愛齊科技 (ALGN) 2020 Q2 法說會逐字稿

Greetings, and welcome to the Align Technology Second Quarter Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Shirley Stacy, Vice President, Corporate and Investor Communications. Thank you. You may begin.

Thank you, everyone, and thank you for joining us. Joining me today is Joe Hogan, President and CEO; and John Morici, CFO. We issued second quarter 2020 financial results today via GlobeNewswire, which is available on our website at investor.aligntech.com. On April 1, 2020, we completed the acquisition of privately held exocad Global Holdings GmbH (exocad). To reflect this addition of exocad into our operations as of Q2 '20, we have renamed the Scanner and Services segment to Imaging Systems & CAD/CAM Services or Systems and Services.

Today's conference call is being audio webcast and will be archived on our website for approximately 1 month. A telephone replay will be available today by approximately 5:30 p.m. Eastern time through 5:30 p.m. Eastern time on August 5. To access the telephone replay, domestic callers should dial (877) 660-6853, with conference number 13705887, followed by #. International callers should dial (201) 612-7415, with the same conference number.

As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement.

We have posted historical financials, including the corresponding reconciliations, including our GAAP to non-GAAP reconciliation, as applicable. And our second quarter 2020 conference call slides are on our website under Quarterly Results. Please refer to these files for more detailed information.

And with that, I'd like to turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Thanks, Shirley. Good afternoon, and thanks for joining us. I'm pleased to report Q2 results and continued progress across all regions and customer channels that reflect our COVID-19 recovery efforts and those of our customers.

Practices across every region have reopened and are seeing patients, and many of those practices are embracing digital treatment in new ways and more purposely than ever before. In particular, Invisalign providers are using the virtual tools we expedited over the last few months to minimize in-office appointments and deliver doctor-directed personalized treatment that meets the needs of the moment, trusted, safe, convenient and reflecting the digital option. Initiatives we have prioritized globally over the last few months, including support for doctors to ensure treatment and business continuity, a shift to online education and training, ramping availability of virtual tools to keep doctors and patients connected throughout the treatment. And continued investment in consumer marketing, concierge programs and personal protective equipment or PPE are helping doctors navigate this evolving environment and come back stronger as their practices have reopened.

We have received consistently positive reactions and feedback from doctors in support of our efforts over the last few months. While it's too early to know for sure how extensive and sustainable the digital transition will be, interest in digital solutions is building, even among doctors who are not early adopters or advocates prior to the pandemic. The positive feedback and momentum is not just around Invisalign treatment. It includes digital workflow around iTero scanners and general dentistry. Doctors are telling us that iTero is central to their practice and to their practice workflows, and it's key to driving digital treatment.

With that, let me turn to results. For Q2, total revenues were $352 million, down 36% sequentially and down 41% year-over-year, reflecting significantly lower sales of Invisalign clear aligners and iTero scanners due to a full quarter's effect of COVID-19 pandemic on practice closures. Revenues from clear aligners were $298 million, and Imaging Systems & CAD/CAM Services were $54 million.

On a year-over-year basis, while clear aligner shipments were 222,000 cases, down 41% year-over-year, we are pleased with the continued progress we've seen from our recovery efforts throughout the quarter. For the quarter, we shipped Invisalign cases to approximately 48,000 doctors, of which 3,000 were first-time customers, reflecting lower doctor activity due to practice closures primarily in America's GP channel.

We also trained approximately 3,500 new doctors in Q2, including 2,350 international doctors. While our inability to hold in-person courses due to COVID-19 resulted in fewer trained doctors in the second quarter, we continue with a significantly larger number of Invisalign doctors through online virtual education courses, summits and forums. For the teen market in Q2, 71,000 teens and preteens started treatment with Invisalign clear aligners, representing 32% of total cases shipped, reflecting growth from APAC across comprehensive products. By the end of the quarter, we started to see recovery in the ortho channel with increases in Invisalign comprehensive treatments in the teens and preteens segment across most regions, with positive growth predominantly in APAC in the teen segment.

Invisalign First continues to accelerate among young patients as well and reflects greater resiliency as parents continue to prioritize orthodontic treatment for their kids. Overall, both noncomprehensive and comprehensive shipments were down, but with increased adoption of our moderate product among the ortho channel.

Last week, we held our Teen Forum Virtual Edition, taking what was a popular teen intensive program for orthodontists launched last year and recreating it as a virtual experience. In order to facilitate broader attendance among our customer doctors, we scheduled 2 Teen Forum virtual events. The first took place on July 17, and the second will be held this Friday. The program is designed to help doctors understand the highly visible online and on-demand world of today's teens and provide the know-how, tools and confidence to differentiate and grow their Invisalign teen practices.

Approximately 800 customers have registered for this full-day session that combines live and on-demand sessions, clinical and practice integration presentations, panel discussions and invaluable insights from experts with successful teen practices.

Now let's turn to the specifics around our second quarter results, starting with the Americas. For the Americas region, Q2 Invisalign case volume was down 53% sequentially and down 52% year-over-year, reflecting significantly fewer Invisalign case shipments due to the impact of COVID-19. For Q2, reported utilization was down for NA orthos and GPs, both quarter-over-quarter and year-over-year. However, utilization increased in June, especially among certain orthodontists doing more Invisalign treatments with teen shipments recovering faster in North America in late May and through June. As part of our recovery programs, we enable doctors to switch their braces patients into Invisalign treatment by buying their wires and brackets. This program was well received, and as a result, doctors converted approximately 2,500 wires and bracket cases to Invisalign clear aligner patients.

In the GP segment, the timing of office reopenings and case prioritization slowed the recovery in this key segment as compared to the orthodontic segment, but the GP segment is catching up. In terms of timing of the recovery in the Americas, the U.S. continues to lead, followed by Canada and then LATAM, corresponding to the timing of the pandemic-related shutdowns and reopenings in each region.

