Greetings. Welcome to the Align First Quarter 2024 Earnings Call. [Operator Instructions] 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. .

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 2024 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 1 month. .

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 at sec.gov.

Actual results may vary significantly and Align expressly assumes no obligation to update any forward-looking statement. .

We have posted historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our first quarter 2024 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. .

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

Joe?.

Thanks, Shirley. Good afternoon, and thanks for joining us on our call today. .

I'll provide an overview of our first quarter results and discuss a few highlights from our 2 operating segments, System Services and Clear Aligners. John will provide more detail on our Q1 financial performance and comment on our views for the second quarter and 2024 in total.

Following that, I'll come back and summarize a few key points and open the call to questions. .

I'm pleased to report better-than-expected revenue and earnings for the first quarter and a solid start to the year. For Q1, total worldwide revenues were up 5.8% year-over-year, reflecting 3.5% growth from our Clear Aligner segment and 17.5% growth from Systems and Services.

On a year-over-year basis, Q1 revenue growth was up across all regions and was driven by strong Clear Aligner volumes, primarily in the Asia Pacific region.

Year-over-year growth also reflects strength in the orthodontic channel with total Invisalign case starts from teens and younger patients up 5.8% year-over-year, driven by continued momentum across all regions from Invisalign First, as well as Invisalign DSP touch-up cases. .

On a sequential basis, Q1 total revenues were up 4.3%, reflecting a sequential increase in Clear Aligner revenues. Especially for North American orthodontists, as well as strong Systems and Services revenues, primarily driven by iTero Lumina wand upgrades in North America. During the quarter, we achieved several significant milestones.

We completed the acquisition of Cubicure, a leader in direct 3D printing solutions, which is the foundation for our next generational aligner manufacturing. We successfully launched the iTero Lumina intraoral scanner, our next generation of digital scanning technology. We launched the Invisalign Palatal Expander or IPE system in the U.S.

and Canada and received regulatory approval for the Invisalign Palatal Expander in Australia and New Zealand. .

Q1 Systems and Services revenue year-over-year growth reflects nonsystems revenues driven by iTero Lumina wand upgrades and higher scanner volumes and increased services revenue from a larger base of scanners sold.

On a sequential basis, Q1 Systems and Services revenue were up 3.1%, reflecting growth from nonsystems revenues and higher scanner ASPs, partially offset by lower volumes due to seasonality, a strong fourth quarter.

The iTero Lumina intraoral scanner is available now with orthodontic workflows as a new standalone scanner or as a wand upgrade to iTero Element 5D Plus. The restorative workflow is expected to be available in the fourth quarter of 2024. .

In the meantime, GP practices can benefit from the iTero Lumina's new multi-direct capture technology that replaces the confocal imaging technology in earlier models.

The iTero Lumina intraoral scanner has a 3x wider field of capture and a 50% smaller and 45% lighter wand, delivering faster scanning speed, higher accuracy, super visualization and more comfortable scanning experience. .

Overall, we're really pleased with the launch of iTero Lumina scanner. Customer feedback has been positive, and we're really excited about the feedback from doctors. So we've included some great verbatims in our webcast slides. .

Q1 total Clear Aligner revenues were up year-over-year reflecting revenue growth across the regions from strong year-over-year volume growth across APAC markets, as well as the EMEA region. For the Americas region, Q1 Clear Aligner volume was consistent with prior year.

For Q1, total Clear Aligner shipments were up 2.1% sequentially, reflecting seasonality with increased volumes in the Americas regions, offset somewhat by EMEA and APAC regions. .

For Q1, Clear Aligner shipments include over 23,000 Invisalign Doctor subscription cases or DSP touch-up cases, primarily from North America ortho channel, an increase of approximately 49% year-over-year from Q1 '23. .

The DSP touch-up cases are a component of the overall DSP program, which consists of retainers and touch up cases or aligners, and it continues to be an important offering for our customers and their patients. DSP is currently available in the United States, Canada, Iberia, Nordics, the U.K. and most recently, in Italy, France and Poland.

We expect to continue expanding DSP into other country markets and EMEA in Q2 including a 14-stage touch-up aligner offering. .

For non-case revenues, Q1 was up 7.5% year-over-year, primarily due to continued growth from Vivera Retainers along with Invisalign DSP retainer revenues. In a teen market, nearly 200,000 teens and younger patients started treatment with Invisalign Clear Aligners in Q1, up 5.8% year-over-year.

This represents a record number of teen cases shipped as compared to prior quarters, reflecting strength in APAC and EMEA. Teen starts were up sequentially 1.2%, reflecting strength in EMEA and North America, offset by seasonally fewer teen starts in China.

While the teen market tends to be less susceptible to consumer demand around discretionary spending and more resilient than adult orthodontic case starts, we're pleased that in Q1, our Clear Aligner volumes for both adults and teens were up sequentially and year-over-year. .

We believe the Invisalign Palatal Expander system is one of the most exciting innovations we've developed in our 27-year history and is a better option for expanding a growing patient's narrow pallet. Initial response from doctors and patients for Invisalign Palatal Expander system is positive.

The Invisalign Palatal Expander system is not a traditional Invisalign aligner. It's a series of direct 3D-printed orthodontic appliances based on proprietary and patented technology that has 4 systems designed for skeletal expansion.

Clinical data shows that Invisalign Palatal Expander system is safe, effective and proven to deliver skeletal expansion. .

Specifically, our clinical data is based on 49 patients across the United States and Canada between the ages of 6.9 and 11 with a mean age of 8.8 years.

