Align Technology , Inc. (NASDAQ:ALGN) delivered a solid financial performance in the second quarter of 2024, with total revenues reaching $1,028.5 million, marking a 3.1% increase from the previous quarter and a 2.6% rise year-over-year.
The company's growth was primarily driven by a significant uptick in Clear Aligner volumes, which saw a 6.2% sequential increase and a 3.2% rise compared to the same period last year. This growth was attributed to a higher number of adult patients and robust teen case starts.
Despite these positive volume trends, Clear Aligner average selling prices (ASPs) were lower than expected, affected by unfavorable foreign exchange rates and a shift in product mix.
Key Takeaways
- Align Technology's Q2 revenues were $1,028.5 million, up from the previous quarter and year-over-year.
- Clear Aligner volumes grew, but ASPs were impacted by foreign exchange and product mix.
- Non-GAAP operating margin improved sequentially and year-over-year to 22.3%.
- Imaging Systems and CAD/CAM Services revenues saw strong growth, driven by the iTero Lumina scanner.
- The company is actively investing in marketing and introduced the iTero design suite for 3D printing.
- Align Technology made a $75 million equity investment in Heartland Dental.
- Q3 worldwide revenue is projected between $980 million to $1 billion, with total revenue growth for fiscal 2024 expected to be up 4% to 6%.
Company Outlook
- Align Technology forecasts Q3 worldwide revenues to range from $980 million to $1 billion.
- Fiscal 2024 total revenue growth is anticipated to be between 4% to 6% year-over-year.
- The commercial launch of iTero Lumina with restorative capabilities is now expected in Q1 2025.
- GAAP operating margin for fiscal 2024 is projected to be slightly below 2023, while non-GAAP operating margin should be above 2023.
- Capital expenditures for fiscal 2024 are estimated to be around $100 million.
Bearish Highlights
- Clear Aligner ASPs have declined due to product mix changes and negative foreign exchange impacts.
- The gross margin for Q2 was slightly down year-over-year at 70.3%.
- Clear Aligner volume and ASPs are expected to decrease sequentially in Q3 due to seasonality and foreign exchange issues.
Bullish Highlights
- Clear Aligner volumes showed a healthy increase both sequentially and year-over-year.
- The adoption of iTero Lumina scanner contributed to a rise in Imaging Systems and CAD/CAM Services revenues.
- The company is expanding its market reach through various initiatives like the Advantage program and a pilot program with Costco (NASDAQ:COST).
Misses
- Despite overall revenue growth, Clear Aligner revenues were flat year-over-year.
- The anticipated launch of the iTero Lumina restorative product has been delayed until Q1 2025 for additional testing.
Q&A Highlights
- Erin Wright from Morgan Stanley (NYSE:MS) inquired about adult case volume dynamics and the macro environment.
- Joe Hogan of Align Technology expects market stability overall, though exchange rates may fluctuate.
- John Morici reported growth in the adult segment, crediting the company's expanding general practitioners business.
- Joe Hogan described the China market as challenging, particularly in lower-tier cities, but remains optimistic about the upcoming quarter.
Align Technology's second-quarter earnings call underscored the company's resilience in the face of market challenges and its commitment to digital innovation in orthodontic treatment. The company's strategic investments and initiatives aimed at expanding market reach and improving doctor productivity continue to shape its growth trajectory.
With a clear focus on driving demand for its Invisalign clear aligners and capitalizing on the adoption of its advanced scanning technology, Align Technology is poised to maintain its momentum in the dynamic dental industry.
InvestingPro Insights
Align Technology, Inc. (ALGN) has demonstrated a robust financial performance in the recent quarter, which is also reflected in some of the real-time data and InvestingPro Tips that offer deeper insights into the company's financial health and strategic direction. Here are key metrics and tips:
InvestingPro Data:
- The company's Market Cap stands at $18.43 billion USD, showcasing its significant presence in the market.
- With a P/E Ratio of 40.56 and an adjusted P/E Ratio for the last twelve months as of Q1 2024 at 39.07, the company is trading at a high earnings multiple.
- Revenue growth for the last twelve months as of Q1 2024 was 5.72%, indicating a steady increase in the company's sales.
InvestingPro Tips:
- Align Technology boasts a perfect Piotroski Score of 9, suggesting it is in top financial health.
- The management's aggressive share buyback strategy is a positive sign, often indicating the leadership's confidence in the company's future prospects.
For readers looking to dive deeper into Align Technology's financials and strategic outlook, there are 11 additional InvestingPro Tips available, including insights on earnings revisions by analysts and the company's debt level. To explore these further, visit https://www.investing.com/pro/ALGN and consider using the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
Full transcript - Align Technology (ALGN) Q2 2024:
Operator: Greetings. Welcome to the Align Technology Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Shirley Stacy with Align Technology. You may begin.
Shirley Stacy: Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO, and John Morici, CFO. We issued second quarter 2024 financial results today via Business Wire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately 1 month. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website 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 financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our second quarter 2024 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I would like to turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?