For our international business, Q2 Invisalign case volumes were down 17.2% sequentially, reflecting a significant decrease in EMEA, again due to the impact of COVID-19, partially offset by growth from APAC, which is ahead in the recovery curve, in China, Taiwan, Hong Kong and South Korea. On a year-over-year basis, international shipments were down 27.1%, reflecting a decline in EMEA, partially offset by slight growth in APAC. For EMEA, Q2 volumes were down sequentially 44% and down 46% on a year-over-year basis across all markets, with more softness in the GP channel compared to ortho. We continue to see momentum with Invisalign First for Invisalign treatment in young patients. Overall, we saw a slower deceleration in teen shipment growth than adults driven by Germany and France. The expansion markets had less decline and only accounted for 5 points of the decline in EMEA.

We also rolled out a Recovery 360 program in EMEA, with over 3,700 orthodontists enrolled, resulting in a stronger partnership perception by our customers, including an increase in our Net Promoter Score or NPS. Using a combination of our ADAPT consultants, which I'll be describing more later, and territory managers, we helped practices with their workflow and scheduling; increased our doctors' engagement with their patients through the use of education and communication tools; and provided business viability, access and sustainability materials to the doctors.

In May, over 1,400 attendees from 3 regions, 75 countries participated in our virtual Invisalign Scientific Forum in EMEA. At the end of June, we held a virtual GP Growth Summit, with over 1,300 doctors from over 42 countries who signed up to gain insights on business, dentistry, health and change management. During the summit, we launched our GP Recovery Program and received great feedback on the tools and approach we provide to support business recovery. During the quarter, we also offered over 150 online and on-demand education events, which reached over 20,000 GPs cumulatively.

In July, we launched the Invisalign Go Plus system in the U.K., Nordic and Benelux, which offers wider treatment options, enables dentists to treat more patients with confidence and can be easily integrated into a wide range of restorative treatments in their practice. For APAC, Q2 volumes were up sequentially 41%, reflecting improving trends as practices reopened and got back to business as well as COVID-19 recovery measures we implemented in China. On a year-over-year basis, APAC was up 3.4% compared to the prior year and was the only region up year-on-year. As mentioned earlier, we saw positive growth in APAC in teen shipments, led by China, reflecting a strong uptick of recovery programs.

In the GP segment, we saw growth in the noncomprehensive cases with Invisalign Go and the launch of Moderate in China in March, continuing to further demonstrate doctor confidence in treating young patients with Invisalign. Throughout the region, Japan and Taiwan, South Korea successfully managed recovery efforts and performed better than expected.

During the quarter, we reached another major milestone with our 1 millionth Invisalign patient in APAC, an athlete in modern pentathlon and fencing, who is being treated by Dr. Yokoya in Tokyo, Japan. Earlier this month, we held the Invisalign Teen Forum in China in a virtual forum broadcast to 4 venues in Beijing, Chengdu, Wuhan and Hangzhou, to approximately 8,000 participants. The forum focused on the innovations and applications of digital technology in clear aligners as well as theories and clinical practices for teen patients. The forum brought together outstanding orthodontists from leading dental colleges from approximately 30 academic institutions. We believe that our global clinical education programs are the best in the industry, and we have been even more valuable to the doctors throughout the pandemic.

We launched a new and improved digital learning environment for our doctors this year, offering a comprehensive learning platform with role-specific content for orthos, GPs and their teams. The improved functionality enables more online learning opportunities, with spotlight features for what's trending now; recommending learning paths based on doctors' experiences; and expanded categories, including digital treatment planning, comprehensive dentistry and team education. To date, over 85,000 doctors have accessed recorded lectures and completed self-paced learning modules and watched how-to videos in over 3 million sessions. Among the ortho channel, over 30,000 unique users have engaged with a digital learning site, with an additional 50,000 unique users from the GP channel. We are encouraged by the digital training utilization rates among our doctors, which has helped them continue their Invisalign treatment learning journey during the pandemic. Feedback from the participants describes the courses as engaging, providing broader reach to online events and a strong desire that Align continue to provide these virtually. They also acknowledge Align's agility in providing relevant tools and content to help them during the lockdowns. We see this as an ongoing opportunity to enhance doctor learning through direct feedback and continuous improvement.

Building on the benefit of clinical education and training, today, we announced the global launch of the Align Digital and Practice Transformation or ADAPT service. This is our first customized consulting service and support offering for doctors and was developed based on years of learnings from practices that saw strong growth in practice transformation when changing their practice to digital. Initially available to Invisalign and iTero doctors in select segments of the EMEA market and then in the U.S., the global program is now generally available in EMEA and APAC regions and will be available in the U.S. in the second half of this year. The ADAPT program is an expert and independent fee-based business consulting service offered by Align to optimize clinics, operational workflow and processes to enhance patient experience and customer and staff satisfaction, which will in turn translate into higher growth and greater efficiencies for orthodontic practices.

The goal of the ADAPT program is to support digital practice transformation for doctors and their staff. ADAPT is designed for orthodontists with approximately 200 total case starts per year, who are seeking to build their future business. Driven by a team of independent business consultants, analysts and program support specialists, ADAPT offers a customized on-site consulting service to each participating practice. The program combines a review of business operations and practice workflow data with Align's expertise and digital workflow optimization, practice support, business transformation, marketing and clinical education support.

The pilot version of the program has been successfully developed across EMEA, the United States, Asia Pacific region over the last 12 months. As a result of the ADAPT service, participating practices improved profitability up to 15% within 6 months of implementation and increased practice revenue up to 20%.

Our consumer marketing is focused on building the clear aligner category and driving demand for Invisalign treatment through a doctor's office. In Q2, we saw strong digital engagement globally, with more than 70% increase in unique visitors as well on leads. Other key metrics showed increased activity engagement with the Invisalign brand and are included in our Q2 quarterly presentation slides available on our website.

We're pleased with the strong engagement and activity we've seen on our customer platforms over the last few months and believe it speaks to the strength of the brand and consumer interest in treatment even during the challenges of the last few months. In Q3, we are coming into what is typically the strongest part of the teen season, when teens and younger kids are home for the summer break and likely to start treatment before heading back to school. And while back-to-school looks very different this year in many countries, including the United States, this is still a time when practices, especially orthodontic practices, are focusing on younger patients. Teens are the biggest and most critical part of orthodontic practices and are huge influencers and drivers of practice growth. That matters now more than ever as we partner with practices in this recovery.

