Greetings, welcome to the Align Second 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 will now turn the conference over to your host, Shirley Stacy, with Align Technology. You may begin..

Thank you. 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 second 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 today by approximately 5:30 p.m. Eastern Time through 5:30 p.m.

Eastern Time on August 9th. To access the telephone replay domestic callers should dial (929)-458-6194 with access code 342791. 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, products and 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've posted historical financial statements, including the corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our second quarter 2023 conference call slides on our website under 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 second quarter results and discuss a few highlights from our two operating segments, system services and clear aligners.

John will provide more detail on our Q2 financial performance and comment on our views for the third quarter and 2023 overall. Following that, I'll come back and summarize a few key points, and we'll open the call to questions.

Overall, I'm pleased to report another better-than-expected quarter with Q2 revenues and operating margins that exceeded our guidance. Q2 results reflect improving trends across regions, strength in teen and younger patient volumes, driven by momentum in both submitters and utilization as well as continued growth from Invisalign First.

In the Teen segment, which represents the largest portion of the 21 million annual orthodontic case starts, 195,000 teens and kids started treatment with Invisalign clear aligners during the second quarter. An increase of 7% sequentially and 10% year-over-year, reflecting the highest annual growth rate in the teen segment since 2021.

For Systems & Services, second quarter revenues of $169.5 million were up 10.5% sequentially and down very slightly 1% year-over-year.

For Q2, sequential increases in systems and services revenues, reflects increased scanner volumes across the regions and higher services and non-system revenues, reflecting increased sales of certified pre-owned or what we call CPO scanners and higher subscription revenues.

On a year-over-year basis, Q2 services revenues increased primarily due to higher subscription revenues from a large number of iTero scanners in the field. We also had higher non-system scanner revenues related to our certified pre-owned again CPOs and our scanner leasing and rental programs.

For Q2, total clear aligner revenues of $832.7 million up 5.4% sequentially and 4.3% year-over-year. Q2 sequential revenue growth rate is consistent with our historical three year average and reflects growth across all regions.

Q2 non-case revenues at $80 million were up 6.2% sequentially and 18% year-over-year, reflecting continued growth from Vivera retainers and Invisalign Doctor Subscription Program, or DSP, our monthly subscription-based clear aligner program. And Commerce sales for aligner-related consumables, like aligner cases and whitening and cleaning products.

DSP has been successful in addressing an important and growing opportunity for experienced Invisalign doctors. It is our first subscription-based clear aligner program that enables doctors to reach new patients and provide them with a better overall experience.

DSP enables doctors flexibilities to treat simple touch-up cases or offer their patients a superior, flexible, and convenient retention solution. We introduced DSP in the United States and Canada in 2021. We expanded it to Spain and the Nordic countries in Q2 2023, and we'll launch DSP in France and the United Kingdom in the second half of this year.

We have also extended DSP to DSO partners who recognize the value of our Invisalign subscription aligner put model. Over the past two years, our DSP subscription program has continued to ramp and in Q2 drove strong volume growth in touch-up cases typically five to 10 stage cases of aligners.

For Q2 '23, we shipped over 18,000 DSP touch-up cases in North America, up from 15,500 in Q1 '23 and more than double the case volume in Q2 '22 last year. Given its continued success and contribution to our growth this year, DSP touch-up cases are included in my overall commentary for clear aligners.

Otherwise, specified in my remarks, our case volumes and metrics do not include DSP and touch up cases. For Q2, total clear aligner volumes were up 5% sequentially and up 1% year-over-year. Q2 clear aligner volumes, including DSP touch-up cases, were up 5.4% sequentially and up 2.4% year-over-year.

For the Americas, Q2 clear aligner volumes reflect sequential growth across the region from both ortho and GP dentist channels, an increase in teen case starts driven by momentum from Invisalign First and increased adult patients from the GP dentist channel.

In North America, adoption of the Invisalign Comprehensive three and three product drove sequential volume growth. For Q2, North American ortho utilization was up sequentially and down a fraction year-over-year, including DSP touch-up cases.

Q2 North American ortho utilization was up both sequentially and year-over-year as noted in our Q2 '23 earnings slides.

For EMEA, Q2 clear aligner volumes were up sequentially and year-over-year, reflecting growth across the region and continued adoption of Invisalign Moderate, Invisalign Comprehensive three and three products as well as an increase in teen case starts, which grew sequentially and year-over-year driven by Invisalign First and our new Invisalign Teen case packs.

On a sequential basis, clear aligner growth was led by Iberia, Italy, DACH, and Turkey. For APAC, Q2 clear aligner volumes were up sequentially and up year-over-year, reflecting improving trends in China as well as other key markets like Japan, Taiwan, Korea and India.

Q2 APAC results also reflect increased Invisalign submitters and higher utilization, especially for teen patients, driven by growth from Invisalign First in the orthodontic channel, which is especially important as we enter the China team season in Q3.

Q2 APAC results also reflect growth in the GP channel with increased Invisalign submitters and higher utilization sequentially and year-over-year. During Q2, we continued to roll out the Invisalign Comprehensive three and three product in APAC, where it is now available in Hong Kong, Korea, Taiwan, and India.

