愛齊科技 (ALGN) 2017 Q4 法說會逐字稿

Greetings, and welcome to Align Q4 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Shirley Stacy.

Please go ahead.

Good afternoon, and thank you for joining us.

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

Joining me for today's call is Joe Hogan, President and CEO; and John Morici, CFO.

We issued fourth quarter and full year 2017 financial results today via Market 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 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 February 13.

To access the telephone replay, domestic callers should dial (877) 660-6853, with conference number 13674959, followed by #. 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 first quarter and full year outlook for 2018.

These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports 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've posted historical financial statements, including the corresponding reconciliations and our fourth 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 into 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 highlights for the quarter and then briefly discuss the performance of our 2 operating segments, clear aligners and intra-oral scanners.

John will provide more detail on our financial results and discuss our outlook for the first quarter and how we see 2018 unfolding.

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

Overall, the fourth quarter was a strong finish to another outstanding year for Align with better-than-expected revenues, volumes and operating income.

Record Q4 revenues were up 43.7% year-over-year, driven by an increase in Invisalign volumes across all geographies and customer channels as well as by record iTero Scanner revenues.

Q4 Invisalign volume was up 34.2% year-over-year, reflecting strong international growth from increased utilization and expansion of our customer base, which included over 4,000 new customers for the third consecutive quarter.

Notwithstanding this strong performance, our Q4 results were impacted by the new U.S. Tax Cuts and Jobs Act, which reduced our reported net income and EPS.

However, Q4 operating income was a record $109.6 million or 26%.

John will discuss this in more detail in his section in a few minutes.

For the full year, revenue of $1.5 billion increased 36.4% year-over-year, driven by both record Invisalign revenue, which surpassed the $1 billion mark for the first time ever, and record iTero Scanner revenues.

These results reflect continued progress and execution of our 4 strategic growth drivers, which focus on driving international expansion, increasing orthodontist utilization of Invisalign, especially with teenagers; enabling GP dentists to treat and refer more Invisalign cases; and generating consumer demand for millions of people worldwide and connecting them with an Invisalign doctor.

Turning to the specifics around our fourth quarter results.

Let's start with results of our North American region.

For North America, Q4 was a good quarter with Invisalign case volume up 5.1% sequentially and 24.2% year-over-year.

Sequential growth primarily reflects a seasonality -- a seasonally stronger period for GP dentists as patient activities in their offices increase after summer holidays.

Ortho customers treated more adult patients following the busy teen season.

In addition, Q4 Invisalign utilization increased to 3.3 cases per GP dentist, and North American orthos received a record 14 cases per doctor, reflecting continued confidence and uptake of the Invisalign system.

On a year-over-year basis, strong growth was driven primarily by an increased ortho utilization and continued expansion of our GP customer base.

For the full year, both North America orthos and GP dentists achieved record annualized utilization of 47 and 8 cases per doctor, respectively.

For international doctors, Q4 was another strong quarter with Invisalign case volume up 12.7% sequentially and 52.3% year-over-year.

Sequential growth reflects a seasonally stronger quarter for EMEA region following summer holidays for doctors and patients, which offset expected decreases from seasonality in APAC, particularly as the greater China market observed local holidays.

On a year-over-year basis, strong Invisalign volume was driven by growth from both EMEA and the Asia Pacific region.

Year-over-year growth for EMEA was up 42.9%, led by Spain, France and the U.K. We also saw strong growth across all of our smaller expansion markets, which include Central and Eastern Europe, the Middle East and Africa.

In APAC, Q4 volumes were up 63% year-over-year, led by China, Japan and Australia, with record Invisalign volume in most APAC countries.

For the full year, Invisalign volume increased 44.9% led by growth from China and our core EMEA country markets.

In total, international volume represented 38% of worldwide Invisalign case shipments.

Now turning to the teen market, which makes up 75% of total orthodontic case starts each year.

In Q4, 63,500 teenagers started treating with Invisalign clear aligners, an increase of 44.1% year-over-year, driven by continued strong adoption across all major regions and increasingly for younger teens and tweens.

For Q4, year-over-year Invisalign teen patient growth for North America orthos increased 37.8% and international was up 64.7%.

Notwithstanding some seasonality during the quarter, given fewer teen case starts, Q4 was the fifth consecutive quarter that Invisalign teenage patient volume grew faster than adults.

On a sequential basis, North American ortho teen cases were down as expected as our ortho customers shifted their focus towards adult patient case starts in Q4 following a very busy summer teen season.

For the full year, a total of 237,000 teenagers or 26% of our total volume started treatment with Invisalign clear aligners, up 40.4% from 2016.

During the year, we continue to drive adoption of teenage patients through sales and marketing programs, including a major new direct-to-consumer campaign, emphasizing teens and moms.

In addition, at the beginning of 2017, we launched the first clear aligners solution for Class II correction that combines all the benefits of the most advanced clear aligner system in the world, with features for moving the lower jaw forward while simultaneously aligning the teeth.

Invisalign teen with mandibular advancement, or MAF as we call it, offers a simpler, more efficient and patient-friendly option than functional appliances.

MAF was launched in certain country markets in Canada, EMEA and APAC and is ramping up nicely across-the-board, especially in China.

To date, we have shipped over 5,000 MAF cases outside the United States, half of which were in Q4 alone.