In this group, the mean expansion of 6 millimeters was achieved with minimal tipping with ranges between 3.4 and 10.7 millimeters as measured using the change in intermodal width between the initial and post-expansion scans with a mean expansion efficacy of 97%. .

In addition, we found that survey doctors agree the Invisalign Palatal Expander is less painful than traditional expanders and facilitates better oral hygiene compared to traditional metal expanders.

Phase I or early intercepted treatment includes both skeletal, orthopedic and dental orthodontic arch expansion and makes up to 20% of the orthodontic case starts each year.

Combined with Invisalign First aligner treatment, Invisalign Palatal Expanders provide doctors with a full early interceptive treatment solution that allows doctors to treat all Phase I patients. We expect Invisalign Palatal Expander to be available in other markets pending future applicable regulatory approvals. .

Today, Invisalign is the most recognized orthodontic brand globally, and Invisalign Clear Aligner treatment is faster and more effective than traditional metal braces. Yet the underlying market opportunity remains huge and untapped.

We continue to invest in consumer marketing and demand creation initiatives to raise awareness and drive potential patients to Invisalign practices globally. Below are several highlights from Q1 and more information is available in our Q1, '24 earnings webcast slides. .

In Q1 '24, we delivered 14.5 billion impressions and had 43 million visits to our websites globally.

To increase awareness and educate young adults, parents and teens about the benefits of the Invisalign brand, we continue to invest and create campaigns in top media platforms such as TikTok, Instagram, YouTube, Snapchat and WeChat across markets, reaching young adults as well as teens and their parents also requires the right engagement to Invisalign influencers and creator-centric campaigns.

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Our teen Invis is Drama Free campaign was recently recognized by the Association of National Advertisers with a silver award in the REGGIE Awards for creative and strategic excellence.

In the U.S., in addition to our ongoing influencer campaigns, we partner with athletes such as Maxx Crosby, TikTok Gen Z influencer, Overtime Meg and the famous fashion designer, Kristin Juszczyk to create a compelling brand activation at the Super Bowl.

Our campaigns delivered more than 6.1 billion impressions and 18.1 million unique visitors to our consumer websites across the Americas. In the EMEA region, we partner with influencers to reach consumers across social media platforms, including TikTok and Meta, and launched our global consumer campaigns for teens and parents.

Our campaigns delivered more than 1.6 billion media impressions and 8.9 million visitors to our website. .

We continue to invest in consumer advertising across the APAC region, resulting in more than 6.6 billion impressions and 16 million visitors to our websites, a 195% increase year-over-year. We expanded our reach in Japan and India via Meta and YouTube and partnered with key influencers to reach consumers across social media.

We saw increased brand interest from consumers as evidenced by a 285% year-over-year increase in unique visitors to our website in India and a 129% increase in Japan. .

Finally, digital tools such as My Invisalign consumer and patient app continue to increase with 4 million downloads to date and over 381,000 monthly active users, 15% year-over-year growth rate.

Q1 '24 Clear Aligner volume from DSO customers increased sequentially, reflecting growth in the Americas and the EMEA regions and increased year-over-year reflecting growth across international regions. .

Dental service organizations, or DSOs, represent a large and growing opportunity to help drive adoption of digital technology across the dental industry.

We have established relationships with many DSOs globally, that recognize the benefits of digital workflows enabled by our portfolio of products and services that make up the Align digital platform, including increased practice efficiency and profitability, as well as delivering a better patient experience from shorter cycle times and proximity to their customers.

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Smile Docs and Heartland Dental are some of the largest DSO partners and are continuously exploring collaboration with DSOs that can further adoption of digital dentistry. Each DSO has a different strategy and business model and our focus is on working with the encouraging DSOs aligned with our vision, strategy and business model goals. .

Today, we announced an additional $75 million equity increase in Heartland, following the previous $75 million equity investment a year ago. Heartland is a multidisciplinary DSO with GP and ortho practices across the United States.

Their growth strategy includes Heartland's de novo dental practices, which feature modern technology, located in areas with a strong community need for dentistry where Heartland provides practices with opportunities for mentorship, leadership training and continuing education.

In the last 4 years, Heartland opened 240 state-of-the-art de novo practices across the U.S. and are planning to continue investing through more de novo openings. We have a shared sense of purpose with Heartland. Their mission is to help doctors and their teams deliver the highest quality digital dental care to the communities they serve. .

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 $997.4 million, up 4.3% from the prior quarter and up 5.8% from the corresponding quarter a year ago.

On a constant currency basis, Q1 '24 revenues were impacted by favorable foreign exchange of approximately $10 million or approximately 1% sequentially and were unfavorably impacted by approximately $4.8 million year-over-year or approximately 0.5%..

For Clear Aligners, Q1 revenues of $817.3 million were up 4.5% sequentially, primarily from higher ASPs and higher volumes. On a year-over-year basis, Q1 Clear Aligner revenues were up 3.5%, primarily due to higher volumes and ASPs and increased non-case revenues.

For Q1, Invisalign ASPs for comprehensive treatment were up sequentially and up year-over-year. .

On a sequential basis, ASPs primarily reflect higher additional aligners and price increases and the variable impact of foreign exchange partially offset by a product mix shift to lower ASP products.

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

For Q1, Invisalign ASPs for non-comprehensive treatment were down sequentially and year-over-year. On a sequential basis, the decline in ASPs reflect unfavorable country mix shift and higher discounts, partially offset by the favorable impact from foreign exchange.

On a year-over-year basis, the decrease in non-comprehensive ASPs reflect the product mix shift to lower ASP products, unfavorable country mix shift and higher discounts, partially offset by lower net revenue deferrals. .