We plan to launch Invisalign three and three in China in Q3. We are also pleased with the additional adoption of three and three product in APAC, where the majority of cases treated are comprehensive, allowing our doctor customers more flexibility within the Invisalign product portfolio.

In June, we hosted 2023 Invisalign APAC Summit in Singapore and brought together nearly a 1,000 orthodontists and general practitioners, dentists and clinic staff from 18 countries across the Asia Pacific region.

The Summit showcased Invisalign and iTero products, the Align Digital platform and the recent and upcoming innovations, while also highlighting our doctors' experience with digital transformation, and how it improves the patient treatment journey.

Attendees joined expert sessions focused on enhancing treatment planning efficiency, optimizing digital workflows, addressing the unique needs of teens and younger patients in exploring the essential aspect shaping today's digitally driven orthodontic practices.

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 braces through teen-specific sales and marketing programs and product features unique to the Invisalign system.

For Q2, total clear aligner cases for teenagers were up 7% sequentially and 9.7% year-over-year, reflecting improving trends across the regions. On a sequential basis, growth was driven by increased submitters in the APAC and EMEA regions on a year-over-year basis.

TNK starts were in the APAC region, driven by increased submitters and in the EMEA region, driven by increased submitters and utilization, both in the orthodontic channel. Last year, we introduced the Teen Case Packs in the United States and Canada, and in Q1, Q2, we launched them in France, Scandinavia and Iberia.

For the quarter, Teen Case Packs increased sequentially and year-over-year, driven by strength in EMEA. Invisalign First also was up sequentially and year-over-year across all regions and continues to drive adoption of Invisalign treatment among young patients.

Invisalign First aligners are designed for Phase 1 treatment, typically in growing children six to 10 years old, making up about 20% of orthodontic case starts. For the dental service organizations, or DSO customers, Q2 clear aligner volumes increased sequentially primarily from the Americas region.

Overall, clear aligner growth rate from DSO doctors continues to outpace non-DSO doctors and our DST touch-up cases are ramping nicely up as DSO doctors understand the value of the subscription program brings regarding pricing and flexibility for their patients.

Invisalign is one of the most trusted brands in the orthodontic industry globally among both doctors and patients. On the consumer marketing front, we delivered $10.3 billion impressions and had 30.9 million visits to our website in Q2 '23.

To increase awareness and educate young adults, parents teams about the benefits of Invisalign brand, we continue to invest in top media platforms such as TikTok, YouTube, Snapchat, Instagram across all markets as well as key social media influencers and brand ambassadors.

In the Americas, we focused on reaching young adults as well as teens and their parents through our influencer and creator-centric campaigns partnering with leading smile squad creators, including Marshall Martin, Rally Shaw, and Jeremy Lin.

Each of these creators shared their personal experiences with Invisalign treatment and why they chose to transform their smile with Invisalign aligners. Additionally, in the United States, we work closely with athletes over time, a high school sports social media platform that showcases the benefits of Invisalign treatment.

Brand interest remained strong throughout the quarter with 9.2 million consumers visiting our websites in the Americas region, representing 17% growth year-on-year. In EMEA region, we partnered with new influencers to reach consumers across social media platforms, including TikTok and Meta.

In Germany, we launched new testimonial campaigns highlighting the stories of 70 young adults and teens who share why they chose Invisalign treatment and how it impacted their lives. Our consumer campaigns delivered more than 1.7 billion media impressions and 9.7 million visitors to our website.

We continue to invest in consumer advertising across the APAC region, resulting in more than 12 million visitors to our websites and over $4.8 billion impression. We expanded our region in Japan and India via TikTok, Meta and YouTube. We partner with key influencers like [indiscernible].

We saw increased brand interest in consumers as evidenced by 270% year-over-year increase in unique visitors to our website in India and a 46% year-over-year increase in Japan.

Adoption of My Invisalign consumer and patient apps continued to increase with 3.1 million downloads to date and over 350,000 monthly active users, a 28% year-over-year growth. Uses of other digital tools also continue to increase.

ClinCheck live update was used by 40,000 doctors on more than 580,000 cases, reducing time spent and modifying treatment by 20%. Invisalign practice app is increasing in adoption with 88,000 doctors who are actively using this app and 5.1 million photos were uploaded in Q2 via the Invisalign practice set. With that, I'll turn the call over to John..

Thanks, Joe. Now for our Q2 financial results. Total revenues for the second quarter were $1.002 billion up 6.3% from the prior quarter and up 3.4% from the corresponding quarter a year ago. On a constant currency basis, Q2 '23 revenues were impacted by favorable foreign exchange of approximately $1.3 million or approximately 0.1% sequentially.

And unfavorably impacted by approximately $19.4 million year-over-year or approximately 1.9%. Clear aligners Q2 revenues of $832.7 million were up 5.4% sequentially, primarily from higher volumes, higher non-case revenues and higher ASPs.

On a year-over-year basis, Q2 clear aligner revenues were up 4.3%, primarily due to higher ASPs, higher non-case revenues and higher volumes. For Q2, Invisalign ASPs for comprehensive treatment were down sequentially and up year-over-year.

