Greetings, and welcome to Align Technology third quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Shirley Stacy, Vice President of Corporate and Investor Communications. Please go ahead.
Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO, and John Morici, CFO. We issued third quarter 2017 financial results today via Marketwired, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately 12 months. The telephone replay will be available today by approximately 5:30 P.M. Eastern Time through 5:30 P.M. Eastern Time on November ninth. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13671493, followed by pound. International callers should dial 201-612-7415 with the same conference number.
As a reminder, the information that the presenters discuss today will include forward-looking statements, including statements about Align's future events, product outlook, and the expected financial results for the fourth quarter of 2017. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statements. We have posted historical financial statements, including the corresponding reconciliations and our third quarter conference call slides on our website under quarterly results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?
Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide some highlights from the quarter and then briefly discuss the performance of our two operating segments, clear aligners and intraoral scanners. John will provide more detail on our financial results and discuss our outlook for the fourth quarter. Following that, I'll come back and summarize a few key points and open the call up to questions. I'm pleased to report another strong quarter in Q3, results that exceeded our expectations across our key financial metrics, including revenue, volume, margins, and EPS. Our Q3 revenues increased 38.3% year-over-year, driven by increased Invisalign volumes across all of our geographies, as well as strong growth from iTero scanners.
Our strong Q3 results also reflect accelerated growth from teenagers in both North America and Asia-Pacific, with total Invisalign shipments to teens up 46.3% year-over-year and up 26.5% from Q2. On a sequential basis, revenues increased 8.1%, driven by continued strength across Asia-Pacific, which offset expected seasonality in Europe, as well as higher than expected revenues from shipments to SmileDirectClub. For North America, Q3 Invisalign case volume was down 1.1% sequentially, reflecting a decrease in GP dentist channel due to less patient traffic and fewer days in the office from the summer holidays. In addition, as a result of the devastation caused by Hurricane Harvey and Irma, we estimate that our North American volumes were lower by approximately 1,500 cases in Q3, mostly adults.
These declines were partially offset by strong growth from the ortho channel, especially teens. On a year-over-year basis, North America was up 25%, reflecting strong growth from the ortho channel, driven by an increase in teen patients and Invisalign Express Lite products. Q3 Invisalign volume for international doctors was up 6.8% sequentially, driven primarily by Asia-Pacific region, which offset expected summer seasonality declines in EMEA. On a year-over-year basis, Invisalign volume was up 47.4%, reflecting strong growth from both APAC and EMEA. In EMEA, Q3 volumes were up 37.6% year-over-year, led by our core European markets, particularly Spain, U.K., and France. We also saw strong growth across all of our smaller expansion markets, which include Central and Eastern Europe, Benelux, Middle East and Africa, the Nordics, and Russia.
In APAC, Q3 volumes were up 57.4% year-over-year, with record Invisalign volume across all country markets, led primarily by China. Q3 marked the first quarter in which China was our second-largest market in the world behind the U.S. Our active customer base in APAC has almost tripled year-over-year, with over 1,500 docs trained in Q3, mostly within China. Turning to the teen market, over 69.8 thousand teenagers started treatment with Invisalign clear aligners in Q3, up 26.5% sequentially and 46.3% year-over-year, reflecting a very strong summer teen season and accelerating growth rates. North American ortho teen cases increased 22.9% sequentially and 43.6% year-over-year, reflecting our continued efforts to drive adoption of teenage patients through sales initiatives and our direct-to-consumer campaign emphasizing teens and moms.
For international, Q3 teen cases increased 36.7% sequentially and 65.7% year-over-year, driven by accelerated growth across the APAC region, primarily led by China. The introduction of the Invisalign treatment with mandibular advancement is helping to raise visibility for Invisalign treatment of teenagers and contributed to some of the growth in the APAC region. Recall that Invisalign treatment with mandibular advancement is the first clear aligner solution for Class II correction that advances the mandible while moving teeth at the same time. Mandibular advancement is integral to increasing teen adoption. Approximately 30%-45% of teen cases globally need Class II correction. Based on early indications, we are seeing a positive correlation between those customers who use our mandibular advancement feature and increased teen utilization.