As a reminder, we announced about a 5% global price increase for some Invisalign products across most markets effective January 1, 2024. This price increase did not include Invisalign Comprehensive Three and Three products.

Invisalign Comprehensive Three and Three product is available in North America and in certain markets in EMEA and APAC, most recently launching in French territories and in the Middle East. .

We are pleased with the continued adoption of the Invisalign Comprehensive Three and Three product and anticipate it will continue increasing, providing doctors the flexibility they want 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.

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Q1 '24 Clear Aligner revenues were impacted by a favorable foreign exchange of approximately $8.4 million or approximately 1% sequentially. On a year-over-year basis, Clear Aligner revenues were unfavorably impacted by foreign exchange of approximately $3.9 million or approximately 0.5%. .

Clear Aligner deferred revenues on the balance sheet decreased $26.7 million or 2% sequentially and increased $15.8 million or 1.2% year-over-year and will be recognized as the additional aligners are shipped.

Q1 '24 Systems and Services revenue of $180.2 million were up 3.1% sequentially, primarily due to increased nonsystems revenues, mostly related to upgrades and higher ASPs, partially offset by lower volumes. .

Q1 '24 systems and Services revenue were up 17.5% year-over-year primarily due to increased nonsystems revenues, mostly related to upgrades, higher scanner volumes and higher services revenues from our larger base of scanners sold. CAD/CAM and Services revenue for Q1 represents approximately 51% of our Systems and Services business. .

Q1 '24 Systems and Services revenues were favorably impacted by foreign exchange of approximately $1.5 million or approximately 0.9% sequentially. On a year-over-year basis, Systems and Services revenues were unfavorably impacted by foreign exchange of approximately $0.9 million or approximately 0.5%.

Systems and Services deferred revenues on the balance sheet was down $14.3 million or 5.5% sequentially and down $25.3 million or 9.4% year-over-year primarily due to the recognition of services revenues, which will -- which is recognized ratably over the service period.

The decline in deferred revenues both sequentially and year-over-year reflects the shorter duration of service contracts with initial scanner purchases. .

As our scanner portfolio expands and we introduce new products, we increased the opportunities for customers to upgrade and make trade, in addition to other scanner leasing and rental programs.

Developing new capital equipment opportunities to meet the digital transformation needs of our customers and our DSO partners is a natural progression for our equipment business with a large and growing base of scanners sold.

We're pleased to be able to leverage our technological innovations and operational capabilities and efficiencies to provide different types of go-to-market models to our customers, such as rentals and leasing, selling the way that our customers want to buy. .

Moving on to gross margin. First quarter overall gross margin was 70%, approximately flat sequentially and year-over-year. Overall gross margin was favorably impacted by foreign exchange by approximately 0.3 points sequentially and unfavorably impacted by approximately 0.1 points on a year-over-year basis. .

Clear Aligner gross margin for the first quarter was 70.9%, down 0.3 points sequentially due -- primarily due to higher manufacturing spend, partially offset by higher ASP. Clear Aligner gross margin for the first quarter was down 0.8 points year-over-year, primarily due to higher manufacturing spend, partially offset by favorable ASP. .

Systems and Services gross margin for the first quarter was 65.9%, up 1.1 points sequentially due to higher ASP partially offset by manufacturing variances. Systems and Services gross margin for the first quarter was up 4.3 points year-over-year, primarily due to higher ASP, lower service and manufacturing costs. .

Q1 operating expenses were $543.7 million, up 9.2% sequentially and 3.1% year-over-year. On a sequential basis, operating expenses were up by $45.7 million from higher incentive compensation and consumer marketing spend, partially offset by restructuring and other charges not recurring in Q1.

Year-over-year, operating expenses increased by $16.5 million, primarily due to our continued investments in sales and R&D activities and higher incentive compensation. .

On a non-GAAP basis, excluding stock-based compensation, amortization of acquired intangibles related to certain acquisitions and restructuring and other charges, operating expenses were $506.1 million, up 13.3% sequentially and up 3.2% year-over-year.

Our first quarter operating income of $154.1 million resulted in an operating margin of 15.5% down 2.5 points sequentially and up 1.3 points year-over-year. .

The sequential decrease in operating margin is primarily attributed to investments in our go-to-market teams and higher incentive compensation.

The year-over-year increase in operating margin is primarily attributed to operating leverage and proactively managing our costs, partially offset by unfavorable impact from foreign exchange of approximately 0.7 points. .

On a non-GAAP basis, which excludes stock-based compensation, amortization of intangibles related to certain acquisitions and restructuring and other charges, operating margin for the first quarter was 19.8%, down 4 points sequentially and up 1.3 points year-over-year.

Interest and other income expense net for the first quarter was an income of $4.3 million, compared to an income of $1.3 million in Q4 of '23 and an income of $1.1 million in Q1 of '23, primarily driven by a gain on our equity investments and net interest income and offset by unfavorable foreign exchange. .

The GAAP effective tax rate in the first quarter was 33.7% compared to 28.3% in the fourth quarter and 34.8% in the first quarter of the prior year.

The first quarter GAAP effective tax rate was higher than the fourth quarter effective tax rate, primarily due to discrete tax benefits recognized in Q4 of '23, partially offset by increased earnings in low tax jurisdictions in Q1 of '24. Our non-GAAP effective tax rate in the first quarter was 20%, which reflects our long-term projected tax rate. .