On a sequential basis, ASPs reflect larger discounts and product mix shift to lower-priced products partially offset by price increases. On a year-over-year basis, the increase in comprehensive ASPs reflect price increases and higher additional aligners, partially offset by product mix shift, larger discounts and unfavorable foreign exchange.

For Q2, Invisalign ASPs for non-comprehensive treatment were up sequentially and year-over-year. On a sequential basis, the increase in ASPs reflect lower discounts, higher additional aligners, price increases, and favorable foreign exchange.

On a year-over-year basis, the increase in non-comprehensive ASPs reflect price increases and higher additional Aligners, partially offset by product mix shift, larger discounts and unfavorable foreign exchange.

In Q1 '23, we launched Invisalign Comprehensive three and three products in most markets, and we have continued to expand into more markets, as previously mentioned.

The three and three configuration offers our doctor customers, our Invisalign comprehensive treatment with three additional aligners included within three years of the treatment end date, instead of unlimited additional aligners with 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 two or fewer additional aligners.

We are pleased with the continued adoption of the Invisalign Comprehensive three and three product and anticipate that it will continue to grow, 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 subscriptions, retainers, and 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. Q2 '23 clear aligner revenues impacted from favorable foreign exchange of approximately $1.2 million or approximately 0.1% sequentially.

On a year-over-year basis, clear aligner revenues were unfavorably impacted by foreign exchange of approximately $16.3 million or approximately 1.9%.

Clear aligner deferred revenues on the balance sheet increased $13 million or up 1% sequentially and $138.6 million or up 12.2% year-over-year and will be recognized as the additional aligners are shipped.

Q2 '23 systems and services revenue of $169.5 million were up 10.5% sequentially, mostly due to higher scanner volume, higher revenues from our certified preowned program and higher services revenue from our larger base of scanners sold, partially offset by unfavorable ASPs.

On a year-over-year basis, Q2 '23 systems and services revenue were down 1%, primarily due to lower scanner volume and unfavorable ASPs, partially offset by higher services revenues from our larger base of scanners sold and higher revenues from our CPO and leasing rental programs.

Q2 '23 systems and services revenue were impacted from favorable foreign exchange of approximately $0.1 million or approximately 0.1% sequentially. On a year-over-year basis, systems and services revenue were unfavorably impacted by foreign exchange of approximately $3.1 million or approximately 1.8%.

Systems and Services deferred revenues on the balance sheet was down $2.3 million or 0.8% sequentially, primarily due to the decrease in the deferral of service revenues included with our scanner purchase and up $8.6 million or 3.3% year-over-year, primarily due to the increase in scanner sales, and the deferral of service revenues included with our scanner purchase, which will be recognized ratably over the service period.

As our scanner portfolio expands, and we introduced 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 growing our programs and as offering our CPO units for purchase and selling the way the customer -- 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 base of scanner sold. Moving on to gross margin.

Second quarter overall gross margin was 71.2%, up 1.2 points sequentially and up 0.3 points year-over-year. Overall gross margin was unfavorably impacted by foreign exchange of approximately 0.5 points on a year-over-year basis.

Clear aligner gross margin for the second quarter was 72.4%, up 0.7 points sequentially, primarily due to the lower mix of additional aligners, favorable manufacturing variances and higher ASPs.

Clear aligner gross margin for the second quarter was down 0.9 points year-over-year, primarily due to 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, partially offset by higher ASPs and lower freight.

Systems and Services gross margin for the second quarter was 65.1%, up 3.5 points sequentially, primarily from lower service and freight costs, partially offset by lower ASPs.

Systems and Services gross margin for the second quarter was up 5.3 points year-over-year, primarily from lower service and freight costs and higher services revenue, partially offset by lower ASPs. Q2 operating expenses were $541.7 million, up sequentially 2.8% and up 8.5% year-over-year.

On a sequential basis, operating expenses were up $14.5 million, primarily from higher consumer marketing spend and higher incentive compensation.

Year-over-year, operating expenses increased by $42.3 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 $505 million up 2.9% sequentially and up 8.4% year-over-year.

Our second quarter operating income of $171.9 million resulted in an operating margin of 17.2% up 3 points sequentially and down 2.2 points year-over-year. The sequential increase in operating margin is primarily attributed to higher gross margin, as well as favorable impact from foreign exchange of 0.1 points.

The year-over-year decrease in operating margin is primarily attributed to investments in our go-to-market teams and technology, as well as unfavorable impact from foreign exchange by approximately 1.1 points.

On a non-GAAP basis, which excludes stock-based compensation, amortization of intangibles related to certain acquisitions, offset by restructuring other charges, operating margin for the second quarter was 21.3%, and up 2.8 points sequentially and down 2 points year-over-year.

Interest and other income and expense net for the second quarter was a loss of $0.3 million compared to an income of $1.1 million in the first quarter and a loss of $14.6 million in the second quarter a year ago, primarily due to foreign exchange.

The GAAP effective tax rate for the second quarter was 34.8%, consistent with the first quarter effective tax rate of 34.8% and 35% in the second quarter of the prior year.

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 results in 2022.

