Align Technology, Inc. (ALGN) Earnings Call Transcript

Greetings. Welcome to the Align Third Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Shirley Stacy, with Align Technology. You may begin.

Good afternoon. 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 third quarter 2026 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, product outlook and financial expectations. 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've posted historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our third quarter 2026 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. 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. On today's call, I'll review our third quarter performance and the growth priorities we're executing across Align. John will then discuss our financial results and outlook for Q4 and fiscal 2026. Before we start, I'd like to note that we announced our CEO Succession Plan earlier today. I'll return to this topic at the end of the call. For now, let's focus on our third quarter results. We delivered a solid third quarter results with record doctor submitters, record third quarter, Clear Aligner shipments, improved utilization and broad-based international growth. Worldwide revenue was $1.015 billion, up 1.9% year-over-year or 2.4% at a constant currency and in line with our outlook. Clear Aligner shipments increased 6.6% and to $691,000 at the high end of our expectation for mid-single-digit growth in Q3. In Systems and Services, revenue was $175.5 million, down $7.6 million year-over-year and generally consistent with the guidance we provided at Q2. Reported revenue continues to reflect a shift towards lower-priced scanner configurations and more flexible acquisition models and stable ASP on a like-for-like basis, while our installed base and customer footprint continue to expand. From a profitability perspective, non-GAAP gross margin was 70.4%, modestly below our expectation, reflecting higher fuel-related transportation costs. Lower Clear Aligner ASP and the impact of geographic and product mix. Disciplined expense management and productivity improvements contributed to non-GAAP operating profit margin of 24.4% above our outlook. Overall, Q3 demonstrated our ability to execute in a challenging environment, delivering continued Clear Aligner growth, expanding our digital platform and consumer footprint and improving profitability. We remain focused on continuing to drive growth and building on this progress across several key areas. We continue to drive adoption utilization across customer channels. That includes increasing utilization among orthodontists, expanding Invisalign adoption among GP dentists and growing with DSOs and strategic accounts. During Q3, a record 91,000 doctors submitted Invisalign cases, up more than 3% year-over-year, while overall utilization increased 3.4%. We are expanding the patients and clinical needs that we address. Younger patients remain one of our largest growth opportunities and were again an important contributor to our Q3 performance. Younger patient shipments increased at a double-digit rate in international markets with strong teen performance across APAC and EMEA. Our growing patient portfolio, including Invisalign First, Invisalign Pallet Expander in the Nebia advancement with close blocks enables doctors to address younger and more complex patients while expanding the range of orthodontic needs that can be addressed with Invisalign treatment. Affordability and patient conversion continue to be an important focus for us. Our zero additional aligner offering providing doctors with a greater treatment and pricing flexibility. Outpatient financing and commercial programs are designed to help practices convert more prospective patients. Worldwide 0 AA volume increased triple digits year-over-year during Q3. We're also continuing to expand the value of the Align Digital platform. The opportunity goes beyond Clear Aligners or scanner placements individually. We are connecting iTero, scanning diagnostics, AI-enabled treatment planning, Invisalign treatment, exo CAD restorative workflows and practice applications to create a more integrated digital workflow for doctors and patients. This also represents a growth opportunity beyond traditional orthodontics. Through dental laboratories, we can reach GP dentists more broadly and enable digital workflows that integrate tooth movement with sestorative treatment and planning. Invisalign Advanced Restorative Treatment, or ART, as we refer to, is a compelling example of lines expanding its role in comprehensive dentistry, creating new clinical use cases, strengthening ecosystem connectivity and increasing our long-term opportunity across the broader dental marketplace. Importantly, this approach also aligns with the growing focus on oral health by helping clinicians plan treatment more holistically, recognizing the relationship between tooth position, function, restorative outcomes and long-term patient care. These growth opportunities reinforce one another, expanding our doctor-customer base, increasing utilization, addressing more patients and clinical needs, improving affordability and conversion and deepening adoption of our digital platform. So together, they give us multiple pathways to drive growth across Align. With that context, let me turn to our regional performance and the commercial priorities we're executing to drive growth. In the Americas, Clear Aligner shipments increased approximately 1.5% year-over-year, reflecting different performance trends across North America and Latin America. For the first time in 6 quarters, North America total orthodontic shipments increased year-over-year, supported by growth from DSOs. North American DSO shipments increased at double-digit rate overall, including growth across both orthodontists and GP customers. While the broader retail channel remains pressured, particularly for GP customers, orthodontist retail shipments improved sequentially in Q3 with teen orthodontist retail shipments also increasing year-over-year. We view the return to the year-over-year orthodontist case growth strong DSO performance and sequential improvements in orthodontic retail as an encouraging indicator, particularly given continued consumer softness. These early signs of improvement in North America reflect our focus on what we can control, strengthening commercial execution, sharpening our go-to-market strategies and deepening key partnerships to help drive conversion. Through sustained efforts to further this progress, we believe we can -- we will return North America back to growth. Our collaboration with HFD, Healthcare Finance Direct, integrates patient financing options into the Invisalign workflow to give patients greater payment flexibility and reduce administrative function for practices. We're seeing encouraging early traction with these offerings and are evaluating additional financing opportunities, including our