One of the most important ways we partner with customers is by creating demand for Invisalign treatment and to drive teens and parents to their practices for great outcomes and great treatment experiences. We have just launched a new teen- and mom-focused consumer campaign designed to do this just that -- by reaching teens and moms where they are most engaged on digital platforms, social channels and later this year, national and cable TV channels, where they spend the most time, like Instagram, Twitch for teens; Instagram, Facebook and People.com from moms. We're going to leverage influencers that teams and kids follow and trust, like Charli D' Amelio. We recently established a new partnership with Charli, who is a really dynamic kid and accomplished dancer who has a combined following of over 90 million fans on TikTok and Instagram. She's about to become a new Invisalign patient and ambassador for our brand. She'll be sharing her treatment journey in a way that is relevant to teens across social platforms.

And our new campaign will get the heart of what -- get to the heart of what Invisalign is and what it isn't, using straightforward language that teens respond to. Our goal is to tell teens why parents -- Invisalign is more advanced and more comfortable than traditional braces, emphasizing that this is not your parents' braces. We also want to ensure that they know that doctors are front and center in the Invisalign treatment because it's time to be very candid about the benefits of digital orthodontics and Invisalign treatment specifically.

For our Systems and Services business, which now includes exocad, Q2 revenues were down 22% sequentially. We were pleased to see the momentum with Element 5D imaging systems in North America and APAC, along with sales of iTero Element 1 scanner model in China and significant sales of the Flex scanner model in EMEA. On a year-over-year basis, Systems and Services revenues were down 48%, were slightly offset by the inclusion of exocad CAD/CAM Services. Cumulative -- over 24 million orthodontic scans and 5.5 million restorative scans have been performed with iTero scanners.

For Q2, total Invisalign cases submitted with a digital scanner in the Americas increased to 86% from 77% in Q2 last year. International scans increased to 72%, up from 61% in the same quarter last year. We're pleased to see that within the Americas, 96% of cases submitted by North American orthodontists were submitted digitally. We also recently announced that the iTero Element 5D imaging system was awarded Best New Technology Solution for Dentistry in the 2020 MedTech Breakthrough Awards. The annual program honors outstanding health and medical technology products and companies. We also received an award from DentistryIQ, naming the iTero Element 5D imaging system as #10 of 14 products and services to help dentists rebound from COVID-19.

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

Thanks, Joe. Now for our Q2 financial results. Total revenue for the second quarter was $352.3 million, down 36.1% from the prior quarter and down 41.3% from the corresponding quarter a year ago. For clear aligners, Q2 revenues of $298.3 million was down 38.1% sequentially and down 39.9% year-over-year due to volume decreases across most regions driven by North America, EMEA and LATAM, partially offset by APAC. Clear aligner revenue growth was impacted unfavorably from foreign exchange of approximately $6 million or approximately 1 point year-over-year.

Q2 Invisalign ASPs were flat sequentially at $1,255 primarily due to promotional discounts and unfavorable foreign exchange, mostly offset by increased revenue from countries with higher list prices and increased other case revenues. On a year-over-year basis, Q2 Invisalign ASPs increased approximately $25 primarily reflecting price increases in all regions and additional aligner revenue, partially offset by promotional discounts and unfavorable foreign exchange.

One example of a crisis recovery program that we implemented in Q2 was a Switch Program that enabled doctors to switch wires-and-brackets patients into Invisalign clear aligners. Total Q2 Invisalign shipments of 221,900 cases were down 38.3% sequentially and down 41.2% year-over-year. Our Systems and Services revenues for the second quarter was $54 million, down 22.2% sequentially and down 48.1% year-over-year due to volume decreases across most regions, except APAC, promotional discounts and decrease in service revenue, partially offset by exocad revenue.

Moving on to gross margin. Second quarter overall gross margin was 63.7%, down 7.9 points sequentially and down 8.3 points year-over-year. On a non-GAAP basis, excluding stock-based compensation expense and amortization of intangibles related to exocad, overall gross margin was 64.4% for the second quarter, down 7.4 points sequentially and down 7.8 points year-over-year. Q2 gross margin reflects Align's decision to maintain our headcount and salaries across our operations in anticipation of a volume pickup as the COVID-19 pandemic subsides. This decision also enabled us to manufacture nasal test swabs for hospitals and PPE for use by our own employees as well as our doctors as they reopen their practices.

We also postponed iTero subscription fees for 1 month in the U.S. and parts of APAC. On a year-over-year basis, Q2 gross margin includes approximately 0.7% impact from unfavorable foreign exchange.

Clear aligner gross margin for the second quarter was 64.5%, down 8.5 points sequentially and down 9.2 points year-over-year due to lower volumes driving higher cost per case and increased freight costs from higher international shipment mix. On a year-over-year basis, the decrease in the clear aligner gross margin was partially offset by an increase in Invisalign ASPs and continued efficiency improvements. Systems and Services gross margin for the second quarter was 59.2%, down 2.6 points sequentially and 4.4 points year-over-year due to lower ASPs and lower volumes, with higher cost per unit and amortization of intangible assets related to the exocad acquisition, partially offset by lower service support costs.

Q2 operating expenses were $297.3 million, down sequentially 8.4% and up 16.2% year-over-year. The sequential decrease in operating expenses reflects lower travel spend, decreased compensation related to commissions and lower marketing and media spend, partially offset by higher exocad acquisition costs. Year-over-year, operating expenses increased by $41.5 million. This is mainly caused by the $51 million favorable litigation settlement received in Q2 2019, offset by cost control measures in Q2 of 2020. On a non-GAAP basis, operating expenses were $265.6 million, down sequentially 11.9% and down 7% year-over-year due to the reasons as described above, offset by exocad costs.