Joe Hogan: Thanks, Shirley. Good afternoon, and thanks for joining us on our call today. I'll provide an overview of our second quarter results and discuss a few highlights from our two operating segments, System and Services and Clear Aligners. John will provide more detail on our Q2 financial performance and comment on our views for the third quarter and for 2024 in total. Following that, I'll come back and summarize a few key points and open the call to questions. Overall, I’m pleased to report solid second quarter results. Total Q2 '24 revenues of $1,028.5 million were up 3.1% sequentially and 2.6% year-over-year, reflecting growth in both Clear Aligner volumes and Imaging Systems and CAD/CAM Services revenues. Q2 '24 total revenues were unfavorably impacted by foreign exchange of approximately $11.6 million or 1.1% sequentially and unfavorably impacted by approximately $18.1 million or 1.7% year-over-year. For Clear Aligners, Q2 '24 volumes increased 6.2% sequentially and 3.2% year-over-year, driven by growth from adult patients, and strong teen case starts across the regions, led by strength in Asia Pacific, EEMA, and Latin America. Our Q2 results also reflect a record number of doctors submitting cases, and record doctors shipped to for the quarter. Q2 '24 Clear Aligner ASPs were down sequentially and lower than anticipated in our second quarter outlook, due in part to greater impact of unfavorable foreign exchange across multiple currencies, especially the Japanese yen, Euro, and Brazilian real, as well as discounts, and product mix shift to lower ASP products. As a result, total Q2 revenues were slightly below the expected range for our Q2 quarterly revenues. Notwithstanding these factors, non-GAAP operating margin for the second quarter was 22.3%, up 2.5 points sequentially, and up 1.0 point year-over-year. For Imaging Systems and CAD/CAM Services, Q2 '24 revenues increased 9.2% sequentially and 16.1% year-over-year reflecting continued adoption of our next-generation iTero Lumina scanner, which made up the majority of our equipment sales, iTero Lumina wand upgrades, iTero Element scanner trade-ins, as well as increased iTero scanner leases. For Q2 '24, adult patient case starts were up 5% sequentially and 1% year-over-year, reflecting our highest number of adult shipments in 8 quarters, driven by strength in the GP channel, led by North America and APAC dentists. In teen and growing kids’ segment, over 216,000 teens and younger patients started treatment with Invisalign clear aligners during the second quarter, an increase of 8.8% sequentially and up 8% year-over-year, reflecting growth across regions, especially from Invisalign First in the EMEA and APAC regions. In Q2, the number of doctors submitting teen or younger patient case starts was up 8% year-over-year, led by continued strength from doctors treating young kids also known as "growing patients. The response from doctors and their patients to Invisalign Palatal Expander System continues to be positive. We believe that Invisalign Palatal Expander System is a better option for expanding a growing patient's narrow palate compared to traditional appliances used today. The Invisalign Palatal Expander System is currently available in the U.S., Canada, Australia, and New Zealand. We expect it to be available in other markets pending future applicable regulatory approval. Non-Case revenues include our Vivera retainers, which include retention aligners ordered through our Doctor Subscription Program or DSP, as well as clinical training and education accessories in eCommerce. Q2 Non-Case revenues were up 3.5% sequentially and up 5.1% year-over-year, primarily due to continued growth in retainers and DSP. For Q2, total Clear Aligner shipments include approximately 25,000 Invisalign DSP touchup cases, a record high quarter of 37% year-over-year. DSP continues to drive growth and is currently available in North America and certain EMEA countries. During the quarter, we extended DSP into more countries in Europe and we anticipate expanding into additional markets going forward. DSP is also now available in 14 stage touch up aligner offering across all markets where it's available. As a result, Touch-Up cases increased significantly in Q2. Q2 '24 Clear Aligner volume and DSO customers increased sequentially year-over-year reflecting growth across all regions. DSOs represent a large and growing opportunity to help drive adoption of digital technology across the dental industry. We have well-established relationships in many DSOs globally that recognize the benefits of digital workflows enabled by our portfolio of products and services that make up the digital platform. Including increased practice efficiency and profitability, as well as delivering a better patient experience from shorter cycle times and customer proximity. Smile Docs and Heartland Dental are two of our largest DSO partners. We are continuously exploring collaboration with the DSOs that can further the adoption of digital dentistry. Each DSO has a different strategy and business model, and our focus is working and encouraging DSOs aligned with our vision strategy and business model goals. Today, Invisalign is the most recognized orthodontic plan globally and Invisalign, Clear Aligner treatment is faster and more effective than traditional metal braces. Yet the underlying market opportunity to remains huge and untapped. We continue to invest in consumer marketing and demand creation initiatives that raise awareness and drive potential patients to Invisalign practices globally. In Q2, we had more than 17 billion impressions in 50 million visitors to our websites globally. Below are additional highlights from Q2 and more information is available in our Q2 '24 earnings webcast slides. To increase awareness and educate young adults, parents and teens about the benefits of Invisalign brand, we continue to invest and create campaigns in social media platforms such as TikTok, Instagram, U2, Snapchat, WeChat, [indiscernible] across the markets. Reaching young adults as well as teens and their parents also requires the right engagement through Invisalign Influencers and creator-centric campaign. In the Americas, our influence in social media campaigns, featured Olympic athletes such as Rebeca Andrade from Brazil, Andre De Grasse from Canada, Jordan Chiles from the United States and Paralympic athlete Lizzi Smith from the United States. To bolster T demand -- teen demand, we launched new activations with teen high school sports, social media platform, Over Time, including several programs focused on showcasing elite high school athletes across boys' football, girls' basketball, girls' soccer. We highlighted why they chose to transform their smile with Invisalign aligners and showcase their results. In the EMEA region, we partnered with influencers to reach consumers across social media platforms, including TikTok and Meta (NASDAQ:META), and launched our global consumer campaigns for teens and parents. In APAC, we continue to invest in consumer advertising across the region and expanded our reach in Japan and India via meta and YouTube and partner with key social media influencers. Finally, adoption of my Invisalign consumer patient app continued to increase with over 4 million downloads to