First quarter net income per diluted share was $1.39, down sequentially $0.24 and up $0.26, compared to the prior year. Our EPS was not impacted on a sequential basis from foreign exchange. Our EPS was unfavorably impacted by $0.09 on a year-over-year basis due to foreign exchange.

On a non-GAAP basis, net income per diluted share was $2.14 for the first quarter, down $0.28 sequentially and up $0.32 year-over-year. .

Moving on to the balance sheet. As of March 31, 2024, cash, cash equivalents and short term and long-term marketable securities were $902.5 million, down sequentially $78.2 million and down $18.9 million year-over-year. Of our $902.5 million balance, $217.5 million was held in the U.S. and $685 million was held by our international entities. .

In January 2024, we received approximately 37,000 shares of our common stock upon final settlement of the $250 million accelerated share repurchase from Q4 of '23. In total, we repurchased approximately 1.1 million shares at an average price per share of $230.13 under the Q4 ASR contract.

We have $650 million available for repurchase of our common stock under our January 2023 repurchase program. During Q2 '24, we expect to repurchase up to $150 million of our common stock through either a combination of open market repurchase or an accelerated stock repurchase agreement.

Q1 accounts receivable balance was $950.7 million, up sequentially. .

Our overall days sales outstanding was 86 days up approximately 1 day sequentially and up approximately 3 days as compared to Q1 last year. Cash flow from operations for the first quarter was $28.7 million.

Capital expenditures for the first quarter were $9.4 million, primarily related to our continued investments to increase aligner manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $19.3 million. .

We're continuing to use our healthy balance sheet to drive growth and profitability. During the quarter, we continued to make disciplined investments in our strategic growth drivers.

We completed the acquisition of Cubicure, which will enable us to scale our 3D printing operations to eventually direct print millions of custom appliances per day, and we exited the quarter with a healthy cash flow position and no long-term debt, maintaining a strong position to support our additional $75 million investment in our DSO partner Heartland Dental and our $150 million stock buyback.

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Now turning to our outlook. Assuming no circumstances occur beyond our control, we provide the following framework for Q2 and fiscal 2024. For Q2 '24, we provide the following business outlook. For Q2 '24, we expect worldwide revenues to be in the range of $1.030 billion to $1.050 billion.

We expect Clear Aligner volume to be up sequentially and Clear Aligner ASP to be down slightly sequentially, primarily as a result of unfavorable foreign exchange. We expect Systems and Services revenue to be up sequentially as we continue to ramp iTero Lumina in Q2 2024.

We expect Q2 '24 GAAP operating margin and non-GAAP operating margin to be slightly above Q1 '24 GAAP and non-GAAP operating margins, respectively. .

For fiscal '24, we provide the following business outlook. We expect fiscal '24 total revenue to be up 6% to 8% versus 2023, which is higher than our prior outlook of up mid-single-digit growth compared to 2023. The increase in our 2024 revenue outlook reflects our Q1 results, Q2 outlook and continued execution of our growth strategies.

We anticipate that the incremental revenue reflected in our 2024 outlook will be roughly split 50-50 between our 2 operating segments. .

We expect fiscal 2024 Clear Aligner ASPs to be slightly up year-over-year. We expect fiscal 2024 GAAP operating margin and non-GAAP operating margin to be slightly above the 2023 GAAP operating margin and non-GAAP operating margin, respectively.

We expect our capital -- our investments in capital expenditures for fiscal 2024 to be approximately $100 million. Capital expenditures primarily relate to building construction and improvements as well as manufacturing capacity in support of our continued expansion. .

With that, I'll turn it back over to Joe for final comments.

Joe?.

Thanks, John. .

In summary, Q1 was a good start for the year. While I'm pleased with our results, I'm even more excited about Align's innovation in 2024 on our next wave of growth drivers that we believe will continue to revolutionize the orthodontic and dental industry in scanning software and direct 3D printing. .

Our focused execution of our product road map and innovation pipeline has resulted in the largest introduction of new products and technologies in our history, further advancing our software scanning and 3D printing capabilities.

We're excited about the potential for these strategic investments to enable a new phase of growth to transform the orthodontic industry again. .

The iTero Lumina intraoral scanner has the potential to set a new standard of care for dental practices by simplifying the scanning of complex oral regions while offering superior chairside visualization and a more comfortable experience for patients, especially kids.

The Invisalign Palatal Expander increases the clinical applicability of the Invisalign system to nearly 100% of orthodontic case starts. It is a revolutionary removable 3D-printed appliance that is clinically proven to be safe and effective. It is less painful than traditional metal expanders and promotes better oral hygiene. .

And our recent acquisition of Cubicure, a pioneer of 3D printing solutions for polymer additive manufacturing, brings a talented team and unique cutting-edge technology into Align to help us scale our 3D printing operations, providing ultimate design freedom and highly customized outcomes from a customer and patient standpoint as well as operational benefits to the business.

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We see incredible opportunities in this business and continue to make the Invisalign system the standard of care in orthodontics. By continually innovating and developing digital technologies and services that enable more doctors to easily diagnose and treat patients with crooked teeth and help them retain their healthy beautiful smiles.

We're increasing access to care for millions of people, who might not otherwise receive orthodontic treatment. .

With that, I thank you for your time today. We look forward to sharing our continued progress in leading the digital transformation of the orthodontic and restorative dental industry. .

I'll now turn the call over to the operator for your questions.

Operator?.

[Operator Instructions] Our first question comes from Elizabeth Anderson with Evercore ISI. .

