愛齊科技 (ALGN) 2016 Q1 法說會逐字稿

Greetings, and welcome to Align Technology's First Quarter 2016 Earnings Conference Call.

(Operator instructions) I will now turn the conference over to your host, Shirley Stacy, VP, Corporate and Investor Communications.

Thank you, you may now begin.

Good afternoon, and thank you for joining us.

I'm Shirley Stacy, Vice President of Corporate Communication and Investor Relations.

Joining me for today's call is Joe Hogan, President and CEO, and David White, CFO.

We issued First Quarter 2016 financial results today via Marketwired, 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 12 months.

A telephone replay will be available today by approximately 5:30 p.m.

Eastern time through 5:30 p.m.

Eastern time on May 5. To access the telephone replay, domestic callers should dial (877) 660-6853, with conference number 13634117, followed by pound.

International callers should dial (201) 612-7415 with the same conference number.

As a reminder, the information that the presenters discuss today will include forward-looking statements, including statements about Align's future events, product outlook, and the expected financial results for the second quarter of 2016.

These forward-looking statements are only predictions, and involve risks and uncertainties that are set forth in more detail in our recent periodic report filed with the Securities and Exchange Commission.

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

We have posted a set of GAAP and non-GAAP historical financial statements, including the corresponding reconciliations, and our first quarter 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 some financial highlights and then briefly discuss the performance of our two operating segments, Invisalign Clear Aligners, and scanners.

Dave will provide more detail on our financials, and also discuss our outlook for the second quarter.

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

Q1 was a solid start to 2016, with better-than-expected revenue and earnings driven by continued strong year-over-year Invisalign volume across our entire customer base, with North America up 21% and international up 34%.

Demand for our new iTero Element scanner remains strong, driving a 72% year-over-year growth in scanner and services revenues.

For Q1, North America clear aligner volume was up both sequentially and year-over-year.

On a sequential basis, Q1 was driven primarily by our North American orthodontist customers, who achieved record utilization of 10.4 cases per doctor this quarter.

On a year-over-year basis, our Q1 volume growth rate continues to outpace the three-year average, and was driven by continued increase in ortho utilization, and expansion of our GP customer base.

Q1 Invisalign volume for international doctors was down 1.5% sequentially, as expected, given the seasonally lower period in Europe due to winter holidays and up to 34% year-over-year.

In EMEA Q1, volume was up 34% year-over-year, led by growth across our core European countries, and was especially strong in Spain, which was up 70%.

Investments made in sales, clinical and customer care, with our new selling processes, are showing quick returns.

Our new geographies also performed well year-over-year with Benelux, Eastern Europe and the Nordic markets up over 90%.

In Asia-Pacific, total Q1 volume was 35% year-over-year led by China and Japan, each of which were up 50% or more.

Record Invisalign volume in both Southeast Asia and Taiwan was driven by growth of more than 40% year-over-year, as they continued to make progress in smaller country markets with our direct sales approach.

Next month in Macau, we look forward to hosting our second Invisalign APAC summit, where almost 700 customers will attend the largest Invisalign summit outside of North America.

The APAC summit will focus heavily on recent innovations, Invisalign advantages over other treatment options, and peer-to-peer sharing of successful treatment outcomes in very complex cases.

In the important teen segment, the total number of Invisalign cases worldwide in Q1 increased 22% year-over-year, reflecting continued adoption of Invisalign treatment for teenagers 11 to 19 years old.

On a 12-month basis, 148,000 teens started orthodontic treatment with Invisalign with an average age of 15 years.

We are pleased with continued growth in teenage cases, especially among North American orthos.

We're also beginning to make progress in growing our teen business outside the United States, where we had 30% year-over-year growth from international doctors.

Our integrated customer marketing campaigns in North America, EMEA and APAC leveraged traditional paid media, search, digital marketing, PR and social media to engage consumers at every point in the consumer purchasing journey.

Consumers' interest and demand for Invisalign treatment continues to grow, as we can see from the increase in key program metrics worldwide.

For example, in Q1, the total number of unique web visitors to Invisalign.com or its regional equivalent increased 30% to 3 million, and the total number of consumers who search for an Invisalign provider increased 27% to nearly a half a million.