date and over 384,000 monthly active users and 8% year-over-year increase. Usage of our other digital tools also continued to increase. ClinCheck live update was used by almost 50,000 doctors on more than 692,000 cases, reducing time spent and modifying treatment plans by an average of 16.3%. Invisalign practice app is increasing in its adoption with 85,000 doctors who actively are using the app and 5.9 million photographs were uploaded in Q2 via the Invisalign practice app. Year-over-year growth in Q2 system and services revenue were up 16.1%, reflect higher scanner ASPs and non-system revenues driven by a terra luminal wand upgrades increased service revenues in a larger basis, scanner sold. On a sequential basis, Q2 systems and services revenues were up 9.2%, reflecting higher scanner volumes, higher scanner ASPs and higher non-system revenues driven by a iTero Lumina terra wand luminal wand upgrades. The iTero Lumina is new multi direct capture technology replaces the confocal imaging technology in earlier models and has a 3x wider field of capture and a 50% smaller and 45% lighter wand, delivering faster scanning speed, higher accuracy, superior visualization, and a more comfortable scanning experience. Lumina is currently available with orthodontic workflows as a new standalone scanner or as a wand upgrade from iTera element 5D Plus scanner. During the second quarter, we had a record number of competitive trade-ins demonstrating the continued success of the iTera Luminous Scanner in the marketplace. We're also seeing a halo effect with Invisalign scans. We're pleased to see more doctors coming into the digital ecosystem with an increase in first time Invisalign case submitters as well as return of lapse submitters. Overall, Q2 we're very pleased with the continued uptake of iTero Lumina Scanner with ortho workflow and response from customers. We're looking forward to a limited market release for the restorative software on Lumina in Q4, followed by full commercialization in Q1 '25. Today we introduced the iTero design suite, offering doctors an intuitive way to facilitate designs for 3D printing of models, bite splints, and restore restorations and practice. This software innovation is designed to help doctors increase their practice efficiencies and elevate patient experiences by shortening the time to treatment through an intuitive way to design for in-practice 3D printing. The Align digital platform provides an innovative portfolio of customer-focused technologies that enable seamless end-to-end workflows for dental professionals. iTero Design Suite is now available through an early access program. Doctors using an iTero scanner can submit their interest via their scanner, or my iTero portal. Software is expected to be available later this year in selected markets. With that, I'll turn it over to John.
John Morici: Thanks, Joe. Now for our Q2 financial results. Total revenues for the second quarter were $1,028.5 million, up 3.1% from the prior quarter and up 2.6% from the corresponding quarter a year ago. On a constant currency basis, Q2 '24 revenues were impacted by unfavorable foreign exchange of approximately $11.6 million or approximately 1.1% sequentially and were unfavorably impacted by approximately $18.1 million year-over-year or approximately 1.7%. For clear aligners, Q2 revenues of $831.7 million were up 1.8% sequentially, primarily from higher volumes, partially offset by lower ASPs. On a year-over-year basis, Q2 Clear Aligner revenues were flat, primarily due to higher discounts. A product mix shift to lower ASP products and the unfavorable impact from foreign exchange offset by lower net revenue deferrals, higher volumes and price increases. Q2 '24, Clear Aligner revenues were unfavorably impacted by foreign exchange of approximately $9.5 million or approximately 1.1% sequentially. On a year-over-year basis, Clear Aligner revenues were unfavorably impacted by foreign exchange of approximately $14.7 million or approximately 1.7%. For Q2 Invisalign ASPs for comprehensive treatment were down sequentially and year-over-year. On a sequential basis, the decline in a SP primarily reflects higher discounts, a product mix shift to lower a SP products and the unfavorable impact of foreign exchange. On a year-over-year basis, the decline in comprehensive ASPs primarily reflects higher discounts, a product mix shift to lower ASP products and the unfavorable impact from foreign exchange, mostly offset by lower net revenue deferrals and price increases. For Q2, Invisalign ASPs for non comprehensive treatment were down sequentially and year-over-year. On a sequential basis, the decline in ASPs reflects the unfavorable impact from foreign exchange, higher net revenue deferrals, and a product mix shift to lower ASP products partially offset by price increases. On a year-over-year basis, the decrease in non-comprehensive ASPs reflects higher discounts, a product mix shift to lower ASP products, the unfavorable impact of foreign exchange and the unfavorable impact of a price adjustment in the UK to make the recently mandatory application of VAT to our liners cost neutral to customers. Our Invisalign comprehensive three and three product and anticipate adoption will continue to increase is available in North America, EMEA and its certain markets across APAC. We are pleased with the continued adoption of the Invisalign comprehensive [3-in-3] product and anticipate an adoption will continue to increase. Comprehensive [3-and 3] provides doctors the flexibility they want while allowing us to recognize more revenue upfront with deferred revenue being recognized over a shorter period compared to our traditional Invisalign comprehensive product and benefiting us with a more favorable gross margin. Clear Aligner deferred revenues on the balance sheet decreased $7.8 million or 0.6% sequentially and decreased $5.2 million or 0.4% year-over-year. Ambo will be recognized as the additional aligners are shipped. Q2 '24 systems and services revenues up $196.8 million were up 9.2% sequentially, primarily due to higher volumes, higher ASPs and non-system revenues mostly related to upgrades Q2 24 systems and services revenues were up 16.1% year-over-year, primarily due to higher ASPs, increased non-system revenues, mostly related to upgrades and our leasing rental programs and higher service revenues. We are pleased to be able to leverage our operational and financial capabilities to provide different types of go-to-market models for our customers such as leasing and rental options. In the end, we are focused on selling the way our customers want to buy. Q2 24 systems and services revenues were unfavorably impacted by foreign exchange of approximately $2.1 million or approximately 1% sequentially. On a year-over-year basis, systems and services revenues were unfavorably impacted by foreign exchange of approximately $3.4 million or approximately 1.7%. Systems and services deferred revenues on the balance sheet was down $20.4 million or 8.3% sequentially and down $43.4 million or 16.2% year-over-year, primarily due to the recognition of services revenues, which are recognized ratably over the service period. The decline in deferred revenues both sequentially and year-over-year primarily reflects the shorter duration of