One example is Dr. Lekic in Canada, who is seeing the benefits of switching from an analog to digital method of orthodontics, not just with mandibular advancement, but with Invisalign treatment in general. With the launch of mandibular advancement, because of the renewed commitment to being fully digital and phasing out the use of metal braces, Dr. Lekic has started 162 patients in Invisalign treatment since Q2 '17. Of those, 120 were teenagers and 24 were treated with mandibular advancement feature. This is compared to only three Invisalign cases in 2016 and only one Invisalign case in the first quarter of this year. That's an amazing transformation for Dr. Lekic's business and speaks to the impact of digital approach for younger patients. Invisalign treatment with mandibular advancement is not available in the U.S. yet, as it's currently pending FDA approval.
Our consumer marketing programs continue to increase demand for Invisalign treatment and are key to adoption in both the teen and adult segments. Each year, we invest $ millions in consumer advertising and social media campaigns that raise awareness, create preference, and help consumers find an Invisalign practice near them. In 2017, we increased our investment in consumer marketing by 60%, which we believe is contributing to our strong growth. Despite our efforts, most of the consumers interested in Invisalign treatment still end up in metal braces or don't start any type of orthodontic treatment at all. This as a phenomena isn't new, we've been working for years to identify gaps like these and develop solutions that turn more consumers into Invisalign patients for our customers.
In January, we launched a new consumer capture program with the Smile Concierge team in Raleigh, North Carolina, whose goal is to reach more consumers one-on-one and ensure that anyone that contacts us directly has the best experience with Invisalign brand beginning to end. Our Smile Concierge service educates consumers on the benefits of Invisalign treatment, answers their questions, helps them to schedule an appointment, and Invisalign providers from our next level partnership listed as VIP on invisalign.com.locator. The team also follows up with consumers through digital apps and email to find out whether they keep their appointment and start Invisalign treatment. It's really exciting to see how something as simple as direct personal touch has resulted in such positive response from our consumers and our doctors.
The team receives incredible feedback from consumers every day who appreciate the white glove service we provide, which is translating into shorter research cycles for the average consumer interested in Invisalign treatment in a win-win for Align, our customers, and consumers. Over the past 10 months, our Smile Concierge team has contacted 50,000 consumers who took a smile assessment on invisalign.com and scheduled 20,000 consultations with nearly 800 Invisalign practices across the U.S. To date, 5,000 have already started treatment with an Invisalign provider, which equates to $ millions in revenue to Invisalign practices, we're just getting started. Our new Smile Concierge service is not only helping turn more consumers into Invisalign patients, we're also learning a lot about consumer conversion. For example, convenience and speed of contact are critical to conversion.
If we can't schedule an appointment for a consumer to see a doctor within 72 hours, meaning they can't get onto the doctor's schedule within three days, the likelihood of that consumer converting to Invisalign patient drops by 40%. On top of that, for the consumers that get scheduled for a consultation, 65% of them cite financial concerns as the reason they don't start treatment, with 25% of them stating that a high down payment in the practice is the main barrier to acceptance. With that in mind, as part of our Smile Concierge service, we've just launched a patient financing pilot that addresses consumer financing concerns, as well as insurance coverage for orthodontic treatment.
In developing this pilot, it was important for us to find a solution that offers consumers the ability to customize their own down payment, monthly payment, and interest rate in a way that can fit into any budget. Equally important is providing an end-to-end digital workflow for both the consumer and the doctor, and with our new third-party financer partner, we've done just that. When consumers finance their treatment through us, Invisalign providers no longer pay Align. Instead, they just receive payment for the treatment fee minus Align's lab fee. By changing the financial relationship between the patient, Align, and the provider, Invisalign treatment becomes a revenue source for the provider and eliminates the need for them to pass on the high down payments to patients. Finally, we've also learned what's important for consumers when it comes to choosing an Invisalign practice, and digital technology really matters.
As part of the Smile Concierge referral process, consumers are offered the top three Invisalign practices in their areas, and it turns out that the iTero scanner is one of the key influencers. While this isn't surprising to us, it is important to be able to validate another example of digital technology like our iTero intraoral scanner replacing an old analog process like PVS impressions. With that, let's review the results for the iTero business. Q3 was a strong quarter for iTero and better than expected, with revenues up 25% year-over-year on record iTero scanner shipments. The iTero scanner is central to restorative workflows and key to our GP strategy. In Q3, we saw a nice uptake by GP dentists with record contracts at our GP summit in September.