Our second quarter operating loss was $73 million, down 204.4% sequentially and down 141.4% year-over-year. Our second quarter operating margin was negative 20.7%, down 33.4 points sequentially and down 50.1 points year-over-year. The sequential decrease in operating income and operating margin are primarily attributed to lower revenues and gross margin as a result of lower volume from COVID-19 impacts. Operating margin was unfavorably impacted by approximately 0.9 points year-over-year from foreign exchange. On a year-over-year basis, the decrease in operating income and operating margin primarily reflects lower gross profit on lower volumes from the impact of COVID-19, in addition to the prior year quarter, included the $51 million favorable litigation settlement. On a non-GAAP basis, which excludes stock-based compensation, acquisition-related costs and amortization of intangibles related to exocad, operating margin for the second quarter was minus 11%, down 28.1 points sequentially and down 35.6 points year-over-year.

Interest and other income and expense net for the quarter was an expense of $0.5 million, including a $1 million hedge loss related to the exocad acquisition. Excluding the hedge loss, interest and other income and expense net was $0.5 million income on a non-GAAP basis.

With regards to the second quarter tax provision, our GAAP tax rate was 44.8%, which includes a tax benefit related to the impact of changes in the jurisdictional mix of forecasted income to GAAP profits recorded last quarter. The second quarter tax rate on a non-GAAP basis was 27.8% compared to 33.2% in prior quarter and 25.3% in the same quarter a year ago. The second quarter non-GAAP tax rate was lower than the first quarter's rate primarily due to changes in jurisdictional mix of forecasted full year results.

Second quarter net loss per diluted share was negative $0.52, down $19.73 sequentially and down $2.35 compared to prior year. On a non-GAAP basis, net loss per diluted share was negative $0.35 for the second quarter, down $1.08 sequentially and down $1.84 year-over-year.

Moving on to the balance sheet. As of June 30, 2020, cash and cash equivalents were $404.4 million, a decrease of approximately $386.3 million from the prior quarter, which is primarily due to the acquisition of exocad, partially offset by our free cash flow improvement. Of our $404.4 million of cash and cash equivalents, $160.2 million was held in the U.S. and $244.2 million was held by our international entities.

Q2 accounts receivable balance was $473.3 million, down approximately 11.2% sequentially. Our overall day sales outstanding or DSOs was 121 days, up 34 days sequentially and up 44 days as compared to Q2 of last year due to doctor office closures that resulted in slower accounts receivable collections. We expect DSOs to remain relatively high as doctors' offices return -- resume normal business activity.

Cash flow from operations for the second quarter was $59.9 million. Capital expenditures for the second quarter were $34.4 million primarily related to our continued investment in increasing the aligner capacity and facilities.

Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $25.5 million. Under our May 2018 repurchase program, we have $100 million still available for repurchase of our common stock.

Now let me turn to our outlook. Since the last time we talked, the orthodontic and dental market has continued to evolve in response to government regulations and safety guidance of local, regional and national health officials. We believe that all of our markets have bottomed out and are recovering, albeit at different rates and different times, corresponding with regional outbreaks and recoveries from COVID-19 preventative measures as we are now seeing improvements in consumer and doctor activity. Nevertheless, we are mindful that the demand environment remains uncertain. There may be additional waves of infection, and governments around the world may strategically choose to shut down cities, states and countries again, forcing people to shelter-in-place and practices to close again. Therefore, we are not providing any forward-looking guidance.

While our management team understands the markets remain fluid, we continue to focus on taking care of our employees, customers and shareholders. Specifically, for our employees, we are committed to protecting our employees and do not intend to implement furloughs or salary reductions. For our customers, we will continue to be supportive of our customers who are impacted by COVID-19 and are committed to helping slow the spread of the virus by providing PPE to doctors. We continue to release products, tools and promotions to help our doctors recover from the crisis. For our shareholders, we will continue to invest in our strategic initiatives to grow in a vastly underpenetrated market and position our company to capture growth as the market returns to normal. This includes continued investment in Align's end-to-end digital workflow as well as increased investment in the Invisalign brand and consumer demand creation, as you heard Joe describe earlier. We will continue to add resources in markets that give us a good return.

I'm very proud of what Align has accomplished while maintaining our financial discipline during this pandemic. We finished Q2 with $404.4 million in cash and cash equivalents, closed the purchase of exocad for $430 million and still delivered free cash flow of $25.5 million despite having the lowest volume Align has had in a very long time. Our cash flow reflects the strength of our business model, the strength of our balance sheet and our strong operational focus.

I'm also pleased to share that we have established a new line of credit of $300 million with a consortium of banks led by Citibank. This new line replaces our line of credit with Wells Fargo. As the market leader in clear aligners and digital dentistry, we are well positioned to continue investing strategically for the future.

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

Thanks, John. In summary, we're pleased with our progress last quarter and by the customer responses to the actions we've been taking to support their practices and patients. We have developed a careful recovery approach that accounts for the safety of our employees, our customers and their teams and their patients and are committed to helping doctors navigate this evolving environment and be successful.

One of the biggest lessons we have learned over the last few months is about the critical importance of digital technology. Align has always been a proponent of digital treatment. But think about all the things that digital platforms and virtual tools have enabled during the crisis: the people in the businesses and the customers who stayed connected, the way we were able to adapt to working from home, the rise of telehealth and teleconsults, the AI that modeled the virus patterns and informed health experts and so much more. Consider also the companies that have thrived, most are companies that are digital at their core, Amazon, apple, Zoom, DocuSign, Netflix, InstaCart, just to name a few.

The advantage of digital are much more magnified to practitioners and consumers. This became even clearer in our industry when practices were shut down for months. Over and over, we heard, "I've been able to help my Invisalign patients progress in treatment, but I had to just try to keep my patients in a holding pattern with wires and brackets." Treating orthodontic cases has amplified the clear benefits of digital technology in clear aligners. This isn't meant to sound self-serving. This pandemic has emphasized the benefits of digital technology across many facets of our lives and businesses. Our acquisition of exocad adds additional digital workflows that play in the GP space and lab space. We're all excited about the exocad team and what our investment brings to this new world of digital dentistry.