Our non-GAAP effective tax rate in the second quarter was 20%, reflecting the change in our methodology. Second quarter net income per diluted share was $1.46, up sequentially $0.32 and up $0.02 compared to the prior year.

Our EPS was unfavorably impacted by $0.02 on a sequential basis and unfavorably impacted by $0.15 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.22 for the second quarter, up $0.40 sequentially and up $0.07 year-over-year.

Note that the prior year 2022 non-GAAP net income per diluted share in our prior year 2022 non-GAAP reflects the Q4 2022 change in our methodology for the computation of our non-GAAP effective tax rate. Moving on to the balance sheet.

As of June 30, 2023, cash, cash equivalents and short-term, and long-term marketable securities were $133.8 billion up sequentially $112.4 million and up $56.6 million year-over-year. Of our $133.8 billion balance $314.3 million was held in the U.S. and $719.5 million was held by our international entities.

In Q2, we completed a $75 million equity investment in Heartland Dental a multi-disciplinary DSO with GP and ortho practices across the U.S. 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. Q2 accounts receivable balance was $908.4 million, up sequentially. Our overall days sales outstanding was 81 days, down approximately two days sequentially and down approximately four days as compared to Q2 last year.

Cash flow from operations for the second quarter was $251.9 million. Capital expenditures for the second quarter were $58.5 million, primarily related to our continued investments to increase aligner manufacturing capacity in facilities. Free cash flow, defined as cash flow from operations less capital expenditures amounted to $193.3 million.

Now turning to our outlook. As Joe mentioned earlier, we are pleased with our Q2 results. While the macroeconomic environment still remains uncertain, we have seen improvements in the operating environment and the consumer demand signals that influence our outlook.

For Q3 2023, we anticipate our worldwide revenue to be in the range of $990 million to $1.01 billion, up approximately 12% year-over-year at the midpoint.

We expect our Q3 2023 GAAP and non-GAAP operating margin to be slightly up from Q2 2023 as we continue to strategically prioritize our investments in R&D and go-to-market activities to drive growth.

For full-year 2023, assuming no circumstances occur that are beyond our control, we anticipate our 2023 worldwide revenue to be in the range of $3.97 billion to $3.99 billion, up approximately 7% year-over-year at the midpoint.

We also expect our full-year 2023 GAAP operating margin to be slightly above 17% and our 2023 non-GAAP operating margin to be slightly above 21%, a 1 point improvement from the guidance we provided in April of 2023. For 2023, we expect investments in capital expenditures to be approximately $200 million.

Capital expenditures are expected to primarily relate to building construction improvements as well as manufacturing capacity in support of our continued international expansion. With that, I'll turn it back over to Joe for final comments.

Joe?.

At our continued growth despite the economic slowdown in uncertain environment. Q2 results demonstrate our resilience and adaptability. While we cannot predict future economic conditions, we're confident in our ability to focus and execute on our strategic growth initiatives.

As a leader in digital transformation, we offer a powerful suite of innovative digital tools that make up the aligned digital platform, which provides a seamless end-to-end digital experience for doctors and their patients. Innovations launched over the last year include ClinCheck live update for 3D controls.

This enables doctors to generate modified Invisalign patient treatment plans in real time, reducing modifications that used to take weeks to as little as two minutes. Improving practice productivity while also improving the quality of treatment plans.

Invisalign Personal Plan, or IPP streamlines the treatment planning process and helps doctors achieve their desired treatment plans more consistently and efficiently.

Invisalign Smile Architect allows general dentists to integrate clear aligner therapy into their comprehensive treatment plans by combining tooth alignment and restorative planning in a single platform.

Invisalign Virtual Care, equips doctor with a next generation remote monitoring solution that has new artificial intelligence assisted capabilities to streamline their workflows. Cowen being computed tomography or CVCT, enables doctors to visualize the patient's roots as part of the digital treatment planning process.

Invisalign Outcome Simulator Pro, expand Align's existing Invisalign outcome simulator technology and adds the benefit of the company's ClinCheck in-face visualization tool that combines a photo of a patient's face, with their 3D treatment simulation, creating a truly personalized view of how their new smile will look.

Itero-exocad Connector integrates iTero intraoral camera and NIRI images with exocad DentalCAD 3.1 software, and allows dental professionals to visualize the internal and external structure of teeth.

In addition to these and other incredible innovations in the coming years, we'll continue to build a digital platform and add new capabilities to improve clinical outcomes and elevate the patient experience to drive continued practice growth and positive patient experiences. Thank you for your time today.

We look forward to speaking to you at our upcoming Investor Day on September 6, where we'll share with you our views about the incredible market opportunity we have and how Align is uniquely positioned to continue to lead the transformation of the digital orthodontic industry. Now I'll turn the call over to the operator for questions.

Operator?.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Jeff Johnson with Baird. Please go ahead..

Thank you. Good afternoon guys. Hey Joe, congrats on a nice bounce back quarter here. I wanted to start really on the teen market. Obviously, that's where we all focus long-term on the business. But that 9.7% year-over-year growth, when I look back last year, it was your first quarter in a long time of negative year-over-year growth in teens.

So you had a bit of an easy comp there, although, obviously, '21 was a fantastic year.