Q3 results also reflect the initial uptake of iTero scanner from its first commercial availability in Japan, as well as from our new distribution agreement with Patterson Dental in the U.S. and Canada. Use of the iTero scanners for Invisalign case submission in place of PVS impressions continues to expand and remains a positive catalyst for Invisalign utilization. For Q3, total Invisalign cases submitted with a digital scanner in North America increased to a record 61.9%, up from 48.8% in Q3 of last year. Overall, we continue to be excited about the long-term potential for at-home doctor-directed market and are pleased with our equity investment and supply agreement with SmileDirectClub. For Q3, aligner shipments to SmileDirectClub, or SDC, were higher than expected and more than doubled sequentially, reflecting continued strong volume growth as well as a shift to Align manufacturing more of SDC's aligners than what SDC internally produces.
As SDC's exclusive third-party supplier, this quarter we produced about two-thirds of their clear aligner volume as compared to only one-third in the prior two quarters. While this shift was not anticipated, our world-class manufacturing operations can accommodate changes in SDC's order flow easily. We're pleased to be able to support their continued rapid growth. With that, I'll now turn it over to John.
Thanks, Joe. Now for our Q3 financial results. Total company revenue for the third quarter was a record $385.3 million, up 8.1% from the prior quarter and up 38.3% from the corresponding quarter a year ago. Clear aligner revenue of $341.6 million was up 6.4% sequentially on higher than expected volume and favorable foreign exchange rates, as well as increased revenue from shipments to SDC. Year-over-year clear aligner revenue growth of 40.2% reflected strong Invisalign shipment growth across all customer channels and geographies, increased Invisalign prices, and revenue from shipments to SDC. Q3 Invisalign ASPs were up sequentially approximately $25 from Q2 to $1,310, reflecting favorable foreign exchange, a favorable shift in our product mix, and price increases, partially offset by increased promotional discounts.
On a year-over-year basis, Q3 Invisalign ASPs were also up $25, reflecting price increases, an increase in additional aligner revenue, favorable foreign exchange, partially offset by increased promotional discounts. For the third quarter, total Invisalign shipments of 236.1 thousand cases were up 1.8% sequentially, driven primarily by our Asia Pacific doctors and North American orthodontists. Year-over-year Invisalign case volume growth was up 32.8%, driven by growth across all regions as well as expansion of our customer base, predominantly from Asia Pacific. For North American orthodontists, Q3 Invisalign case volume was up 1.8% sequentially and up 31.9% year-over-year. For North American GP dentists, Invisalign case volume was down 5.2% sequentially and up 15.9% year-over-year. For international doctors, Invisalign case volume was up 6.8% sequentially and up 47.4% year-over-year.
Our scanner and services revenue for the third quarter was $43.7 million, up 23.2% sequentially and up 25% year-over-year, primarily due to our continued investment in go-to-market activities in APAC and EMEA, as well as the initial uptake of the iTero scanner from its first commercial availability in Japan. Moving on to gross margin. Third quarter overall gross margin was 75.9%, down 0.1 point sequentially and up 0.8 points year-over-year. Clear aligner gross margin for the third quarter was 77.9%, down 0.2 points sequentially, primarily due to an increase in aligners per case, driven by additional aligners, partially offset by higher clear aligner ASPs. Clear aligner gross margin was up 0.2 points year-over-year, primarily due to leveraging our manufacturing costs over higher volumes. Scanner gross margin for the third quarter was 60%, up 3.3 points sequentially, primarily due to higher ASPs.
Scanner segment gross margin was up 2.9 points year-over-year, primarily a result of lower service costs. Q3 operating expenses were $193.7 million, up sequentially by $6.4 million or 3.4%, primarily related to increased global headcount. On a year-over-year basis, Q3 operating expenses were up 31.7%, reflecting increased headcount and continued investment in our go-to-market activities critical to the growth of our business. Our third quarter operating margin was 25.6%, up 2.2 points sequentially and up 3.3 points year-over-year. The sequential increase in operating margin relates primarily to increased clear aligner volume. On a year-over-year basis, the increase in operating margin primarily reflects higher revenue and lower cost per case, partially offset by increased headcount and higher marketing expenses.
