisalign doctors. We also continue to see good adoption of the Invisalign Moderate product for noncomprehensive treatment in the GP channel.

During the quarter, we continued to offer online and on-demand education events which reached over 14,000 GPs cumulatively. Invisalign volumes in China were flat sequentially and up over 200% year-over-year. In Q1, China volumes gained momentum throughout the quarter.

The Align clinical education site is the go-to digital hub for Invisalign doctors and team education and training. The digital learning environment was relaunched in February 2020 for Invisalign doctors, offering a comprehensive learning platform with role-specific content for orthos, GPs and their teams.

The site enables more online learning opportunities with spotlight features for what's trending now, recommended learning paths based on doctors' experiences and expanded categories, including digital treatment planning, comprehensive dentistry and team education.

During the quarter, over 102,000 unique users, having accessed the records lecture, completed self-paced learning modules and watched how-to videos, viewing more than 3 million pages of learning content. On the Ortho channel, over 38,000 unique users have engaged with a digital learning site and additional 63,000 unique users from the GP channel.

We also continue to see good adoption of the ADAPT program, which is an expert and independent fee-based business consulting service offered by Align to optimize clinics' operational workflow and processes to enhance patient experience, customer and staff satisfaction.

As a result of the ADAPT service, practices experience higher growth and greater efficiencies for orthodontic practices as well as improved profitability after implementation. To date, we've seen a 50% increase in Invisalign cases among doctors' cohorts within 6 months of participation in the ADAPT program.

In addition, while still early in the program, we're also seeing a strong correlation or halo effect on teen utilization among ADAPT doctor cohorts.

On consumer marketing, this focuses on educating consumers about the Invisalign system and driving that demand to our Invisalign doctor offices, ultimately capitalizing on the massive market opportunity to transform 500 million smiles.

In Q1, we continue to see strong digital engagement globally with more than 138% increase in unique visitors, 95% increase in doctor locator searches and 35% increase in leads created on a year-over-year basis, driven by our global adult and mom-focused campaigns and teen-focused influencer content. Our U.S.

Mom/Teen multitouch, multimillion-dollar campaign with influencer-led YouTube videos, a mom-focused TV spot, a custom Twitch activation and mega teen sensations such as Charli D'Amelio and Avani Gregg continued to perform well and garnered 4.2 billion impressions in Q1.

The statistics I shared previously speak to the continued success this marketing campaign is having to not only drive demand with consumers but also educate them on the benefits of Invisalign treatment through a doctor's office. The Align Digital Platform continues to gain traction globally.

Our consumer and patient app, My Invisalign, is now available in 58 markets, resulting in a more than 4x increase in app downloads and 3x increase in patients actively using our app in Q1 '21 versus the same period a year ago. Our consumer and patient feature usage continues to increase.

For example, Invisalign Virtual Appointment Tool was used 86,000 times and our insurance verification feature was used 27,000 times in Q1. Further, we received more than 575,000 patient photos in our Virtual Care feature to date globally, providing us rich data to leverage our AI capabilities to improve our services for doctors and patients.

Lastly, our new consumer website has been rolled out to more than 50 markets and continues to drive increased effectiveness in lead creation. In the EMEA region, we built on the tremendous success we saw with the consumer marketing pilot in Q4 in the U.K.

and expanded our media investments across the U.K., Germany and France to drive engagements, resulting in more than 335% increase in unique visitors and a 95% increase in leads.

We also expanded our consumer advertising in the APAC region in Australia, Japan and China, and saw more than a 2,000% increase in consumer engagement and a 298% increase in leads. Several key metrics that show increased activity engagement with Invisalign brand are included in our Q1 quarterly presentation slides available on our website.

Our NFL partnership continues to do well, generating over 23.5 million impressions during the quarter. It continues to be another major integral channel to reach adults considering clear aligner treatment through an Invisalign-trained doctor.

During the quarter, we expanded our sports partnership marketing strategy with the Invisalign brand named the official smile partner of the Golden State Warriors.

As part of the agreement with the 6x NBA Champion Golden State Warriors, the Invisalign brand also is the official smile partner of the Santa Cruz Warriors, the Golden State's G League affiliate, and the Golden Guardians, its e-sport affiliate.

The sponsorship includes an omnichannel activation across TV, digital media, social, a jersey partnership with the Golden Guardians and the Santa Cruz Warriors.

Finally, on the consumer marketing front, we also launched our first ever social purpose initiative in Q1 called Invisalign ChangeMakers, an award program we developed in partnership with the National 4-H Council. This is to celebrate and highlight teens in making an impact in their communities.

We were blown away by the number of recommendations and stories we received about teens, from redistributing excess food to combat hunger in their communities, to donating weighted blankets to those in the autism spectrum.

Overall, it's been heartwarming to learn about each of these amazing teenagers who bring a unique approach to positively impacting their communities and following their passions to create change. In total, we received nearly 800 ChangeMakers applications.

On June 28, we will announce 100 winners, each of whom will receive $5,000 to help them continue their goodwill efforts. We'll also celebrate these young forces of change with a virtual ceremony currently slated for mid-July. We are continuing to invest in creating consumer demand for Invisalign Aligners in markets around the world.

