Greetings, and welcome to the Align Technology First Quarter 20 17 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms.
Shirley Stacy, VP of Corporate and Investor Communications. Thank you, Ms. Stacy. You may begin.
Good afternoon, and thank you for joining us. I'm Shirley Stacey, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO and John Maricci, CFO. We issued Q1 2017 financial results today via MarketWired, which is available on our Web site at investor. Aligntech.com.
Today's conference call is being audio webcast and will be archived on our Web site for approximately 12 months. A telephone replay will be available today by approximately 5:30 p. M. Eastern Time through 5:30 p. M.
Eastern Time on May 11. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13658 703 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 Q2 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 expresses no assumes no obligation to update any forward looking statement. We've posted historical financial statements, including the corresponding reconciliations and our Q1 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. 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 2 operating segments, Clear aligners and intraoral scanners. John will provide more detail on our financial results and discuss our outlook for the Q2. Following that, I'll come back and summarize a few key points and open up the call to questions.
2017 is off to a great start with 1st quarter revenues, volumes, gross margin and EPS all above expectations. First quarter net revenues were up 30% year over year, driven by strong Invisalign case shipments, up 27% year over year to a record 38,900 doctors this quarter. These reflect the growth from both our North American and international regions and higher than expected teenage cases across the board, which increased 32% year over year. Itero scanner revenues increased 47% year over year and were down sequentially as expected. For Q1, North American Invisalign case volume was up 8.4% sequentially and 20.3% year over year, driven primarily by North American orthodontists, but GP Dentists showing improving growth trends.
Continued strength in North American ortho channel reflects another record quarter for Invisalign utilization of 12.6 cases per quarter, which includes substantially higher use by teenager patients, a positive indication for market share gains from metal braces. In Q1, we expand our adult focused media buying to target both men and women with specific segment focus. This new buying target built on historical strength we have had with adult females, while also reaching adult males in a much more pointed way than ever before. We saw the results of this new media targeting come through in our sales as strength continued with adult females and also significant growth with adult males choosing Invisalign treatment. During the quarter, we launched Invisalign Light in North America, which was the first introduced in EMEA and includes up to 14 stages of aligners.
We also began piloting Invisalign Go in North America in Q1, including with some of our dental service organizations or DSOs. IGo for short is an aesthetic solution designed to empower general dentists to treat more patients. IGo creates a simplified approach that guides dentists through identifying, planning and treating aesthetic cases. On a year over year basis, shipment growth of 20.3% was driven by increased adoption of Invisalign by orthodontist and continued expansion of our GP customer base. We continue to make good progress with our DSOs with Invisalign shipments up nearly 50% year over year in Q1, significantly higher than non DSO practices.
DSOs are leaders in adopting new technology and innovation in dental industry. They were the first to consolidate practices, automate processes and drive greater efficiencies in order to scale their operations. The next phase in the DSO industry shift will be driven by the consumer and their preference for everything digital, which we have branded DSO 3.0 and our new marketing programs in collateral. Consumers today want digital experiences to provide them with more insight to the treatment and options and what steps to take in order to achieve a healthy lifestyle. By leveraging our technologies, iTero scanning, Invisalign treatment plans, progress tracking application, time lapse features, our DSOs will be able to collect data on their active patients and tailor dentistry and orthodontics the way their patients want to consume it digitally.
Working together with DSOs, we can help accelerate the industry shift to full digital practices much quicker and more effectively than with other companies. As part of our newly formed Americas region, in Q1, we completed the acquisition of our distributor in Brazil, which includes a small team of employees who will be based in our Sao Paulo offices in Latin America. Brazil is estimated to have approximately 1,400,000 North Adani case starts each year and employs nearly 20% of the world's dentists. As the world's 2nd largest market for cosmetic interventions, Brazil represents a tremendous growth potential for Align and this acquisition will help us establish our leadership position in Latin America and support our long term growth strategy. Q1 Invisalign volume for international doctors was up 11 point 4% sequentially and up 41.3% year over year.