With regards to our third quarter tax provision, our tax rate was 17.9%, which includes $1.7 million in excess tax benefits and is down by approximately 0.5 points compared to 18.4% in the same quarter last year. Primarily due to the 2017 adoption of ASU 2016-09, which requires excess tax benefits related to stock-based compensation be recognized as a reduction to tax expense and certain one-time tax charges incurred in the prior year from implementing our new international corporate tax structure. The revenue and cost to supply aligners to SmileDirectClub are included in our operating profit and reported results. Additionally, we also report our share of SmileDirectClub's losses below operating margin and our tax provision and is entitled Equity in Losses of Investee, Net of Tax. Our share of SDC's loss net of tax in Q3 was approximately $1.6 million, decreasing our diluted earnings per share by $0.02.
Third quarter diluted earnings per share was $1.01, up 18.8% sequentially and up 60.3% compared to prior year. Moving on to the balance sheet. As of the third quarter, cash equivalents, and marketable securities, including both short and long-term investments, were $737.9 million . This compared to $676.6 million at the end of Q2, an increase of approximately $61.3 million primarily related to earnings growth. Of our $737.9 million of cash equivalents, and marketable securities, $236.3 million was held by the U.S., and $501.6 million was held by our international entities. Q3 accounts receivable balance was $321.3 million, up approximately 10.2% sequentially. Our overall DSO was 75 days, up one day sequentially and down three days from 78 days in Q3 last year. We anticipate that our DSOs will decline over the next few quarters.
Cash flow from operations for the third quarter was $118.1 million, up $58.3 million compared to the prior year. Free cash flow for the quarter, defined as cash flow from operations less Capital Expenditures, amounted to $70 million. Capital Expenditures for the third quarter were $48.1 million, primarily relating to building purchases and improvements, equipment purchases for additional manufacturing capacity, as well as our global expansion efforts. During the third quarter, we concluded our previously announced $50 million accelerated stock repurchase. We received a total of 0.4 million shares under the ASR at a weighted average share price of $146.48. We have $250 million remaining for repurchases under the existing stock repurchase authorization. With that, let's turn to our Q4 outlook and the factors that inform our view, starting with the demand outlook.
For international, we expect Invisalign volume to be up from Q3 as EMEA customers return from seasonally slower summer holidays, partially offset by a slight decrease in APAC as the Greater China market observes the Golden Week holiday. For North America, we expect Invisalign volume to be up sequentially, reflecting a seasonally stronger quarter, partially offset by some lingering effects of hurricanes Harvey and Irma. For our scanner business, we expect a slight sequential increase reflecting a typical strong end-of-the-year demand for capital equipment. Q4 sequential growth reflects the benefit from orders taken at our North America GP summit in Q3 and global expansion. As Joe commented earlier, this quarter, we produced two-thirds of SDC aligners. However, we expect our aligner shipments to SDC to be down sequentially in anticipation of a production shift back to their own internal manufacturing.
With this as a backdrop, we expect the fourth quarter to shape up as follows. Invisalign case volume is expected to be in the range of 245,000-250,000 cases, up approximately 29%-32% over the same period a year ago. We expect Q4 net revenues to be in the range of $391 million-$398 million, an increase of approximately 33%-36% year-over-year. We expect Q4 gross margins to be in the range of 75%-75.5%, reflecting higher ASPs, partially offset by higher expenses as we regionalize our treatment planning operations. We expect Q4 operating expenses to be in the range of $198 million-$202 million, up on a sequential basis to reflect our continued investment in go-to-market activities. Q4 operating margin should be in the range of 24.3%-24.8%.
Our effective tax rate, including an excess tax benefit of about a million dollars, should be approximately 22%. We expect a $1.5 million loss related to our share of SmileDirectClub. Diluted shares outstanding should be approximately 81.9 million, exclusive of any share repurchases. Taken together, we expect our Q4 diluted earnings per share to be in the range of $0.92-$0.95. As we continue our operational expansion efforts, we expect CapEx for Q4 to be approximately $55 million-$60 million, and we expect depreciation and amortization to be $10.5 million-$11 million. With that, I'll turn it back over to Joe for final comments. Joe.
Thanks, John. We're pleased with the performance of the business and feel good about the overall momentum and strength of Align. With that, we'll open up the call to any questions. Operator?
Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press *1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press *2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you. Our first question comes from the line of Robert Jones with Goldman Sachs. Please proceed with your questions.
Great. Thanks, Joe and John, for the questions. A very big step-up in ASPs. John, I know you touched on some of the factors there, FX mix and price increases. It does look like that you're calling for this to be sustainable at least through the end of the year. I was maybe hoping you could just talk about the drivers and I guess maybe specifically, mix and the price increases is where I'd be most interested in what's driving that and why you think that looks like it'll hold at least through the end of this year.