I was wondering if you could talk about how you're seeing the overall demand environment? I guess, I'm particularly curious about the U.S.

sort of how you're seeing it from like a consumer demand perspective, especially and any comments you could make on the SmileDirect impact on volumes in the quarter? And then secondarily, if you could comment a little bit more on the broader demand environment in China, that would be super helpful. .

Elizabeth, I'll start off and have John jump in on anything. First of all, we describe the business right now as stable. The same things that we talked about as we came out of the fourth quarter, and we see that stability broadly around the globe.

And you saw in our script that we just read to, that it's good from an adult standpoint and also a teen standpoint, too, which, again, led to that kind of stability that we talk about. .

If I look around the world, I mean we've -- that stability exists, whether it's in Asia, whether we've seen it in parts of Europe and we see it in the United States and the Americas also. So I -- it's hard for us to call out a particular region or whatever that is dramatically down or dramatically up.

We just see them moving pretty much in unison in the first quarter. .

John, would you add anything?.

No, I agree. And that's -- we're driving the growth strategies. As we've said, we've seen that stability in the environment and we're executing against that. .

And Elizabeth, last thing on your SmileDirectClub comment, them not being advertising like they were before or whatever, we can't attribute any part of the demand equation up or down as part of that.

And obviously, that was more pronounced in the United States than it was anywhere else in the world, but I can't attribute any change in the marketplace because of them not advertising at this point in time. .

Our next question comes from Brandon Vazquez with William Blair. .

I wanted to focus for a second on the -- on the teen side, you have the Palatal Expander out there now getting great reviews, and it seems like it closes, if I'm understanding the numbers correctly, maybe 20% of that market that you haven't been able to hit before. This is such a big opportunity.

I'm curious if you can just reflect on like how does commercialization within teens look in the next couple of years now that you have kind of a broader and more fuller portfolio here compared to the prior couple of years? And what does that mean for growth rates within that teen section and adoption within teen that's underpenetrated relative to teens as we look forward the next couple of years?.

That's a good question, Ben. I think we -- as we mentioned, it's 20%. And there's -- we don't -- we call them tweens, really. They're young students before they really hit the teen years and have a mature dentition. With Invisalign First and now with IPE, we can handle the 20% that's out there on the Phase I.

And some teens just need -- tweens just need dental expansion and some of you really have to split the suture and widen the pallet overall. We feel in both those cases, with IPE and Invisalign First, these are very unique products specific to that area.

And we think it will actually make doctors that aren't comfortable with the Phase I, may be even more comfortable now because of the impact on patients is not what it was before when you tried to work these kinds of cases with wires and brackets or higher risk expanders and those kinds of things. .

But like anything in the orthodontic community, it takes time. It takes time for acceptance. And the good thing about this is IPE is about a 30- to 35-day kind of an episode. So our feedback loop is really good. You can tell from my transcript also is right now, we're approved in the United States and Canada and recently in ANZ.

And right now, we're throttled by the regulatory procedures we have to go throughout the world. So we'll be able to give you more specificity on this brand as we go forward. But as I mentioned in my closing too, we're really excited about that technology.

And we didn't tie together the new Lumina scanner has such a broad kind of a bandwidth from a scanning standpoint, it scans that palate that you have to cover with Invisalign First extremely well. So those technologies thread together very well out there. So we're excited about it and more to come. .

Next question comes from Jon Block with Stifel. .

Hoping to ask 2, maybe just the first one, throughout the quarter, there was sort of like an obsession or a big focus from investors on month-to-month trends. There was talk about February strength, March weakness. I don't think if anyone really knew if it was the consumer or the calendar or both.

So maybe you guys can talk a little bit about how it played out for you guys, elaborate on February and March? And as much as you can, just touch on April here for the first 2 to 3 weeks. And then I'll ask my follow-up. .

Yes, Jon, this is John. Look, from -- as we talk about the quarter and think about -- we're very pleased with our results in Q1, we saw stability, as Joe mentioned, and that really continued from the end of the year into the quarter, less about month-to-month.

I mean it was the stability and then the execution that we had throughout the quarter with our products. .

Okay. And then I'll just shift gears. John, I might stick with you. I believe the wording is slightly above the 2023 OM, which I think is 21.4% unchanged. Despite the higher revenues, the midpoint going from roughly 5% to 7%.

So can you talk about where that extra spend is going? Do we see the returns on that this year? Or will that aid and give you some more tailwinds into 2025?.

And then just to tack on to that, the new higher guidance doesn't -- implies at a 6% in the back part of this year, year-over-year growth, which isn't too dissimilar from 1H, but the comps get more difficult. So the stacks need to accelerate.

Why should we be comfortable with that? Is that just an accelerating contribution from some of those new products like Lumina and IPE?.

I think that latter point is how I would look at it, Jon. We're making investments. We make investments throughout the year. We get the shorter longer-term investments that we make different returns on whether they're short or long term.

But what we see is a stable environment, continued investments in go-to-market activities, we have new products coming. So that helps us accelerate with things that we'll have on the iTero side, as well as IPE and others that Joe talked about, where we really get the approval later in the year.

So it's about a stable environment, making investments into that environment and then executing on our growth strategies, and that should give us the benefits that you described in the second half. .

Our next question comes from Jeff Johnson with Baird. .

John, maybe following up on Jon's question there and just a little finer point on the guidance itself. You've taken that guidance from mid-single digits to 6 to 8 scanner and CAD/CAM services came in obviously strongly in the double digits, upper teens.

Should we think about kind of that double digits, maybe not in the upper teens, but double digits is kind of where the scanner and services continues this year? And your Clear Aligner revenue guidance kind of still in the mid-single digits. I think last quarter, we were talking about both those segments being mid-single-digit growers.