Our global campaigns include a multichannel media strategy using digital video, social media, influencer marketing and TV. For our Systems and Services business, Q1 revenues were up 5.8% sequentially, reflecting slightly lower scanner volume following a record fourth quarter.

This is primarily due to the seasonality of capital equipment sales at year-end and higher services revenue. On a year-over-year basis, Systems and Services revenues were up 104%, reflecting strong scanner shipments and services. The iTero Element 5D Imaging System continues to gain traction across all regions.

Element 5D is the first integrated dental imaging system that simultaneously records 3D intra-oral optical impressions, 2D color images and Near Infrared Images or NIRI technology.

Full arch scans can be completed in as little as 60 seconds, and NIRI technology scans the structure of the tooth in real-time without harmful radiation, acting as digital aid for detection of interproximal caries, or cavities, above the gingiva line.

In APAC, the Element Flex is doing well with its wand-only configuration that provides needed mobility so doctors can see patients anywhere they choose and also or perform full arch scans in even the smallest office.

During the quarter, we announced availability of the iTero Element Plus series, which expands the iTero portfolio to serve a broad range of the dental market. The new Element Plus series offers faster processing time, advanced visualization capabilities for a seamless scanning experience in a new sleek ergonomically-designed package.

It's also engineered with the latest computing power, a dedicated AI chip and new AI-based features as well as an easy upgrade path for future innovation. In terms of digital scans used for Invisalign case submissions in Q1, total digital scans increased to 80.9% from 75.8% in Q1 last year.

International scans increased to 75.1%, up from 68.7% in the same quarter last year. For the Americas, 85.5% of the cases submitted digitally compared to 80.5% a year ago. Cumulatively, over 35.4 million orthodontic scans and 7.5 million restorative scans have been performed with iTero scanners. Turning to exocad.

A year ago in April, we welcomed exocad into the Align family. I want to thank the entire team for their continued progress on integration and road map development.

Together, we are working to extend exocad's position as a key technology provider for the dental CAD/CAM industry and to drive continuous innovation with the open and integrated approach that is the foundation of exocad.

During Q1, the new release of exocad's DentalCAD3.0 Galway was successfully rolled out globally with very positive customer feedback. A record number of over 70,000 verified prosthetic components were created in DentalCAD Galway, one of the largest prosthetic libraries in the industry.

exocad also reached a new milestone for the exoplan database, which now supports nearly 10,000 implants from over 90 manufacturers. The new release also includes a unique and highly innovative DentalCAD feature, Instant Anatomic Morphing, that reduces design time by up to 30% compared to previous version.

It also includes new AI technology for exocad's Smile Creator, which enables time-saving automatic detection of facial features. In addition, the new MyiTero Connector was launched directly to exocad labs. The MyiTero Connector creates an easy and integrated way to receive intra-oral scan cases from thousands of iTero doctors worldwide.

New cases are downloaded automatically and will show up directly in the DentalDB case list. exocad also co-hosted a joint dentistry event in the U.K. to showcase full workflow with ChairsideCAD titled Digital Dentistry Hands On.

The virtual roadshow aimed at general dentists showcases a full digital workflow for the clinical environment with ChairsideCAD, exocad's complete open architecture CAD software platform for single-visit dentistry. Hosted by Dr.

Gulshan Murgai, the participants of the roadshow series learn how to use the software for single-visit restorations and implant planning in the dental practice along the entire digital dentistry workflow.

These are just a few milestones, and we're excited about the opportunities ahead to shape the dental industry with technology and expertise that benefits all customers, labs, partners and users. We look forward to sharing more about ongoing exocad developments. 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 $894.8 million, up 7.2% from the prior quarter and up 62.4% from the corresponding quarter a year ago. For Clear Aligners, Q1 revenues of $753.3 million were up 7.5% sequentially and up 56.4% year-over-year, reflecting Invisalign volume growth in most geographies.

Clear Aligner revenue growth was favorably impacted by foreign exchange of approximately $14.4 million or approximately 2.1 points sequentially and on a year-over-year basis, by approximately $22.3 million or approximately 4.6 points. For Q1, Invisalign Comprehensive and Non-Comprehensive ASPs were both up sequentially.

On a year-over-year basis, Q1 Invisalign Comprehensive and Non-Comprehensive ASP decreased. Overall, on a sequential and year-over-year basis, ASPs were favorably impacted by foreign exchange. On a year-over-year basis, ASPs were impacted by higher net revenue deferrals in all regions and higher promotional discounts.

Clear aligner deferred revenue on the balance sheet increased $79 million sequentially and $256 million year-over-year and will be recognized as the additional aligners are shipped. Total Q1 clear aligner shipments of 595,800 cases were up 4.9% sequentially and up 65.8% year-over-year.

Our Systems and Services revenues for the first quarter was a record $141.5 million, up 5.8% sequentially due to product mix and increased services revenues from our larger installed base and exocad's CAD/CAM services.

Year-over-year, Systems and Services revenues was up 104% due to higher scanner shipments and services and the inclusion of exocad's CAD/CAM services from the April 2020 acquisition and increased services from our larger installed base.