new CareCredit pilot. Patient interest in Invisalign remains strong, but affordability can be a barrier to starting treatment. These initiatives are part of our broader effort to address that barrier and convert more patient interest into treatment starts rather than waiting for consumer environment to improve. During the quarter, we launched the Shift Happens campaign to consumers to increase adult consumer awareness and Invisalign consideration. Our commercial focus is on helping practices convert that interest into consultation and treatment starts. In Latin America, Clear Aligner growth remained strong across channels, was up double digits year-over-year. DSO shipments increased significantly year-over-year, while retail also grew, including positive performance across both GP, dentists and orthodontists. Our Latin American priorities are centered on affordability and digital adoption, including expanding DSP availability, advancing Invisalign Pay initiatives and broadening iTero access through additional partners, financing alternatives and scanner configurations. Turning to EMEA. Clear Aligner shipments increased a double-digit growth rate year-over-year, supported by strong utilization across orthodontists and GP dentists and double-digit DSO growth. Retail was also an important contributor. EMEA retail shipments increased 8% year-over-year with growth across both orthodontists and GP dentist customers. In EMEA, we are focused on orthodontist utilization, teen and growing patient treatment and clinical education, especially Class II. We're working to expand the GP engagement through digital workflows and broader treatment opportunities, including ARC. With DSOs, we continue to focus on improving conversion and scale adoption across practice locations. In Systems and Services, our focus is on expanding Illumina PC, targeting competitive and legacy iTero scanner users and expanding submitters through art and third-party partnerships. In APAC, Clear Aligner shipments were up double digits sequentially and increased year-over-year driven by record doctor submitters and strong younger patient demand. Teen shipments increased double digits year-over-year led by China. Retail was the primary channel growth driver in APAC during Q3. APAC retail shipments increased 16% year-over-year with double-digit growth across both orthodontists and GP dentist customers. In APAC, we are focused on expanding adoption, improving conversion and strengthening the customer experience. This includes expanding private distributor coverage in China, increasing penetration in lower-tier cities and activating DSOs and accelerating tween and teen treatment. We're also focused on improving patient conversion in Japan through orthodontists growth programs as well as driving iTero initiatives. Across the rest of Asia, our focus is on building on the momentum in higher growth markets, including India, Korea and Taiwan. Customer experience is also an important growth lever across APAC. We're focused on clinical support, customer service, simplifying commercial processes and improving the digital experience. Together, these actions give us multiple avenues to expand growth across orthodontists, GP dentists, retail practices, DSOs, younger patients and digital workflows. We continue to see a significant opportunity to expand the Invisalign adoption among GP dentists by connecting orthodontic treatment more closely with restorative and broader oral health care workflows. GP performance remains variable by market and channel. North America GP retail remains pressured, while EMEA and APAC GP Retail both delivered positive year-over-year growth and North America GP DSO grew double digits. These results reinforce our view that GP adoption can expand through clinical education, affordability, digital workflows and broader restorative treatment opportunities. Art is one example of how we are connecting alignment and restorative treatment planning. Along with iTero, Exo CAD and our broader digital platform, these workflows help us engage GP dentists across a wider range of treatment options and create new opportunities to incorporate Invisalign into sort of patient care. Turning to Systems & Services. Q3 revenue was $175.5 million, down 7.6% year-over-year. The difference between reported revenue and underlying adoption remains important. This reflects a deliberate strategic shift toward flexible acquisition models rather than weakening demand. Revenue continues to reflect a greater mix of lower price configurations as well as flexible acquisition models, including leasing, financing, rentals and certified preowned systems. The mix of iTero-leased units continues to grow and was up double digits again year-over-year. These customer-focused solutions are designed to lower the initial barrier to adoption, expand our customer footprint and give doctors more ways to access our digital technology. Our focus remains on expanding iTero's reach. And in Q3, the number of scanner units placed, including leased, rented and certified preowned systems, increased double digits year-over-year to more than 157,000 systems globally. In limited pilot, 11 DSO location practices integrating iTero Illumina with Invisalign practice app increased new patient exam capacity by approximately 15% without adding staff or extending operating hours. Nearly 3/4 of participating locations improved productivity. The long-term value of Systems & Services extends beyond the initial scanner placement, a larger, more engaged and trained installed base creates opportunities to expand adoption of restorative workflows and generate reoccurring software and services revenue. Before turning the call over to John, I want to briefly update you on our strategic initiatives we discussed last quarter. Following our constructive and ongoing discussions with Elliott Management, the first of our 3 independent directors joined Align Board August. Quentin Blackford, President and CEO of iRhythm Technologies is an accomplished global health care and med tech leader, and we're pleased to welcome him to Align. Our strategic and operating model review is progressing with work focused on commercial effectiveness, organizational scalability, operating efficiency and resource allocation. We're particularly focused on ways to improve performance in North America, identifying additional margin expansion opportunities without compromising growth. We are incorporating early observations into our planning and operating process, and we'll provide additional detail as objectives are finalized. And we can quantify their expected impact. The operating improvements we are already delivering also reflect broader work across manufacturing, productivity, automation, treatment efficiency and disciplined resource allocation. Our goal is straightforward: drive profitable growth while building a more efficient and scalable business. With that, I'll turn the call over to John.