It seems like to me now, maybe the raise here is being driven more by the scanner and CAD/CAM services. And as Joe calls the market stable, then maybe the Clear Aligner revenue still kind of expected to be in that mid-ish single digits.

Is that a fair kind of way to look at guidance?.

That's a fair way to look at it, Jeff. I mean, you would see, given the new products that we have with Lumina and iTero, we'll see a little bit faster growth. We're very pleased with what we saw in the first quarter. Typically in the first quarter, you don't have a sequential gain in revenue from the fourth quarter being an equipment business.

So we're very pleased with what we saw there. But then we also look at the Clear Aligner business, and we expect to be able to grow and continue to grow there, both in terms of the investments that we're making in a relatively stable environment and some of the new products that should help supplement that growth. .

Yes, that's helpful. And then one other follow-up. I think it's been asked in the past maybe at an Analyst Day or something. I don't remember if you've given a clear answer.

But it's something I keep getting asked here more recently, and that's a percentage of your patient base of maybe orthodontic cases that get financed through some sort of third-party patient financing company.

We have seen in areas like full arch implants, some of the aesthetic procedures outside of dental, where lending standards have gone up, FICO scores have gone from the 500 to 700, something like that to qualify for patient financing in this cost of capital and tougher capital environment.

So what percentage -- do you know a percentage or round about of what cases get financed? And if those lending standards have changed at all and put an incremental pressure on patients here more recently?.

Yes. What we see, Jeff, is it varies country by control say U.S. is maybe the most -- and I'll combine ortho and GP together, roughly 1/3 of the cases that we see get some type of external financing. Remember, many patients or parents will pay in advance. That's great for doctors.

Many doctors, especially orthos will do some type of kind of internal financing where you kind of pay as you go and so on. And many doctors are continuing to do that, especially in the tougher environment.

And we're doing things to help doctors to try to give them a little bit more extension in payments so that they can provide and pass that on to their patients as well. And we'll work with DSO partners to really try to help them work with these external companies to try to give better financing rates to try to get these patients to go into treatment. .

So we're well aware. We know we can help. We have the balance sheet and the cash to be able to help with our customers, so that they can pass that on. And that's something that we want to keep working towards. .

John, any change to note over just the past few months even in those lending standards getting tougher? Or do you feel like that's stable as well as just kind of the overall environment as you've described that way?.

I look at that as more stable. I think there was a lot of things. If you go back to last year, people are really getting a bit of sticker shock in terms of the higher interest rates, when they came to try to go into treatment. I think people are past that. .

I think when I see this or what I hear from doctors or see from our customers that it's a little bit more stable. There's not a big change. .

Our next question comes from Michael Cherny with Leerink Partners. .

Can you hear me okay?.

Yes, we can hear you fine. .

Okay. So just relative to the spend, I want to dive in a little bit more, if possible. You talked about the investment growth.

Can you delineate relative to that investment, how you're thinking about the growth into, call it, your core markets or some of the new product launches? And especially with regards to the ramp on the printing side, how much incremental printing spend, so to speak, is coming now versus where you think it's going to grow, what the run rate should be on ramping that over time?.

Yes. I think we have a core business that we're running. And obviously, there's a certain amount of investment that you have to be able to grow around sales, sales and marketing and the go-to-market activities that we have. .

There's also R&D spending that we've had throughout the time. And now as that R&D in the case of acquiring Cubicure and now turning this into more of a platform to be able to build our 3D printing. There's a certain amount of spend that we have. How that lays out, it varies over time that we'll have. But rest assured, we know how to scale products.

We know how to scale 3D printing. We'll make the right investments to be able to start scaling up that direct fab printing while making sure that the core business has the right investments for growth, and we'll balance that as we go forward. .

Our next question comes from Jason Bednar with Piper Sandler. .

First I want to build on some of the macro questions that have been asked. I don't want to belabor the point, but other consumer discretionary companies called out a downtick in March. It doesn't sound like you saw any of that, but just wanted to confirm that's the case with respect to Invisalign demand.

And maybe speak to your confidence to drive Clear Aligner volumes going forward, now that comps turn a little bit tougher.

How much do you think you might need to fund that growth with investments to drive more traffic into the office?.

Jason, on the first part is, we talk about the stable environment that we've seen that stability of it. We read and I read, what's going on there with the consumer investment, some concerns, particularly in the luxury goods or what's going on out there. .

But honestly, I think often what we see and analysts who follow us here just really pick up the U.S. data. And what we see is differences all around the world, and that's what's great about having an international business. You have some counter cycling in the sense of the demand patterns and what goes on out there.

But I would say there's nothing that we would highlight right now. I would say that we think something has changed in what we saw in the second half of 2023, to what we saw in the first quarter of this year. .

John, you?.

And in terms of investments, we make the investments that we need go to market and manufacture and other expansion as we continue to grow. We'll continue those investments.

But as we've talked about, not only for the -- now the second quarter when we're talking about that sequential improvement in op margin and what we've talked about in total year where we expect the year-over-year improvement in margin. We're making sure that we're investing with that right amount of profitability.

To still be able to grow into our market and expand the opportunity -- expand on the opportunities that we have, but then being respectful in terms of what margin we need to be able to deliver for the company. .

All right. Very helpful, Joe and John. And maybe one follow-up here to maybe a multi-partner on teen. So bear with me. But this might be a nuanced look. It seems like a lot of emphasis here just recently in product development and marketing that's really trying to tap into that much younger market, that Phase I opportunity.