service contracts applicable to initial scanner purchases. As our scanner portfolio expands and we introduce new products, we are increasing the opportunities for customers to upgrade and make trade-ins. In addition to our scanning, leasing and rental programs. Developing new capital equipment opportunities to meet the digital transformation needs of our customers and our DSO partners is a natural progression for our equipment business with a large and growing base of scanners sold. The structural programs we have implemented across both of our operating segment benefit our customers by providing them with more options to choose what they need. In some cases at a reduced price that may impact our ASPs, but the cost of service for us is, is lower and the benefit is then reflected in our gross margins. Moving to gross margin. Second quarter overall gross margin was 70.3%, up 0.3 points sequentially and down 0.9 points year-over-year. Overall gross margin was unfavorably impacted by foreign exchange by approximately 0.3 point sequentially and unfavorably impacted by approximately 0.5 points on a year-over-year basis. Clear aligner gross margin for the second quarter was 70.8%, down 0.1 point sequentially due primarily to lower ASPs, partially offset by lower additional aligners and leverage manufacturing spend. Clear aligner gross margin for the second quarter was down 1.7 points year-over-year due primarily to lower ASPs and higher manufactured spend as we continue to ramp up Poland manufacturing facility and the impact of unfavorable foreign an exchange. Systems and Services gross margin for the second quarter was a record 68.2% up 2.3 points sequentially, primarily due to higher ASPs and manufacturing efficiencies. Systems and services gross margin for the second quarter was up three points year-over-year for the reasons stated above. Q2 operating expenses were $575.6 million, up 5.9% sequentially and 6.3% year-over-year. On a sequential basis, operating expenses were up by $31.9 million due primarily to about $31 million in legal settlements year-over-year. Operating expenses increased by $33.9 million, primarily due to legal settlements and higher employee compensation, partially offset by lower outside services, advertising and marketing expenses. On a non-GAAP basis, excluding stock-based compensation. Amortization of acquired intangibles related to certain acquisitions, restructuring, legal settlements and other charges, operating expenses were $499.5 million, down 1.3% sequentially and down 1.1% year-over-year. Our second quarter operating income of $147 million resulted in an operating margin of 14.3% down 1.2 point sequentially and down 2.9% year-over-year. Operating margin was unfavorably impacted from foreign exchange of approximately 0.6 points sequentially and unfavorable impacted by 1.2 points year-over-year. On a non-GAAP basis, which excludes stock-based compensation, Amortization of intangibles related to certain acquisitions, restructuring legal settlements and other charges. Operating margin for the second quarter was 22.3%, up 2.5 points sequentially and up 1 point year-over-year. Interest and other income expense net for the second quarter was an expense of $3.2 million, primarily due to unfavorable foreign exchange compared to an income of $4.3 million in Q1 of '24, and an expense of $0.3 million in Q2 of '23. Recall that Q1 '24 included a non-recurring gain on our equity investments. The GAAP effective tax rate in the second quarter was 32.9% compared to 33.7% in the first quarter, and 34.8% in the second quarter of the prior year. The second quarter GAAP effective tax rate was lower than the first quarter effective tax rate, primarily due to discrete tax events is recognized in Q1 of '24 that did not reoccur in Q2 of '24, and that benefit was partially offset by an increase in non-deductible expenses. Our non-GAAP effective tax rate in the second quarter was 20%, which reflects our long-term projected tax rate. Second quarter net income per diluted share was $1.28, down sequentially $0.11 and down $0.18 compared to the prior year. Our EPS was unfavorably impacted by $0.11 on a sequential basis, and $0.17 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.41 for the second quarter, up $0.27 sequentially and up $0.19 year-over-year. Moving on to the balance sheet. As of June 30, 2024, cash, cash equivalents and short and long-term marketable securities were $782.1 million, down sequentially, $120.4 million, and down $251.7 million year-over-year. Of our $782.1 million balance, $140 million was held in the U.S and $642.1 million was held by our international entities. During Q2 '24, we repurchase approximately 0.6 million shares of our common stock at an average price of $250.73 through $150 million of open market repurchases. As of June 30, 2024, $500 million remains available for repurchases of our common stock under the January 2023 big purchase program. During the quarter, we completed a $75 million equity investment in Heartland Dental, a multidisciplinary DSO with GP and Ortho practices across the United States. Q2 accounts receivable balance was $1,020.1 million, up sequentially. Our overall day sales outstanding was 89 days, up approximately 3 days sequentially and up approximately eight days as compared to Q2 last year. Cash flow from operations for the second quarter was $159.8 million. Capital expenditures for the second quarter were $53.5 million, primarily related to our continued investments to increase aligner manufacturing capacity and facilities. Free cash flow defined as cash flow from operations, less capital expenditures amounted to $106.4 million. Now turning to our outlook, assuming those circumstances occur beyond our control, we provide the following business outlook for Q3 and fiscal 2024. For Q3 2024, we expect our Q3 worldwide revenues to be in a range of $980 million to $1 billion. We expect Clear Aligner volume to be down sequentially as a result of Q3 seasonality and clear aligner ASPs to be down sequentially, primarily due to foreign exchange and product mix. We also expect systems and services revenues to be down sequentially because of Q3 seasonality. We expect our Q3, 2024 GAAP operating margin to be below Q3, 2023, GAAP operating margin and Q3' 2024 non-GAAP operating margin to be flat to Q3 2023 -- non-GAAP operating margin For fiscal 2024, we expect fiscal 2024 total revenue growth to be up 4% to 6% year-over-year. Doing part to lower Clear Aligner ASPs year-over-year from continued unfavorable foreign exchange and product mix. In addition, our revised revenue outlook reflects our anticipated commercial launch of iTero Lumina with restorative capabilities to occur in Q1 of 2025 instead of 2024 as previously of 2025 instead of 2024 as previously anticipated? We expect fiscal 2024 GAAP operating margin to be slightly below 2023 GAAP operating margin and 2024 non-GAAP operating margin to be above 2023. non-GAAP operating margin, we expect investments in capital expenditures for fiscal '24 2024 to be approximately $100 million. Capital expenditures primarily relate to building construction and improvements as well as manufacturing capacity in support of continued expansion. With that, I'll turn it back over to Joe for final comments, Joe. Thanks.
