Align Technology, Inc. (ALGN) Earnings Call Transcript & Summary

Hello. Thanks for joining Piper Sandler's 32nd Annual Virtual Healthcare Conference. This is Jason Bednar. I cover medtech here at Piper, and I'm pleased to have with me today from Align Technology, Senior Vice President and Chief Financial Officer, John Morici. John, welcome, and thanks for joining us today in this virtual format and hopefully, the only time we have to conduct this conference in a remote fashion like this. I have nearly a half hour here for our discussion. For those tuning in, there is no audio Q&A. [Operator Instructions] With that, why don't we dive right in. John, thanks so much for being with us today. As I'm sure you have guessed, there's a lot I'd like to discuss following last week's Investor Day that you and the team hosted. Great content as always at that event. So thank you for that.

Sure.

So why don't we start just maybe with some of the real-time comments that you and Joe addressed with the broad-based business momentum that continued into November? Can you talk about this comment in the context of lockdowns that are kind of underway or were underway at the time in Europe, and worsening case numbers throughout much of the U.S.? There's probably several factors here that are at play. But what's different here in November than, say, if were to think back to like the March, April and May time frame?

Yes, it's a good question, Jason. I mean I think back -- if you look back at the end of March, April, even into May, a lockdown was shutdown, meant that the offices were actually shut down. The practices were shut down. Nobody could really go out and go in for any type of care. Doctors couldn't provide that care. I think what we see now is it's very targeted. It's very much of a -- like the medical practice that the dentistry orthodontics is, those offices are still open and where they're open, we have the opportunity to continue to do volume with our customers. They're seeing patients and so on. So it really comes down to are those offices open. And we're still seeing them open. But there is uncertainty in the marketplace given COVID and relapses. A doctor's office could be open. It could be allowed to be practicing. But you could end up with someone on the staff gets COVID and that particular office shuts down. But broadly, it's because the offices are still open now, and that's what we're currently seeing.

Okay. And then maybe like, I guess, a nuanced question off of that. I mean I think it was back on the 3Q call, you talked about business momentum that had built into, not just during 3Q, but then further into October. I mean did that momentum build further into November? I mean is that what the message was at the Investor Day? Or just that what you saw in October continued into November? How should we see it?

What we see is the momentum continues. And so the momentum we saw, as we said in the third quarter earnings, we saw that build throughout the third quarter. Every month got better. That continued into October. Last week, we updated that we continue to see that momentum into the fourth quarter, meaning that those months, we're getting better as we went forward. And it's really a testament to the fact that we continued to make investments, marketing, sales, operations and so on, technology, throughout the crisis and into the recovery. And we think that, that helped position us well as we move through the third quarter recovery and continued into the fourth quarter.

Okay. All right. That's helpful. And then maybe one more point or one more question on that topic. I mean how would you say patients are responding? I mean doctors' offices are opening or are opened currently through the kind of this second wave that we're all going through. How -- are patients responding any differently as the weeks go by and we see pockets of COVID worsen? Or is -- I guess, just how are patients responding, in your opinion?

I think what we see is people are just being more careful. They understand the situation that we're in as each of these areas go under certain types of lockdown or shutdowns as needed. But it's not as broad-based as what we've seen. I think people are learning to adapt to the fact that if they go out, they've got to wear a mask, getting socially distant. And when you go to a dental office, for example, many times, you might not be in the waiting room waiting, you might be in your car until you get a text and then you come up. And you might have to realize that the chairs that you have, it's every other one, and you don't have people right next. And so there's things that we've all learned as we've gone through, just as the doctors have had to learn these, but it's much more kind of a standard way to operate now. And so we're seeing more of that. But what we do see, and patients want to have care, but they want to have care done in a safe way and doctors who are able to provide this and who are able to give them options around Invisalign treatment. Knowing that they don't have to go to the doctor, maybe as many times during treatment to get things adjusted, gives those patients some confidence that they can be treated, they can be treated safely, and that's good for everybody.

Okay. Yes. And kind of a collective adaptation, and we're all getting used to it and totally appreciate that. Maybe if we talk about maybe one of your -- the channels that we all care about here, with teens. Would it be inaccurate to say that you're seeing the effects here in 4Q of an elongated Teen season? I think, again, going back to the third quarter call, you talked about mix being a little bit non-normal. The summer season wasn't the typical summer season for a lot of different schooling reasons here in the U.S. and over in China. But I mean, would you say you're seeing some of this teen elongation? Those -- the teen season elongation stretch here into 4Q, whether it be in U.S. or in China?

You do see some of that. I think what you pointed out is that just the timing of things are a little bit different. On the front end, a bit, for example, in China, you had some of the kids that were in school a little bit longer and kind of pushed the teen season to start a little bit later into July and then carry out a little bit longer. You also see that in U.S. and other countries where kids go back to school, typically, they go back in person in the fall, get their treatment done in the summer and then they're ready to start that school year. And here you have maybe -- some schools still aren't open. There's not that sense of urgency to essentially maybe go into treatment. Some of that treatment extends out a little bit into through the third quarter and into the fourth quarter, where typically, you would have had that teen season happen in August or September. So it varies. But in the end, we're providing our products to our customers in a way that they want to be able to treat those patients. Patients are coming in with kind of their motives in mind when they want treatment, how they want treatment, and we're remaining flexible to be able to treat them.