Thank you, Joe. Before turning to our results, I'd like to express my sincere gratitude for your leadership and partnership over the years as well as your many contributions to Align. Your impact will continue to benefit the company and help shape our future success. Total revenues for the third quarter were $1.148 billion, up 1.9% year-over-year and in line with our Q3 expectations. On a constant currency basis, total revenue was 2.4% year-over-year. Q3 Clear Aligner revenue was $839.3 million, up 4.2% year-over-year, primarily reflecting higher volume, price increases, lower net deferrals and higher non-case revenue, partially offset by geographic and product mix, higher discounts and unfavorable foreign exchange. On a constant currency basis, Q3 '26 Clear Aligner revenue was up 4.7% year-over-year. Clear Aligner revenue per case shipment was $1,215, down 2.3% year-over-year or 1.8% at constant currency, consistent with our expectation, primarily due to mix shift to lower-priced countries and products and higher discounts, partially offset by price increases and lower net deferrals. Q3 Systems & Services revenue was $175.5 million, down 7.6% year-over-year. Revenue continued to reflect the mix towards lower-priced scanners and flexible acquisition models. On a constant currency basis, Systems & Services revenue was down 7.1% year-over-year. Importantly, like-for-like scanner pricing stabilized during the quarter. Moving on to gross margin. Third quarter overall gross margin was 68.7%, up approximately 4.5 percentage points year-over-year or 5.3 percentage points at constant currency. Performance primarily reflected operational efficiencies and the absence of significant prior year charges, partially offset by lower ASP, restructuring and other charges and unfavorable foreign exchange. Importantly, the lower ASP is primarily due to product and geographic mix rather than change in pricing discipline. On a non-GAAP basis, Q3 gross margin was 70.4%, flat year-over-year and approximately 0.7 percentage points higher at constant currency, but modestly below our outlook of approximately 71%. The variance primarily reflected lower Clear Aligner ASP product and geographic mix and Systems & Services mix, partially offset by manufacturing productivity, automation and lower refinement rates. Q3 Clear Aligner gross margin was 69.3%, up approximately 4.4 percentage points year-over-year, primarily reflecting operational efficiencies and lower depreciation expense on assets disposed of other than by sale, partially offset by elevated freight costs, restructuring costs and lower ASP. On a constant currency basis, Q3 Clear Aligner gross margin was up 5.2 percentage points year-over-year. Q3 Systems & Services gross margin was 66.2%, up approximately 4.9 percentage points year-over-year, primarily due to lower restructuring, COGS efficiencies and lower U.S. tariff rates, partially offset by lower ASP. On a constant currency basis, Q3 Systems & Services gross margin was up 5.5 percentage points year-over-year. Third quarter operating income was $169.2 million, resulting in an operating margin of 16.7%, up approximately 7 percentage points year-over-year or 8.5 percentage points at constant currency. On a non-GAAP basis, Q3 operating margin was 24.4%, up approximately 0.5 percentage points year-over-year and approximately 1.4 percentage points at constant currency. Disciplined expense management and continued productivity improvements allowed us to exceed our non-GAAP operating margin expectation despite the modest gross margin shortfall. Our Q3 GAAP effective tax rate was 20.6% compared with 40.1% in the third quarter of 2025, primarily reflecting the prior year impact of restructuring charges in our jurisdictional mix of income and lower U.S. taxes on foreign earnings in the current quarter. Our Q3 non-GAAP effective tax rate was 20%. Third quarter diluted net income per share was $1.90, up $1.12 compared to the prior year. On a non-GAAP basis, Q3 diluted net income per share was $2.80, up 7.3% year-over-year. GAAP and non-GAAP EPS were unfavorably -- each unfavorably impacted by approximately $0.24 year-over-year from foreign exchange. As of September 30, cash and cash equivalents totaled $1.145 billion, up approximately $140 million year-over-year. Cash flow from operations was $183.2 million, capital expenditures were $45.1 million and free cash flow was approximately $138 million. During Q3, we repurchased approximately 627,000 shares at an average price of $164.73 per share, returning $103.3 million to our shareholders. Year-to-date, we have repurchased $200 million of common stock. For fiscal 2026, we