North America 2016 marked the strongest Q1 to date for the Invisalign brand in terms of earned media with 27% increase in overall impressions.

In EMEA, we focused primarily on lead generation activities in Q1, which drove 670,000 visitors to regional Invisalign websites, and our Invisalign social media community grew significantly, up 150% compared to Q1 last year.

In Asia-Pacific, we've been preparing for several major consumer campaigns in China, Australia/New Zealand, and Japan, that will launch in Q2.

The new campaign in China will be our very first in the country, targeting females 25 years and older in both Shanghai and Beijing.

In Q1, our scanners business revenue was up 17% sequentially and 72% year-over-year, reflecting a record number of units shipped in a quarter.

Demand for the iTero Element scanner continues to expand our installed base, fueled primarily by North American orthodontists.

As of Q1, 94% of our top 1% elite orthos have purchased at least one scanner, and 64% of our top 1% elite GPs have purchased a scanner for their practice.

We also continue to see strong adoption of digital scanners for Invisalign case submissions in place of PVS impressions.

For Q1, total Invisalign cases submitted with a digital scanning worldwide increased to 36%, which reflects a record 44% from North America and 18% from international doctors.

While these scans are predominantly from our iTero scanner, we're beginning to see some uptake from 3M's Tru Def and Sirona's Omnicam, the other two digital scanners that also qualify for Invisalign case submission.

Adding to this today, we announce Invisalign interoperability with another third-party scanner.

In Q4 of this year, three of 3Shape's scanners are expected to be approved, which will enable Invisalign providers with a TRIOS scanner to submit a full arch digital impression in place of a traditional PVS impression.

Clinical validation of the workflow is mostly complete, however, given our ERP implementation this summer, the ability to support TRIOS scanners for Invisalign case submission cannot be finalized in our Invisalign doctor site, which we call IDS, until after the ERP implementation is complete.

We also announced an agreement with 3Shape to enhance existing STL export workflow between iTero scanners and laboratory partners using 3Shape Dental Systems software.

This will enable improved consistency for customers using the workflow.

With that, I'll now turn the call over to David.

Thanks, Joe.

Let's review our first quarter financial results.

Revenue for the first quarter was $238.7 million, up 3.7% from the prior quarter, and up 20.5% from the corresponding quarter a year ago.

On a year-over-year comparative basis, first quarter revenue growth rate was lower by approximately 5 points related to the Additional Aligner policy and the impact of foreign currency exchange rates.

First quarter clear aligner revenue of $219.7 million was up 2.6% sequentially, and up 17.5% year-over-year.

The sequential revenue increase was primarily related to increased clear aligner volumes.

Q1 ASPs were slightly up from Q4 about $5, due to more Additional Aligner submissions and fewer promotions, partially offset by foreign exchange rates and a small shift in product mix towards our low end products, driven by the Single Arch option we introduced last year.

Our year-over-year revenue growth reflected Invisalign case volume growth across all customer channels and geographies, partially offset by lower ASPs primarily related to Additional Aligner policy change and foreign exchange rates.

For the first quarter, total Invisalign shipments of 163.7 thousand cases were up 2.1% sequentially, reflecting growth predominantly from our North American orthodontist customers.

Year-over-year case volume growth was 25.2%, driven by growth across all regions.

For North American orthodontists, Q1 Invisalign case volume was up 7% sequentially, reflecting higher adoption and utilization rates across the channel, and up 23.6% year-over-year.

For North American GP dentists, case volume was flat sequentially and up 18.6% year-over-year.

For international doctors, Invisalign case volume was seasonally down 1.5% sequentially, and up 34.1% year-over-year.

Worldwide Invisalign utilization in Q1 was 4.9 cases per doctor, up from 4.5 in Q1 last year.

North America ortho utilization was a record 10.4, up from 9 in the prior year.

North America GP utilization was 3, up from 2.9 in the prior year, and international utilization was 4.7, also a record, up from 4.4 cases per doctor in Q1 last year.

In Q1, we added 2,470 new Invisalign doctors worldwide, 870 of which were new North American doctors and 1,600 of which were new international doctors.

Our scanner and services revenue for the first quarter was $19 million, up 17.2% sequentially, and 72% year-over-year.

We're pleased with continued strong demand for the iTero Element scanner.