So I guess I'm trying to figure out in this economy, when I think about comps from '21 that were so tough, when I think about competition that's out there, where do you think that 9%, 10% teen growth is relative to where you expect to be normalized? Are we still expecting a nice improvement of this over the next few years back to kind of mid, upper teens, something like that? I just would like to get your views on that..

Jeff, I mean you know how important that teen market is to us, like I talked about in the script of the 21 million case starts and the majority of those 75%, 80% being teen. So I look at that sequential growth in teens is being really positive. Now we did have a good number to compare against, like you said.

But when I highlighted in our -- the Invisalign First product line and how well that product is doing overall, and it continues to grow phenomenally throughout the world in all three regions that we have. Our teen packs different business models or plans that we put together, really helps with that piece, too.

So Jeff, when you look at our coming technology improvements and products and those kinds of things, they're targeted really well with the teen market also. So the numbers that you mentioned about potential growth and penetration in that marketplace, in line with our investments and where we think we'll go in the marketplace.

But let's be honest, it's been -- that's a struggle to get orthodontists to really move on teens. But our top docs are almost exclusively Invisalign across the board. Our job is to bring this new technology out, but also infuse it well within doctors, so they're comfortable with the work practices and comfortable with the clinical outcomes.

And I feel we've made really good progress in that area..

That's helpful. Thank you. And then just would like an update maybe on China. Obviously, third quarter tends to be a big teen season there, but we're also seeing some mixed macro feedback on China as a whole kind of from an overall economic standpoint.

So just what's kind of current tenor of business in China? And just remind us how bad were things in third quarter last year in China, we just kind of lose track of the COVID shutdowns and all that, but should third quarter be an easy comp in China? Or were things opening back up there before we got to the beginning of this year where they shut back down again.

Thanks..

Yes. China, obviously, from an economic standpoint, Jeff, it's -- we watch that closely as everybody does, too, but we have to take it as it is right now. And we had a good quarter. We had a good start in the first quarter, too. And so we're seeing good sequential momentum, an improvement in that sense in the business overall.

Obviously, when you look at the third quarter, I mean, we all know you watch our stock closely. We know the third quarter is a huge teen market in China, as I mentioned in the script, too. And we're really good on that, but we feel very confident in the sense of our positioning there and where China stands right now.

I can't comment on future economic activity there with any more accuracy than you can. But what we've experienced in the second quarter and what we see going into the third, we feel good about it..

Thank you..

Thank you, Jeff..

Thank you. Our next question comes from the line of Jon Block with Stifel. Please go ahead..

Hi, Jon..

Good afternoon. Hi, Joe. I'll start on innovation. And Joe, going into '23, you called out this year is one of the biggest for Align in terms of innovation when we think about the company's history. At the end of the prepared remarks, that was really helpful. You laid out a handful of innovations.

Where are you with the next wave? And when I say the next wave, any details that you can give with paddle expansion in terms of timing in the U.S., maybe if you can elaborate a little bit on the limited rollout in Canada to date.

And is there anything else that we should expect more near term, i.e., maybe next three to 12 months before some of those longer-term aspirations come into play on direct printing? And then I'll ask my follow-up..

Jon, obviously, the Invisalign Palate Expander has come a long way. You probably get -- that we've had some four ways into Canada recently and good feedback on our product line.

When we look at the investor conference coming up, we'll obviously give you a much more detailed discussion in the sense of where that product stands, and how we'll commercialize it. But overall, what I'd tell you, John, we know how to make it. We have a process that makes it.

Remember, with our business though, just making it doesn't mean anything, you've got to scale this thing to million. And so that's what our focus is right now is how we scale, how we roll this out. There's obviously a lot of regulatory qualifications we have to meet in each area because it's a new device, too, but I feel good about that.

And Jon, when you look our development, you know this well, you can almost draw a line between the production of product and then the software that we talked about with the software piece.

Obviously, IPE represents both of those, right? It's new software and new kind of treatment planning, but it's actually a 3D-printed device that we haven't launched before. So just think about in the scale-up mode, but when we see you on September 6, we'll have many more details for you..

Okay. That's helpful. And then maybe as my second question, sort of one of those famous two partners. John, to start with you, can you elaborate on the ASP for comprehensive Q-over-Q? I believe you said it was down Q-over-Q, little confused because I think you would have had the full quarter the price increase on the 3x3 and the comprehensive.

So if I've got that right, maybe if you can tease out why it would have been down Q-over-Q. And then, Joe, the upside for the cases, I'm packing it around 10,000 relative to the implied guide that you gave back for 2Q. I've got the U.S. cases essentially in line with our estimate. International seems to have really been the driver of the upside.

And maybe to build on Jeff's question, can you just give some more details where the outperformance was? Was it China? Was it EMEA? Where do you see maybe the better-than-expected results specific to those international regions? Thanks guys..

Yes. Just first on the ASP, Jon. Yes, the comprehensive were down slightly, just a reflection of some of the product mix that we had as well as some of the discounts that we have partially offset by price decrease. So nothing out of the ordinary there, we actually saw an increase on a sequential basis for non-comp.

But the comprehensive was just more mix..