The better than expected sequential increase was driven by growth in both the EMEA and APAC regions. In EMEA, Q1 volumes were up 38.8% year over year. We had record quarter of growth across nearly all country markets as our TFM model continues gaining traction across the ortho channel with Spain, the UK and Germany leading the way. In Q1, we introduced Invisalign Teen with mandibular advancement in certain country markets in EMEA and launched Invisalign Go in the UK, K, France and Germany. We also completed the acquisition of our EMEA distributor, which includes opening our first office in the Middle East, which gives us direct access to customers and distribution partners across Russia, Commonwealth of Independent States, the Baltics, Turkey, Monaco, Israel, Cyprus, the Middle East and Africa.
In Asia Pacific, Q1 volumes were up 45.2 percent year over year, led by China, Japan and Australia, New Zealand. In Q1, we launched Invisalign Teen with mandibular advancement in Australia, New Zealand, Hong Kong and South Asia and more than 800 doctors attending the peer to peer launch events. We also held a South Asia forum with record 200 doctors and participated in New Zealand's Association of Orthodontists Forum. Finally, in South Korea, we transferred all Invisalign practice is currently managed by our network partner to a direct coverage model. This gives us a 100% direct coverage of the Korean market and will enable our team to continue developing the market for clear aligners and help accelerate growth and adoption of Invisalign treatment.
Turning to the teen market for Q1, 49,000 teenagers started treatment with Invisalign clear aligners, up 11.3% sequentially and 31.6% year over year. North America ortho shipment growth was well above the 3 year average, both sequentially and year over year. International case shipments to teenage patients increased both sequentially and year over year as well, with Q1 teen shipments representing about 30% of total teenage cases. In Q1, we introduced the 1st clear aligner solution for Class II correction in certain country markets in Canada and May and APAC. Invisalign team with mandibular advancement combines the benefits of the most advanced clear aligner system in the world with features for moving the lower jaw forward while simultaneously aligning the teeth.
This new solution offers a simpler, more efficient and patient friendly treatment option than functional appliances and without the need for elastics typically used to treat teen Class II patients. It's not available in U. S. Yet. It's pending 510 approval from regulatory.
In Q1, we are excited to launch our new global Made to Move campaign. Is the first time we've had an integrated campaign approach for consumer and professional audience across all regions. The multi channel national consumer campaign will reach potential patients through TV and digital advertising, social media and PR programs. Launched first in North America, we will begin to extend our Made to Move campaign and other key country markets beginning in May. While it's still very early, our new campaign is already driving over 40% higher engagement in digital media versus prior media and followers across Invisalign social channels are up 13% this quarter.
We're also seeing the effectiveness of the new target audience in media planning. In Q2, we'll launch a significant push to drive consumer demand and conversion with moms and teenagers. We will dial up our in marketing to moms with a national multi touch campaign under the Made to Move campaign umbrella. And in mid May, we'll launch our national campaign marketing to teenagers. The national campaign will utilize key social media platforms such as Instagram and Snapchat and YouTube to raise awareness of clear aligners with custom programming for teens.
In Q1, our scanner revenues increased 46.9% year over year and decreased 33% sequentially as expected. Given we work through the backlog for Itera elements from the end of last year, these results are more reflective of the typical capital equipment buying cycle, which is softer in Q1. This past March at the International Dental Show, IDS we call it in Cologne, we had a greater presence in Showcase iTero and Invisalign Go and the benefits of the combination with applications such as Invisalign progress tracking. We also previewed the time lapse application that provides dentists with the ability to compare scans over time to instantly visualize changes in patients' tooth wear movement and gingival recession. Overall positive interest as we continue to expand our presence among GPs in EMEA.