Our Systems and Services deferred revenue was up 17% sequentially and up 102% year-over-year, primarily due to the increase in scanner sales and the deferral of service revenues, which will be recognized ratably over the service period. Moving on to gross margin.

First quarter overall gross margin was 75.7%, up 2.5 points sequentially and up 4.1 points year-over-year. On a non-GAAP basis, excluding stock-based compensation and amortization of intangibles related to our exocad acquisition, overall gross margin was 76.1% for the first quarter and up 2.5 points sequentially and up 4.2 points year-over-year.

Overall gross margin was favorably impacted by approximately 0.5 points sequentially and 0.7 points on a year-over-year basis due to foreign exchange.

Clear Aligner gross margin for the first quarter was 77.6%, up 2.7 points sequentially due to increased manufacturing efficiencies from higher production volumes, higher ASPs and lower freight, partially offset by higher additional aligner volume.

Clear Aligner gross margin was up 4.6 points year-over-year due to increased manufacturing efficiencies from higher production volumes and lower freight, partially offset by lower ASPs.

Systems and Services gross margin for the first quarter was a record 65.4%, up 1.2 points sequentially, primarily due to manufacturing efficiencies from higher production volumes and higher ASPs, partially offset by increased freight.

Systems and Services gross margin was up 3.6 points year-over-year due to manufacturing efficiencies from increased volume, higher ASPs and services revenues. Q1 operating expenses were $451.7 million, up sequentially 13.7% and up 39.2% year-over-year.

The sequential increase in operating expenses is due to increased compensation, primarily from additional headcount and incentive compensation, consumer marketing spend and other general and administrative costs.

Year-over-year, operating expenses increased by $127.2 million, reflecting our continued investment in sales and R&D activities and investments commensurate with business growth.

On a non-GAAP basis, which excludes stock-based compensation, amortization of intangibles related to our exocad acquisition and acquisition costs related to our exocad acquisition, operating expenses were $424.8 million, up sequentially 14.1% and up 40.9% year-over-year.

Our first quarter operating income of $225.4 million resulted in an operating margin of 25.2%, down 0.3 points sequentially and up 12.5 points year-over-year. The sequential decrease in operating margin is attributed to operational investments.

The year-over-year increase in operating margin are primarily attributed to higher gross margin and operating leverage.

On a non-GAAP basis, which excludes stock-based compensation and amortization of intangibles, the acquisition costs related to our exocad acquisition, operating margin for the first quarter was 28.6%, down 0.4 points sequentially and up 11.5 points year-over-year.

Our operating margin was favorably impacted by approximately 0.8 points sequentially and 1.5 points on a year-over-year basis due to foreign exchange. Interest and other income and expense, net, for the first quarter was a gain of $36.2 million, primarily driven by the SDC arbitration award gain.

Excluding the SDC arbitration award gain, interest and other income and expense, net, was a $7.2 million expense on a non-GAAP basis. With regards to the first quarter tax provision, our GAAP tax rate was 23.4%, which includes tax expense of approximately $11 million related to U.S.

taxes on the SDC arbitration award received and approximately $14 million of excess tax benefits related to stock-based compensation. Our GAAP tax rate this quarter was lower than the prior quarter rate of 25.9%, primarily due to the higher excess tax benefits from stock-based compensation, partially offset by foreign income taxes at different rates.

Our GAAP tax rate was higher than the same quarter last year, which was negative 2,745%, primarily due to a onetime tax benefit of approximately $1.5 billion associated with our corporate structure reorganization completed during the first quarter of 2020.

The first quarter tax rate on a non-GAAP basis was 20.2% compared to 14.5% in prior quarter and 33.2% in the prior year. The first quarter non-GAAP tax rate was higher than the prior quarter rate, primarily due to lower tax benefits from foreign income tax at different rates.

In comparison to prior year, the non-GAAP tax rate for the first quarter was lower primarily due to higher tax benefits from foreign income tax at different rates. First quarter net income per diluted share was $2.51, up $0.51 sequentially and down $16.70 compared to prior year.

On a non-GAAP basis, net income per diluted share was $2.49 for the first quarter, down $0.12 sequentially and up $1.76 year-over-year. Moving on to the balance sheet.

As of March 31, 2021, cash and cash equivalents were $1.1 billion, an increase of approximately $170.9 million from the prior quarter, which is primarily due to cash flow from operations. Of our $1.1 billion of cash and cash equivalents, $684.4 million was held in the U.S. and $447.3 million was held by our international entities.

Q1 accounts receivable balance was $719 million, up approximately 9.3% sequentially. Our overall days sales outstanding was 72 days, up approximately 1 day sequentially and down approximately 15 days as compared to Q1 last year. Cash flow from operations for the first quarter was $227.2 million.

Capital expenditures for the first quarter were $43.4 million, primarily related to our continued investment in increasing aligner capacity and facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $183.8 million. We also have $300 million available under our revolving line of credit.

Under our May 2018 repurchase program, we have $100 million remaining available for repurchase of our common stock. Now let me turn to our outlook. Overall, we are very pleased with our first quarter results and our continued strong momentum across regions and customer channels.