Jon, back to me is -- yes, you're right. I mean, when you look at from a regional standpoint, EMEA and APAC stood out. Really across the board in EMEA, I mean like I mentioned in my script, had Iberia did well. U.K. did well. The Nordic side, we just introduced DSP and different things. We're excited about those areas, too.

So -- and then the teen growth there overall across those geographies was good. So I mean, it's just -- I think just good strong performance.

And then when you think about the EMEA economy, too, Jon, I mean last year there was a lot of uncertainty with the Ukraine situation that hasn't gotten any better, but Europeans and the European countries, I think have solidified their economies around that. And just we're seeing some improvement from a consumer sentiment standpoint, too.

So that's reflected in our numbers also. On APAC, obviously, China was good year-on-year. Japan actually was very strong for us, too, along with Korea, in different parts of Asia, as I mentioned. So it's still broadly really good improvements in both of those regions by country and also specifically in that teen segment that I mentioned.

So we're seeing good improvement Jon, from a sequential standpoint..

Next question please..

Our next question comes from the line of Nathan Rich with Goldman Sachs. Please go ahead..

Great, good afternoon. Thanks for the questions. Hey Joe, hey John. I guess, could you maybe just talk about how adult cases performed relative to your expectations, improved slightly, but I think still down a little bit year-over-year. And how are you thinking about the biggest swing factors that could impact revenue in the back half.

Does the guidance kind of just reflect a continuation of the environment that you saw in 2Q? And is there any kind of part of the business that you're watching specifically, either teen versus adult or certain markets that you feel are especially big swing factors in the back half?.

Yes, I'll take that one, Nate. This is John. When you look at the commentary that we gave, we saw improving trends as we went into the second quarter. We see that in the results. And our guidance reflects that. It shows up in Q3, and it also gives us the confidence to talk to a guide for the total year.

So that's how we've kind of factored things in and looking at the normal metrics in indices that help us with that. As far as adult versus teen, as we said, teen season now. We saw good results in Q2, and we expect that to continue in Q3. As we've said, China is a big market, U.S. big market in Q3, and we expect that to continue.

And adults important for us, too. We have a lot of capabilities to be able to go to those general dentists and try to work where those adults might be wanting to come into treatment and be able to help provide for them as well as our orthodontists.

So we feel good about the efforts that we have to try to improve both teen and adult as we go through this year..

Okay, great. And then just a clarification on the touch-up cases. So -- it sounds like that's pressuring the North America ortho utilization metric. But if you back that out, or kind of include touch up, it would have been up year-over-year.

I'd just be curious to get your sense of what portion of those 18,000 touch-up cases would have been cases kind of in your view in the past prior to DSP just so we get a sense of what that shift might look like?.

Yes. So those touch-up cases, as we talked to those 18,000, those would have been -- those are the touch-up cases that would have been the lower-stage products that we had 5 stage, maybe 7 up to 10, but in that range, 5 to 10, but probably more on the low side of that in terms of the stages.

And we see this great adoption with the DSP program, as we mentioned in the prepared remarks, it doubled from last year. We wanted to give some commentary about how big this is becoming and show them in our kind of our discussion about the year-over-year, and the sequential and so on.

And at Investor Day in September, I'll give a lot more detail about kind of where it came from, how it's become more and more important and what it means going forward because we're going to include these cases going forward. But in the end, we see in all cases where we see -- we've seen the DSP program, it drives incremental volume for us.

Those doctors continue to do those comprehensive cases that we see, but those doctors are also doing these low stage touch-up cases as well as retention. And we think that's a good thing for our doctors..

Great, thank you..

Thanks, Nate..

Thank you. Our next question comes from the line of Brandon Vazquez with William Blair. Please go ahead..

Hi, Brandon..

Hello, thanks for taking the question. I just wanted to follow-up first on the DSP program. If we're doing our math correctly, it seems like most, if not all of the year-over-year increase in case volumes is actually coming from the DSP program.

So one, is that correct? And two, maybe if it is, can you talk about where do you think the mix goes eventually to DSP? And is DSP at this point accretive to your case volumes? Or are you seeing accounts kind of switch what they would have been doing as kind of normal base volumes into DSP?.

We're actually seeing DSP as accretive. So we're not seeing -- we're seeing -- fundamentally, we're seeing doctors who were either making them themselves or going to lab or other ways of making the Aligners actually switching over and continuing to give us those comprehensive cases, but then they're also now giving us the DSP cases.

Remember, most of DSPs, the majority of DSP is retention, and it's the retention that we're providing. But then a subset of that is these touch-up cases and like I said, about 18,000 or so. And what we've also commented to it would have -- it would have helped us by about 1.5 points on an overall basis. So we reported our volumes up about 0.9%.

And they would have been up 1.5 points on that to 2.4%. So it's accretive no matter how we look at it, and it's certainly accretive from a standpoint of the margin that it generates. It's generating some of the highest margin from our product portfolio that we have because the cost to serve is very straightforward for us.

There's no additional liners or anything else. So we recognize all the revenue as soon as we ship without additional aligners related to that..

Okay. And then one other second on.......

Other clarification on your question was whether you put DSP or not, we were up year-over-year in our numbers..