Use of the iTero scanners for Invisalign case submissions in place of PVS impressions continues to expand, remains a positive catalyst for Invisalign utilization. For Q1, total Invisalign case submitted with a digital scanner in North America increased to a record 54.4%, up over 10 percentage points from the same quarter last year, which reflects an acceleration in case shipments with intraoral scanners, especially by North American orthodontists. Q1 was our 1st full quarter supplying clear aligners to SmileDirectClub and shipments to this new channel were solid. At the beginning of the year, SmileDirectClub launched a consumer advertising campaign that has performed well and is extending the message of treatment with clear aligners versus braces. They've also doubled their network of smile shops where potential patients can schedule a scan or have 3 d impressions and photos taken.
Overall, we remain excited about the long term potential for the at home doctor directed market and working with SmileDirectClub to bring better smiles to more people. With that, I'll turn it over the call to John.
Thanks, Joe. Let's review our Q1 financial results. Total company revenue for the Q1 was a record $310,300,000 up 5.8% from the prior quarter and up 30% from the corresponding quarter a year ago. Clear aligner revenue of $282,400,000 was up 12.3% sequentially, driven primarily by better than expected Invisalign shipments and higher Invisalign ASPs. Year over year clear aligner revenue growth of 28.5% reflected strong Invisalign shipment growth across all customer channels and geographies, partially offset by foreign exchange rates.
Q1 Invisalign ASPs were up sequentially approximately $40 from Q4 to $12.70 reflecting lower promotional activity. On a year over year basis, Q1 Invisalign ASPs were up approximately $15 primarily due to price increases, partially offset by increased promotional discounts, products shipped to low stage products and foreign exchange. For the Q1, total Invisalign shipments of 208,100 cases were up 9.5% sequentially, driven primarily by North American orthodontists and international doctors. Year over year, Invisalign case growth volume was 27.1%, driven by growth across all regions as well as expansion of our customer base predominantly from the Asia Pacific region. For North American orthodontists, Q1 Invisalign case volume was up 13.6% sequentially and up 27.5% year over year.
For North American GP Dentists, Invisalign case volume was up 2% sequentially and up 11.4 percent year over year. For international doctors, Invisalign case volume was up 11.4% sequentially and 41.3 percent year over year. Worldwide Invisalign utilization in Q1 was a record 5.4 cases per doctor, up from 4.9 in Q1 last year. North America ortho utilization was a record 12.6, up from 10.4 the prior year. North America GP utilization was 3.1, up slightly from 3.0 the prior year.
And international utilization was 5.0, up from 4.7 in Q1 last year, reflecting continued expansion of customer base in Asia Pacific. In Q1, we added 3,260 new Invisalign doctors worldwide, of which 980 were new North American doctors and 2,280 of which were new international doctors. This compared to 3,700 in Q4 and 2,480 total doctors trained in the same quarter last year. Our scanner and services revenue for the Q1 was $27,900,000 down 33% sequentially and up 46.9% year over year. Moving on to gross margin.
1st quarter overall gross margin was 75.9%, up 0.8 points sequentially and 0.2 points year over year. Clear aligner gross margin for the Q1 was 77.9%, up 0.4 points sequentially, primarily due to leveraging our manufacturing costs over higher volumes, higher Invisalign ASPs and partially offset by increased aligners per case. Clear aligner gross margins were down 0.4 points year over year, primarily due increased aligners per case as we continue to treat more complex cases, partially offset by manufacturing efficiencies. Scanner gross margin for the Q1 was 56.1%, down 4.9 points sequentially, primarily due to a slight increase in excess and obsolescence reserves and higher freight costs. Scanner segment gross margin was up 11.1 points year over year, primarily a result of higher ASPs and lower manufacturing and servicing costs of our iTero Element Scanner relative to our previous scanner.