Align's digital platform has made it possible for thousands of doctors and patients to continue Invisalign treatment throughout a global disruption, thanks to the digital orthodontics of Invisalign aligners, iTero digital records and simulations, digital treatment planning and virtual monitoring and care. At Align, we've always believed that digital orthodontics is the best option for teens and adults. As you can see from a peek at our new teen campaign, we're going to feature this going forward. What's clear to us is that the momentum we're seeing in the business and in the dental and ortho practices reflects more than just one thing or one new product or tool or one program or action. It reflects continuous improvement and continued execution of our core strategy across our business in every region. We're going to continue to stay the course while remaining vigilant and agile.

We feel good about the progress that we have made. And as we continue along the recovery phase of COVID-19 crisis in many regions, we are focused on what we can control and impact. We are in a unique position to continue investing into a huge underpenetrated market to extend our lead and accelerate growth.

With that, I want to thank you again for joining our call. I look forward to updating you on our progress as the year unfolds.

Now I'll turn the call over to the operator for questions. Operator?

(Operator Instructions) Our first question comes from the line of Nathan Rich with Goldman Sachs.

Joe, you highlighted the improvement in utilization that you saw in June. I understand sort of the rationale for not providing guidance for 3Q, kind of given the situation. But can you maybe help us better understand kind of where the business stood kind of at the end of June, just so we have a better sense of sort of what the jumping-off point is as we think about the back half of the year?

Yes. I mean we saw dramatic improvement between April and June. Obviously, we were kind of in the jaws of COVID-19 with all the shutdowns and all in April. May was a little better, and then we were seeing strong momentum as we've moved into June. So I think you can look at that as a significant improvement in our business overall.

Okay. Great. And then you highlighted the 3,000 customers that were new to Invisalign this quarter. Can you maybe just talk about how that compares to maybe what you see in a typical quarter and kind of what you're doing to ensure that those doctors become kind of longer-term customers of Invisalign?

Yes. I mean that's -- I mean when you think about COVID-19 and what the business has really faced in that, 3,000 customers to us was terrific in that way, right? I mean you don't actually look for new customers coming in on that. You're looking for utilization rates on your current base. So I mean we felt -- and I felt really great about the 3,000, and obviously, that got stronger as the quarter went on.

Our next question comes from the line of Elizabeth Anderson with Evercore.

Can you talk about -- do you think Asia is a good path to think about in terms of the recovery? Or do you see sort of significant differences in that geography that would -- that should prevent us from extrapolating?

Yes. I think it's -- Asia is so diverse in itself. It's hard just to extrapolate Asia, Elizabeth. I mean obviously, China was kind of first out of this thing. But China has had a bumpy road also with the recent issues in Shanghai and different areas. So every one of these regions has its own unique footprint and its own unique model in the sense of how they've dealt with the virus. But I don't -- obviously, it's in our transcript here, but we see significant improvement in really every region around the world.

Okay. And I think you commented also in terms of your cost structure, in terms of not furloughing or laying off employees. Is there any other major changes to the cost structure in like the third quarter, maybe just in the back half of the year generally, that we should think about as we're updating our models?

Hi, Elizabeth. This is John. No, we continue to believe in our model. It's a vastly underpenetrated market. We're going to make strategic investments to be able to grow in that market. Whether it's R&D, sales, marketing, we're going to continue to make those investments where we see a return.

Our next question comes from the line of Steve Beuchaw with Wolfe Research.

I wonder, first, Joe, could you give us any more color on the breadth of uptake of some of the new digital tools that you referred to and the extent to which practices are making these changes and converting over to something of a "virtual” experience. I mean is this 2% of your customer base? Or is it a lot bigger than that? Any color is really, really helpful there.

Steve, when we talk about a digital platform, you really start with iTero on the front end, right? Even in a downturn like we saw with COVID, in the capital equipment business, iTero was -- showed up well and then particularly with 5D in different areas. But that's the front end of this whole piece that we talk about on a digital platform. Then you move through our, obviously, our treatment planning and all. But what we added, when you think about the whole breadth of a global digital platform, we added virtual care that you knew about, and we came out so that doctors could talk to their patients remotely and be able to track treatment. And actually, we had several doctors actually close cases remotely with our virtual treatment capability. And that really extended the effectiveness of the doctors and the effectiveness of the digital treatment in that sense, too.

There's a lot of imaging that we do now in our treatment planning, in all too, and so it's not just tracking patients. It's also having images and different things that you can share with patients in the sense of where they should be around treatment in those types of areas. So it's a broad kind of a digital platform we're talking about. I mean we had tens of thousands of people on our virtual care platform as we roll that thing out in a matter of 30 days and then all around the world. And we'll continue to update that platform with AI. We'll make it much more predictive so that doctors don't have to look at every patient. We have a strong road map in that sense too, Steve. So it's just -- it's the breadth of a digital platform and how it covers everything, from starting with a consumer, turning them into a patient, from iTero all the way to the back end and being able to monitor and treat those patients.

Got it. And just one more for me. What I'm trying to get to here is some perspective on what the underlying trend is. And I appreciate that you don't want to talk about the exit rate leaving 2Q and you're not going to give guidance for 3Q. But what if I said, let's imagine a scenario where we don't have another wave of lockdowns, where practices are operating in what is admittedly a challenging environment, but we don't have any sort of government level or professional society level edict that says, "Hey, you got to stop doing cases or stop engaging in practices." If that's the operating environment we're in, I mean, can you grow in 3Q or the back half of the year? Can you speak at all to what the business would like -- look like in that situation if we don't get more lockdowns?

Hey, Steve, I'd say we're incredibly optimistic in the scenario that you painted, where we don't see another COVID shutdown in a major market that lasts a long period of time. Based on the recoveries that we've seen in the latter half of May and then the strong recovery in June, we feel really good about the future of this business in the third and fourth quarter and beyond. John, anything to add?

Yes, that covers it.

Our next question comes from the line of Jon Block with Stifel.

Hey, Joe, hopefully you can hear me okay.

Yes, we do.

I want -- in somewhat of a similar line of questioning, just sort of inundated with e-mails about sort of trends, so let me try to frame it this way. I think it was Slide 8. You guys said increase in North American utilization for June. I think first part of the question, I just want to be clear, that was for both orthos and GPs? I thought the slide was hard to tease that out.