Notwithstanding these strong results, production capacity has been more constrained than expected as we strive to ramp production and work down backlog.

Moving on to gross margin, first quarter overall gross margin was 75.7%, slightly better than expected, up 0.7 points sequentially and down 0.6 points year-over-year.

Clear aligner gross margin for the first quarter was 78.3%, up 0.4 points sequentially and down 0.8 points year-over-year.

The sequential increase was primarily driven by lower freight costs from a slightly lower mix of international shipments.

The year-over-year decrease in gross margin was primarily the result of lower clear aligner ASPs related to our new Additional Aligner policy implemented in July of last year.

Q1 gross margin for our scanner segment was a record 45%, up 7.3 points sequentially and 16.7 points year-over-year.

Both the sequential and year-over-year increase in gross margin was primarily a result of higher ASPs and lower cost of our iTero Element scanner.

Q1 operating expenses were $127.3 million, up sequentially by $13.8 million, or 12.2%, primarily due to the planned annual increases in employee compensation and benefits programs, costs associated with our internal sales meeting events that take place in Q1, increased investments in sales and marketing and go-to-market activities, as well as our ERP implementation program.

Q1 operating expenses were lower than our outlook, due primarily to more ERP costs being capitalized than anticipated during the quarter.

In addition, the timing of certain investments in marketing were delayed to the second quarter and second half of the year.

On a year-over-year basis, Q1 operating expenses were up $25.1 million, or 24.6%, reflecting increased head count and continued investment in go-to-market activities incidental to the growth of our business, as well as our ERP implementation project.

Also recall that in the first quarter last year, operating expenses included a benefit of $6.8 million associated with a medical device excise tax refund.

Our first quarter operating margin was 22.3%, down 3.5 points sequentially and down 2.4 points year-over-year.

This sequential decrease in operating margin relates primarily to higher expenses as just described.

On a year-over-year basis, Q1 operating margin was impacted by approximately 2.5 points from the Additional Aligner policy, and foreign currency exchange.

Also note again that the year-over-year comparison reflects the aforementioned benefit of the medical device excise tax in Q1 2015.

With regards to our first quarter tax provision, our tax rate was 23.4%, slightly up from our 2015 tax rate of 22.6%, and 18.2% in Q4 2015.

2015 and Q4 2015 tax rates are lower, primarily a result of lower tax expense related to the true-up incidental to the filing of certain tax returns, and the renewal of the US R&D tax credit in Q4 2015.

First quarter diluted earnings per share was $0.50 compared to $0.60 reported in Q4, and $0.44 reported in the same quarter a year ago.

First quarter EPS was impacted by approximately $0.09 per share from the new Additional Aligners policy and the yearly impact of currency.

Further recall that the first quarter of last year included a benefit of $0.06 per share associated with the refund of the medical device excise tax.

Moving on to the balance sheet, capital expenditures for the first quarter were $20.2 million, primarily relating to equipment purchases to expand our manufacturing capacity in Juarez, Mexico, as well as our ERP implementation.

Cash flow from operations for the first quarter was $30.7 million, and free cash flow for the first quarter, defined as cash flow from operations less capital expenditures, amounted to $10.5 million.

During the quarter, we also used $22.6 million of cash to pay employee taxes for the net settlement of vesting employee stock awards that otherwise would have been issued.

Over the last 12 months, these amounts, together with repurchases, have amounted to $128.6 million.

Today, we announced that our Board of Directors has authorized a plan to repurchase up to an additional $300 million of the Company's stock.

This latest authorization is in addition to the existing $300 million authorization announced in April 2014, which brings the total authorization to $600 million.

To date, we have purchased approximately $200 million of our stock and anticipate we will repurchase another $100 million over the next 12 months.

Cash, cash equivalents and marketable securities including both short- and long-term investments were $680.8 million.

This compares to $678.7 million at the end of 2015, an increase of approximately $2.1 million.

Of our $680.8 million dollars of cash, cash equivalents and marketable securities, $216 million was held by the US and $464.8 million was held by our international entities.

With that, let's now turn to our business outlook and the factors that inform our view.

Starting with the demand outlook, for North America we expect Invisalign volumes to be up sequentially from Q1.

With International, we typically see strong sequential growth following Q1 winter holidays in EMEA and the Lunar New Year in APAC.