Got it..

So sequentially not sure -- go ahead..

Got it. That's helpful. The next question is just on teens.

I think, Joe, you had said a little earlier, a little frank about there's hurdles within the teen market and kind of pushing that share into existing accounts to get a little deeper -- can you guys just talk about what are kind of the top hurdles right now? Why has it been a little bit tougher to get the incremental share in the teen market? And what are you guys kind of focused on in the next six to 12 months to push that share forward? Thanks..

Hey Brandon, in general, when you look at orthodontic workflows, if they're not completely digitized in the sense of what they do and you're kind of in a down cycle right now with orthodontists and their challenge.

They feel like on a wire bracket side, they can just make more money with wires and brackets versus Invisalign because the raw material costs are 3.5x. Now if you're fully digitized your workflows and everything else, obviously, you make more money with Invisalign.

But I think in these kind of challenging economic times, it's just more difficult to move the orthodontic community over to the clear aligner piece because they're just used to the workflow of what we have with versus wires and brackets. I can say Invisalign First seems to be an exception to that.

In the sense of how Phase I kind of patients are treated. That's not a constant when you look at what's going on in the orthodontic industry. But we see a lot more interest in Phase I with Invisalign First than we thought before. I think that's going to help to be a span breaker for us in this whole thing.

In the future, there's no doubt to us in the sense that clear aligners of the future, no white spot lesions, obviously six months faster than a normal kind of a treatment, much easier for patients. We know all those things. When you ask what the biggest issues are, they're not basically clinical anymore.

It's about workflow, workflow and confidence in orthodontic practice..

Thank you. Our next question comes from the line of Elizabeth Anderson with Evercore ISI. Please go ahead..

Hi guys. Congrats on the quarter and thanks so much for the question. One, this -- don't take this as a complete because I'm very happy that we have full-year guide.

What I was -- wanted to ask was like what -- did you guys see sort of in the end markets or in your -- the visibility of your results to the macro picture that made sort of this time the right time to kind of move on from what we've had in the quarterly guide, the last couple of quarters into this sort of longer guidance..

Yes, I'll give you the high-level view, and I'll turn it over to John, Elizabeth for the ground thing. But I mean, obviously, we had a good second quarter, and we feel we can see through to the third quarter whatever.

At that point, too, like we said, with the qualifiers is continued economic situation that we see now, we feel confident just based on what we understand from a cyclical standpoint to be able to call the fourth quarter. And so look, we're still in very difficult economic times and uncertain times.

But with the second quarter out of the way and with what we talked about improvement, particularly in a sequential sense, we just felt like I mean we're going to give it to you, you're going to make it up. So we might give the best guess we have. But John can give you more..

Yes look, I can't add much more to that. We've got now a couple good quarters behind us. We've seen stability kind of turning to improving trends. It's a good position to be in. We continue to see that into the third quarter. As Joe said, it's not great, but it's better than it has been from an overall economic standpoint.

And so based on the order trends and kind of how things are looking, we felt comfortable about Q3 and translate that to total year as well..

Got it. And just as a follow-up, are you guys taking any different approach to sort of like, sales either so from like a personnel perspective or a focus versus earlier in the year? I know sometimes you guys have sort of been ramping reps. And then that had sort of flatlined.

So I just wanted to understand sort of like how you're thinking about that as we go into the balance of the year and sort of set up for 2024?.

Elizabeth, I'd say our sales practices are consistent and dynamic in the same way, consistent in the sense of the number of salespeople we have, how we train those salespeople, how they go to market. We obviously offer different products in different areas.

We split up orthodontics salespeople and general dentistry salespeople specifically because it's just a different kind of a call. So there's no I'd say, big change in the sense of how we go to market. And obviously, our iTero sales force works really closely with the Invisalign sales force and overlaps in some areas.

But I might be missing your question, but there's no, I'd say, material changes going on from a sales as salespeople, a number of salespeople standpoint and specifically the way we approach the market..

Okay, thank you guys..

Thank you. Our next question comes from the line of Michael Ryskin with Bank of America. Please go ahead..

Thanks for taking the questions. I got a couple of quick ones. One is well, actually kind of related. One is just related to the results, 1Q to 2Q and sort of your outlook for 3Q -- just sort of a yes or no question.

Is it safe to say that you're kind of back to the usual seasonality you've seen historically, it's been a little volatile for the last couple of years, but it seems like we're setting the back in that routine.

Is it safe to say that, that should be our base case approach going forward?.

Well, I think what we see is in terms of our Q2 to Q3 guide, that is more of a typical seasonality flat to slightly up from Q2 to Q3. So that's -- that is that how that goes going forward. I think given the commentary that we've given just the overall macro uncertainty, we're not ready to say that. We're completely back to normal seasonality.

But what we see in the short term here in the guidance that we gave that reflects that..

Okay. And then the second one would be on the Analyst Day. I mean, a couple of pieces there. One is, could you just what goes into the thought process that now is the right time to have the Analyst Day. As you say markets are still pretty uncertain. There's still some volatility, visibility is not fully back.