expect to repurchase approximately $500 million of common stock, up from $466 million repurchased in 2025 and reflecting the conviction of our Board and management in Align's long-term value. Now turning to Q4 and fiscal 2026. I am pleased to deliver third quarter revenue and Clear Aligner volume in line with our outlook while improving year-over-year profitability. Consistent with our first and second quarters, these results were achieved against a challenging market backdrop. As demand across the dental and orthodontic industry continued to be affected by a softer environment for discretionary health care spending and capital equipment investment. Those conditions persisted through the third quarter, and our fourth quarter outlook reflects what we continue to see across the broader market. Our updated 2026 guidance reflects a reduction in expected reported revenue versus our prior outlook provided at Q2, driven by 2 main factors. First, our Q4 Systems & Services revenues outlook is lower than our prior guidance. Although we expect scanner volume growth and solid scanner ASPs stabilize on a like-for-like basis during Q3, product mix continues to shift towards lower-priced scanners and more flexible acquisition models, which resonates well with customers amid a more challenging environment for capital equipment purchases. Second, we have slightly lowered our Clear Aligner volume as well as ASP assumption, largely driven by product and geographic mix in addition to foreign exchange. Assuming no circumstances occur beyond our control that could impact our business for Q4 2026, we expect worldwide revenues to be in the range of $1 billion to $1.20 billion. We expect Q4 Clear Aligner volume to be up low single digits year-over-year. We expect Clear Aligner ASP to be down approximately 1% year-over-year. We expect Systems & Services revenue to be in the range of $170 million to $180 million. We expect worldwide GAAP gross margin to be approximately 71% and non-GAAP gross margin to be approximately 72%. We expect GAAP operating margin to be approximately 20%. We expect non-GAAP operating margin to be approximately 26%. For Q4 2026, we expect to repurchase up to $300 million of our common stock. For fiscal 2026, we expect 2026 worldwide revenue to be approximately $4.11 billion to $4.13 billion. We continue to expect 2026 Clear Aligner volume and revenue growth to be up approximately 5% to 6% year-over-year. We expect 2026 Clear Aligner ASP to be slightly below 2025. We expect 2026 Systems & Services revenue to be $715 million to $725 million. We expect 2026 GAAP operating margin to be approximately 16.2%, up approximately 2.7 points year-over-year. We expect 2026 non-GAAP operating margin of approximately 23.7%, representing approximately 100 basis point improvement year-over-year, consistent with our previous guidance. We expect capital expenditures of approximately $125 million to $150 million. We expect to repurchase approximately $500 million of our common stock during 2026. As we look to 2027, we believe we are well positioned to deliver another year of revenue growth and margin expansion. Importantly, our preliminary planning assumes an operating environment broadly consistent with current conditions and does not require a consumer recovery. We expect a continued driving Invisalign volume growth in 2027, record doctor submitters improving utilization and the growth initiatives discussed today support that confidence with additional initiatives under development. We also continue to expect a broadly stable Clear Aligner pricing environment with ASP slightly down, driven primarily by product and geographic mix. For Systems & Services, 2026 has been a transition year for revenue. We expect solid unit growth and continued expansion of our installed base and we expect stable ASPs positioning Systems & Services for revenue growth in 2027. On profitability, we continue to target at least another 100 basis points of non-GAAP operating margin improvement in 2027, building on the approximately 100 basis points we expect to deliver in 2026. Our focus is on improving efficiency while preserving investment in the initiatives that support sustainable revenue growth. Share repurchases should provide an additional benefit to earnings per share growth as we continue to view buybacks as an attractive use of capital at prices that we do not believe reflect Align's long-term value creation potential. We will provide our full 2027 outlook when we report fourth quarter results following the completion of our strategic and operating model review with Jen leading the business. With that, I'll turn it back to Joe. Joe?