Yeah. Good question. You're right. We did see some mix benefits with some volume that came through Asia. That helps us from an overall standpoint. We saw some FX favorability that came in this quarter. As you've noted, we have price increase that is in our numbers as well, partially offset by some discounting. Netted all together, we feel that, for fourth quarter, it should be flat to slightly down from where we're at in Q3.
Okay. Got it. I guess just on the patient financing, interesting new wrinkle. Joe was hoping maybe you could talk about the opportunity there. Any data or survey work you guys have done that might help us get our head around how many people actually maybe go to Doctor Locator or go to see a doctor about pursuing Invisalign, ultimately don't elect to do the treatment because of cost? Might help us frame how this might help the opportunity there.
Bob, it's a good question. We don't have any real statistics to tell you how many people go on Doctor Locator and how many. We can tell you from our consumer capture efforts. We talked about the Smile Concierge service, this is one of the big items that consumers have to deal with. Often orthodontists also ask for a large down payment up front, too, that even if the customer can avoid credit, it's still a pretty big hit from a cash standpoint up front. We think this will be a good factor, a significant factor for us in helping to bring more consumers into Invisalign. We don't have any statistics right now to tell you exactly what that might be. I'd say just stay with us. As we go through this, we'll be able to give you more and more specifics on it.
Awesome. Thanks for the questions.
Okay.
Our next question is from the line of Steve Beuchaw with Morgan Stanley. Please proceed with your questions.
Hi, good afternoon.
Hey, Steve.
Two from me on the same basic concept, and it's about the trajectory of investment in the business. I have to imagine you feel happy about on the marketing spend trajectory and on the efforts in Asia that these have paid off as well as they have. You gave a couple of interesting statistics on, I think it was 60% growth in marketing spend and something like a tripling of the customer base, and I believe that was broader Asia. Could you talk about, one, how you think about the growth of marketing spend and the commercial team from here, then two, a similar question, more specific to Asia, how you think about the remaining runway for customer acquisition, considering how much success you've had and how much you probably learned about how things are working there?
Yeah, Steve, it's Joe. On the marketing spend, I just say we just continue to do what we can in the sense of driving volume, and there's no formulaic methodology we have here. Obviously, we've focused on teens in a big way in North America to get the lift that we had. That spend also has been, I'm thinking, really refined in the sense of how much is social media, how much go to the mother segment, how much goes to teens, and how it's done. I feel there's a lot of accuracy and sophistication in the sense of how we go about it. We do know that we've had a pretty big signal in the sense of being able to spend more in that channel and seeing an increase in our orders, and we'll keep spending where we can.
I think a broader question than that, and I'll bleed into your second one, is how we do this overseas, too. In North America, a lot of our marketing dollars on teens were focused in the third quarter, in the second quarter also. We'll look at translating what we're learning here in the United States overseas, and we've had a pretty good response from a teen standpoint in China also. Now, we have some restrictions in the sense of how you can advertise in certain geographies, and we have to be compliant in that sense, we'll be smart in the sense of how we use the advertising dollars. From an Asia runway standpoint, we talk about going wide in the business. You saw we trained another 1,000 docs overall in China for the quarter.
There's a direct correlation in the sense of being able to train those docs and we see the increase in orders going forward. Remember, our penetration rates in places like China are still relatively thin when you think about the available population. Also India, we're really just getting started in Korea and Taiwan. Australia, we saw terrific growth there, too, and that's a market that we've had fairly good penetration rates in over the years. There's different formulas we have to use for different geographies in the sense of adding salespeople, adding docs. Like in Australia, it's a different deal in the sense of it's more like North America, where it's advertising and specificity of where you spend from a sales standpoint that helps in that way.
I know I'm not helping you a lot, Steve, in the sense of being able to model that, but tell you that we obviously watch this closely. We want to invest in a sense of where we get the biggest return, and we do watch that part also.
That is really helpful, Joe. If I could just sneak in one housekeeping item. I wonder if you had any updates on timelines in the U.S. for mandibular advancement and for iGo?