For our scanner business, we expect revenues to be up sequentially from Q1 as we continue to ramp production for the new iTero Element and fulfill strong backlog and demand.

Notwithstanding this strength, given recent and continuing constraints on production of the new iTero Element, our outlook for scanner revenue for the full year is slightly less robust than original anticipated.

With this as a backdrop, we expect the second quarter to shape up as follows.

Invisalign case volume is anticipated to be in the range of 174.5 to 177.0 thousand cases, up approximately 20.7% to 22.4% over the same period a year ago.

We expect Q2 net revenues to be in the range of $253.3 million to $258.3 million.

We expect Q2 gross margins to be in the range of 75% to 75.5%, slightly down sequentially, primarily due to a higher freight cost due to increased mix of international shipments as well as increased training revenue which carries lower gross margins.

We expect operating expenses to be in the range of $142.7 million to $144.2 million.

Q2 operating expenses will increase quarter-over-quarter based on several factors.

Q2 will carry the full-quarter impact of employee compensation-related costs such as annual wage increases, stock-based compensation awards, and new hires.

Some investments and sales territory coverage and go-to-market activities that were anticipated in Q1 were delayed to Q2 in the second half of the year.

Given our continued success in driving growth and adoption of Invisalign outside the US, we do intend to make some incremental investments in the second half of 2016.

Our Q2 operating margin should be in the range of 18.7% to 19.7%.

Our effective tax rate should be approximately 24%.

And diluted shares outstanding should be approximately 81.4 million, exclusive of any share repurchases.

Taken together, we expect our Q2 diluted EPS to be in the range of $0.46 to $0.49.

With that, I'll turn the time back over to Joe for final comment.

Joe?

Thanks, David.

I'm pleased with Q1 and our better-than-expected start to the year, thanks to continued growth and adoption across our customer base.

We credit that to our focus on and investment in key growth drivers, especially our continued expansion outside of North America, commitments of product and technology innovation and consumer demand programs that help drive Invisalign adoption.

Q2 will be a busy quarter for us, with the upcoming AAO in Orlando, the APAC Summit in Macau, and our Analyst Day coming up in June.

I look forward to seeing many of you at that analyst meeting in New York, and to sharing more details about our opportunities for growth, our competitive advantages, and the key things we're focusing on for the future.

Thank you for your time today.

I'll now open the call to questions.

Operator?

(Operator instructions) our first question comes from Robert Jones from Goldman Sachs.

Thanks for the questions.

You guys mentioned that some of the investments were delayed from Q1 to later in the year.

I guess the first part would be why were they delayed, and then the second part, more importantly, does that delay in investment have any impact at all on your view of mid-20% revenue growth for the year?

Obviously, case growth continues to be pretty strong, and also tied to that level of investment.

Just wondering if the timing of the spend has affected at all your view of the full year?

Bob, this is David.

I'll see if I can field that for you.

They were marketing expenses, as we talked about, as I mentioned in the script.

They were, however, though, related to things that had longer-term, had a longer-term aspect to them, so they weren't near-term types of items that would necessarily be driving current-year case growth.

They had more to do with portfolio types of planning and studies and things like that, so nothing, no impact to the year.

Got it, and then I guess just on the international side, case growth, obviously very robust there but kind of in line with the type of growth we've seen in the last few quarters.

I know you guys had mentioned more investment this year coming on the international side versus the domestic side.

I'm just curious if you could talk about what type of growth rate or growth rate acceleration we should maybe think about on the year's international side, and then maybe just the timeline or timing around the returns on the investments you're making internationally would be helpful.

It's Joe, Bob, and I'd say what we expect is to continue with the growth rate we've seen from an international standpoint, so I don't see a change there.

You know, and a sense of overall in that business, it's pretty much what we've been telling you.

There's not a lot of dilution in the sense of what we do internationally, in the sense of the resources we put in in a year, and the return we're getting on those resources, too.

So, think about that return and the aspect of one year kind of return on international commercial kinds of resources.

Got it.

Thanks so much.

You're welcome.

Thank you.

Our next question comes from Steve Beuchaw, from Morgan Stanley.

Thanks for taking the questions, guys.

My first one is actually on the buyback.

Of course, very nice to see.