Joe Hogan: Thanks, John. In summary, I'm pleased with our overall performance for Q2 and the growth we delivered across the business for clear aligner volumes as well as strong revenues from scanners and services. Notwithstanding the impact of unfavorable foreign exchange on our revenues, we believe the end markets are stable overall and we're committed to supporting our doctor customers in the future of digital innovation. Our purpose is to transform smiles and change lives with the goal of being the standard of care and orthodontics with Invisalign Clear Align of treatment. Clinically, we believe that we can treat the vast majority of orthodontic cases today. From the simplest to the most complex clinical efficacy is no longer a question. We now focus on the treatment experience for patients and on efficiency and growth for our doctor customers. The orthodontic case start market is vastly underpenetrated and there are millions of consumers who would benefit from digital orthodontics. We continue to evolve to better meet the needs of doctors, potential patients who increasingly seek convenient, elevated digital experiences. Our digital platform of integrated technologies, software and services has helped improve orthodontic treatment from millions by delivering seamless workflows and dental practices on mobile devices and through remote monitoring, and are designed to help doctors and patients realize the benefits of a truly seamless end-to-end digital workflows and patient experiences. But the journey from analog to digital has proven difficult for practices. The orthodontic practice of the future requires full digital transformation to truly realize the promise of digital. And there is no other med tech company in the world that can help practices meet this challenge. With that, I thank you for your time today. We look forward to sharing our continued progress as we move the industry forward through digital orthodontics. Now I'll turn the call over to the operator for your questions. Operator?
Operator: [Operator Instructions] Our first question comes from the line of Michael Cherny from Leerink Partners. Your question please.
Michael Cherny: Good afternoon. Thank you for taking all the question. Maybe if I can just dive in a little bit on the guidance change and some of the moving pieces. In particular, I want to get a sense from you of what you view as within your control versus outside. Obviously, FX is something that management can't control, but you think about the guidance in particular on the ASP side, how do you think about the flow through of what isn't within your control on mix? Is there something you do on promotion? Is there anything else that can come from a pricing competition that you should be worried about? Just want to dive a little bit more into that number given that it seems to be the biggest fulcrum point relative to the guidance change.
John Morici: Yes, it's a good question, Michael. This is John. Look, when we looked at the total year when and based on what we're seeing now, we see the unfavorable foreign exchange impact. We saw it in Q2 and we continue to see and project that that will continue for the rest of this year. So that's in our outlook. Just over a point of our reduction in our total year is related to foreign exchange. The mix effect that you talked about, that's really the way our customers want to buy. In some cases, they're buying lower price products, it's part of our portfolio. We see that as incremental in cases like doctor subscription program. They're just at a lower ASP. But what we end up seeing then is a better gross margin. Our cost to serve in many cases is lower than that, but it really is a reflection of what doctors want to do with the cases that they buy.
Michael Cherny: Okay. Thank you.
John Morici: Thanks, Mike.
Operator: Thank you. And our next question comes from the line of Elizabeth Anderson from Evercore ISI.
Elizabeth Anderson: Hi guys. Thanks so much for the question. I was wondering if you had just regarding the guidance, if you had any insights that you could share on whether any of the iTero restorative scan revenue was originally contemplated in the 2024 guidance and now with the push out on the launch, if that was sort of an impact on the guidance as well? And then as a follow-up, if you could talk a little bit more about the acceleration in the teen revenue, or sorry, in the teen cases, which accelerated off a tougher comp, that would be helpful to also get some more additional perspective there. Thanks.
John Morici: Yes. Hi, Elizabeth. Yes, you're right. The Lumina restorative that we expected to launch in the fourth quarter, now the full launch in -- into next year. That revenue was expected for this year. So that's part of the reasoning for taking down our overall guidance, in addition to the FX as I said on the previous question. And then your question on teen, look, we're pleased with our teen growth. We saw good over 8% growth on a quarter-over-quarter basis, 8% growth on a year-over-year basis. We saw good adoption in many places around the world. And it's a further reflection of the various products that we have, the adoption that doctors have. A lot of new doctors coming into the ecosystem to get trained and then actually become customers of ours. So we're pleased with the progress that we're seeing within teen.
Elizabeth Anderson: Great. And any chance you want to quantify that iTero restorative contribution change or no?
John Morici: Yes, We're not getting it directly, but its less than a 1%, slightly less than a percentage of the total.
Elizabeth Anderson: That's helpful. Thank you.
Operator: Thank you. And our next question comes from the line of Jon Block from Stifel. Your question please.
Jonathan Block: Hey, Joe, good afternoon. Yes, where to start? Everyone was nervous about cases and then you come in and you beat cases handling, and obviously the focus is going to be on the ASP. So John, maybe let me know if I have these numbers right. But it looks like the aligner ASP was down roughly 4% Q-over-Q. The FX hit was about a 1%. So can you talk in detail as much as possible, the other 3% decline in the ASP Q-over-Q, if I've got that right, it seems like a big deviation from where your head was at 3 months ago. How much of it was mix versus discounts? And if it was a lot of mix, why did mix become so pronounced over the past 3 months? And maybe we can start there please.