Let me pause by bringing together what you've heard today. We delivered solid Q3 performance with record third quarter Clear Aligner shipments, record doctors submitters improve utilization continued expansion of iTero customer footprint and stronger operating performance, varied by market and channel. But we also saw important areas of traction, including overall orthodontist growth, strong DSO performance in Latin America, broad-based growth in EMEA and strong retail performance in APAC and America. While the external environment remains challenging, our results continue to demonstrate that we have meaningful opportunities to improve performance through execution regardless of the pace of the macroeconomic recovery. We're focusing on increasing utilization among orthodontists, expanding Invisalign, adoption among GP dentists, growing with DSOs and strategic accounts, extending our leadership in kids and teens, improving affordability and patient conversion and increasing adoption of our digital workflows. Across Systems & Services, our priorities are to expand the iTero customer footprint, increased utilization and connect scanning more deeply with diagnostics, treatment planning, restorative workflows and Invisalign treatment across the Align digital platform. We also have a significant innovation pipeline ahead of us. Across digital treatment planning, AI-enabled capabilities, growing patient treatment, restorative workflows, scanning solutions and CAD/CAM software, we're investing in technologies that can expand clinical applicability, improve the customer experience and make our business more productive at scale. We continue to be excited about our next-generation direct fab patient 3D printed materials platform, what we call NXT technology. NXT unlocks greater control, consistency and precision across appliance, designS enables an entirely new level of Invisalign performance and personalization. Building on the Invisalign Palate expander, our first direct 3D printed orthodontic appliance, we are broadening the application of 3D printing across the Invisalign portfolio as well as expanding it into new categories. Invisalign specifics, attachment systems launched this year expands our 3D printing capabilities beyond aligners and appliances into attachment system itself. By conducting digital treatment planning, manufacturing, clinical delivery, it represents another step toward a fully integrated digital workflow. This week, we will begin a U.S. pilot of a new product category, Sports Mouth Guards powered by our 3D printing technology and material science capabilities. Sports Mouth Guards represent a large and growing market opportunity and then growing awareness of concussion risk and contact sports. There is also a significant overlap with kids and teens as we expect it to drive awareness and utilization of Invisalign treatment through Invisalign doctors while providing incremental revenues. Invisalign Sports Guard is a custom direct 3D printed sports mouthguard made from an iTero digital scan. It comes in multiple thickness options and will be available through participating Invisalign providers. Invisalign Sports Guards are customizable for each athlete's unique needs for comfort and support. Optimized for high performance specific to the activity, thanks to the power of high-performance polymers and unique 3D printed designs. Expected to offer over time a broader set of diagnostics and other sensing capabilities. These are important steps in a broader road map and includes additional orthodontic applications and the opportunity to apply direct fabrication technology more broadly to aligner treatment. We will continue to advance the road map as we scale the technology and validate each application. What gives me confidence looking ahead is that we are not dependent on any single growth driver, geography or customer segment. We have opportunities to increase orthodontist utilization, expand GP adoption, grow with DSOs, extend our leadership in kids and teens, improve affordability and patient conversion and increased adoption of the Align Digital platform. Before we open the call for questions, I want to briefly address my decision to step down and the planned CEO succession announcement we made today. Leading Align has been a tremendous privilege and this is an amazing decision -- a meaningful and amazing decision for me as we move forward. The process has been carefully planned for some time. It reflects a thoughtful long-term focus. As announced, our Board has appointed Jennifer Davis as Align's next CEO. Jen will join us on November 2 as CEO-Elect and a member of our Board. She will assume the CEO and President role on December 31 of this year. Jen brings 33 years of leadership experience, including leading Procter & Gamble's Global Healthcare business, with global experience across innovation, digital transformation, brand building operations and customer development in oral health. Jen will be joining the company with powerful innovation platform, a talented global team trusted relationship with doctors around the world and significant opportunities across orthodontics and digital dentistry. I'm extremely proud of Align, the strong foundation we've established and the relentless contributions of every member of our Board, management team and organization. I am confident in this transition plan, and I'm looking forward to working closely with Jen over the coming months. I strongly believe she is the right leader to build on that foundation and lead Align through the next phase of growth and value creation. My focus remains squarely on driving the business, executing the priorities we discussed today and continue to advance the growth, innovation and operating initiatives underway across Align. I remain confident in the opportunities ahead for Align and the team executing our strategy and in our ability to continue to build long-term value for our customers, shareholders and employees. Thank you for joining us. Operator, we'll now open for questions.