And we're very excited about the potential for MAF worldwide, however, we do not expect any material contribution in the U.S. for MAF until the back half of 2018 as we continue to work through the 510(k) regulatory approval process with the FDA, which includes collecting additional data and analysis.

The Invisalign brand is one of the most recognized in the dental and orthodontic market.

Our integrated consumer marketing programs leverage traditional pay media, search, digital marketing, PR and social media to engage consumers at every point in the consumer purchase journey.

These programs continue to drive demand for Invisalign treatment and are key to adoption in both the teen and adult segments.

In 2017, we launched a new Made to Move brand platform for Invisalign, which has been really impactful around the world.

In North America, we expanded our traditional digital media campaigns targeting both men and women for the first time and made a significant investment in our marketing to teens and moms.

We stepped up our approach to teens by partnering with content developers, teen and mom social media influencers and teen brands like AwesomenessTV, which we saw pay off in increases in our consumer website activity and opt-in metrics.

We also saw a positive impact from the global Made to Move campaign across EMEA and APAC.

EMEA focused heavily on digital, social and web traffic, which resulted in huge increase in their online Smile Assessments and other KPIs.

APAC markets like Singapore and Australia also saw an increase in KPIs based on their focus on social media and local event and influencer-driven marketing.

As a result, in total for the year, there were over 15 million unique visitors to the Invisalign websites worldwide.

1.8 million potential patients searched for an Invisalign provider on doc locator, up 41% from 2016.

600,000 consumers completed Invisalign Smile Assessments on our website, of which, 445,000 opted in for follow-up and the Invisalign social media community grew over 42% to 745,000 consumers following the Invisalign brand worldwide.

You may recall that in January last year, we launched a new Smile Concierge program in Raleigh, North Carolina, with the objective to help more consumers start Invisalign treatment and improve their overall experience by shortening their research cycles and utilizing consumer insights to help our doctors better engage with consumers.

Throughout the year, we made great progress from ongoing program improvements in December.

We achieved a major milestone with the 6,500 Invisalign patient for the Smile Concierge team.

Cumulatively, we scheduled over 26,000 Invisalign consultations, which equates to connecting hundreds of consumers to Invisalign practices every day.

We continue to see incredible potential as our doctor's offices are implementing changes to better engage with consumers that we send to them every day.

We've also started to expand the Smile Concierge service outside the United States with our first teams up and running in Singapore, Brazil and Australia, with each of these countries having a great start to the year, helping more consumers become Invisalign patients.

Over the course of the year, we'll update you on our continued progress in leveraging important learnings about consumer behavior and establishing Smile Concierge teams in EMEA and Asia Pacific regions.

In 2018, our Smile Concierge team will be very closely linked to the new Invisalign store pilot that we opened in November, which we utilize our consumer insights to better capture leads coming out of the store experience.

The Smile Concierge team will be utilizing our touch point learnings to reach out to consumers who receive a scan but don't schedule an appointment with the doctor.

In addition, we'll use our automated text and e-mail services to remind consumers when and where to pick up their aligners or to see a doctor as scheduled.

These are just a few of the exciting new ways that we're helping to educate consumers on the benefits of getting a better smile with Invisalign treatment and connect them with an Invisalign doctor of their choice.

The Invisalign store pilot program that launched in November is an extension of our long-standing direct-to-consumer marketing programs that connect potential patients directly to doctors for Invisalign treatment.

We're looking to other successful brands and how they use a physical location to engage consumers and extend the brand experience.

In this case, we are trying to extend and strengthen what we do through digital ads, social media, PR and TV advertising and our customer's own in-practice patient marketing.

Our pilot store model relies on the doctor and the doctor's office for treatment.

We are not treating patients in the store.

Instead, we are educating consumers on how Invisalign works, showing them a scan-driven simulation of how they might look with straighter teeth and offering to connect interested consumers with a doctor of their choice should they subsequently decide to pursue treatment.

To date, we've learned a lot about creating the right consumer experience with the Invisalign system through a storefront and are continuing to evolve and make continued progress.

In Q1, we will open another pilot store in San Jose, California near our corporate headquarters.

We're planning to open 2 additional pilot stores on the East Coast sometime in the first half of this year.

We look forward to continuing to learn more from these 4 locations and sharing our progress throughout the year.

Q4 was a strong quarter for iTero and better-than-expected with revenues up 30.8% sequentially and 37% year-over-year on record iTero Scanner shipments.

Q4 results reflect continued strength in our GP channel following our GP Summit in September as well as sales to our major DSO partners and through our iTero distributor, Patterson Dental.

The iTero Scanner business was also strong in EMEA and has been growing rapidly in Asia Pacific, especially Japan where we received certification for iTero in Q3.

Customers are quickly realizing the significant benefit of our iTero Scanner platform, and we are excited about the opportunity to continue to expand iTero's footprint worldwide.

The iTero Scanner is central to our digital approach and overall customer utilization of Invisalign treatment.

Use of the iTero scanners for Invisalign case shipments in place of PVS impressions continues to expand and remains a positive catalyst for Invisalign utilization.

For Q4, total Invisalign cases submitted with a digital scanner in North America increased to a record 64.1%, up from 51.3% in Q4 last year.

International scans increased to 40.8%, up from 24.9% in Q4 of last year.

Not only does the iTero Scanner provide the best workflow for Invisalign treatment with the Invisalign outcome simulator and progress assessment tool, but it also seamlessly integrates with downstream restorative workflows, significantly improving their accuracy and precision.

iTero is also the only scanner with TimeLapse technology that makes chair-side consults more productive.