It has been over a year since the pandemic began, and I want to briefly recap the actions we took to support our employees by protecting employee jobs and salaries and by supporting our customers with PPE, extended payment terms, training and many other areas of assistance.

Instead of going quiet, we accelerated our investments in marketing to drive consumer demand to our doctors' offices and stay top of mind with consumers. We accelerated our digital technology investments so that we could provide virtual tools to our doctors, enabling them to stay connected with their patients and keep their treatment moving forward.

We continued to grow the business, increased our investments in R&D and product innovation and developing our plans for manufacturing expansion in EMEA. We did all these things for our customers, partners, employees and shareholders because we believe in the industry and the size of the market opportunity.

Our results are the outcome of our conviction in our business model, focus and ability to execute.

While there continues to be uncertainty around the pandemic and global environment, the strength in our business reflects the purposeful decisions we made through the pandemic and fuels our confidence in continuing to invest into growth to drive demand and conversion globally. Q2 is off to a great start and momentum has continued through April.

Consumer demand trends and patient traffic across the dental industry are favorable and continue to improve. Given these factors and the positive trends we continue to see across the business, we believe it is important to share our current outlook and provide guidance for the full year.

Note that the outlook we are providing does not reflect any potential significant disruption or additional costs related to any supply constraints. With that, let's turn to our full year 2021 outlook and the factors that inform our view.

We have growing confidence in our digital platform and how it is driving growth across all regions and market segments. We expect 2021 revenues of $3.7 billion to $3.9 billion, up 50% to 58% year-over-year.

Consistent with past years, we expect second half revenue to make up more than half of the full year revenue, and our second half revenue to grow year-over-year around the midpoint of our long-term operating model target of 20% to 30%.

As discussed during our last earnings call, we are increasing our investments in sales, marketing, innovation and manufacturing capacity to continue to drive our growth programs and accelerate adoption in a vastly underpenetrated market. On a GAAP basis, we anticipate 2021 and operating margin to be between 23.5% and 24.5%.

On a non-GAAP basis, we expect 2021 operating margin to be approximately 3 points higher than our GAAP operating margin after excluding stock-based compensation and intangible amortization.

In addition, during Q2 '21, we expect to repurchase $100 million of our common stock through either open market repurchases or an accelerated stock repurchase agreement we intend to enter into on or prior to May 3, 2021. The repurchase is intended to complete the $600 million stock repurchase authorization announced on May 23, 2018.

For 2021, we expect our investments in capital expenditures to exceed $300 million. Capital expenditures primarily relate to building construction and improvements as well as additional manufacturing capacity to support our international expansion.

This includes our planned investment in a new manufacturing facility in Wroclaw, Poland, our first one in the EMEA region. We intend to fund these needs with cash generated from operations. With that, I'll turn it back over to Joe for final comments.

Joe?.

India, Brazil, France, Poland, Ukraine, Mexico, Thailand and Japan. We are continuing to monitor the situations and are providing support and resources to those impacted employees. Thanks for your time today. I look forward to updating you on our progress as the year unfolds. Now I'll turn the call back over to the operator..

[Operator Instructions]. The first question is from Nathan Rich from Goldman Sachs..

Maybe starting with the guidance for the year and your expectations over the balance of the year. I appreciate the detail that you gave.

I guess, should we think about the revenue cadence as being similar to a normal year? And Joe, I mean, it certainly seems like the shift in market share that you've been highlighting has accelerated during the pandemic.

I guess I'd be curious to know if you have any way of kind of quantifying the magnitude of this shift as we think about the ability of -- you just kind of sustain this momentum going forward and the gains that obviously Clear Aligners has had during the pandemic..

All right. Nathan, we're obviously optimistic. I mean, given the guidance we had today and the strong first quarter results, we really feel good about where we are. The great thing about this growth is it's been broad and deep, okay? It is across every region. We see it whether it's in APAC, or whether it's EMEA, whether it's in the Americas overall.

And then across the GP spectrum, across the ortho spectrum, too, it's been terrific. And it's also up and down. That's why we're giving you comprehensive, noncomprehensive now, all different kinds of cases. So we just feel great about the demand patterns, the depth and breadth of this rebound and that's why we have some clarity now.

We decided to give guidance, and we're excited about this year and going forward.

John, any thoughts on it?.

And to add to your question, Nathan, the seasonality and things that we've seen in the past will continue. We would expect those to continue as we go through this year. So it's hard to compare year-over-year, especially in the first half. But going forward, it makes sense to look at it quarter-over-quarter..

Great. And if I could just ask a quick follow-up on the -- it seems like it's going to -- there's going to be more discussion around comprehensive versus noncomprehensive instead of the regional breakout going forward. So I was wondering if you could just level set us on the current mix of business between comprehensive and non-comprehensive cases.

And how you're thinking about the growth of those two categories going forward?.

Yes. When you look at it, Nathan, it's about 75% comprehensive, 25% noncomprehensive. It can vary by quarter based on teen season and so on, but that's roughly the split there. And we're investing in both areas to be able to grow, whether it's on the ortho side or the GP side for those categories..

And Nate, I think you know the margin on those products also. So there's not -- this is not like a margin split. I mean, you still have higher margins on the less than comprehensive product line, too. So it's a good mix..