On mandibular advancement, we expect to hear back from the FDA in December sometime. That's all we know. It's lights out when you do that, you submit your data, then basically the FDA kind of goes behind closed doors and kind of works through it. We feel we submitted good data, and we'll just wait and see what they have to say in December. From an iGo standpoint, remember we keep iterating on iGo in different parts, different geographies in the sense of the product itself and how that interacts with the doc and the patient. We continue to do well with that product line. You'll see more data on that, on iGo and iGo success as we get into, as we report the fourth quarter next year, we'll have more specificity on it.
Got it. Thanks a bunch.
All right, Steve. Thanks.
Our next question is from the line of John Krieger with William Blair. Please proceed with your questions.
Hi. Thank you.
Hi, John.
Joe, obviously the years played out very well in terms of volumes. Can you just talk about how the infrastructure's holding up? Are you starting to see any bottlenecks or choke points that could be challenges if the demand continues to be this strong?
Yeah. John, that's a great question. Obviously, when you start to grow at this rate, above what we predicted. We've been able to stay ahead. From a manufacturing standpoint, we always build a certain amount of buffer capacity so that we can cover things like this. Initially, we had a little bit of trouble in the sense of ClinCheck and our people that actually do the ClinCheck pieces, but we experienced that back actually in January or so, and we adjusted to give us extra capacity for the year. Right now, we're in good shape. It's a good thing about this business in the sense that we can adjust capacity pretty quickly within a certain number of weeks and months when we have these kind of things.
We're trying to anticipate and lay resources in ahead of these things so we don't get into a situation where we can't handle demand.
Great. Thank you. Then maybe any early thoughts on 2018 and sort of key puts and takes. For example, should we think about the storms here in North America as maybe causing you to start more slowly or maybe giving you a little bit of pent-up demand as you move into next year?
I wouldn't call the storms material at all, John, I wouldn't even consider that in your equation. Right now, we kind of talk about this. We anticipate that there'll be 2018 questions and look, we have good momentum now, you can see us going into the fourth quarter, I think John's given you some really strong indications of where the fourth quarter's going to be, we try to be as specific as we could to help in that sense, we're really not ready to get into conjecture on 2018 at this point.
All right. Great. Thank you.
Bye, John. Thanks.
Our next question is from the line of Jonathan Block with Stifel. Please proceed with your questions.
Great. Thanks, guys. Good afternoon.
Hi, John.
I'll ask you two questions as well. Maybe just the first one, the international case volume number was tremendous, notably APAC. You mentioned the trained docs, and that was certainly big. Is some of that, Joe, also due to the local treatment planning facility that just opened up, or is arguably that even too soon to be yielding benefits and that still might be on the come in subsequent quarters?
I'd say right now that I wouldn't call any of the extra volume right now, John, associated with those. In fact, we just got back from, we were in Germany just last week to take a look at our treatment facility we opened up in Cologne there. Honestly, it's just starting to get ramped up. The initial indications, just like in China, these are really good. They interface well with customers. The teams there are very excited in the sense of what they can do. Just getting closer to those customers and being in that geography from a cultural and a timeframe standpoint is really critical. No, that really hasn't impacted volume yet. We'll give you a report as we get into next year and this becomes a little more mature.
We obviously put that in there because we think midterm, longer term, this is going to be a volume driver for us.
Got it. Actually, you just answered the question with that very last statement. That's perfect. Then just to shift gears, patient financing pilot, I want to make sure I've got my arms around this correctly. The doc gets a treatment fee, less Align's lab fee. Are you guys the one taking on the financing risk? If so, should we think about it as a potential long-term tailwind to sort of your realized ASP offset by what could be sort of this theoretical bad debt expense from the consumer? Maybe if you can just talk through that. Thanks, guys.
John, can you handle that?
Yeah. I'll take this one, John. It's a third party that will take on any of the financing. The bad debt or anything else that comes with this would be a third party. It would not be associated with us at all.
Okay. Just zero impact to your ASPs. Perfect. I'll take the rest offline. Thanks, guys.
Yep. See you, John.
Our next question is from the line of Matthew O'Brien with Piper Jaffray. Please proceed with your questions.
Good afternoon, team. This is Kevin on for Matt today. Thanks for taking the time. I wanted to take a moment on iTero, which seems to be the focus for this year and beyond. With record shipments, I'm just curious how you're looking at the trend for case submissions and the broader strategy on the ground for iTero. Seems like a bigger piece than we previously anticipated. The second part of the question is, I know you mentioned in the prepared remarks about the lower patient traffic in summer holidays. Just wanted to reconcile the sales effort on the scanners into GP offices and kind of how does that relate to the lower volume in the quarter? It seems a bit of a mismatch.