So kind of what goes into that decision? And then related to that, the long-term guide, is that something you're going to be addressing just as we start thinking about modeling 2024 and going forward from there?.

We usually do this about every two years, Michael. It is a really sophisticated algorithm we use to figure that out, but it's about every two years. And we think it's just about time for that, too, from the standpoint of just to reinitiate the investor base in the sense of where we're investing, how we see the marketplace.

And just a good summary of a lot of the questions that have been asked..

Got it..

Yes, sorry.

Is there one more question?.

Our next question comes from the line of Jason Bednar with Piper Sandler. Please go ahead..

Hi, Jason..

Thanks. Good afternoon. Thanks for taking my questions guys. I wanted to touch on a few things that stood out to us in the quarter. Maybe first, just the combination of a sequential increase in doctors you ship to plus higher utilization across all channels that you serve again, always good to see that combination come together.

I know you don't provide the granularity anymore on doctor shipped across the U.S. or international markets.

But -- just I guess, directionally, are you able to specify whether the increase in doctors is exclusive to China coming back online and expansion in APAC? Or did you see an increase in users in your North American channels and EMEA channels as well?.

Yes, Jason, you're right. We don't give that level of detail, but we saw more doctors that we ship to in APAC related to China, as you said, and we saw it in other regions as well. So we are pleased with the number of doctors that we're shipping to. It's a reflection of our products.

And what they want to do and then as well, being able to be up on a utilization basis is a good metric as well..

Okay. I guess maybe just to follow-up there, John, real quick.

Can you confirm whether or not you saw that increase in North America in Orthos or GPs or both?.

Yes, we saw improvement for North America as well..

Okay, all right. Great. And then I know we got some good details on some of your APAC markets, including China. But I guess wondering if you can talk about just monthly cadence of U.S. trends throughout the quarter and maybe even here in July.

Some of the work we've done shows that there's maybe a bit more mix trends in April and June, May was pretty strong. I guess just wondering how that drives what you were seeing in your case shipment trends throughout the quarter? And then same question for EMEA, if you could elaborate just on how the quarter unfolded in that region? Thank you..

Yes. We're really not giving -- like -- I don't really want to get into the month-by-month activity. I think the results kind of show where they were, Jason, and then it also kind of reflects what we've been able to give from a guidance standpoint as well.

But without getting into months by country and region and so on, it gets a little difficult to give that level of detail. But I think the results that we have for Q2 and what we've talked about how the sequential improvement and what we were able to see on a quarter-over-quarter basis and what it means for the guidance kind of speak to that..

Okay, fair enough. Thanks..

Thanks, Jason..

Our next question comes from the line of Brandon Couillard with Jefferies. Please go ahead..

Hey thanks guys..

Hi, Brandon..

You mentioned scanner ASPs as a bad guy in terms of segment gross margin sequentially and year-over-year. Joe, could you just talk about the competitive environment and whether you're seeing pricing pressure intensifying, just your macro view there would be helpful. Thanks..

Yes, I wouldn't call it, a bad guy. I think what we tried to communicate was, we have a mix in there that's from a price standpoint. We feel good about our upper-end product line and the prices we're able to get for a 5D Plus and 5D Flex and it's a premier scanner in the marketplace.

As you mentioned before and as you know, I mean, there's a certain sensitivity in the marketplace about these kind of capital expenditures in a dental office when a lot of the economics are challenged right now in the orthodontic and in dental side. So we see that. But despite that, you could see we turned really good numbers around.

Our CPOs help us to fight on the lower end. CPOs are the certified preowned that allow us to go down market if we have to. And obviously, when you look at the marketplace, it's pretty -- if you have the -- what we would call the confocal imaging scanners, like that we lead with.

And then there's products like Metadata whatever they try to take the low end and whatever. But we feel -- I feel good about our capability, our value proposition, and I think our numbers reflect that this quarter and in the past too. So I'm not saying there's not a competitive environment.

I just feel we have a superior product line, and then we have a good value stream that we offer from a standpoint of the integration with Invisalign through iTero and then [indiscernible]..

Great. And John, you mentioned freight costs coming down year-over-year as a positive tailwind to gross margins. I think first time in a while. I think that's been the case.

Do you expect that to be sustainable over the next several quarters? And any color on how we should about gross margins in the second half of the year relative to 2Q base?.

I think it's a reflection of just it's freight, but maybe some of the material costs and others that as we manage things, manage our business and we see less inflationary pressure from kind of the raw material/freight and other inputs. And we're always driving productivity. We're always trying to be improve our productivity.

We saw that in some of our gross margin improvements, both for clear aligner and the scanner and services. And we'll work to continue to manage it. But seeing some of those pricing pressures, the input pricing pressure come down that continues..

Very good. Thank you..

Thank you. And we have reached the end of our question-and-answer session. I will now hand the call back over to Shirley Stacy for closing remarks..

Thank you, everyone, and thank you again for joining us. We look forward to speaking to you at any financial conferences and industry meetings. And as Joe mentioned, Align is hosting its 2023 Investor Day, September 6 in Las Vegas. For more information, please visit our Investor Relations page on aligntech.com.

Or if you have any questions, please contact Investor Relations. Thanks, and have a great day..

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