The next question is from Jason Bednar from Piper Sandler..

Congrats on a really nice quarter here. I actually want to start on guidance as well. If I focus in the second half of the year, maybe when comps tend to normalize a bit and use the midpoint of that 20% to 30% long-term guide you've got out there.

Are you able to talk about how this comes together from a regional or channel perspective? Is it safe to assume that teens international still grows above that mid-20s level? And then is it right to think about imaging and CAD/CAM growing at that mid-20s level as well?.

Jason, this is John. We would look at Invisalign and our System and Services to grow at that midpoint in the second half, so around that 25% year-over-year across the business. And we're making investments and continued investments, as we've talked about, to really establish and continue our growth..

Okay.

And John, just sorry, anything from a regional or channel perspective, international or teens or just how that all comes together?.

I think we're not forecasting by each of the regions and so on from that. I think you can -- from our business, we're trying to grow teens. It's a great indicator for the penetration on the ortho side, and we'll continue to grow that, but not giving specifics by region..

Okay. Understood. And then just one other follow-up. I mean, the Clear Aligner gross margin was extremely strong this quarter. The Clear Aligner revenue, that grew $50 million sequentially with COGS that fell by $10 million. John, I know you stepped through some of the factors just incorporated there.

But is this a sustainable level that we should be thinking about for Clear Aligner gross margin going forward, kind of in this upper 70s level? Or maybe were there some other factors that helped push that gross margin higher here just in the first quarter?.

Well, we did see some FX benefit, as we called out, but it's a reflection of investing in this business, adding capacity, adding in places where we see the growth, and this was leveraging some of that -- those investments.

So it's a reflection of the work that we have, the productivity that we can drive across the business, utilizing some of the facilities that we have and then benefit a bit from FX on a quarter-over-quarter basis..

The next question is from Elizabeth Anderson from Evercore..

Congrats on a nice quarter.

Can you talk about any changes in your DSO strategy? I know you obviously, highlighted the DECA renewal in the quarter, but I just didn't know if there -- as we come out of COVID, anything to think about there in terms of how you're working with that group of customers?.

No, Elizabeth, actually, we do, we can. We bring the entire Align digital platform together with iTero, the different -- some DSOs want to approach this thing from a comprehensive standpoint, some want noncomprehensive.

So we just basically gear our digital platform and our product line based on what a DSO wants to do and what they want to accomplish, and not just in the U.S. but really all over the world..

Got it. That's helpful.

And then in terms of the new facility in Poland, should we think about the potential impact on the gross margin line to be similar to when you open the Ziyang facility? Or is there a different way that you -- that this one is different?.

I think when we look at that, we'll leverage to ramp up that facility as fast as possible as a lot of volume can come through from EMEA. So I wouldn't look at that as a model for that. Remember what we did in China was a temporary facility to move to a greenfield, and this is a greenfield new facility to start with..

The next question is from Jon Block from Stifel..

Joe, nice quarter. Two relatively quick ones. I guess to start, Joe, you called out EMEA and North America as the primary case volume, call it, upside drivers, not APAC. And just maybe if you could talk to APAC a little bit more.

It was sort of first in COVID, and I think everyone was thinking first in, first out, but it seems like EMEA has been stronger. I mean, it was on a 2-year stack basis despite all the headline stuff that we hear in EMEA. Any details on APAC? Obviously, you've got a pretty big competitor in China. Any more granularity there would be very helpful.

And then I've got a little bit of a tighter follow-up..

Jon, first of all, I mean, EMEA was amazing in that way, but I wouldn't let it eclipse APAC, right? We feel really good about APAC across the board. China, obviously, being a big area, the sequential growth of China. When you look at fourth quarter versus first quarter, it's right in that 7%, 7.5% range like the entire business is.

And then obviously, APAC is extremely diverse, but from Japan, ANZ, those key areas that we have in APAC, it's really strong growth. So I really feel great about APAC. It's just there's somewhat of an eclipse right now because EMEA was extremely strong. But you shouldn't let yourself think in any way that, that means APAC was weak in some way.

We feel good about APAC as we go into the first quarter and the whole year..

Okay. Yes, I guess, good problem to have. Second one is sort of a derivative of Nathan's question.

But the biggest question I get from investors is this pull-forward of demand, right? In other words, is the 1Q '21 volume, call it, success, is that at the expense of future quarters? And it seems like your guidance suggests you're not too worried about that, Joe.

But can you give us more detail here? Like why aren't you worried about any pull-forward? What are you hearing from sales reps? What are docs saying about sustaining the momentum throughout the year?.

Yes, John. John, first of all, it's the breadth of this growth, right? It's not like it's a singular region like we just talked about with EMEA and APAC and how strong the Americas is. We're seeing great uptake in the GP side. We see terrific growth there, the orthodontic side. You see our team numbers are good and respectable.

We're moving in the teen season. So what we feel good about is just the breadth and depth of this business. It's not just leaning on 1 or 2 legs from a strategy standpoint, it really is well positioned going forward. We hear the same thing about demand pull-forward or whatever. We -- doctors aren't talking like that.