John Morici: Yes, Jon, when you look at mix that we have, we see doctors utilizing DSP more and more as a record amount of DSP that we had in a quarter that's at a lower ASP. We saw a lot of GP growth. We talked about adult cases being up, and the best volumes that we've seen in several quarters, and many times that's lower stage products, that we end up seeing come through. And so when we see the ASP, it's just a reflection of the different products that are being sold and those doctors are taking those up, at that. But you also know, and we've talked about where margins in many cases are better at those lower stage products, and we end up seeing this as a benefit to be able to see show up in gross margins and also off margins.
Jonathan Block: Okay. So I, I guess to maybe just as a follow-up to that, are you saying that discounts weren't more aggressive, call it in 2Q '24 than maybe what we've seen historical? And just tack on to that follow-up, you brought down the midpoint of the rev guide from about 7% to 5%. You said FX was a 1%, you said the GP restorative push on Lumina was slightly less than 1%. I mean, are you sort of implying that clear aligner revenue by and large for 2024 is somewhat unchanged or maybe down a smidge and, and then I'll ask my quicker follow-up. Thanks.
John Morici: Yes, Clear Aligner revenue down a little bit for the total year because of the ASPs that we spoke about not necessarily due to any volume changes. Like you said, we are pleased with the Q2 volume that we have. But that’s how we’ve look at the change. Mostly the FX for the total year as we've described, and then some mix, but then the rest of it due to iTero changes from this year to next year.
Jonathan Block: Okay. And last question for me. I guess online, just John, if I've got this right, it looks like the revenue comes down a little bit, the midpoint, but I believe the non-GAAP EBIT margins came up slightly, I think before it was like flat to slightly up, and now you're saying slightly up. So maybe just talk through the dynamics where you're able to arguably increase the non-GAAP EBITDA margin assumption for '24 even off the more modest revenue base. And thanks for the time, guys.
John Morici: Yes, no, it's a good question. And so as we looked at and as we talk about some of the -- I know ASP gets a focus, but really when you look at the margin that we get on all of these products is as they go to some of the lower stage products, we end up with a better margin. Our cost to serve is lower, which shows up in gross margin and flows its way to op margin. And I think the rest of it as you saw with this quarter from an OpEx standpoint and how we think about the levers that we could pull or not pull, we're very mindful of that in this environment and want to be able to deliver as much volume and as much top line as we can, but be very mindful of the operating profit that we need to deliver.
Operator: Thank you. And our next question comes from the line of Jeff Johnson with Baird. Your question please.
Joe Hogan: Hey Jeff.
Jeff Johnson: Hey Joe. Good afternoon, guys. Wanted to start maybe on your doctor ship to number in the quarter. You shipped to a little over 86,000 docs this quarter. I think for 3 straight years you've kind of been in that 82,000 to 85,000 range. So maybe not a big breakout, but at least some of these underlying numbers on utilization is doctors ship to and that are starting to perk up a little bit. So I guess what I'm trying to understand on that doctor ship to number, are you starting to see some benefits of some of the investments Jon has been talking about the last couple quarters on getting that doctor prescribing base to expand? Is it expanding that base? Is it slowing the outflow of that base? As we know you've had some competitive losses here over the last couple years. Just maybe help us understand the inflow and the outflow rates and what's moving between those two pieces. Thanks.
Joe Hogan: Hey Jeff, Joe. First of all, we're pleased with that. It's good to see a utilization go up. It's also great to see the doctors go up too. And obviously there's a strong concerted effort. We talk about that underserved marketplace out there and we know there's still a lot of doctors to train and there's still doctors do a lot more cases. So it's a big focus for the business. When you ask that question, are we loser in fewer or gaining few? There's always a mix and a change in those kinds of things, Jeff. But overall you can see here that we're gaining, it's not saying that we don't lose some docs sometimes, but you know, we often bring them back too. The whole story with what we've been through as competitors have entered the marketplaces, sometimes we'll lose some doctors, they often come back and one of the things about our business too, sometimes it takes 18 months for doctors to figure out if those competitive cases are actually going to work. And obviously I think we’re -- we're making good progress in the sense of convincing doctors to move ahead with us. And this growth in doctors and utilization occurred across the globe, which is great. It wasn't like it just came out of one region.
Jeff Johnson: Yes, understood. All right. And then maybe just a follow-up on the manufacturing side. We saw the news maybe a couple months ago of Emory's new role leading Direct Fab. He's going to stay in that role it sounds like through 2026 when he is going to write off into the sunset. So does that tell us anything about timelines on Direct Fab? I mean, Emory just doesn't seem like the kind of guy that would want to walk away in the middle of something. So is that kind of drawing a line in the sand that by 2026 you should be up and running fairly well, fairly maybe not efficiently, but fairly completely in getting that Direct Fab plans all put together and rolling out some of that 3D printed stuff in a bigger way?
John Morici: Hey Jeff, it's a good question. We have a lot of faith in Emory. He's been here for so long and he's the only guy that's ever scaled, aligners to the point, that he has. And so it's really fun to have him in this role because he gives us great feedback in a sense of where we are. Jeff, the best I can say what we've talked about with the analyst is we're looking at 2 to 3 years on this scale. And don't think of it as a linear line. This is one where you have to do a lot of equipment work at first to get the efficiencies, to have this equipment work 24/7. And then secondly, this is a brand new resin [ph], it's never been sourced before. And so finding the source of the resin, making sure you have the reactor capacity, all those things take time. So I look at over the next year, we do a lot of that groundwork and then you'll start to see products and different things that will roll from that. So, but it's best to fix in your mind that it's a 2 to 3 year kind of a rollup.
Jeff Johnson: Understood. Thank you.
John Morici: Okay.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Brandon Vazquez from William Blair. Your question please.