By scanning patients at every visit using TimeLapse and comparing historical scans to a current scan, patients see for themselves the changes in their tooth wear, tooth movement and changes in gingiva over time, encouraging them to accept treatment right at chair side.

In Q4, we cited a distribution agreement with Glidewell Dental for an iTero Element scanner in North America with glidewell.io, the in-office solution, a chair-side restorative ecosystem designed to simplify the process of prescribing and delivering laboratory-quality dental restorations.

In 2017, iTero scanners volumes were up 37.5% year-over-year.

Today, there are over 6.3 million orthodontic scans and 2.4 million restorative scans have started with iTero scanners.

Finally, in the doc-directed, at-home channel, Align is a third party supplier to SmileDirectClub and has 19% equity investment in the company.

We manufacture a portion of SDC aligners with non-Invisalign clear aligners.

The Q4 shipments to SDC were down sequentially, as expected, as SDC increased their own internal capacity.

As an investor and supplier to SDC, Align is focused on 2 things: expanding the market for orthodontic treatment and providing greater access to simple teeth straightening solutions to millions of more people who prioritize convenience and affordability; and creating new opportunities for Invisalign doctors by connecting consumers who aren't candidates for SDC's limited protocols to an Invisalign practice.

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

Thanks, Joe.

Now for our Q4 financial results.

Total company revenue for the fourth quarter was a record $421.3 million, up 9.4% from the prior quarter and up 43.7% from the corresponding quarter a year ago.

Clear aligner revenue of $364.2 million was up 6.6% sequentially on higher-than-expected volume.

Year-over-year clear aligner revenue growth of 44.8% reflected strong Invisalign shipment growth across all customer channels and geographies and increased Invisalign prices.

Q4 Invisalign ASPs were down sequentially, approximately $5 from Q3 to $1,305, reflecting higher deferrals related to additional aligners and higher promotional discounts, partially offset by international price increases.

On a year-over-year basis, Q4 Invisalign ASPs were up approximately $75, reflecting price increases, favorable foreign exchange, product mix as well as the impact of discontinuing distribution and going directly in several regions, partially offset by increased promotional discounts and higher deferrals related to additional aligners.

For the fourth quarter, total Invisalign shipments of 255,000 cases were up 8% sequentially, driven by our EMEA and North America customers.

Year-over-year, Invisalign case volume growth was up 34.2%, driven by growth across all regions.

For North American orthodontists, Q4 Invisalign case volume was up 2.3% sequentially and up 30.7% year-over-year.

For North American GP dentists, Invisalign case volume was up 9.2% sequentially and up 16.1% year-over-year.

For international doctors, Invisalign case volume was up 12.7% sequentially and up 52.3% year-over-year.

Our scanner and services revenue for the fourth quarter was $57.1 million, up 30.8% sequentially and up 37% year-over-year, primarily due to continued global investment in go-to-market activities and sales promotions as well as shipments to key DSO partners and our U.S. distributor, Patterson Dental.

Moving on to gross margin.

Fourth quarter overall gross margin was 75.5%, down 0.4 points sequentially and up 0.4 points year-over-year.

Clear aligner gross margin for the fourth quarter was 77.6%, down 0.3 points sequentially, primarily due to higher manufacturing spend, driven by operational expansion activities.

Clear aligner gross margin was up 0.1 points year-over-year, primarily due to increased ASPs and partially offset by higher manufacturing spend.

Scanner gross margin for the fourth quarter was 62%, up 2 points sequentially and up 1 point year-over-year, primarily due to higher manufacturing efficiencies.

Q4 operating expenses were $208.3 million, up sequentially 7.5% and up 37.2% year-over-year, primarily due to increased employee headcount and continued investment in our go-to-market activities critical to the growth of our (inaudible).

Our fourth quarter operating income was a record $109.6 million, up 11% sequentially and up 60.3% year-over-year.

Our fourth quarter operating margin was 26%, up 0.4 points sequentially and up 2.7 points year-over-year.

The sequential increase in operating margin relates primarily to leverage, operating spend in sales and marketing off higher volumes, partially offset by lower gross margin due to operational expansion activities.

On a year-over-year basis, the increase in operating margin primarily reflects higher revenues from both clear aligner and scanner and services, which created operating expense leverage.

With regards to our fourth quarter tax provision, our tax rate was 92.4% and is up by 72.6 points compared to 19.8% in the same quarter last year, which includes $86.6 million in tax expense as a result of the U.S. Tax Cuts and Jobs Act enacted on December 22, 2017.

This is comprised of $76.6 million of mandatory deemed repatriation tax on foreign -- on accumulated foreign earnings not previously taxed by the U.S. that we expect to pay over the next 8 years, and $10 million noncash write-down of our deferred tax assets due to the statutory tax rate decrease from 35% to 21%.

Going forward, we may repatriate cash back to the U.S. to invest in market expansion opportunities, provide additional working capital and have greater flexibility to fund our stock repurchase program.

In accordance with the SEC Staff Accounting Bulletin No.

118, we have recorded provisional amounts in the Q4 financial statements for certain income tax effects of the Act based on reasonable estimates and information available at the close of the period.

We may adjust and refine the provisional amounts over the next year when additional information, analysis and legislative guidance becomes available.

Fourth quarter diluted earnings per share was $0.13, down 87.1% sequentially and down 78% compared to the prior year.