And then if that's the case, Joe, was that pure? In other words, I'm getting questions on practices reopened in May. And obviously, there's a lot of backlog. So you're saying North America grew in June. But was it pure? Was it a benefit of backlog? And maybe if you can comment if that growth continued into July would be very helpful for North America.

Hey, Jon. This is John. Some of that is -- some of it's backlog and some of it's additional growth that they would have. So the utilization has improved as those doctors have come back to work and they're seeing patients. And that's true in North America, and that's true in all countries where we see those doctors' offices opening up. So it's hard to tell how much is backlog versus how much is more run rate going forward, but we're seeing a combination of them both.

And the second part of that question, John, while I've got you, that increase, or the year-over-year growth in North America, does that continue into the month of July?

We have got momentum and continue to be strong, Jon.

Okay. Fantastic. And the second part of the question, I'll go from very near term, next month, to sort of 18 months out, 24 months out. John, just as we think about the model longer term, I think The Street has you guys, from a 2021 perspective, revenue is higher in '21 than '19. Let's throw away 2020 for a whole host of reasons. But let's look '21 versus '19. Structurally, if revs are higher by x percent, should the margin structure also be higher? I look back to '19, you had some one-timers in legal, et cetera. You reset the base ex stock-based comp. But if that were the case, I'm just trying to figure out, do you think the margin profile would also follow when we look out at the earnings power?

Yes. Thanks, Jon. So as we look at investing, our long -- we believe in our long-term model, our long-term growth model, and that has upped margin at the 25-plus percent. So that's how we look to keep investing. As you get some benefit through the expansion and other things, you might get some leverage as you go, but we believe in that long-term model, and that's how we look forward on our investments.

Our next question comes from the line of Ravi Misra with Berenberg Capital Markets.

So just, first, I wanted to ask, you gave us some sort of inclination about what the COVID impact was in Q1. Anything that you can provide color-wise on that for Q2?

Yes. I think, Ravi, what we could tell you is, I mean, obviously, April was tough as we came out of March into April. We saw some stabilization in May and then good progress in June overall. So just a complete kind of beginning and end to that quarter overall. And like we just mentioned to Jon, is that that's continued into July also.

Okay. I guess it's going to be hard to get a dollar figure out of you guys. How about just on ADAPT, I'm curious about the business model here when you're talking about kind of increase in utilization. Can you help us think about how you plan on monetizing that? Is there some sort of profit-sharing or revenue-sharing that it comes to the increased caseload? And when does that kind of start to kind of flow through the P&L? Should we expect this as a 2021 event? Or when -- is this a small program that shouldn't really have a material impact to revenue?

Well, Ravi, this is John. So you're talking about the ADAPT program that we spoke about?

Yes. Yes.

Look, we believe in the digital transformation, and this is the way we've seen it in testing that we've done to be able to help practices be more efficient, moving from analog to digital. We believe in that platform and believe in that process. And these are initiatives that we'll take to help with that. It will be a service for a fee. And those doctors, those practices, will see the benefit. We've seen it time after time on those practices that they've seen improvement in their efficiency and profitability, and we want to be able to provide that service.

Kind of an upfront payment?

Well, I think the way we bill for that will be probably different by region. But it is -- it's not an easy transition for practitioners to go from analog to digital. And we've known that it's been one of the frictional points of customers wanting to, obviously, to go digital from a dentistry standpoint, orthodontics standpoint. So we've learned a lot, and we're using those learnings for customers that reach out and really want to make a commitment for a digital transition. And we know we can help. We piloted it last year in every region, and we roll it out full force now.

Our next question comes from the line of Steven Valiquette with Barclays.

So you guys mentioned the -- that braces buyback program, which has some success with 2,500 patients switches. I guess I was curious whether that program is something you expect to turn into substantially larger numbers in the remainder of 2020. Or is that going to be maybe a smaller part of the overall picture? Also, did you do that just in North America? Or are you planning to do that in most regions?

We -- yes, we have been doing that program in different countries in Asia for a while. So I mean we knew how to implement it. We thought it was a good time in North America, obviously, because of some doctors being trapped with their wires-and-brackets patients and their inability to help them. So will we continue that? We'll continue it through this quarter. If we -- whether we continue it or not will be really based on what consumer needs are and what doctors' needs are. But we'll make that decision when the time comes. But we're just trying to help in the moment in the sense of doctors being able to control their practices and help their patients.

Okay. Finally, my preteen daughter was wondering if you can say hi to Charli D' Amelio for her when you get a chance.

John and Shirley know her better than I do, but they will put a good word in for her, okay?

Our next question comes from the line of Matthew O'Brien with Piper Sandler.

Just for starters, just as we think about the recovery here in Q2, and I look at the adult number on a worldwide basis, looks like it was down 45, teen was down 32, per my math. But obviously, in the U.S. or North America, that number was much lower. So with the higher unemployment rate, with more people kind of staying at home, how does the adult market in the U.S. recover during the back half of the year?

Well, I think it's honestly hard to call that. I mean obviously, what you're pointing out, are teens are -- and this is the seasonal time for teens, and we know we'll get a strong signal here in the third quarter. But we're optimistic about adults. I think there's a lot of -- just talking to different people in the marketplace, and you know this too, there seems to be a lot of people with time on their hands, wanting to do elective procedures that they haven't had time to do before. And we're picking this up all around the country. So unlike 2008, where a lot of things kind of folded up because people were worried about their personal wealth, even though people are sheltering in place or socially distancing, and especially our demographic that we work through right now, seems to have more time on their hands too to be able to pursue these kinds of things. So we're relatively optimistic on the adult segment going forward, third, fourth quarter also.

Okay. And then the follow-up question, Joe, just to your point about all this enthusiasm that you're seeing going forward, and you're holding SG&A higher, gross margins are taking a hit right now because you're keeping folks in place. You've got all this optimism. The doc training number was down a little bit, but obviously, that's COVID-related. So can you just kind of illuminate a little bit more where all this enthusiasm and optimism comes from as we start thinking beyond this year? Were your touch points on the doc side in terms of virtual, plus in-person, way higher? I guess what everybody is trying to get their hands on, because of COVID, do you think this could accelerate the adoption of clear aligners versus traditional brackets and wires, given all the benefits of less office visits, et cetera?