[Operator Instructions] And our first question comes from Michael Cherny with Leerink Partners.

Joe, best of luck in retirement as you move on. I'll just ask one now. I'm sure there's plenty of others. But as you think about the changing conditions that you saw underlying the difference in views and particularly on case starts between what you saw in 3Q versus what you saw in 4Q, can you give us a sense on what some of the factors were relative to the low single-digit case start expectations? What are you seeing from a leading indicator perspective? Anything else you can point to in terms of the drivers and the build on the 4Q numbers? The 3Q level was very strong across the Board. Curious what you're seeing relative to how the setup is for 4Q, though, as you look to -- into next year?

Yes. Thanks, Michael. We felt great about our third quarter performance. We see a challenged market really across the globe in so many countries. And as I mentioned in his script and John mentioned in his script, too, we felt really good about being able to deliver in that kind of environment. As we look at the fourth quarter, we see continued challenged consumer overall. And that's a common theme we see across the Board. I mean obviously, with our Systems & Services business, we have a reorientation that you saw in the third quarter you've seen this year, and that's reflected in our go-forward statement, too. So this is not a singular type of variable that we're discussing here. This is a broad-based, I think, reticent consumer that we sense not just in North America but different parts of the world, and that's being reflected in our guidance.

Our next question comes from Jon Block with Stifel.

Joe, I'll start with the question that's likely for you and probably Jennifer as well. The Sports Mouth Guard, I know it's a bit early, but more importantly, just big picture, what does it say about line? Like is this the start of going into adjacencies. You called out mouth guard before -- when you first got there, we heard about sleep apnea -- is this a clear liner company going forward? Is this a 3D printing company going forward? We would just love your thoughts there.

John, great question. Look, when I started, obviously, sleep apnea was on a table and I shot that because I felt the technology was diversionary. I thought it was a channel we didn't understand overall. A reimbursement system, we had not a prayer of understanding [indiscernible] sell in the front of a customer. And it was also an item that is very difficult to be able to manufacture and do it in at scale like we have to do. And so I just thought it was a diversion in the sense of what the company would focus on. As I look at Mouth Guard, John, I can tell you that almost every orthodontist we have out there is asking for Mouth Guards. They feel that's a leader product for them in that team market, especially with schools and different kind of demand profiles with schools and kids in those specific ZIP codes. The reason I want -- I thought it was time to do this is we have a unique resin we've developed. It's has significant advantages over resins that are used for mouth guards today. It's 3D printed. So the first mouth guard that you can make specifically for certain sports, certain configurations in the way people speak and how they present themselves. It gives you a huge amount of flexibility in the sense of how you can go after that marketplace. Sports Mouth Guard business is anywhere between $6 billion to $8 billion and how you look at it. It's primarily a boil and bike kind of a marketplace. It means non-exact kind of manufacturing science that's used about it. So John, why in this case, unique technology, very unique from a consumer standpoint, right in line with our channels of distribution, right? Our orthos want to have it. GPs wanted too, but orthos also so we can sell it through our current channels without any kind of friction. So I look at it as 180 degrees versus sleep apnea devices.