My question is, are you framing the buyback for 2016 as something like a new normal, or is this something that we should think of as a one-time step up relative to the historical trend?

So, I don't think there's any intended change in the program that we announced a couple of years ago, Steve.

We announced $300 million, we anticipated to repurchase $100 million dollars a year.

In the first two years of that program, we repurchased $70 million of the $100 million in each case using an ASR, and then we repurchased the remaining $30 million in open market transactions over the balance of the year.

And this year, pretty much the same thing except we're changing it to a 50/50 split.

No other change, other than that.

Okay, got it.

So, it's not -- okay, now I understand the pure ASA.

So, and then my second question actually, David, is could you quantify how much of the spend was delayed out of Q1 into the balance of the year?

So, the portion that was delayed into Q2 is in our guidance.

The portion that was delayed into the second half is about $2 million or so, roughly.

Got it.

And then, I --

Go ahead?

Thank you very much, have a good night.

You bet.

Thank you.

Our next question comes from John Kreger from William Blair.

Hi, thanks very much.

Joe, can you just maybe give us an update on market commentary?

There's been a fair amount of economic volatility in recent months.

Are you seeing any of that filter through to your GP or ortho customers?

I haven't seen any change at all from what we experienced in 2015, as we go into 2016.

Nothing recently, either, in that sense.

So, what does that tell you?

Does that say there is just not as much sensitivity around what we would probably think of as a fairly discretionary purchase by consumers, or do you think there's just such an under-penetration for clear aligners that you can kind of power through the cyclicality that an orthodontist might see?

I'd be cautious, but you know, I haven't gone through a cycle in this business yet, John.

So, I'd just be cautious in what I'd say here.

I'd say, if I look at the economic data and back up a little bit, a lot of that economic data has to do with inventory and production right now, and I don't think it's in a consumer sense, something that's definitive yet.

So, what I'm seeing right now, what I'm trying to communicate to you, is the market feels now as the market has for the last really 10 months since I've been here.

If this thing hits the consumer, and there's a significant consumer effect, I think it'd be naive of us to just say that we think we'll just power through that with the same kind of growth rates we have today.

But, I think we've just got to take that a quarter at a time, right now.

Great.

Thanks, and then one more, you mentioned the upcoming AAO meeting.

It's been a little longer than I think in the past of when you guys have announced some product updates.

Any preview you could give us about something that might be coming then, or just in general the cadence that we should expect about new product innovation?

No big change in the cadence of new product introduction.

I can't give you any kind of a look under the covers right now in the sense of you know, what we might do at the AAO, John, or not do at the AAO, but look.

R&D is incredibly important to us.

You know we're focused on malocclusions in the sense of making this a deeper and deeper penetration against wires and brackets.

We're really excited about that future portfolio and what we can do, but not ready to announce anything big, you know, coming up on the AAO right now.

Okay, great.

Thank you.

You're welcome.

Our next question comes from Brandon Couillard from Jefferies.

Hey, thanks.

Good afternoon.

Joe, just a question on the case, the digital case submissions.

I'm curious as to your latest thoughts on how much contribution, or how you would characterize the success or progress of the CEREC relationship so far, and just given the installed base size I'm surprised it doesn't seem to have been a larger contributor to date.

Any color you can share, there?

You know, Brandon, it really hasn't changed.

I think we try to communicate to the market as much as possible, is that we think these -- open source way is the way to go, to make sure that we, our ability to no matter what scanner you're on, if you have the kind of accuracy and capability, that you can submit an Invisalign kind of order.

I'm frankly not surprised at what we've seen.

I think when you look at Sirona, they've been cautious in the sense of how they bring people on, to make sure of accuracy, and which is really good in the sense of how they can interface with us.

And so, right now, it's really no change in the sense of I think what we anticipated prior to Sirona coming on, and what we're seeing right now, but again we feel good about that open source commitment, and we feel good from a North America standpoint in particular, to see the rates of digitized impressions coming in.

It's good for our business.

It's actually good for customers, because the -- and patients, because of the accuracy of it, and how much faster we can actually turn things around.

And sorry if this has already been asked, I don't think so, but could you -- you pointed to perhaps the Cadent iTero scanner revenues falling a little bit short of your prior goal for the year.