Brandon Vazquez: Hi everyone. Thanks for taking the question. I'll ask two upfront because it's kind of guidance related. One a little near-term, which is basically, I think if you do the sequentials and the implied numbers on the guidance that you've given us, there's maybe like a high single digits revenue increase going into Q4. I think, correct me if I'm wrong, but that's kind of like pre-COVID levels of seasonality, back when the business was a little more normal. So the question near-term being, given the uncertainty in the market, what kind of gives you the confidence that you guys can kind of return normal seasonality within this year? And then the follow-up to that on kind of a long-term guidance question is like, okay, we look with [indiscernible] three years out, what's kind of the growth expectations of this business sort of growth algorithm? Any color you can give us around that, assuming that, we're, it seems like we're stuck in somewhat of a an uncertain end market stable, but not exactly where you want it. So talk about the opportunity to accelerate if even possible, in an end market like this over the couple plus three plus years. Thank you.
John Morici: Yes, Brandon, this is John. I could take the question kind of on the remaining part of this year and so on. So we've guided to what we can see, based on how the quarter played out. We actually saw in the second quarter. I mean, I'm not saying it's a return to normal seasonality, but it was much more seasonal in the second quarter in terms of how our volume progressed and how it changed quarter-over-quarter to more normal seasonality. And so our reflection of what we tried to do for the rest of this year based on what we see. In terms of volume, takeout FX and some of that noise that gets caught into Q2. But from a underlying volume standpoint, we saw, um, more normal seasonality. And as we play out the rest of this year, we expect that to continue with teen season that comes in, that we're in now. China in the third quarter is a strong quarter for them because of team season, Europe, not so much. We expect that to, uh, play out more normally as it moves from Q3 to Q4. When we think of the total and looking out into 3 years, and so look, we're in an underpenetrated market and we've talked about a lot about that. We think we have the products and the go-to-market capabilities to really move this market forward. And it's up to us to be able to help drive this market forward. And when we look out and we look out in our long-term model, we believe in, in the opportunity revenue growth is 25% plus percent and up margin 25% plus. And that's how we are positioning things for growth, for whether it's Direct Fab, and the growth opportunities that we have there and the efficiencies that we can drive as well as the standard production that we have now. That's how we're building from an investment standpoint. We're mindful of changes that can happen short-term and economy and so on. And that's why we give you kind of the guidance that we have, at least now in short term, but in longer term we believe in, in our model. And, and that's how we're investing in the future.
Operator: Thank you. [Operator Instructions] Our next question comes from the line of Jason Bednar from Piper Sandler. Your question please?
Q - Jason Bednar: Good afternoon everyone.
Joe Hogan: Hey, Jason,
Jason Bednar: Hey, there, I wanted to touch on one near-term item with third quarter guidance, some of the spend discussed already, but clearly over the -- lower than where you'd probably model things out internally 3 to 6 months ago. And I guess I'm just reminded of maybe where we were a year ago in the third quarter, you had higher expectations than where ended up finishing. So I guess I'm curious maybe how much of that experience from last year informed your view on volumes and product mix versus, say, the trends and macro data points that you've seen develop the last few months? And then maybe include here if you could just how you're seeing that team season develop since we are in the thick of that right now.
John Morici: Yes, Jason, I can take that on, on the Q3. Some of those specifics, certainly we look at last year, we look at the 2022, you know, you got into those COVID years, they're tough to call and then you have to jump before COVID. So now you're talking almost 5 years ago. So, you look at what you see at the time knowing that most recently you have, we know we have Europe, has a summer kind of shutdown, comes back into September. We want to be able to see in September that they do come back. USS is in team season, China to get into the teen season as well. And we want to see how that plays out. So we call based on based on what we expect, both from a volume standpoint and we are really trying to give the foreign exchange that we see, that started the quarter, in July, where that FX is and not make an assumption as to whether things are going to get better or worse. We want to put that out there and really try to give you more of the underlying performance for the business. Joe, you want to talk about purchase?
Joe Hogan: Yes, on the teen side, Jason as I said in my script, and we were pleased with the team growth. It was over 8%, which is great to see. A lot of that was supported by Asia and also Europe when you really got to get into team numbers. Again, IPE is part of that. It's -- we look at that as obviously pre-teen and we watching the ramp up of that, that is obviously pre-teen and we were watching the ramp up of that and the acceptance in the marketplace. So hope I'm answering your question, but overall, we feel good about the team now. There's a big team season in China in the third quarter, we're watching it closely. We expect be able to perform in that side too. So I'm optimistic as it stands.
Jason Bednar: Okay, great. Then just for my follow-up, I'm going to pack a few in here. Maybe bigger picture, if we step back and look at some of the recent developments. I know there's a lot of initiatives, different initiatives, marketing programs, menu expansion, customer incentives, so on and so forth. Those all help contribute to expanding that utilization line, improving doctor productivity. You've got the Costco relationship that's been discussed. We uncovered what looks to be one of the larger changes to your advantage program in at least a few years. So I'm curious how you'd have us think about these in the broader context of your commercial efforts. Would you consider things like the Costco and Advantage changes, either are both more impactful than what you typically do? Have you seen any change maybe in doc behavior, just in response to these advantage changes? And then what's the right way to think about each of these influencing that ASP line that's now coming to focus more significantly with today's results? Thank you.