Great color. And then as a follow-up, John, for the quarter, like case is better, I think, certainly better and better than figured. ASP light, maybe you can give a little bit more on that dynamic because -- and I'm thinking about this correctly, comp no AA is not an upfront ASP hit arguably. And then maybe you could just also touch on the exit rate. I know most of the revisions for 4Q were around Systems & Services and maybe a little FX. But it does seem like you noodle down clear line a bit. So maybe you can just talk about that exit rate there.

Yes. Thanks, Jon. I'll start with ASP. Yes. ASPs were above what we expected. We had a little bit of unfavorable FX. We get the continued country and product mix. So 2 of the reasons driving some of that ASP kind of sequentially down really the growth that you see in many of these markets that just have a lower list price. So you see India and China and others that are sequentially and year-over-year growing. That shows up from an ASP standpoint as well as introducing DSP and some of that touch-up cases that we have. We do see that. It's just a low list price product that ends up showing up in ASP, but it was able to help us in the end, drive volume, as we said, and ultimately, deliver the margin that we needed. And that's how we look at that. I would say when we think about the exit rate and we're factoring in, in our guidance what we saw in Q3, we factor in what we see in October. And that's what we used to inform our guide. So no change in terms of how we do it and what we look at. It's just a reflection of a continued challenging market and things that we're doing to try to help offset it.

Our next question comes from Brandon Vazquez with William Blair.

Joe, congrats on a great career at Align and good luck on the next steps. I wanted to focus first, let's just kind of double-click on the macro a little bit. I think the prior to -- we're asking something similar to this. But can you talk a little bit more granular about what have things incrementally from Q2 to Q3 on the macro side? Are there any pockets of things getting worse or better? Joe, I think you had said North America declined in the quarter in your prepared remarks. Did I hear that correctly? And is that -- again, is that better or worse? We don't always get figures like that. So just curious if you can kind of level set us on relative to last quarter, how some of the key geographies are doing.

Brandon, good question. On -- just start with the U.S. where you started with 2 or North America. I mean we felt good about Latin America and our performance here was great. I was happy to see that we had positive orthodontic growth for the first time in -- I think it's the 6 quarters that we've had in the U.S., which is really positive. On the GP side, obviously, we saw continued erosion. That's a larger bucket of doctors we have to call on. There's challenges across keeping up with those doctors and pushing those doctors to consumers that we talked about, being a little less reticent, especially in that GP channel to convert. So I feel -- as I mentioned in the script, too, I feel good about our ability to really push on the GP side. You see our DSO business there continues to grow. It's that retail segment that's challenging, in particular GPs that are doing less than 10 cases a year. And so -- but I feel we've arranged our workforce properly to be able to go after that. We have good early warning signals right now. We're -- we might be losing GPs in different places that we can move our sales force in that way. So I see a challenged market, a challenged consumer, but I feel good about our product base, and I feel good about our ability to address.

The products that are really starting to take hold. We talked a lot about the NO AA or reduced the amount of AA type products. They're growing. And across the globe growing at a triple-digit rate, which is great. That's really helping win with doctors, especially in that gray area with that upfront cost. And then we also talked a lot about, and we're seeing more and more, especially in this challenged environment where those potential patients are turning to financing to be able to help them afford that treatment. And you see our partnerships with many finance companies, not just in North America, but it's really now become more across the globe, and that's helping win those gray areas as well with those patients.

Got it. And then intra-quarter, we had gotten a lot of questions around China VBP. I know there's some nuances to your exposure to China and then the private versus the public I don't -- hopefully, I didn't miss something in the prepared remarks, but maybe a good opportunity to kind of level set investors what the potential exposure is to China VBP in the orthodontic side. And then also what kind of is the latest in expectations of timing?