Could you quantify that, and perhaps give us a sense of the magnitude of the backlog, and how long you think it might take to burn off?

Yeah, Brandon.

So, you know, when we ended 2015, we had more than six months of backlog on the iTero scanner, and that number still holds true today, notwithstanding the fact that we -- you know, our revenues in that business were up significantly in Q1 and we're almost doubling the business.

In the January call, we talked about our expectations of that business perhaps doubling this year, and I think that might have, given where we are today with some production capacity constraints and so forth, that might have been a little more optimistic by maybe 10% or so.

And we hope to work through those constraints, and work down the backlog, you know, as we continue to ship product throughout the balance of the year.

Thank you.

Thank you.

Our next question comes from Matthew O'Brien from Piper Jaffray.

Hi guys, thanks for taking the questions.

So, you guys have seen impressive North American growth over the last four quarters.

How much can you attribute that to the stratification of the sales force?

I think it's not a binary answer, Matt, on this whole thing, is I think the stratification was helpful when you define that stratification is, you know, we're focused on really high-end orthos, what we call our stem account, and then how we've allowed our territory managers to go across orthodontics into also GP.

That's been an efficient alignment, but we've also put a significant number of more resources into the field also, and so there is, there's a multiplier there in the sense of the customers we're touching and how we're spreading the workforce.

So, I think those two main variables, it's hard to pull apart how much each was effective, but we know that both of them have been effective in the sense of allowing us more customer time and placing reps in front of high user kind of accounts, that really need different types of things than some of the newer users or smaller users do.

Great.

And also, I apologize if you guys have maybe asked this or answered this already, but single arch was a big growth last quarter.

How much did that contribute to the GP segment this quarter?

Thanks.

So, good question.

You know, as we looked at it, if you look at the single arch and you look at even the pricing actions we took last -- a year ago in Q2, where we lowered the pricing on both the E5 and the E10, we changed the staff discount program, and so forth.

As we look at it now, we're seeing great traction on those products.

I mean, they're growing well, and much faster than what the rest of our business is on a volume basis.

Maybe not the same rate on the revenue side, but certainly on a volume basis, they're growing at a rate faster than what our full products are.

And when you look at it on a quarter-over-quarter basis, or I should say a year-over-year basis, it's probably about 3 points of growth, when you compare it year-over-year.

Great, thank you very much.

Thank you.

Our next question comes from Chris Lewis from Roth Capital Partners.

Hey Chris, are you there?

I'm here, can you hear me?

Yes, we've got you, Chris.

Okay, great.

Joe, you mentioned you're beginning to see some progress with teen in international markets.

Can you talk about what's starting to drive that progress?

You know, Chris, again, this is on the subjectivity to my comment here, but I think if you look at the history, particularly in North America, we've had a history here of years of people thinking we really, in orthodontics, not thinking we could do teens.

As we go overseas, I don't think we're burdened with that mythology as much, because obviously we changed the type of malocclusions we could do.

We moved into teens pretty well, and we've changed our portfolio to address that.

I just think there's less inertia to overcome overseas, than maybe what we've had in North America over the years, is my guess.

I mean, obviously what we're going to have to do, is double back in North America and push a lot harder in the sense of our capability in that area now, to overcome I think some history that has existed there.

On the Additional Aligners program, it's been around I think nine months since you implemented that.

I was hoping you could take a minute and kind of talk about it, if you're starting to see ordering patterns and your customer behavior in terms of utilization rates being impacted from that program?

Okay.

Yes, Chris, when we look at the impact of additional aligners, we look at it over many years.

We see increasing usages of additional aligners over time, and primarily that's the result of a number of factors -- the fact that we're treating more complex cases, the fact that our mix is shifting a little bit from the standpoint that international is growing faster than what North America is, since they treat typically more complex cases than what we do here in North America.

That's kind of shifting some of that.

But, when we look at all those usage rates, we don't see any particular aberration in those rates that we can specifically attribute to the change in the policy.

What we know is, when we talk to doctors, they love it.

They're appreciative of the fact that it's easier for them to practice with us.

They don't have to be constantly thinking in the back of their mind -- if I submit a request for additional aligners, am I going to pay for this one or not?

So, we don't -- when we look at the data, we don't actually see anything that shows an aberration.