Q1 operating expenses were $174,000,000 up sequentially by $22,100,000 or 14.5 percent, primarily related to increased employee headcount, commissions associated with higher volumes and marketing spend as a result of our investments in geographic expansion, our new advertising campaign and the commercialization of new products. On a year over year basis, Q1 operating expenses were up 36.7 percent, reflecting the aforementioned investments. Our first quarter operating margin was 19.9%, down 3.4 points sequentially and 2.4 points year over year. The sequential decrease in operating margin relates primarily due to increased headcount and marketing expenses as we continue to grow our business. On a year over year basis, decreased operating margin primarily reflects the higher operating expenses as we invest in headcount, geographic expansion and new products in order to increase the adoption and accelerate the growth of our business.
With regards to the 1st quarter tax provision, our tax rate was minus 11.4%, which includes $21,300,000 in excess tax benefits and is down by approximately 31.2 points compared to Q4 2016. In our Q1 of 2017, we adopted accounting standards update entitled Improvements to Employee Share Based Payment Accounting. Under this new standard, excess tax benefits and deficiencies associated with employee share based payments are no longer recognized as additional paid in capital on the balance sheet, but instead recognized directly to income tax expense or benefit in the income statement for the reporting period in which they occur. We also supply aligners to SmileDirectClub and therefore revenue and costs for this activity are included in our operating profit and reported results, although they were immaterial to the company this quarter. Additionally, we also report our share of SmileDirectClub's losses below operating margin and our tax provision and is entitled Equity and Losses of Investee, Net of Tax.
This Q1 loss, net of tax, was $1,100,000 or $0.01 per diluted share. 1st quarter diluted earnings per share was $0.85 compared to $0.59 reported in Q4 and $0.50 reported in the same quarter last year. 1st quarter earnings per share included the benefit of $21,300,000 or $0.26 per share from excess tax benefits on stock based compensation in accordance with the new standard. Moving on to the balance sheet. As of the Q1, cash, cash equivalents and marketable securities, including both short and long term investments, were $644,200,000 This compared to $700,000,000 at the end of 2016, a decrease of approximately $56,000,000 primarily related to the purchase of our new headquarters building.
Of the $644,200,000 of cash, cash equivalents and marketable securities, 222.7 $1,000,000 was held by the U. S. And $421,500,000 was held by our international entities. Q1 accounts receivable balance was $267,100,000 up approximately 8% sequentially. Our overall DSO was 77 days, up one day sequentially and up 10 days year over year.
The increase is a result of our ERP and other related systems implementation last July, which have impacted the timing of our customer collections. We anticipate that our DSOs will remain above our historical average for several more quarters as we work through these changes. Cash flow from operations for the Q1 was $47,600,000 During the quarter, we used $36,500,000 to pay employee taxes for the net settlement of vesting employee stock awards that otherwise would have been issued. Capital expenditures for the Q1 were $59,600,000 primarily relating to the purchase of our new facilities in San Jose, California, as well as equipment purchases for additional manufacturing capacity and building improvements. During the Q1, we repurchased approximately 40,000 shares of stock for $3,800,000 which completes the April 2014 repurchase plan.
We have $300,000,000 available for repurchase under the 2016 repurchase program that was announced on April 28, 2016. With that, let's turn to our business outlook and the factors that inform our view, starting with the demand outlook. For our international markets, expect seasonally higher period for APAC and EMEA. For North America, seasonally up for orthos and GP dentists. For our scanner business, Q2 equipment purchases are seasonally higher.
With this as a backdrop, we expect the Q2 to shape up as follows. Invisalign case volume is anticipated to be in the range of 221,000 to 200 and 24,000 cases, up approximately 25% to 27% over the same period a year ago, reflecting continued strong demand across all channels and regions. We expect Q2 net revenues to be in the range of $340,000,000 to $345,000,000 an increase of 26 percent to 28% year over year. We expect Q2 gross margins to be in the range of 74% to 75%, reflecting a higher mix of Itero business and Align manufacturing expansion in Asia Pacific. We expect Q2 operating expenses to be in the range of $180,000,000 to $184,000,000 up quarter over quarter primarily due to increased headcount, increased marketing expenses related to our new Invisalign brand and team campaigns.