Our diluted earnings per share includes $86.6 million or $1.06 per diluted share impact due to the new U.S. Tax Cuts and Jobs Act.

Moving on to the balance sheet.

As of the fourth quarter, cash, cash equivalent and marketable securities, including both short and long-term investments, were $761.5 million.

This compared to $700 million at the end of 2016, an increase of approximately $61.5 million, primarily related to earnings growth.

Of our $761.5 million of cash, cash equivalent and marketable securities, $271.4 million was held by the U.S. and $490.1 million was held by our international entities.

Q4 accounts receivable balance was $322.8 million, up approximately 0.5% sequentially.

Our overall day sales outstanding, DSO, was 69 days, down 6 days sequentially and down 7 days from 76 days in Q4 last year.

DSOs have decreased as a result of improved collection activities across all regions.

Cash flow from operations for the fourth quarter was $162.3 million, up $81.3 million compared to prior year.

Free cash flow for the fourth quarter, defined as cash flow from operations, less capital expenditures, amounted to $92.8 million.

Capital expenditures for the fourth quarter were $69.5 million, primarily relating to building purchases and improvements, equipment purchases for additional manufacturing capacity as well as our global expansion efforts, including a new manufacturing facility in [Zhong], China, which will open in the second half of 2018.

During the fourth quarter, we repurchased approximately 0.2 million shares of stock for $50 million under the April 2016 repurchase program.

We have $200 million remaining available for repurchases under the existing stock repurchase authorization.

Before we move to the Q1 outlook, I would like to make a few comments on our full year 2017 results.

In 2017, we shipped a record 931,000 Invisalign cases, up 31.4%.

This reflects 44.9% volume growth from our international doctors and 24.3% volume growth from our North American doctors.

Shipments of our iTero scanners were up 37.5% over 2016.

Total revenue was a record $1.5 billion, up 36.4% year-over-year, with Invisalign revenues breaking above $1 billion for the first time.

Full year operating income of $353.6 million, up 42.1% versus 2016 and operating margin at 24%, up 0.9 points versus prior year.

Free cash flow was $242.8 million.

For the year, we repurchased 0.6 million shares of Align stock for $103.8 million.

2017 diluted earnings per share was $2.83, which includes $86.6 million or $1.06 per diluted share impact due to the new U.S. Tax Cut and Jobs Act comprised of a $10 million write-down of our deferred tax assets and a mandatory deem repatriation tax of $76.6 million.

With that, let's turn to our Q1 outlook and the factors that inform our view, starting with the demand outlook.

We expect our international business to continue to grow sequentially.

For North America, we expect Q1 to be seasonally up for both GP dentists and orthos.

For our Scanner business, we expect a sequential decrease following a strong year-end.

In addition, capital equipment purchases are seasonally slower in Q1.

As Joe commented earlier, this quarter, we supplied fewer aligners to SDC in Q4 2017 compared to prior quarters.

We are anticipating this trend to continue as SDC continues to ramp up their own manufacturing capacity.

With this as a backdrop, we expect the first quarter to shape up as follows: Invisalign case volume is expected to be in the range of 264,000 to 269,000 cases, up approximately 27% to 29% over the same period a year ago.

We expect Q1 net revenues to be in the range of $400 million to $410 million, an increase of approximately 29% to 32% year-over-year.

We expect Q1 gross margin to be in the range of 74.3% to 75%, reflecting higher expenses as we regionalize our treatment planning operations, partially offset by higher ASPs.

We expect Q1 operating expenses to be in the range of $223.5 million to $227.5 million, up on a sequential basis to reflect our continued investment in go-to-market activities.

Q1 operating margins should be in the range of 18.5% to 19.5%.

Our effective tax rate, including an excess tax benefit of about $22 million, should be approximately 2%.

We expect a $1 million to $2 million loss related to our share of SmileDirectClub.

And diluted shares outstanding should be approximately 82 million, exclusive of any share repurchases.

Taken together, we expect our Q1 diluted earnings per share to be in the range of $0.94 to $0.98.

In addition, as we continue our operational expansion efforts, we expect capital expenditures for Q1 to be approximately $65 million to (inaudible), and we expect depreciation and amortization to be $10.5 million to $11 million.

Now let me turn to our full year view.

We anticipate 2018 revenue to be at the high end of our long-term operating model range of 15% to 25%.

We also expect Invisalign revenue and volume growth to be close to the high end of that model.

While we expect the Scanner business to do well and continue to grow, we would not expect the same rate of growth of volume and revenue as we saw in 2017.

We expect operating margins to be approximately flat to 2017 result as we plan to continue to fund our investments to fuel growth.

We expect the equity loss for our investment in SmileDirectClub to be $1 million to $2 million per quarter.

We expect our tax rate for 2018 to be approximately 18%, which includes approximately $24 million of excess tax benefits.

As we've seen historically, we expect our earnings power in the second half of the year to be stronger than the first half, with second half operating income to account for somewhere in the range of 56% to 58% of our full year results.

We expect capital expenditures for 2018 to be in the range of $200 million to $230 million, primarily due to operational expansion and ongoing growth of the business.

Finally, regarding the new revenue recognition standard, ASC 606, we plan to adopt the standard in the first quarter of 2018 by applying the full retrospective method.

We have assessed the financial statement impact of adoption, including but not limited to, volume-based discount programs, sales commissions and the identification of performance obligations, and are continuing to evaluate the transition and disclosure requirements of the standard.