You remember last year, Kevin, we were shipping a lot from backlog on the volume piece. What you're seeing this year is a pure demand signal. There's nothing really coming out of backlog. I think if you're talking about that discrepancy, that's the one I'd point out.
Okay.
I think on your broader question on the volume of the business, I think it's important to understand that when we talk about sales last year of iTero, it was broadly a North American business. What we're seeing now, we're seeing increased uptake in Europe. We've just approved in Japan, we had some significant shipments in Japan in the third quarter also, and we'll move into Asia broadly more next year. I'd say you see the business, just it's getting broader internationally, and that adds to the volume also. In the United States, I hear in your comments, I think you understand that we've had a really good amount of orthodontic penetration with iTero.
Right.
More and more of our sales are moving into GPs. That's one of the reasons we put together the Patterson Dental distribution agreement, because of their strong position with GPs and help us through. We have some work to do on restorative workflow and areas like that to be more viable in that channel. We've gotten really good pickup, and we're enthusiastic about the future, that North American channel for GPs, too.
Okay, great. Second question comes from China. I think a few folks touched on this, too. Just wanted to discuss just the utilization trends in that market and the strategy that's done differently there that you would highlight versus the rest of the international markets. Is there anything on the ground that I'm missing driving this, or is it just continued adoption, training, and utilization as you would expect?
Continued adoption, training, and utilization, just as you described, Kevin.
Okay.
I wish I could make it sound harder and more sophisticated. It's about getting resources in place and moving it through. Now, we just put up a treatment planning facility in China, and that's really been ramping up well. We were getting good customer feedback. We'll continue to move more and more resources to enhance that position in China in the future.
Perfect. Thanks so much.
Yeah, sure.
Our next question is from the line of Erin Wright with Credit Suisse. Please proceed with your questions.
Great. Thanks so much. Just to follow up on sort of the scanners. I guess, what sort of traction are you seeing for standalone, I guess, versus sort of the competing closed architecture systems, just given sort of the distribution shifts that we've been seeing kind of in the periphery in the U.S. Is there sort of stocking dynamics that we should be considering here near term? Thanks.
Erin, I missed that question. Could you rephrase the first part?
iTero, sorry.
Yeah, no, I got iTero, but it was underneath that.
What did you mean by closed systems?
Yeah, closed systems. Yeah.
Oh, like closed architecture systems, involving chairside milling and
Oh, you mean like a Sirona system that's
Yeah.
Yeah. No, we don't
Right.
We have a completely open system in that sense. Yeah. Sirona, they're capable of doing a scan and sending it in to us. You can bypass an impression with a Sirona scanner. You can't necessarily get simulation and a lot of visualization and things that we offer on the iTero side.
Great.
Did you talk about capacity on iTero, or
Yeah. Any sort of stocking with distributor relationships there that we should be?
Oh, no, I understand what you mean. No, nothing like the Patterson Sirona thing. Okay, don't worry about any kind of stocking things affecting our numbers in any material way.
Okay, great.
Okay.
Then.
Yeah.
Can you give us an update on the SmileDirectClub and how that's sort of resonating with customers and how you weigh sort of that direct-to-consumer relationship with also practitioners as well? Thanks.
Yeah. Our relationship with SmileDirectClub is good. We value it. I think we're very synergistic in the sense of how we work with one another. Remember, those are SmileDirect's customers. We don't see them. We don't really experience them. We just do what SmileDirectClub's asked us to do it. Obviously, if part of your question is a lot of consternation in the orthodontic channel about doctor-directed, and kind of systems that would be more of a digital dentistry, remote kinds of things where it's not involved in a doctor's office. Again, that's not us. We're not part of that. SmileDirectClub really controls that and holds it. There is a market for this. SmileDirectClub continues to do a great job in the market and grow pretty substantially.
It would be stupid to ignore that there is a certain amount of consternation in the marketplace and pushback, I think SDC continues to do a great job out there.
Great. Thank you.
You're welcome.
The next question is from the line of Richard Newitter with Leerink Partners. Please proceed with your questions.