It's all pretty much qualitative, and we know that it's one of the factors that we believe is driving the record ortho utilization we're seeing right now.

Utilization last quarter, Q1, was 10.4, and it's one piece of the whole puzzle, I think.

Okay.

Thanks for the time.

Thank you.

Our next question comes from Jon Block from Stifel.

Great, thanks, and good afternoon, guys.

Maybe two or three.

The first one, Joe, I believe for you -- on the teen market, I think you guys gave some metrics.

Teen's up about 22%, trailing 12 months, but it is lagging adult and you mention the average teen age around 15 years old, but of course a lot of teens are out there getting orthodontic care at 11 to 14.

So I guess the question is, can you go younger with the current product, or do you need something more specific to mix dentition and tracking compliance, etc.?

Jon, I think you know the answer to that question.

You know that.

(laughter) But I think, honestly, one part of the practical side of me, Jon, says that our teen utilization rate in the 20% to 25% range, depending on how you look at it, is really insufficient given the market is 75% teens.

And so, regardless of how young you want to move back into the teen segment, we have plenty of opportunity when you look at complete dentition above 13 years old.

So, we should be able to get at, regardless of that kind of approach.

But obviously, our R&D is focused on how we can go back and look at what I call morphology changes, rather than just moving teeth, it's actually moving things.

And you know, obviously we have some clinical trials in the marketplace in that area to see how well our appliances can fit in that particular area, and we're optimistic about it.

Okay, and the next two questions I promise I really don't know.

So, the first one, David, for you -- you mentioned maybe on Cadent, more optimistic by 10%.

I just want to make sure I understand what you meant.

So, if Cadent revs were going to roughly double this year, which was the initial guidance, that was an increment of $45 million.

I believe you're saying maybe it's $4 million or $5 million too high?

Is that correct?

And then the second part is, do you make up that $4 million or $5 million shortfall to still keep your, I think it was low-to-mid 20% revenue guidance for the year?

And then I've just got one more.

So, I think the net of it all is that our revenue guidance is roughly intact.

We'll make it up elsewhere, either through pricing or through other things that were built into that plan.

Okay.

And then, just the very last one, you guys gave some interesting metrics on sort of the percent of high-volume guys that own a scanner, and there's a lot of them, and we've done work showing the average scanner user does a lot more cases than your overall average.

But, this brings back into question sort of the chicken or egg.

So, are there any metrics that you can give, even at a high level, of what someone looks like before they get a scanner and then where they go six, 12 or 18 months after they bring it into their practice?

Thanks, guys.

Jon, we don't -- we're obviously looking at that.

Our penetration rates are being furthered right now.

You've got to look at ortho differently than you do GPs in that sense, but we really don't have anything definitive to share with you yet that would say, you buy a scanner you automatically do more Invisalign.

We're not ready to say that yet.

Okay, perfect.

Thanks for your time, guys.

Our next question comes from Richard Newitter from Leerink Partners.

Hi, this is Robby in for Rich.

Can you hear me?

Hi, Robby, yes.

Hey, Robby.

Great, thanks for taking the questions.

I had a question, a couple questions, one maybe on the doc training and then another on gross margins.

First, on the Invisalign doctor training, sequentially it looks like there's a seasonal step-down in North America, but you're flat year-over-year, whereas OUS training steps up sequentially.

Hoping you could help explain some of the dynamics behind that, and how we should see training progress throughout the year.

And then maybe second, on the gross margins, scanner gross margin of about 45%, where do you think that can go over time?

And should we think of sort of 2Q to 4Q at this similar level?

Thanks.

Okay.

So, Robby, on the doctors trained, when you look at those statistics you'll notice that typically we train more doctors internationally than what we do in North America, and when you break it down and you look in North America, it's primarily GPs.

There are re-engagement of orthos and so forth, but the predominant mix is on the GP side.

And in terms of the seasonality of that, we typically have a couple periods during the year where that is higher.

Q2 and Q4 are typically the periods during the year that we offer more training, and we try to get more enrollment during those time periods.

On the international side, I think it fluctuates less on a quarter-to-quarter basis, and it's probably geared more by our capacity to take on doctors and feel like we've got enough clinical help and so forth to get them launched, and start off on their Invisalign practice.