We anticipate the adoption of the standard will not have a material impact to our consolidated financial statements.

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

Joe?

Thanks, John, and thanks again for joining us.

2017 was a great year for Align, and I'm very pleased with our strong performance across all key regions, customer channels and product lines.

This year, not only did we celebrate our 20th year in business, we also achieved several major milestones.

We reached our millionth Invisalign Teen and our 5 millionth Invisalign patient.

Invisalign volume in EMEA exceeded 200,000 cases for the first time.

We opened our first treatment planning operations in China and Germany.

China became our second largest country market next to the U.S. Invisalign revenues exceeded $1 billion for the first time ever.

As I reflect on these achievements, I want to take a minute to thank more than 130,000 Invisalign providers around the world who helped us expand the market for orthodontics using the Invisalign system.

Their increasing confidence in using Invisalign clear aligners to treat moderate to complex cases is reflected in our record utilization across all customer channels, and we're grateful for their partnership.

We are continuing innovating to deliver new technology and solutions that provide Invisalign doctors with the right tools, support and services to keep their practices flourishing.

Even with growth rates significantly above the industry, our market opportunity is enormous and getting larger every day.

With less than 10% share of the world orthodontic case starts each year, we have a long way to go to make clear aligners the standard of care, but our goal is to do just that.

There are more than 300 million people around the world who would or could benefit from straighter teeth.

Reaching out to those consumers, helping them understand treatment options and getting them started in treatment will require new approaches and new models.

We're committed to doing that in partnership with our customers.

For 2018, we'll continue to focus on and execute our 4 key strategic priorities, and I feel really good about our plans.

We're continuing to expand our business in EMEA, APAC and will accelerate investment in LatAm and Canada, bringing more resources closer to our customers and launching direct-to-consumer advertising in some markets like Canada for the first time.

The teenage market remains our #1 priority across the ortho channel, and for the first time, we will focus on teens and their moms in our consumer marketing programs in the EMEA region, making it easier for GP dentists to treat more cases, also enables them to refer more complex ones to specialists.

So we are creating dedicated GP resources across our sales and marketing organizations to ensure that we have a better understanding of how to drive Invisalign adoption among GP dentists and support their unique customer needs, including restorative and aesthetic dentistry.

And finally, the Invisalign brand and our consumer marketing programs are key differentiators for the company.

So we'll continue to invest and to build capabilities that enable us to talk directly to consumers, improve the overall experience with our brand, connect more people than ever with Invisalign practices and ensure that they get started in a treatment with Invisalign clear aligners every time.

With that, I'll turn it over to the operator, and we'll open the call up for your questions.

Operator?

(Operator Instructions) Our first question is with Robert Jones with Goldman Sachs.

This is Nathan Rich on for Bob this evening.

Joe, I just wanted to start with the revenue outlook for growth to be at the high end of the long-term range.

Obviously, that still implies a healthy level of growth but down a little bit from what you guys saw in 2017.

You spent a lot of time on the call, obviously, talking about the initiatives that you've put in place and the opportunity that the company still has.

So I was just wondering if you could maybe help us understand what the key drivers of the outlook are for this year and what, if anything, has changed from your point of view.

Well, I think nothing has really changed in that sense.

Obviously, there's some amplitude that we're talking about in a sense of what we're calling right now.

But overall, we see good momentum in the business.

And what we're trying to convey with you is to stay within the volume ranges that we've talked about before.

But we're just going to look quarter-to-quarter.

We continue to look at the same drivers, I mean, continue to look at APAC being strong.

Europe will be strong in North America, particularly around teens, and our focus there is iTero scanners continue to go off well.

So overall, I feel -- I really feel good about our forecast, and we'll be more and more clear, obviously, as we come back to you after the first quarter.

Okay.

And just a follow-up on the outlook.

Does it contemplate any change in the competitive landscape in 2018?

And if you were to see a new competitor come to market, how would that impact your view of the year?

I think, Nathan, we've been very, I think, clear over the last year or so that we do expect competition in 2018.

In these forecasts, we are reflecting any kind of competition we might see.

But there's been nothing out there recently that's changed any position that we've had from a competitive standpoint.

So these forecasts do reflect how we see the marketplace, and that includes potential competition as we get into longer parts of this year.

Our next question is with Erin Wright with Crédit Suisse.

Can you speak to your retail store concept and how you envision that progressing and how -- has there been any sort of surprises thus far with the initiative?

And how will the Smile Concierge team be involved?

Like do you plan to leverage your Smile Concierge build out another country as well to then leverage a retail store concept there?

Or is it too early on that front?

Well, we are translating, Erin, the Smile Concierge program overseas.

We'll look at it.

We'll move it into APAC this year and also move it into EMEA.

What's nice about it is scalable right now.

We can take what we've learned in North America, and there's a lot of IT involved and a lot of process in a sense of how you turn a consumer into patients that we're able to, I think, plug-and-play much better now because we have that experience.

That's really what -- that understanding is what led to the Invisalign store, the pilot that we currently have in San Francisco.

Just wanted to move this even closer to patients.

And remember, again, we're not doing any kind of diagnosis or anything like that.

We do scans in these shops, and we show potential patients or consumers what their smiles could look like in 2 different sets of -- 2 different approaches, what we call Signature and Deluxe.

I would say, what we're doing, we continue to -- it is a pilot.