Matt, you asked the million-dollar question, right, or the billion-dollar question, all right? We think -- I mean obviously, we're -- our story has always been we're way underpenetrated in this marketplace based on what consumers want, based on what our technology can do from a clinical standpoint, the consumer experience that's going on. I think we all think that COVID has really shined a light on this, a much less invasive treatment, much easier in the sense from a patient standpoint, much better workflow for doctors to keep track of their patients.

So we think, if anything, this is the time that this could happen. We're not telling you that this is the tipping point on the entire thing, but we certainly say this isn't hurting our story. And it's certainly being supported out there, not just in the United States, but broadly around the world.

Our next question comes from the line of John Kreger with William Blair.

Just following up on Matt's question, just if you could give us your sense about how you view the attitude of the consumer right now, they had this sort of forced deferral as practices shut down. But now the practices are reopened, what is your sense about the willingness of the consumer to sort of step up and make this purchase? Does it feel like business is normal or still very much kind of in a wait-and-see mode?

Well, it feels like as we're in a teen season, we've talked about this before, John, that this is -- we call these elective procedures, but teens have a certain clinical window that they fit into, and it's always a time frame with parents. And we're very optimistic that, that kind of teen focus and growth will continue in the third quarter, in China too, in the United States and different places. But also, this is a different -- John, this is different than 2008, from what we feel, is consumers seem to have more optimism in the sense of the economy. You see it in the stock market right now. We all see it there. And they have more time on their hands with many people not working from offices.

And so we're optimistic again that there's money out there, and there's a willingness with patients to pursue these elective treatments. And I think you also have to look at the aesthetic markets from a surgical standpoint and see what's going on there, too. It seems to support that kind of an idea also. So it's a -- this is different than what we've seen in past recessions, for sure. I'm not a registered economist. Neither is John. We're good at Invisalign in this business, and that's where we can only just reiterate to you the signals we're seeing in the marketplace. But right now, as this comes back, we know that all dental offices aren't completely up to speed, but that's not necessarily based on demand. That's based on the way that they have to actually pace these patients through their practices to make sure that they keep their staff safe and they keep these patients safe, too.

Great. Great. And then one last one. You mentioned being still very much committed to innovation. Can you give us an update there, how is mandibular advancement being adopted? And any update on palate expansion?

Yes. It's hard to take the second quarter on MA and give you a trend because it was a pretty hard hit overall, obviously, from -- you saw from our numbers. I'd say, overall, mandibular advancement continues to go well. We pair it with our teen first product, Invisalign First product line, which is doing extremely well also. And so what you really find around the world, John, is you find some docs that are just glued to mandibular advancement. They love it. They use it every day. Other ones are trying it out, that they've had it on some patients and they're watching through it. On the First product line, they kind of combine that together. And so we see a significant increase in what I call our clinical penetration because we can do those kinds of cases that we couldn't really have done really 2 years ago at all.

So I'd say the way to look at that is our teen first product, Invisalign First, being the most uptake and the fastest uptake, with mandibular advancement right behind it.

Great. And any update on palate expansion?

We have all the protocols. We know how to do it. We're trying to find a manufacturing capability that can scale with what we feel the needs are out there. That sounds trivial. But in a business like this where you have an incredible amount of volume you have to put through, we still have some work to do in that scale-up mode.

Our next question comes from the line of Jeff Johnson with Baird.

So a couple of clarifying questions here, if I could. One, I just want to go back to Jon Block's question on the North American number. It depends on how you read the sentence in your slide deck. Was North America up year-over-year in June? And then if I take your April, May, June comments, and May a little bit better, but June a significant better, it seems like June, on a kind of global revenue basis, had to have been down only about 10% to 20% or so. I don't know if you'll talk to that at all. But when I look at The Street down 20% in the 3Q, it seems like you should be pretty comfortable with The Street kind of at the $486 million revenue number, where it's at right now. So just any help you can give us, again, as we want to make sure we get kind of that 3Q at least ballpark accurate.

Yes. Jeff, it's up year-over-year, not just quarter -- not yes, from a June standpoint, not just quarter-over-quarter, but June year-over-year. So it is a pretty strong signal.

Yes. North America was up year-over-year in June.

Yes.

Okay. And The Street being down 20% in the third quarter from a global revenue perspective, it sounds like your June kind of globally was probably down less than that 20%, if I connect the April, May, June comments. So just kind of your comfort at that $486 million number where The Street vet in 3Q, I know you're not guiding, but I would assume you don't have too many concerns on that number.

We'll give you an A for trying. That was a good one, Jeff.

Yes, it's a good one, Jeff. No, we're not guiding, but we try to give you as much information. I know people are doing surveys and other work as well and you can help triangulate around it. But I just don't want to give out -- for the things that we've talked about, I don't want to give out future guidance.

And Jeff, we're not being cute here. It's just -- it's hard to read signal through noise right now, okay? And that's what we're conveying to you, okay?

Totally understood. Last question, just on the virtual tools. As some docs have come back, we're talking to them, they're saying, "Hey, I have had patients that I haven't seen in 3 months. They're still progressing well. They're maybe going to go to a Q3 month instead of an every 2-month follow-up schedule with their clear aligner patients." And that -- I mean it seems like, to me, we're getting chair time down on even some of these really messed up teen cases to 3 hours, 4 hours, virtual tools, maybe take that even lower over time. Just talk to the efficiencies and throughput advantages that's going to have versus braces. Isn't that going to be the real driver even more so than all this digital and what have you? It's just the efficiency improvements are getting so good here in clear aligners.

Yes. I'd say when you say all that digital, it's just that's what allows them to drive the efficiency you're talking about, Jeff. So when you have these kind of digital tools, they will allow you to monitor patients; to communicate with patients one-on-one; or any kind of AI, they can tell a patient if they're off track or on track. And we know that interaction also encourages patients with the most important variable in this line of treatment is compliance, making sure that they have their aligners intact. And if doctors are watching and we're keeping up in that sense, it helps also.