IPE fits in there, your new marketing branding plans and emphasis there. There seems to be some benefits for younger patients with Lumina.

So it's really -- it seems intentional, but wondering if you could bifurcate for us, how your Invisalign business is performing in this younger patient population relative to the teen as a whole? Where does your penetration sit in those younger patients versus the broader teen channel? And maybe what kind of outsized growth you're expecting from this part of the channel as we look out over the near to intermediate term?.

Jason, just I'll back up on your question, just to give you a kind of a conceptual view.

When you think of Phase I, it's actually been controversial in the orthodontic market for years, some orthodontists don't want to do Phase I because as I mentioned before, the kind of devices that have been used, have been kind of difficult from a consumer standpoint. And so those wait for all permanent dentition and move on to there. .

We feel confident that within this Invisalign First now for dental expansion and then for palate expansion or a morphological change, IPE will do that.

And we think a little track more orthodontists to begin Phase I treatment, but this is an industry that takes a while for things to bake in and for them to gain confidence and I understand it because you're working with kids' teeth and mouths and their dentition. .

But we actually think that a significant amount of growth could come from this area, but we think it will take time, but it's been a great focus for us. And it's going to be interesting to watch how orthodontists in the future actually focus on Phase I, Phase II because these kinds of devices make it simpler for them and for patients in the future.

So right now, I can just kind of give you the ground rules on that, that we've changed those roles. In a sense, but I can't project exactly where it's going. .

Any sense penetration-wise or maybe where you're at relative to the broader teen market?.

I'd say we're just in that story. I mean even Invisalign First is used sometimes on more permanent dentition too. So it's hard -- we'd have to split our cases out of Invisalign First is what the age of patients are or whatever.

But as we get more data and we really get through with IPE and some more specificity around this, we'll share it with you and the rest of the.... .

The only thing that -- I mean if you've tracked us for a while, you know that our average age of teen patients gets younger and younger, I think we're 14 now versus 15 plus before. So I mean that's a reflection of just being able to go after those younger patients with First. .

Our next question comes from Nathan Rich with Goldman Sachs. .

Great. I wanted to go back to the guidance. I know it's kind of been touched on a few different times. But I wanted to ask on the Clear Aligner revenue outlook. It looks like you're raising the outlook for the full year by about 1%.

I guess could you maybe just touch on what changed specifically with respect to that outlook? It sounds like maybe it's expectations around IPE and DSP versus market improvement. But I'd be curious, any color you could share there? And maybe anything on teen versus adult within the updated guidance would be great. .

Yes, I'll start, Nate. So overall, we went from -- we had talked about mid-single digits, so call it 5% to raising it to the midpoint of 7% on a year-over-year, so up 2 points. And really, that's a reflection of a few things. One is the continued stability that we're seeing. We're operating in an environment that's more stable.

We saw that coming into the fourth quarter and now into this quarter as well. So that's good if we want that stability there. .

And then you look at the execution that we have about -- on our core business to be able to grow with a lot of the innovations that we have, the promotions and other things that we have as we get into further into teen season, supplemented with the various new products that we talked about.

We feel really good about Lumina and the launch that we have on iTero and the further expansion that that can drive as well as some of the new products like IPE and others to really not only help those unit sales there, but then as Joe described, we had to pull in other products around Invisalign First and others to really help drive some of that growth that we can see in the teen business.

.

So it's a combination of things, Nate, but it's what we're seeing in stability, how we're executing on our core strategies and then some of the new products really supplementing the extended growth to help us. And that's why we adjusted our total year. .

Okay. That's helpful. And then, John, maybe just sticking with you. The 2Q operating margin, I know up slightly sequentially, but down year-over-year. And I think historically, it's been a little bit variable, but you've seen more of a step-up in the second quarter than I think what the guidance implies.

Anything to call out with respect to FX? Or I think you mentioned some manufacturing cost spend, but just anything there that we should keep in mind as it regards the margin cadence?.

Well, and certainly, we are seeing a stronger dollar. So that's something that we talked about when we think about our guide too, we see a stronger dollar coming out of -- out of the first quarter into the second quarter. Our guide reflects that as well. .

But then you look at the continued investments that we're making to be able to drive more submitters, more doctors into our ecosystem and then ultimately drive more and more utilization. Some of it's that core business that we have to be able to drive growth.

And some of it's some of the new products where there's a certain amount of OpEx spend that we have with that. .

But we're being very mindful of what we can do to be able to drive growth. And then what it also means from an operating margin standpoint. And we're delivering that sequential improvement from 1Q to 2Q in operating margin and then talk to the total year of being up on a year-over-year basis. .

Our next question comes from Erin Wright with Morgan Stanley. .

Great.

I'll ask me 2 upfront here, but follow up on the guidance, and I don't want to belabor this too much, but do you think you have better visibility now just on the underlying demand trends globally? Or would you say that there's still an element or a healthy element of macro uncertainty that's still embedded in your guidance and some conservatism there?.

And then second would be on Lumina and the launch.

And just can you talk about where you're seeing the most success with the launch in the target markets and promotions that where you're focused in terms of expanding share and upgrades as well?.

Erin, this is John. I'll talk a little bit about visibility and guidance. I think what we -- what we enjoy now and what we want to be able to have in an operating environment is more stability, and that stability is there. Markets are open. There's a higher overall higher inflation and interest rates, but people are operating in that environment. .

That stability transcends it to other things that we have. We see the Michigan index or other indices that kind of point to that stability.

Based on that stability, the investments that we're making, how we're going to market, some of the new products that we have, other things that we know that could, on a core basis, drive our business as well as the new products and initiatives that we have, that's what gives us confidence to be able to have a guidance that we gave for Q2 and what it means for the total year.