We work through the workflow between us and the doctor and us and the patient, and we refine that pretty well over the last 60 days and we're making progress.

That will give us the confidence to announce that we're going to move a store in the San Jose and also 2 on the East Coast this year.

But we'll be very clear with you about what we learn.

But again, this is all about how you turn a consumer into a patient.

And this is as much -- this is a doctor model.

I mean, we're working with our doctors to make this happen.

And so how you touch these consumers, how the frictionless way that you move a consumer into a doctor, how fast that information can be received, all that is really important in this customer journey, and we're learning more and more about that and how to do it better.

So we're optimistic about it, and we do have this in our future plans.

And obviously, just like the concierge services, we have success here and we have a model we think is scalable.

We'll look at where that might fit in different countries around the world.

And can you give us an update on the mandibular advancement here?

What sort of data has been requested from the FDA?

And what sort of visibility do you have on timing of the launch?

I guess, what are the next data points there and also how traction for that product, I guess, is helping to build adoption across the teen market outside of the U.S.?

Erin, this is really -- this is actually simple.

It's not like a drug or anything like that.

They just need more data at the FDA, and they just want to have more comfort with the safety and the efficacy of the product line.

So we're supplying that data.

We expect -- hopefully, we'll be through that by the second half of this year, and then we'll move on.

I mean, we -- I talked about the 5,000 cases that we did last year, with 2,500 of those being in the fourth quarter alone.

Honestly, the feedback that we get from our patients overseas is tremendous.

I mean, when we look at the device that we've replaced through this, it's amazing, like a twin block device that's normally used out there.

When you can actually move this jaw forward as comfortably as we do with MAF but also straighten teens' teeth at the same time, it's really an amazing invention.

So I think that's part of the way the FDA wants more and more information because they really haven't seen a device like this before.

But we feel very confident we'll be able to supply their informational needs.

And as we move in the second half of this year, we'll give you more clarity on exactly where that stands.

Our next question is with Richard Newitter with Leerink Partners.

This is Jaime on for Rich Newitter.

A quick question I have, I guess, is on the teen segment.

Of course, you guys posted nice performance this quarter.

So I'm kind of thinking about when you guys think this market could be potentially reaching an inflection point and how we should be thinking about the additional investments in your direct-to-consumer campaign and really seeing the payoff there and how it translates into further growth in 2018.

Jaime, it's Joe again.

Look, I would say we've done one and a row on teens, and we have more work to do on this.

But we have to put a lot of money into this system in a sense of educating moms and teens, peer-to-peer training for doctors, all these things.

And so I'd say the whole idea or enthusiasm around a tipping point, we're not there yet.

We have to continue to see this market and push this market in order to get it going.

We're confident in our ability to do that based on what we've experienced the last 5 quarters but not necessarily ready to do to claim victory.

And this has its own momentum at this point in time.

Okay, great.

And then just one other quick question on scanners.

I guess, you were saying for your -- if I heard you correctly, for the full year 2018, you're not expecting the same sort of growth for the scanner business.

So just kind of on that front, what sorts of expectations or assumptions do you have that baked in for 2018 for growth in this market?

Jaime, this is John.

We would expect scanner growth to be approximately equal to Invisalign.

Our next question is with Jon Block with Stifel.

Joe, maybe for you.

In 2018, another great year of revenue growth expectations and another year of sort of healthy spend expectations as well, so maybe if you can talk to where that spend is being allocated.

Clearly, there's a return, but what is it?

Is it more reps?

Is it additional DTC?

Is it both?

And then how do we think about that spend maybe throughout the year in terms of reaching for that critical mass on the rep front?

And then I've got a follow-up.

John, what we're doing, we're basically magnifying the investments that we made in 2017.

So you'll see, again, investments in teen, broader advertisements that we know helped to drive GP volume growth, particularly in the United States, too, investments in our concierge service.

But behind that, too, is what you alluded to also is more field people on the ground calling on customers to actually drive the business.

So there's a direct -- when you look at the correlation between our investment in these particular areas to drive demand and the demand we're able to drive, and we can see that we realized through that, we're just continuing on the same plan that we have before, Jon.

Behind you, I know your question is leverage, exactly when that leverage does occur.

I mean, that's -- obviously, I'm not avoiding that.

It's just -- I don't -- this thing is not self-sustaining yet.

We have to invest in to drive demand in this business and to educate consumers and particularly and to train doctors.

And so I don't see that going away in 2018, Jon.

I was going to give you a pass, Joe, on the leverage with the top line and where it is.

But to shift gears, I know it's early, but I do want to sort of follow up on the storefront initiative.

Clearly, the model, it gets the volume into the docs' offices and you've been very vocal about that and it's unlike that of SDC, but what are you hearing from your customers, maybe even if it's only specific in San Francisco?

Are there any that are sort of unsettled by, call it, the fixed economics for express type cases?

They should be saying, "Hey, I'm getting $500 instead of $50 for doing an SDC mockup." But have they come around?

Or what are you hearing in the early days from that customer base?

Jon, from a San Francisco store standpoint, when you ask the doctors around San Francisco about the store, there's enthusiastic support for it because they're close to it and they see what we're doing.

But if you go around the country, there is anxiety with doctors in a sense of what is Align trying to do with these stores and how to go about it.

So we continue to try to communicate that this is a doctor's model, and we're trying to drive that demand as much as we can through the orthodontist and also the GP.