And so what doctors find out over time is that they can -- they don't have to see these patients like every 3 weeks, like they do with wires and brackets. They don't have the, obviously, the PPE and everything else associated with their staff and all working through these patients. And if a patient doesn't have to come in from a clear aligner standpoint, you either give them all their aligners upfront or you give them more aligners to allow them to continue their treatment without having an actual doctor's visit. So they're just tools that -- they're kind of tools that we use now and from a business standpoint that we have, but it is applied from the clinical standpoint to keep tracking of patients and to allow doctors to be more productive, for sure.

Our final question comes from the line of Richard Newitter with SVB Leerink.

I was just curious, the Switch Program that you guys are -- launched this quarter, has that been more effective in teens or adults? And then I have a follow-up.

Yes. Rich, this is John. It's a program, as Joe had said, that we had -- we've had in Japan and other places as well. It's something that our doctors and many of their patients who were stuck in treatment and teeth were moving wanted to make a switch to this. It's not necessarily a teen versus adult. It's just patients who want to progress with treatment and didn't want the uncertainty of the current environment that they're in or future environment and went to their doctors and the doctors wanted to be able to switch them over, and we've made it so that they could do so.

I think, Rich, what you're hearing from both of us is, in this case, we're not quite sure exactly how many teens and adults were on the Switch Program. It's a good question. But you got to guess, statistically, the orthodontic market in the United States is 80% teens and 20% adults. So you can guess the majority of these switches were probably teens. But that's -- we're guessing, but we can get that data back to you.

Yes. And the bigger question there that I'm trying to get at, with some of the things that you're talking about in a post-COVID world and all of the benefits that now kind of pile onto aligners versus wires and brackets, I was trying to ask the question through the Switch Program to see if it -- to test my hypothesis. But it would seem that teens and the conversion with -- the conversation with adults and being able to get teens and the parents over the finish line, you have an added level of sell now. Is that what you're actually seeing in the marketplace? And is it fair to say that maybe COVID has resulted in the much-anticipated inflection point for teens? Is that fair?

Well, it's fair that it's helped. I can't tell you that -- the inflection points here, but we certainly see a lot of uptake and interest in a digital workflow and our digital methodology in light of COVID-19. And our experience has been, when doctors can really convert most of their practice, and that's why ADAPT is, once you get over 50%, 60% digital, your practice has changed significantly. And consumers like it better, doctors tend to like it better, like we talked about, you have higher margin and also a dramatic increase, like 20% increase from a revenue standpoint. So yes, this is certainly -- COVID has certainly been a push for this.

We're cautious. We don't want to talk about a crisis that's just terrible for people actually enhancing our business. But the fact is, it does promote a workflow and a capability that's much more convenient at this point in time given the COVID threat.

Our next question comes from the line of Michael Ryskin with Bank of America.

I have a couple of quick ones. In your prepared remarks, Joe and John, you've obviously talked about third quarter, how that's typically the strongest part of the teen season. Typically, you see the nice little bolus in the summer as everyone kind of stays home. I'm just curious, with the strength you saw in 2Q, do you think there could have been any sort of pull-forward in teens in the quarter, just looking at it for the last couple of months, everyone's in home anyway? So any expectations of maybe a little bit of a lull in 3Q? Or should we expect further pickup from current levels?

I think, Michael, when you ask a question like that and you think of our business and how broad it is and global it is today, is there's just a lot of mitigating factors, right? So we can't tell you if there's a backlog of patients that have come in sooner or whatever. We just know it's teen season in the United States and as Canada and -- I mean, I'm sorry, in China, Canada also. And we're -- June was indicative of a good increase in the sense of teens looking for treatment, and we think that will continue.

Great. And then another quick one. I realize you don't want to talk about exit run rate or anything like that. But I think a lot of the assumptions go-forward are that there are no further lockdowns, there are no further sort of quarantine measures implemented. But I just want to ask, in recent weeks, with what's going on at Sunbelt, Texas, California, Florida, have you seen any fluctuation in volumes, any early indications there? I guess I'm kind of asking, on the one hand, you have full recovery of the economy, on the other hand, you have full lockdown, what if we're somewhere in the middle? Are you seeing any indications there?

I would say no.

Mike, I think we look at -- every area is different. We're seeing a different pace of recovery for the various regions and locations and practices. Some practices, they're open, but then somebody within the practice develops COVID and it shuts down. So it varies across. We're doing everything we can to make sure that those doctors have PPE, have promotions, have things in place to be able to help drive volume, but it's very dependent on those specific areas, not just in the U.S., but we're seeing this across the other regions as well.

Mike, like -- it's back to Joe again, too. I just want you to know we have great enthusiasm for teens, and no matter where it is around the world, but we can't tell you if there's a surge of teen patients based on a lot of teens not being in school. We can't tell you if it's a backlog or whatever. But we can tell you we're enthusiastic about the season and that June was a good indication that it's heading in the right direction.

Great. Can I ask a quick clarification? Okay. This has come up a dozen times in the past 5 minutes. Your response to Jeff's question on June, did you mean absolute case volume is up in North America in June or utilization is up in June?

Utilization.

Utilization.

Our final question comes from the line of Brandon Couillard with Jefferies.

Joe or John, just a question on China. If you could speak to growth specifically in 2Q. I know it was still down year-over-year. And were there any other regions kind of outside the 3 that you listed, Japan, South Korea and Taiwan, that were ahead of kind of your internal expectations?

We -- no, I can't say that there was really. I mean we didn't talk a lot specifically about that. But Japan, Taiwan and Korea were exceptions because there were hardly a blip in the sense of what we saw in how they were affected with COVID. But really, every other country in APAC and most countries around the world, we said it fit for the expansion markets in Asia, even obviously, COVID was a big impact on them. I hope that answers your question.

I think so. John, any chance you could share with us the exocad contribution in the second quarter results? Or should we just wait for the Q for that?

Yes. I think we talked about it at the end in the Scanner and Services segment that we have, and I think we would wait for the Q on that. But it's -- we acquired and it's part of our business, and we'll put more details into the Q.

Well, I think that's the last question. So thank you, everyone, for joining us today. This concludes our conference call. If you have any follow-up questions, please follow up with Investor Relations. Have a great day.