.

And Erin, on the Lumina piece, it's Joe, obviously, is -- as I mentioned in the closing of my script, we're really excited about that technology. We've been working on it for 6 years. It is a true new platform. It's not a derivative of the old confocal imaging platform.

And there's really no other scanner in the world that's like that and how we've built it. .

So -- and it will take a while for the, I think, the market to absorb that as you have to do this doctor by doctor and place by place.

But we've had a very enthusiastic response from the orthodontic community, but also the general dentistry community too, even though we're not completely ready for the restorative piece, and we mentioned it will be the fourth quarter this year we'll have that capability out.

It's just the speed of that one, the simplicity of being able to scan, the dimensional tolerances and all that's used in the sense of both comprehensive and orthodontic cases are really unmatched. .

So we're excited about that, but we just have to take this thing. We've only had it out now for roughly a couple of months, but we are expecting to have a really strong year, but more importantly, to have that really be the set of standard from a scanner standpoint for the industry going forward. .

[Operator Instructions] Our next question comes from Michael Ryskin with Bank of America. .

Congrats on the quarter. I want to follow up on something, I think, Joe, you touched on in the prepared remarks. If I caught it correctly, you kind of pointed to a little bit of strength in U.S. ortho or Americas ortho in the quarter stood out for us. .

It seems like it's one of the stronger results in a number of quarters. Just wondering if you could expand on that a little bit.

Is it the Lumina launch? Is the fact that you're moving into younger teens and younger kids, which obviously is going to be a little bit more ortho-focused? Just any structural change you're seeing there with that group of dentists? Or am I just reading too much?.

Michael, I understand your question. I'd say it's -- we feel it's -- we've seen more stability in that market this year than we have last year. We've always known that the teen segment of that much more solid than the adult segment, but the adult segment held up for us in the quarter 2. And so that aspect of the adults was good for us also. .

But I'm very cautious about projecting this market going forward because as you can see with a lot of the surveys that are done, this moves pretty dramatically from month to month. But again, it's not just the United States market we're focused on, the global market has been good for us too in that sense. .

So we're going to take this thing a month at a time, but we're confident enough to say this is stable, that we have products in here that are very helpful from an orthodontic standpoint in new, like you mentioned, Lumina and also IPE that gives us more ground to stand on the sense of those orthos. And so we're excited about that.

But in no way do I think there's a phase change between what we saw last year and this year in ortho. It's just more stable and we have more continuity is another word that I'd use to describe it. .

Okay. And if I could squeeze in a follow-up if there's time. Again, also impressed by the DSP touch-up progress. You called it out in the deck. You got some additional launches later this year. You got the 14-stage touch-up aligner offering you're talking about.

Any way you can start framing in terms of would you incorporate that into guidance at some point in terms of where you think that can go in terms of volumes and revenues or any update longer term, how you see DSP and touch up evolving over time?.

Yes, Mike, I'll take that one. Look, DSP is very popular because it really serves the needs that doctors have. They want to be able to buy things kind of the way they want to buy. They want to be able to instead of making things or doing things themselves, they can use our aligners as part of that DSP and be able to treat those touch-up cases. .

And we like that, that's incremental for us in terms of what we see there. And they can also then use a lot of the aligners that they have for retention. And that's great too because that's typically incremental volume that we have. So I think when we see us rolling this out, like we said a few years ago, it was U.S.

and North America and now into Europe, it continues to do what we expect it to do. .

Doctors start. They adopt it more and more because part of their workflow and we see positive volume from that. And in success for projects -- programs like that, we'll continue to expand those out. .

Operator, we can take one more question. .

And our last question comes from Kevin Caliendo with UBS. .

I have 2 questions. So the first one is on Heartland.

Can you talk a little bit about the benefits of the Heartland investment operationally? And also Heartland is -- my understanding is a pretty profitable business and now with 2 separate investments there, how does their profits or how does the accounting work for that from your perspective at this point? ..

And then secondly, if you can provide -- I guess, with regards to the guidance, I think we understand it. But was that in any way based on the trends that you've seen so far in April? Or if you can elaborate on those in any way, that would be great. .

I can start with the guidance part of that, Kevin. Look, we use a lot of factors to look at where our guidance is. So we're using data from Q1 and the most recent information. But it goes back to the stability that we've seen.

You can see it in a lot of the surveys and other things that a lot of people do, but what we see is that stability, coupled with what we're trying to do to go to market to drive the initiatives we have and the new products that we have. So that's a key part of what we factor in into our guidance. No change from what we normally do.

This is how we've come together in terms of a guidance standpoint. .

In terms of Heartland, we look at Heartland as this is a great investment from investing in a company that shares a digital orthodontic mindset that we have, to be able to do things in a similar mindset, to be able to expand like they're expanding, to be able to get into markets that in some cases, we don't have much market share with or a big presence there.

And they share that same mindset, that expansion. .

They've been around for a lot of years as well. With this investment, it's less than 5%. There's no consolidation or anything else that's required. And we'll evaluate going forward on whether there's any mark-to-market that we have to do going forward.

But it's a continuation of that investment the expansion that they're doing, and we're pleased with the results that we've seen over the last year. .

That actually concludes -- sorry, go ahead, operator. .

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

Thank you so much, and thank you, everyone, for joining us today. We look forward to speaking to you at upcoming financial conferences and industry meetings, including the American Association of Orthodontics meeting in New Orleans, May 4 and 5. If you have any questions, please give us a call. Thank you. .

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