Remember, the questions back in the third quarter, fourth quarter was backlog, right? How much of this was backlog that wasn't consummated in second quarter, early third quarter. And we got way past that. Obviously, we got into the fourth quarter, whatever.

So I think we're just seeing a realization in the adult and the teen market of what digital orthodontics can do. And our company is very well positioned to take advantage of that when you look throughout the world.

John, anything to add?.

Okay..

The next question is from Kevin Caliendo from UBS..

I want to talk a little bit about how to think about seasonality with regards to teens. You typically -- you gear up the summer, it's a big teen season historically.

Has there -- do you expect that again next year as sort of back-to-school might be a little more normal? And what -- how should we think about you gearing up for another incremental teen season? What might be different? Any expectations around incremental share for teens? I'd just love to hear the strategy..

Well, I think we have a strategy really based on every region because the teen season is different by region from a calendar standpoint. And doctors apply our technology in different ways with teens. But let's just take U.S. and Canada for a second.

Obviously, in the second quarter, beginning of third quarter, those are the really strong areas where you'll see our advertising program really kick in, in a big way. We talked about the Teen Awesomeness Centers that we put in place.

That's with making sure that we have doctors that are really well-equipped to handle teens, and we direct the leads to that teams with confidence that they can be serviced properly. Overseas, we understand what those timing are for the teens also, and we put those programs together, too.

Honestly, Kevin, we have a great portfolio, right? And we can go across teens in a lot of different ways, all the way from 6 year olds, to really older teens when you get to 16 to 19 years old, and the tooth movements associated with those two. So it's just having those doctors ready.

It's having the communications with the teens and the moms to make sure they're aware of a digital orthodontic option, and they really ask for that as they go into the doctors. And that's a strategy we apply just in different ways and different seasons around the world, but it specifically applies to teens..

That's helpful. And one -- just one follow-up on margins. The gross margin number was mentioned. You covered that already.

Should we think about any of that flowing down to the operating margin? Or any sort of target for operating margins over the next couple of years? You've historically always looked to spend to grow, and it's always -- you've always been rewarded for it. There's no reason to change.

But just thinking sort of where you are now, maybe if you do have a little bit of an uptick in the gross margin that you can let more of it flow through to the operating side.

How do you think about that?.

I think when you look at it -- Kevin, this is John. I mean, we're looking to balance our growth opportunities with our margin. And in certain countries, you might be at different parts of that equation. But on balance, we're pleased with the gross margin.

We've talked a lot about the investments, the productivity and other things that we see, and that continues. And it gives us a lot of flexibility to be able to invest. But in a vastly underpenetrated market that we're in, making these investments to grow volume make a lot of sense to us.

But we're always mindful of that balance between volume and margin..

The next question is from Ravi Misra from Berenberg Capital Markets..

So just want to press a little bit more on kind of just some of the marketing opportunities that you're highlighting. And just curious, you have the ski team now, you're talking about the Golden State Warriors. I'm sure Draymond Green is not very happy about that.

But just can you help us understand, like, what do you go after when you look at the marketing opportunity? Like in terms of the return that you're searching for the particular brands that you're aligning with? And then I have a follow-up after that..

We do a lot of work on this, just figuring out what channels, what kind of return we get by channel, how much you put in social media, sports team, how much do you put in television. But overall, John and I expect a certain return, and we know what those returns are by region. We invest a dollar here, we know what we get back.

I don't necessarily want to convey exactly what those returns are but we make sure they're positive. And you've seen us increase our advertising pretty dramatically outside the United States. The response for that has been really good. And obviously, we use a lot of what we learned here in North America to apply that around the world.

So Invisalign is an incredibly well-known brand, not just in North America, but all around the world. And being to leverage that and having that as kind of a common name around the world, it's very helpful for us in the sense of driving volumes, giving doctors confidence and patients confidence, too. So we really feel good about our investments.

And obviously, we balance that well with increased salespeople, with technology investments, all the things you have to do when you run a business like this, but it is something that obviously gains a lot of attention and a lot of analysis from us..

Great. And then maybe just one on -- on the press release, something caught my eye around your kind of Ortho Summit Case Shoot-out where the highest vote was around kind of a Class II/Class III Invisalign case presentation. Historically, that's been something -- I think maybe -- that unless you're a bleeding edge KOL or doctor that you weren't doing.

The fact that, that's kind of winning the kind of peer award now, does that suggest that you're getting deeper into these more complicated cases? And just more specifically, do you feel that you have an edge versus your competitors in the space that allow you to do this? Or is this kind of a class effect that you think has to do with comfort and ease of use of the technology as a whole?.

Yes, Ravi, it's a good question. Look, remember, we have -- we've done, what, we said 10.2 million cases. And through those 10.2 million cases, we've learned a lot, and we learn more every day. And we run AI and machine learning across those cases. And that's how we just launched GA, as we understood and defined cases.

We have some issues with posterior open bite and different clinical kind of issues that would bore you to death, but we understand based on millions of cases that we have done, which is the best way to move those teeth to ensure that they end up in the right positions with the right smile at -- obviously, you want to do this as quickly as you possibly can because patients don't want to be in treatment over 5 years.