Q2 operating margin should be in the range of 21 percent to 22%. Our effective tax rate, including a windfall benefit of $2,000,000 to $3,000,000 should be approximately 21%. We estimate that Q2 impact of the SmileDirectClub transaction to not significantly impact EPS And diluted shares outstanding should be approximately 81,600,000 exclusive of any share repurchases. Taken together, we expect our Q2 diluted earnings per share to be in the range of $0.71 to $0.74 which includes approximately $0.03 of excess tax benefit. In addition, as we continue to operational continue our operational expansion efforts, we expect CapEx for Q2 to be approximately $30,000,000 to $35,000,000 Now let me turn to our view of 2017.
Given the stronger than expected results we've seen to date, we now anticipate 2017 total revenue to be at the high end of our long term operating model range of 15% to 25%. We also expect Invisalign revenue and volume growth to be at the high end of that model. Notwithstanding continued investments in our strategic growth drivers, we remain comfortable with the operating margin for the full year to be flat to slightly up from 2016 operating margin of 23%. With that, I'll turn it back over to Joe for final comments. Joe?
Thanks, John. In closing, I'm pleased with our continued progress and execution of our strategic growth drivers. The dental industry remains healthy and our customers continue to report solid patient traffic in their offices. I just returned from the AAO meeting in San Diego this week and was excited to see the level of activity in our booth and the interest level in our products, especially for teenagers as we kick off the summer teen season with our new teen focused campaign. We had 2,000 doctors and their staff visit our booth and 300 attendees participated in our iTero iron record scanning challenge, where an iTero scan was completed in under one minute for the first time in competition.
We will be in Dubai in May hosting our EMEA summit with over 400 customers attending the 2 day peer to peer event. We've got a lot going on in Q2 and I look forward to sharing more with you at the upcoming financial conference and meeting. I'll now open the call to questions. Operator?
Our first question comes from the line of Robert Jones of Goldman Sachs. Please proceed with your question.
Great. Thanks so much. I guess just looking at the significant step up in case growth per ortho in North America. In particular, Joe, you highlighted a couple of times on the call that the impressive team growth, which accelerated materially. I'm curious, you had a few initiatives at play in the quarter.
Anything you can share on how much of the teen growth specifically within Ortho North America was because of things like the teen challenge versus some of the more tactical changes you had within the sales force and I'm thinking about dock locator and things of that nature?
Hey, Bob, it's a good question. I mean, you've asked ourselves this question during the quarter too is, unfortunately, we don't do single variable equations around here. We have a number of things we've done with teens. And again, we'll make it more complicated as we get into more intense advertising in the Q2. But what you mentioned teen challenge, we think certainly had an impact in this sense.
I think some of the changes we've made on doc locator and a sense of the specificity of the patient directed into accounts was part of that also. Also our next level parts with customers, which basically takes customers to another level depending upon the share of business that we receive or the accelerated growth level that they can provide to us. Remember, Bob, when you go back about 75% of the normal orthodontic cases in the United States are teen based. So if you want to do more Invisalign, it's going to be hard to just dip into adults if you really want to increase in that sense. And you have to look at your teen business too.
So I'd say those three major variables is what really we drove from a North America standpoint to team growth in the Q1.
Got it. And so no one stood out more than another? No.
Yes, couldn't separate it.
And then I guess just my follow-up on the early recently launched products that you mentioned like Invisalign Lite, Invisalign Go, Mandipular Advancement. Given those are still relatively new within the case numbers that you're sharing, how
should we
think about these products helping accelerate or play into case growth as we move throughout the year?
I can't give you the John can help you on the dimensions of it, but I'd say when you talk about the mandibular advancement, which is completely different animal than the like the 15 stage we have for light, the light product fits really well when you think about E5, E10 and now E15. Customers can understand it. They can integrate it. And we saw really rapid uptake with that product line. When you come out with new products in this business like mandibular advancement, the infusion rate into the marketplace is slow.