There's a specific question about the Signature product and our cost for it.

I mean, that hasn't been a favorite of our doctors that we set that price, but obviously, there is a market price for around that, for that kind of, and I call it anterior teeth movement, which is basically just a smile kind of improvement that we know that patients really want and we feel that we have to deliver.

There are some docs that readily support it and are happy with it.

There's other ones that aren't happy with it, too.

And we continue to let them make that selection, whether they want to participate in that or not.

We also have our Deluxe cases as we haven't set a price on, that the orthodontists have been very happy with in a sense that we do have a significant number of patients that offer the Deluxe, too, when they understand potential bite changes and what that might do for the long-term dentition.

Hope that helps, Jon.

Our next question is with Steve Beuchaw with Morgan Stanley.

This is actually Zach Wachter on for Steve.

Joe, I wonder if you saw the 3Shape and 3M release out today on the collaboration.

And any early thoughts on that?

Yes.

Zach, the one thing I was kind of stunned with was that, basically, 3M admitted that their scanner doesn't function properly for digital marketplace.

I mean, that surprised me more than anything.

With that, it doesn't surprise me that they would go to 3Shape because 3Shape does have a good confocal imaging scanner, as we know, partially supported by our technology.

But that's just to be expected in that sense.

But I -- the real part that surprised me was really the desk scanner that 3M currently has apparently will be retired in some way.

So as far as what does that mean from a competitive standpoint, it doesn't change anything at all.

It just means that 3M felt that they needed a different front-end from a digital standpoint in their system than what they currently manufacture.

Okay, great.

And as far as the 3Shape transition on the scan submissions, how are you doing in terms of backfilling those volumes?

And what do you think about the overall impact there?

That's like we didn't call in our forecast any impact.

We have customers upset at us because we had to make that move and wanted to make that move.

But we're working through that, through offers of iTero that helped to offset this and also through subsidizing some submissions that we could have in a fundamental way than the analog way in order to do impressions.

So right now, we're not calling any kind of a downside based on that.

We emphasize with customers that have been affected from a workflow standpoint.

We're doing everything we can to mitigate that and make it as easy as possible.

Okay.

And there have been a couple of questions on the storefront.

I wonder specifically on the consumer finance program separate from the store, if there have been any early learnings there that you can share and any incremental volume lift to speak to.

Zach, these are good questions.

We got to tell Steve -- we'll tell Steve how good you are.

We're going to -- John is going to answer that question for you.

Zach, it's John.

Look, we're doing a pilot now in some key markets and learning a lot and working through to make sure that we have the best possible patient and customer experience through this.

So we're learning, making sure that it gets rolled out in the right way.

And you'll see a larger rollout coming in the future.

Our next question is from John Kreger with William Blair.

Joe, given the very strong growth that you just finished up in '17, how do you feel about the manufacturing infrastructure's ability to handle it?

If you had similar growth in '18, as you just put up, would there be any strains on the system, in Juarez, in particular?

And do you have to put some more capital work there to stay ahead of that?

John, yes, we do.

I mean, we do that almost systematically.

We make sure that we have enough SLA equipment and capability in Juarez, obviously, we're going to have extra capacity now coming on in China that will help to take some pressure off that facility, too.

We also could have a bottleneck on the patient on the -- when you look at Costa Rica and what we do overall from the case assessment and a case prescription standpoint.

But we tend to stay up with that.

And we had a big challenge last year because we had a lot of volume come at us pretty quickly, and we were able to recover and get that done.

So I think, John, right now, I feel good about our operations team, our ability to anticipate that to have that kind of capacity available upfront to get this done.

So we don't look at that as being an issue in 2018.

Great.

And then just 1 follow-up.

Can you talk a bit key new innovations?

So you gave us a nice update on mandibular advancement.

As we think about '18, is there anything else on the horizon that you maybe care to preview?

Well, I think we've talked a lot about rapid palate expansion.

I mean, we talked about that about 18 months ago.

We've been given updates on that.

That technology continues to progress.

We're enthusiastic about it.

That's rapid palate expansion, John.

We do -- you put in, in this case, a device, it replaces a device where you use, actually, a wrench today to turn it.

It's very crude in a sense of how you expand the palate.

This would be a digital way with plastic being able to expand the palate on a regular basis.

We also have a product called dental expansions, which would expand your upper jaw also with Invisalign -- with Invisalign aligners also.

So those are the big products that we're moving toward.

When you think about the teen marketplace that we call tweens and teens, and 30% of that marketplace is basically rapid palate expansion and MAF, mandibular Phase I kind of things.

So that technology is really aimed at making us have a more substantial footprint and capability in that teen segment.

Our next question is with Jeff Johnson with Baird.

So most of my questions have been answered.

But, John, I think it was you who mentioned on SDC maybe revenues coming down a little bit in the forward quarters here after a couple of quarters in a row near $10 million as they continue to ramp their aligner manufacturing.

I guess my question, just why do they keep investing in manufacturing capacity?

Obviously, they have a good partner in you guys.

You guys have plenty of manufacturing.

I know maybe some strain on it in Juarez as we were just discussing.

But why the investments there still?

And why not just continue to use you guys for most of their aligner needs?

Jeff, I think it's -- I think it looks -- it's a separate company, they're looking at this as how they want to run their company and decisions that they make to invest and produce their own product.

We take anything that comes externally from -- that they don't want to manufacture.