And I don't think we see as much seasonality in terms of how we plan out the international doctor side of it.

And then the second question was on scanning?

What were the gross margins on scanners?

So, the gross margins on scanners, they're in the 45% to 50% type of range and a lot of that is due to when we designed the new iTero Element, we designed it as not only a more feature-rich product than the 2.9, which it replaced, but we designed it a lot for cost reduction.

And so, you have a much smaller footprint in terms of physical form factor, you know, that sits in the doctor's office.

You have much lower support costs for the product because the wand detaches from the base unit.

The training is all done virtually, instead of us actually having to actually hold classes on the training.

It's done virtually.

The doctor installs it himself, versus us having to send somebody in to do a field install.

So, all those things kind of contribute to -- from a business model standpoint, why it's a better gross margin proposition than what the prior version was.

Does that answer your question?

Yes, it does.

And then maybe if I could get one more in?

Regarding the 3Shape announcement, sorry if you've mentioned it, I may have missed it.

Did you say anything about what you think their install base is, and how many dentists that opened up for you?

No, we didn't, and we're not quite privy to that information either.

So, I mean obviously, it's a successful scanner, but there's not an installed base number that's been shared with us.

Great, thank you.

Thanks, Robby.

Thank you, Robby.

Operator, we'll take one more question, please.

Our last question comes from Jeff Johnson from Robert W. Baird.

Thank you.

Good evening, guys.

Joe, just want to start with you.

Hey, how are you all?

So Joe, starting with you, on the utilization number, the 10.4 number.

Obviously, as you guys said, kind of an all-time high on the North American ortho side.

As I'm looking at it, it's also, I think, about the biggest sequential jump up I've seen in that metric as well.

So, I want to revisit the point you made about kind of end markets being stable.

How much of that sequential improvement maybe is coming from some of the efforts you guys have been putting in the field?

A lot of the work we've done, and I'm sure others, but survey work, and that seems like North American dental market has picked up here a bit in the last six months.

How much might be tied to those factors, things like that?

Just want to focus a little more on that 10.4 number, if possible.

Jeff, it's a good question, I'll tell you.

Again, it's a gray answer, because I think we don't see this definitively.

But, I would say, I just look at kind of a constant force from a market standpoint over the last 12 months.

And then overall, I think it's really the people that we put in the field.

It's obviously, I think some of our, you know, inventions like E5, E6.

And frankly when you think about E5, E10, and some of our pricing dynamics on that too, all these things I think have really helped us from a penetration standpoint with those guys.

So, I wouldn't necessarily attribute it to a market uptick.

I think the market has been very consistent.

I think our resource allocation and focus is, I think it'll really help in that sense.

All right, great, and then David, just one question for you on the guidance, or at least on some of the P&L numbers.

You mentioned the operating margin, 250 basis point hit I think you said between the Extra Aligner policy and the FX in the quarter.

Any chance you could split that out, or disaggregate those two numbers?

And then, just want to make sure I've got my gating correct.

It seems like the FX drag pretty much goes away starting in the second quarter, and the Extra Aligner policy will at least anniversary through the model starting in the third quarter?

Is that the right way to think about those drags?

So, you know, when you always do these compares, it's always against what you're comparing to.

When you're comparing quarter-over-quarter, FX and Additional Aligner is not a big impact on Q2.

It's a little bit of a drag, you know, but well, 20 bps or so.

When you look at it year-over-year, you see a bigger impact, and like you said, about almost 3 points.

Most of that's Additional Aligner, about $8 million of that is Additional Aligner, and like another $2.5 million or so roughly of FX.

Okay, and then the FX component as we go into 2Q, would expect that pretty much on a year-over-year basis we're done with most of those headwinds at this point, you think?

Well, you tell me what exactly (multiple speakers) --

Assuming, assuming currency stays stable where it is today?

If currency stays flat, the only quote -- headwind -- you might say we have, that we keep calling out, is Additional Aligner.

An Additional Aligner, in our discussion about Additional Aligner and its impact, kind of swan songs in Q2 because once we get to Q3, our comparatives will have the full impact in it both ways.

Got it.

Thank you.

Thanks, Jeff.

Thanks, Jeff.

Well, thank you everyone for joining us today.

This concludes our conference call.

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