John Morici: Yes, that's a good, great question, Jason. I look at -- just to answer it a couple different ways, because I think one is like on the advantage you brought up, that's really a reflection of trying to put some structure, a little added structure to our Advantage program where many of our promotions we're trying to get to. And in the end for an Advantage program is trying to get new doctors in, give them a progression of, how they can get discounts as they do more and more cases drive utilization. So that's, that's good for new doctors, that's good for existing doctors. So the Advantage changes really we're trying to put more structure into that, into the second half and then carrying forward because they really had better refreshed, like, what we've got now. But it's all about driving utilization, getting doctors to do more and more cases. Programs like we're testing or piloting with a Costco is really just trying to drive more conversion. Find ways where those consumers or those potential patients are out there, they're shopping around, they're looking at, you see the economy, you see inflation, you see other things. We know those potential patients are out there. We just have to find ways to be able to connect them with a great product that we have with our customers, with our doctors. And Costco is an example of that, that we'll test and we'll see. But it's really that specifically is designed around conversion drive as much conversion as we can.
Jason Bednar: Thank you.
Operator: Thank you. And our next question comes from the line of Michael Ryskin from Bank of America (NYSE:BAC). Your question please.
Michael Ryskin: Hey, thanks for taking the question, guys. Joe or John, I want to follow-up on a point that you touched on a couple times already in terms of the ASPs. You talked about part of it is the mix shift and a lot of it is how your customers want to buy, whether that's different products within portfolio, whether or DSP, things like that. But what I want to get at is, are you concerned by that trend itself at all? Is that, that customers want the lower products? I guess that gives you the option to still meet them in the air and that still drives the volume, but is that something that you expected. This shift down? As you say, the market's still very unpenetrated. It's a big untapped market, so you'd think that you wouldn't be seeing the demand elasticity type of price that you are. So is this temporary because of the current macro environment and consumer sensitivity, or does it say something deeper that the rest of the market that's out there really doesn't exist at that, 1,300 plus ASP maybe it's lower and lower and lower.
Joe Hogan: Hey Michael, it's Joe. Look, I think the ASP piece to try to explain as much as we can is, we're always staring at the margin side to make sure that our margins are good. We find out that all over the world, I mean, if you're in India, they ask for a different product and they ask in the United States at different areas, and some people want a 5x5, someone want 3x3, all these things are different products for different kinds of applications. And GPs [indiscernible] at times too. So what we're seeing and there's varying ASPs on it, but we always have -- you see, our margins have actually moved up on that. So you're seeing not necessarily the market just driving price down, you're just seeing us having a variation of options that customers or doctors want around the world and making sure that we supply those well. One -- we talk about 25,000 cases came through DSP. Remember, those are cases that, that doctors used to mold these things in their offices in order to address those, right. And now they're buying three or four of ours now, yes, we're getting great margin on that product line, but overall it's a lower ASP in that sense as part of the DSP program. So what you're seeing is just us responding to a market. It's a good market out there with varying degrees of price and value, and you'll see us continue to do that in order to grow the marketplace.
Michael Ryskin: Okay. And then much quicker follow-up hopefully, sorry if I missed it, but did you call up why the Lumina restorative was pushed out to 1Q '25? Was this commercial decision or something on the development side?
Joe Hogan: Yes, Michael, well, there's like five areas of restorative that you have to be very good at as you go through this. And truth of reviews, we made extremely good progress on most of them. But we just -- we wanted to take a little extra time to make sure we get this right and we want to make sure that we run it through our doctors who are actually going to use it, the luminaries out there that help to promote the product and make sure that they're comfortable with it too. So we just feel it's diligent and responsible to make sure that we take a few more months here, launch it in the first quarter so that we have the world's best product.
Michael Ryskin: Okay. Thanks. Makes sense.
Operator: Thank you. And one moment for our next question. And our next question comes from the line of Erin Wright from Morgan Stanley. Your question please.
Erin Wright: Thanks for taking my question. So did you see any recent changes, for instance, in the adult case volume dynamics throughout the quarter? And just what are you seeing so far in the third quarter in terms of adult cases? I guess, has anything changed in terms of your view on the macro environment and for the remainder of the year? And I hate to belabor this, but also for the Americas too, but on the macro question, are you generally expecting stability in your guidance or are you anticipating a range of outcomes from a consumer and macro environment standpoint for the remainder of the year?
Joe Hogan: Aaron, we -- I mean, we had that in our script and we talk about it as we're expecting stability. I mean, obviously not stability and exchange rates, right? We can't, we're not that smart. We'd be working somewhere else if we knew exchange that well. But as far as the market overall and how we want to go about it, we still feel we're dealing in a stable environment. The last thing I'll say about this, this is a very global business. You saw that the Japanese yen, Brazilian real, the business is growing substantially that way, and there's a certain amount of stability that we have that plays across geographies too.
John Morici: And that adult piece we saw growth. We saw highest quarter in many quarters. So we're pleased with it. I think it's a reflection of our GP business, growing GPs, growing with DSOs and so on being able to, to get some of that volume through. Like Joe said, it's more of a stability that we're seeing, but we're pleased with that adult growth. And some of that contributes to some of that lower ASP product. It's great if that's how doctors want to buy to be able to treat those adults, we're happy to sell it to them. And as Joe said, it -- it's a better margin for us.
Erin Wright: And you mentioned China too and the key market there, but just generally speaking, can you give us an update on kind of China, the underlying demand trends and market dynamics there?
Joe Hogan: It's Joe again, Erin. China performed the way we wanted China to perform, just as we predicted. Overall, I mean, the market is challenging. I think that Tier 3 and 4 cities are actually challenged more than the private and one and twos. But overall there's no surprise we have a good team there. Juno [ph] is a great leader for us there and we like the results and we're looking forward to a good team quarter there, which is third quarter is always the biggest quarter for China.
Erin Wright: Okay. Thank you.
Joe Hogan: You're welcome.
Operator: Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Shirley Stacy for any closing comments.
Shirley Stacy: Thank you, operator, and thank you everyone for joining us on the call today. We look forward to speaking to you at upcoming financial conferences and industry events. If you have any questions, please follow-up with our investor relations team. Have a great day.
Operator: Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.
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