Yes, Brandon, this is John. So VBP will participate in. It's going through its process. I would expect that as things open up into the fourth quarter in terms of products that will be entered into, we'll participate in. As you know, and it's been 1 well documented, it usually starts on the public side. We don't have a lot of exposure on the public side. Only about 15% of our business in China is public. Most of it's private. But we'll participate in that. We think that it helps grow in this market where like we said, from a company standpoint, most of our product is on the private side. But the vast majority of cases done in China are done with wires and brackets. So if VBP allows more exposure, more people to be able to use Clear Aligners that will help participate and help drive. We feel that with our operations there, our treatment planning, the sales force, everything that we have on a go-to-market standpoint really will help us as we navigate through that process.

Our next question comes from Vik Chopra with BMO Capital Markets.

Joe, best of luck to you, and thanks for all your help. Over the [indiscernible]. The question for me is on 2027 framework that you laid out. You've targeted another 100 basis points of margin improvement without a consumer recovery. Can you talk about the biggest drivers of that? Is this a floor or a base case? And does the Elliott operating review -- is there potential for that to add to that?

John?

Yes. I can start with that, Vik. When we have a lot of productivity and efficiency programs in place. Obviously, we know how to manufacture and manufacture at scale there to drive productivity. So many of the actions that we've been doing for the last several years are coming to fruition, and we're driving that improved productivity. We're seeing that this year. We see the gross margin improvements that we've had in the business. Some of it is product related, where you have that less dependence on these complicated products that have multiple refinements and we go to fewer refinement-type products. That drives a lot of productivity in our business. So some of it is at the product level, some of it's at the initiatives that we have to be able to help drive improvements in productivity. Of course, we're going through this strategic review and understanding where we could save money, where we could invest to be able to drive growth and do it in a profitable way. So we feel good about the efforts that we have up until this point. We'll continue to make refinements to it. And then at the end of Q4 here, we'll be prepared to talk about what that means for 2027. But we hold to the fact that the op margin improvement next year that we've committed to that at least 100 basis point improvement is progressing well, and we'll update more about what that means for the rest of the P&L next quarter.

Our next question comes from Jeff Johnson with Baird.

Joe, again, I'll just add the congrats on a great career and good luck in retirement. Let me ask one follow-up question on VBP, if I could, and then I want to ask a case volume question as well. But John, on VBP, obviously, a lot of moving parts, as you said, maybe getting bigger into the public side if you bid on that side of the business here in this round. On the private side, we are hearing the Chinese government kind of pushing for private docs to also participate from a pricing perspective in VBP. I guess, net, we don't know how that's going to play out. But should VBP be a good guy, a bad guy for you guys next year, there's all the moving parts on what happens in your private market pricing versus if you get public market incremental volumes? So help us out maybe on just net how we should think about this?

Well, as you're right, there are a lot of moving pieces to it, Jeff. And I think when you look at it as -- if it gets it will get to private as it goes to private. The real question will become is what doctors do with those price differences do they pass them on to the potential patients. We hope they do because that will drive an increased amount of utilization and adoption of Clear Aligners. So we hope that, that's where it ends up going. But we see increased volume that will come through. That's typically what happens to VBP. We think we're properly positioned in China to be able to kind of in China for China to be able to manage the cost. And I think when you look at it overall from a net-net revenue standpoint, it's to us, it's neutral to positive, just from the standpoint, you're going to drive a lot of volume, I think, as it works its way through the system. And you will have some price, but I think the volume helps offset it. And as long as that product portfolio that we have is in place as well as some of the in-China operations we have, we think we're properly positioned.

All right. Fair enough. And then just on the case volume side, you're guiding low single digits for 4Q. I think when I think about how you guided '26 previously on last quarter's call and guided 3Q on the 2Q call. Feels like that 4Q case volume guidance globally is maybe down 1 point or 2 point relative to what you were thinking? Just taking your pulse on that, is that about right, maybe 1 point or 2 point lighter than you would have been expecting, number one. and you'll hit very similar comps. You hit a 7-plus comp here in the fourth quarter. The next few comps into 27 are going to be similar. Is that kind of low single digit for 4Q against a 7-plus comp about the way we should think about coming up against those other 7% comps through the first few quarters of next year as well?