And it varies as you've seen kind of quarter-by-quarter based on what they produce versus what they go outside with.

But it's just an internal decision that they make.

Okay.

Fair enough.

And then when I try to triangulate, I take your 1Q guide, kind of your 1H versus 2H EBIT guide and think about kind of what's going on in the business right now, help me out just understand what looks like it could be a down margin in the first quarter.

And I know John is going to give you pass on that, but let me just push a little bit on it.

How much of that is just your opening in Cologne recently, opening in China and the treatment planning, China manufacturing costs or manufacturing facility being built out?

It just seems like you are doing quite a bit right now, a couple of new storefronts and all that stuff.

Is that really the driver of just some elevated expenses here in the near term?

Or should we be thinking anything ASP-driven or anything else kind of core fundamental to the business just versus some investments that need to be made right now?

Yes, Jeff.

It's mostly investments.

If you think about how 2017 played out from the investments early on in the year and progressively as we went quarter-by-quarter, we got increasing operating leverage.

It's the same type of play that we would have for 2018.

We're investing, we continue to follow the strategy that we have and you'll see those investments throughout the year.

And first quarter, it's not as much operating leverage, but to guide something flat on a year-over-year basis around that 24%, you would expect to see some of that increase as we go through the year.

Our next question is with Matt O'Brien with Piper Jaffray.

This is Kevin on for Matt today.

I wanted to follow up on a previous question on manufacturing.

I know China, the facility there is coming on later this year.

I was just curious on the primary investments there.

Are there any updates to new printers or materials and, I guess, more broadly with the large growing cash balance and possible repatriation of some cash back into the U.S., how the company thinks about the best use of cash at the moment?

Yes.

I could start with that one.

I mean, when we think about our China operation, I mean, when we -- as kind of have been noted, when we talk about investments that we have to make to make up -- to accommodate the manufacturing, we're always investing.

So now we're going to add to that capacity that we need in China.

So it's really a shift, in some cases, from Mexico to China, and we'll continue to make those investments as needed from an overall growth standpoint.

And when we look at our cash position that we have, as we said on the -- previously, we're going to look at what strategically makes the most sense to bring cash back where we need it, where we can properly use that cash for future investments.

But in other cases, like China, we'll leave cash there to be able to grow that operation that we need.

So we're going to look at this very strategically as to how we best fund our growth.

Okay, great.

And then lastly, I was just looking at the percentage of cases done through the iTero digital scanning process.

It goes up nicely every quarter, and it was right around 50% in North America this time last year, so large incremental improvement.

Ideally, you're looking for 100% there, but is there an internal target that the company is looking for in '18 or the coming years?

And secondly, how would you think about any kind of savings from fewer adjustments being sent back or shipping the molds out?

Is it more significant than we might assume?

It's Joe.

We really don't set numbers year-to-year to think where we're going to be, but you saw a 10-point increase last year in North America alone.

So I mean, we expect that going forward.

As scanners are more and more adopted, obviously, fewer impressions are going to be done.

So I mean, ideally, you'll get to 100% some day.

But getting to 80%, 85% is probably going to be at the top of the area, because a lot of -- particularly on the GP side, we'll be maybe reluctant to invest in the scanner until they know that they have enough Invisalign volume to really support that.

But as far as the savings of doing that, we actually -- obviously, you don't have -- you have better fitting aligners.

We know all those things occur from that, but we don't have any quantification in a sense of the economics or changes in that way that I can share with you, that I know.

Our last question is with Brandon Couillard from Jefferies.

Just a couple of housekeeping questions, John.

In terms of the 1Q revenue guidance, $400 million to $410 million, pretty rare that we see a sequential quarter-to-quarter decline, if ever, does that imply -- can you give us some sense of like the actual magnitude of the scanner step-down from 4Q into the first quarter and perhaps spike out whether that largely reflects upfront Patterson shipments that really won't recur in the first quarter?

Yes, Brandon, it's -- yes, as you pointed out, the revenue is -- the numbers that we guided to is just a pure reflection of what we expect from a scanner standpoint and being the strength of Q4 from a scanner standpoint.

A big quarter from a capital standpoint and investment standpoint by our doctors doesn't necessarily repeat in Q1.

So that's a step-down that we see.

So it's really what's driving that change and that it's not unexpected in terms of how we look at Q4 to Q1.

And then secondly, in terms of the '18 outlook, could you give us a sense of where you see your percentage of SmileDirect manufacturing volumes shaken out for the year?

And then secondly, curious if you've finalized plans of whether you expected to take some more list pricing this year.

So on SmileDirectClub, we would expect about the same volume year-over-year.

So what we saw in '17 should approximately repeat in 2018, and that would be included in the overall numbers that we gave.

And in terms of ASPs, we've increased in the past, we haven't announced any increase in 2018.

We'll let our customers know in advance and then communicate that afterwards, but our past history has been to (inaudible).

Okay.

Thank you, everyone.

Sorry, operator.

Thanks, everyone.

This concludes our conference call today.

We look forward to seeing you at upcoming financial conferences and industry meetings, including the Leerink Healthcare Conference, Morgan Stanley, European Healthcare Conference and the Chicago Midwinter Meeting.

We're also announcing today that we will be hosting an Investor Day in New York City on May 23.

Additional information will be available shortly.

We hope to see you there.

If you have any questions, please contact Investor Relations.

Thanks, and have a great day.

This concludes today's teleconference.

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