So I feel we have an incredible advantage. You look at SmartTrack, you look at how we initiate that with over 4 million lines of codes that we have in ClinCheck. You look at the accuracy of iTero in the sense of transferring information through over to our manufacturing facility in order to make this.

It's so -- and I feel very confident about a 24-year first-mover advantage on what we've done. Now obviously, there's competitors out there and competitors are coming up. But a lot of them have to crawl through the friction that we did in order to learn this.

And a lot of the IP that we've put down that makes us unique in the sense of how we position ourselves in the marketplace. So back to what you started with, when you do these shoot-outs and all, it's really great to sit in the audience and look at the before and after photos. I mean it's amazing.

When I first joined this business, I just said, I -- hard to believe that you can do this. What's happening today is it's becoming more common. I mean you go all around the world. It was -- it's not 1 or 2 doctors doing this. There's hundreds, if not thousands, that are doing incredible kinds of cases.

And so -- which I think that more and more, it just lends credibility to this product line. It can do what we say now 90% of all the cases that are out there.

That's not just because it's plastic, right? It is the whole system from how we 3D print, what plastic we use, the algorithms we use, how we constantly tweak it by the information that we have, driving a brand like this, having the kind of training. We talked about 200,000 doctors that we've trained who've gone through these things.

This takes time to do, it takes expertise. And doctors need that confidence in understanding. And we feel we can give it to them better than anyone..

And that technology is brought about by investments, and we'll invest over $250 million this year alone in R&D to improve our systems and Invisalign for our customers. And that's an advantage. It's an advantage, like Joe said, over a period of time, but we're continuing to invest to make things better and better for our customers..

The next question is from Richard Newitter from SVB Leerink..

This is Jaime on for Rich. Just one question for me. Appreciating that you guys are obviously focused on driving higher ortho teen utilization, overall GP adoption at the same time.

I'm just curious, in your view, which of the 2 is likely to be the bigger make-or-break driver of growth over the near to intermediate term?.

You know, it just sounds like a terrible answer to you, but they're both. Really, we talk about 500 million patients out there that could use Invisalign treatment. We know that of the 15 million orthodontic cases, roughly 75% to 80% are teens -- I mean all those -- they're both huge opportunities.

And there's not a difference from a technology standpoint or how you apply that technology to either of those that would make one easier to do or more beneficial than another. So honestly, both of those are great reservoirs of growth for us..

Got it. Okay. And then just....

Go ahead, Jaime..

One last one for me, just on the DSO.

Kind of the business model and strategy that you guys have for entrenching iTero systems in DSOs across all practices, kind of how do you approach that? And when you do see DSOs where the large majority of their practices have adopt the iTero scanner, what's the sort of pickup that you guys see in terms of utilization?.

Well, where you use iTero scanners, you train the doctors properly, you have the right products in a GP channel like iGo and different products like that. We get terrific uptake. I mean, you can't measure it the way you do share a chair at the orthodontic office. But we get -- our DSO business is significant now. It's meaningful that way.

And it's one where that digital platform strategy, as you kind of outlined in your question, is what we employ. But again, we employ it in different ways, depending on how a DSO really wants to engage with us..

Next question is from Jeff Johnson from Baird..

John, I want to go back. You mentioned the $250 million in R&D. And I think the number we've discussed over the last, I don't know, probably somewhere in the last 6 or 9 months or so, it's like $500 million total of what you guys spend, not only on R&D, but channel support, advertising, social media, all that stuff.

And on our mind, that's one of your bigger barriers to entry, even probably more so than some of the IP and what have you. But it sounds like with some of the stuff, you're taking up EMEA, you're taking up APAC advertising, more and more sports teams and things like that.

Is that $500 million number a dated number at this point? Is that barrier to entry and that spend even going well above that number in the near to intermediate term?.

You will see that. That's a good question, Jeff. We talked about that at our last Investor Day, about the $500 million combined kind of the marketing go-to-market plus the R&D. And what you'll see is as in success.

And we've talked about a lot, as you know, where we see returns, where we see volume, where we see profitability, we're going to continue to make those investments. So as we go through this year, that number will most likely go up as we find success in these investments and find that right return..

Yes. Fair enough. And Joe, I'd be interested. I mean, we saw COVID case counts and restrictions even in the 1Q in some of the markets you called out in EMEA as being so strong, U.K., France. I'm sure some others, you called out other areas. Obviously.

India that we're all watching closely, but a lot of other markets as well that are still dealing with COVID case counts and heightened risks there.

Does that even matter to case shipments to Invisalign at this point? I guess what I'm trying to figure out is, is that stuff holding back some volumes that could come through next year? Are we all just with COVID fatigue still comfortable going in and getting Clear Aligner cases even in those markets? So is COVID a risk factor, I guess, that you've had to build in some caution in the guidance for in some of those markets? Or are cases just as strong in those markets as they are in markets where maybe COVID is a little more under control?.

Yes. Jeff, it's a good question. It's just what we've seen. There's one definitive. If offices are shut down and patients aren't allowed to go to offices, we saw that. That happened in the second quarter, it happened all around the world. And then the term lockdown is used very loosely all around the world, what's a lockdown and what isn't.