Okay. Okay. Makes sense. I wanted to shift over here to another topic that caught a lot of attention last week, the significant increase in spending that you and Joe alluded to. I think it makes a ton of sense. I mean business is booming. You got a lot of white space in front of you. The first question though is, I mean, are you and Joe signaling a further acceleration in spending growth compared to what we've seen in recent history? And I ask you this question because, I mean, core OpEx spending, if you exclude stock comp, has been growing pretty significantly under your and Joe's tenure. I think something like north of 25% CAGR. You've seen CapEx spending that's up three to fourfold versus the prior regime. So I mean, that spending has already been taking up a few notches, if you will. So I guess, should we be using history as a guide when we think about spending plans going forward and kind of extending out that spending growth? Or should -- or are we talking about maybe something that inflects higher off of the trajectory that we've been on?

Yes, it's a good question. I think you have to think about short term and long term when it comes to that. When we think of the -- our long-term growth model, we're committed to that. The 20% to 30% revenue growth, 25-plus percent op margin and that's our long-term growth model. That's how we think about our future investments. Of course, you're going to get things that come up on a short-term basis where you might be adding some capacity. We opened up our China manufacturing and that kind of is binary. You weren't doing that before. And now you have that manufacturing, there's some spend. You mentioned CapEx as well related to that. But in other cases, where we see volume opportunities, we're committed to trying to grow in this underpenetrated market. That's one of the reasons why we continue to invest even during the pandemic and during the crisis. In this underpenetrated market, we knew we needed to further make inroads and sales, add some of the market. And we talked a lot about that at an Investor Day, some of the responses that we're seeing in some of our marketing spend, different tools that we're able to provide, virtual tools, some of the remote care and other work that we've done to be able to give those doctors the ability to treat these cases throughout. Then, of course, we have to add on operations. And you have to add in operations in advance of when you're going to see that volume because it's -- there's no off the shelf. Emory talked a lot about the -- how complicated and how technical things are in terms of providing that manufacturing, and there's no off-the-shelf products for that. We have to customize this equipment and so on. And it takes us time to be able to do that. But that being said, we're all about driving return on investments. And so the model that we have is our long-term model. We have reiterated that last week. You're going to see pockets of spend where it makes sense, certain quarters and regions and so on to be able to grow in this underpenetrated market. But we feel good about the returns that we're getting, the investments that we're making to help continue to grow our company as we are.

Okay. So I guess just maybe -- since the emphasis here on the long-term model, I mean, should investors just be baselining themselves that maybe this spend here near term takes the margin below the long-term model -- the operating margin below the long-term model in like the next year or 2? Or is that some -- are you -- or is that long-term model something that you would say you're executing to each year to delivering each year? I guess just how to balance that again.

I would call it the latter. I mean we believe in that long-term model, that's how we allocate our investments that we want to make. You're going to have different times of the year that you might be above or below that model based on -- in certain geographies, it would be like that. But when we think about the investments and we think about we haven't guided for next year, but that model would apply as we think about for next year as well. And it's just a reflection of some of the timing. We have to invest ahead to be able to grow into this volume. So upwards of 50% of our revenue is spent to unlock friction that's in the system, whether it's marketing, create that consumer awareness and try to drive conversion, having salespeople on the ground to expand out and be able to reach these doctors and help train and so on. New products that we spend on, we spent 6.5%, 7% of our revenue on R&D, making things simpler, better from a software standpoint, better products, a lot of new technology that's gone in. And then, of course, we have to keep the operations running and then stay out in front of that demand because like I said, it takes several months to be able to build that capacity, so you constantly have to be looking forward. But we can do all this because we're in a vastly underpenetrated market. It was like that pre-COVID. It's like that kind of post-COVID in terms of where we're at. So we have to keep that spending to be able to drive this adoption. And we like the progress that we're making.

Okay. Right. And totally makes sense, John, maybe let's shift gears a little bit. You've done a lot of work that the team has on the ortho-restorative side, really to encourage Invisalign adoption and stimulate demand and make it easier for doctors to work with Align and use the system. And everything you've done with iTero from a workflow standpoint, the GP-focused aligner solutions like iGo, the exocad acquisition. I just don't think everyone appreciates the infrastructure and GP-focused strategy from Align, but it's been pretty impressive. I mean do you still have more to do on this front? Or do you think you have most of the pieces in place and now it's just more about execution?

Well, I think we're building the pieces. I think, as you called out, exocad is a key investment that we made. We made it in the middle of the crisis. We closed that deal right at the beginning of April and all cash deal, biggest acquisition that we've made to date. It provides that software to be able to really interface with the labs, can interface with the doctors to be able to help create that visualization and that -- the output for those restorative products that companies have. So it's a very key part to that, the ortho piece that we have, where we're providing the orthodontic tools to be able to straighten teeth and provide that visualization, and then this creates that restorative piece that interfaces with labs so that as a general dentist, you can get the ortho work done and as well get the software to provide the implant or whatever else is needed for the restorative piece for those patients. But this is a journey that we're on. We're digitizing the ecosystem that we're in. We talk a lot about it -- and at Investor Day, we talked a lot about the platform that we're creating and how we're -- at the front end, you have iTero, getting the scan and all the software that goes in behind this to, ultimately, get an aligner to move your teeth, but it's really a digital company, everything from front -- from the front to the end, and it's about driving in this underpenetrated market. So we really focus in on the digital orthodontic work that we can help provide. That's been the focus of the company from the beginning, 20-plus years ago. It's still our focus. We add in an acquisition like we did with exocad to really help that orthodontic, that digital orthodontic work that we've been trying to provide and build. And we'll look to continue to make those investments to be able to really take digital orthodontics to that next level. But that's been our focus. That's something that is very important to the company. And we continue to see good adoption of our products because of that.

Okay. So I guess to follow up there, would it be right to think that anything additional on the ortho-restorative side would probably be more software focused? And then I guess, product-focused or kind of tangibly -- tangible focused? I mean I guess, just is there a way to think about what's coming next on -- again, on the ortho-restorative side?