Hi. Thanks for taking the questions. Joe, I just wanted to start, your growth trajectory, it continues to accelerate. You're at a level, these are some pretty enormous year-over-year numbers here. I was just wondering if you could reflect a little bit upon the age-old question we always ask you, balancing driving future growth through reinvestment and dropping through to the bottom line. As we kind of think about some of these marketing initiatives that have clearly been paying off, it sounds like you guys are probably at a point where teens inflecting, and you might want to dial forward some of these initiatives. Is that the way to think about it, that you could be at a tipping point here, or inflection point in adoption, and you guys are going to kind of put the gas pedal on expenses?
How should we think about, philosophically, your view of growth versus reinvestment?
Yeah, Richard, I'd start and I'd just turn your attention to how under-penetrated we are in this marketplace. It's incredible, right? Globally, we can do 60%-70% of the orthodontic cases out there today, we have 8%. A lot of the investment and things that we make, whether it's recruiting new doctors in China or if it's targeting moms and teens here in the United States, is about really driving the penetration, that there's an entitlement in this business we should have based on what patients want and based on what our technology can deliver. I know there's always questions on leverage out there. Our operating profit was over 25%, obviously was helped by SDC this quarter, and it's significant. We showed good leverage this quarter, despite exchange and despite what I'd call kind of unusual from an SDC standpoint.
I would say we're getting some leverage in this business. I don't expect material change in the sense of the input-output ratio of this business. We have to continue to invest aggressively in forward sales forces, in marketing, especially in technology, too, to stay ahead and to penetrate more of the marketplace. We've always said that our goal was 25%-30% operating profit in this business. We could do that tomorrow if we wanted to, you wouldn't like the growth numbers. Right now, we're going to get as close to that lower end, and we keep working that piece, and we feel good about the trade-offs that we're actually administering right now between volume and margin. Does that make sense, Richard?
Yep. No, yeah, it makes a lot of sense. I think a number of investors would agree that you're striking the right balance and the trade-off there. My second question, just on teen, can you break out a little bit, the continued acceleration that we're seeing in that category, I get a lot of it was helped outside the U.S. In North America, what kind of traction are you getting with the GP channel in teen? Obviously, the orthodontic channel's been a little bit more dominant there, are you starting to see some inflection on the GP side with that segment?
With the GP segment in general, I would say no. Honestly, I would say Invisalign Go is helping us understand that more. I could tell you the GP segment in the U.S. is certainly different than the segment in Germany, than it is in Japan, than it is in China. Each one of these countries kind of has a different solution that we have to work through, whether it's workflow or what preferences are or whatever. I would not say we're in an inflection point at all with GPs. I'd say we have a lot of growth. Teen growth with GPs, not where they're focused. There's a lot of GPs who won't touch a teen. They're worried about working teens. When we talk about teens, we're really talking about ortho channel utilization in the end.
Okay, thank you.
Yeah.
Thanks, Richard. Operator, I think we've got one more question, please.
Yes. That question is coming from the line of Jeff Johnson with Robert W. Baird.
Thanks. Good evening, guys. I'll try to be quick here as the last question. Joe, I guess first question, just why did we see the increase in SDC volumes in third quarter? Was there a driver of that? Was there a reason behind that? Why does it revert in fourth quarter, or do we just kind of live with a little bit of volatility here going forward?
I think I'll answer your last question first. You live with the volatility going forward, Jeff, okay? We don't control SmileDirectClub's decision-making process. I'm not quite sure exactly why we received that much more of SDC's volume. I don't count on that going forward, and that's basically what John's comments were in his opening about it. I wish I could be more specific about it, Jeff, but I can't.
Sorry.
Go ahead.
Should we at all read that as a demand spike in the third quarter? Like all of a sudden, volume came in stronger than they expected in the third quarter, or do you think it was just them putting off some volume on you?
Look, they continue to grow, but I'd say it's a combination of both. It's not driven as discreetly by volume, I'd say.
Yeah. Okay, my last question, just on the iTero Fusion program. You lock some GPs in at some higher implied volumes there with that program. Just what's been the response to that program? Has that program taken off, or is it taking off? How should we think about the implications for the GP numbers from that program going forward?
I think you got to move outside of North America in general. The biggest uptick in excitement for Fusion has been outside of North America, and it's been really received extremely well. In North America right now, we're really just getting cranked up on the Fusion piece and would have more for you in the fourth quarter results, Jeff.
All right. Thanks, guys.
Okay. Yeah, Jeff, thanks a lot.
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