The situations like in India right now are a disaster, obviously, and people are very cautious.

But the rest of the way around the world, what we see is it looks like communities and people have been able to manage this, okay? Is there any kind of a backlog of patients not going into dental offices because of that? I think in certain countries around the world, there is, but we can't really quantify that right now.

And again, the breadth and depth of our demand pattern gives us confidence that we think we can predict around it..

The next question is from Erin Wright from Crédit Suisse..

Great.

Can you speak a little bit about what you're doing differently in terms of promotions or other initiatives around iTero that's really resonating with customers maybe differently now? And where is the traction mostly tied to, on the ortho or GP channel? And do you anticipate any lumpiness quarter-to-quarter across that business?.

Yes. Well, iTero's been great for us, right? You have a good services business there. We announced the Plus series iTero, which is -- Erin, it's a breakthrough. I mean, it sounds like it's a derivative as far as incremental but it is really a strong platform. We talk about the artificial intelligence we've been able to embed in that machine.

We see doctors, both on the GP side and the orthodontic side, really excited about it. This is not a promotional discussion in a sense of when you ask your question about how to promote it. There's nothing tricky there. What we do is we have a broad number of products. You have the NIRI product plus, which is the very high end of the product line.

Then you have a flex system, which I mentioned in my opening, which is basically a wand itself and it's used with the -- a normal kind of a computer that's adapted to that. And it helps to get flexibility in the sense of what a customer wants to use or a doctor wants to use on both ends.

So I feel it's like how we take this to market, the different products that we have and the different way that we segment that is -- and then, obviously, if you want to do Invisalign, this is the front end, the key end of our digital platform and that's very attractive to both GPs and orthos that really want to do Invisalign.

They know that iTero is critical for that..

The next question is from Brandon Couillard from Jefferies..

John, maybe just a two part question around guidance. The operating margin outlook would suggest your margins kind of moderate a bit over the balance of the year from 1Q levels.

Can you sort of elaborate on your expectations for gross margins for the balance of the year? And then what should we -- how should we think about the trend of ASPs over the next few quarters? I'd just leave it there..

Yes. Brandon, when we look at -- we're pleased with our gross margin and margins that we had in the first quarter. A lot of things came together on that. When we look at the investments and the growth opportunities we have, we're not giving specific guidance around our gross margin.

What you can see as it translates to op margins, it's a reflection of the growth opportunities we have, the investment opportunities that we have to be able to invest and grow in this business. And we can update as we go forward based on what we see. Your other part of the question regarding kind of ASPs and so on.

When you look at -- we have a breakout, and we show that on a regular basis between comprehensive and noncomprehensive. We don't expect any major fluctuation across our ASPs. The only thing that comes up, and we saw it in this quarter a bit was with currency changes.

But in terms of the promotions and how we go about the business and how we're trying to drive growth, there's nothing out of the ordinary that would impact ASPs..

The next question is from John Kreger from William Blair..

I just wanted to follow-up on Jeff's question a bit.

So if you move beyond office closures, as you look at certain regions of the world becoming hot spots and then that fading, does that impact demand levels that you're seeing?.

It's not a great answer for us, John, it's yes and no, okay? Depending on the severity and where it is, I can say yes. For the most part, we say no. And that's after the second quarter when, again, the definitive piece, if you shut offices down and you won't let patients in there, we're going to have an issue.

But actually, after the second quarter, early third quarter, we've been dealing with lockdowns that are basically lockdowns of time frame, lockdowns of where people can travel, but not specific lockdowns of doctor offices. If the market stays away from that, we feel we're pretty good..

Thanks, John. Operator, we'll take one more question..

The next question is from Michael Ryskin of Bank of America..

I'll just ask a quick one. Sort of want to expand a little bit on the ASP question that was just asked. I'm just wondering, you cited a little bit in your prepared remarks in terms of promotional things like that, discounts.

Are you referring specifically to the Advantage program? And if you could talk about how some of the orthos and GPs are falling in with those tiers.

Have you seen any movement over the last couple of quarters where people are falling more into the platinum and the diamond grouping there? Kind of also backing into sort of the numbers on utilization between ortho, I've seen some really nice numbers the last couple of quarters.

Is that indicative of that, a higher portion of orthos and GPs falling at those higher tiers and therefore, walking in those -- the higher promotional discounts?.

Yes. Certainly, that is an impact. When you have -- as doctors grow through the tiers, they become more proficient. They had taken on more cases, whether they're on the ortho side or the GP side, we see them work their way through tiers. They do more cases, then we get that volume benefit. And then they'll see those discounts there.

We've had those programs in place. Those programs really help drive utilization and really talk to the utilization growth that you noted there. So those are programs that we've had. They're there to drive utilization, and it's something that we've used in our business and expect to continue to use..

This concludes the question-and-answer session. I'd like to turn the call back over to Shirley Stacy for closing remarks..

Well, thank you, everyone, for joining us today. We appreciate your time. We look forward to seeing you or speaking with you at upcoming financial conferences and industry meetings and events. If you have any follow-up questions, please contact our Investor Relations department. Have a great day..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..