You really you have dentists and orthodontists who want to try the product. They want to see how it works. They're just cautious on the front end until they gain confidence with it. So I mean mandibular advancement, remember we don't have a 510 in the United States yet. We have to that will occur later this year, we hope so, but we'll launch it the rest of the way around the world.
That product is truly a breakthrough. We'll have to work hard from a peer to peer standpoint to help to promote it or whatever. But it gives us more credibility again in that team market than we had before. But I wouldn't look at I wouldn't look at material numbers for mandibular advancement in 2017 in any way. It will be how fast we can infuse that product in the marketplace.
Thanks so much.
Yes. Thanks,
Bob. Our next question comes from the line of Steve Bausch of Morgan Stanley. Please proceed with your question.
Well, good afternoon. I've so I've never been someone who congratulated a company on a great quarter and I'm not going to do that here, but even though it was a great quarter, but I'm going to be the first to congratulate you on joining the $10,000,000,000 Market Cap Club here in the aftermarket.
Thanks, Steve. That's great.
So hopefully I was first in the queue on that one. Just a couple for me. I mean, I completely agree, of course, with Bob that when you look at the quarter, you have to take a step back and say, wow, this is the fastest growth I've seen in certainly in my model. It's fairly remarkable to step up. Teen really jumps out.
I wonder if you could sort of hypothesize for me about how important the 1 week aligner change out was specifically. I know you called it out briefly, but could you just dive a little bit deeper there? And could you give us a sense for specifically in the U. S, because a lot of investors really like to focus on this point, just how much faster team growth was relative to the 2016 trend? You mentioned it was faster, but could you give us any more granularity there?
I'll take the first one. I'll give John the second one on this one, Steve. On the growth trial, on the 1 week wear piece, again, it's hard to pull that signal out from the volume noise, I'd call it. But what we see is we're seeing rapid uptake by our orthodontists and GPs on moving to 7 day kind of aligner wear. We're also getting good feedback in the sense that helps them in the close cycle with patients to know that those particular
episodes are going to last sometimes
half the time or what another one was. So it becomes quantify to the extent of, that it is. As far as the U. S. And the Faster piece that you mentioned before, John will deal with.
Steve, was your question specifically on teen growth in the U. S? Or was
it Exactly.
Yes, I mean teen growth, we have an overall growth model built in. This is definitely faster than we had built in initially, and that's what led to some of our upside that we saw in Q1. So team was definitely stronger than we would have modeled out so far this year. Yes.
And I think just adding to what John said, Steve, the comment that we made about teen North American ortho teen growth being faster than the last 3 year average, that gives you a couple of things to look at.
Got it. And then as I was at the Align booth at IDS, I thought the look, the message that I'm getting here from the team is very clearly that this just almost isn't an orthodontics company anymore. This is a company that wants to and has now taken a big step toward becoming just a bigger part of the dock office as a sort of consumer brand. And I understand that your ambitions are to become a true consumer power, maybe the Nike of oral healthcare. Joe, it'd be really helpful now that you've seen some of the progress with these initiatives and some of the progress with SDC for that matter, if you could just sort of refresh us on your thinking on the path there and how this plays into your thinking about the 15% to 25% range with the business really sitting at the high end?
Thanks so much.
Steve, first of all, I mean, you saw our presence at IDS. We had a strong presence down at the AAO in San Diego. But I might hear your comments like that. One thing I want to make sure is that we're not looking at ourselves as a general dentistry company. We do clear aligner systems and we do scanners and we don't have the kind of penetration in the marketplace we think we should have here or anywhere in the world.
And so we'll stay focused on those items. So don't I don't want anyone to think that we're trying to broaden our wings become more of a general dentistry company. It's not what is kind of in the cards. I think what you when you Steve, you look at the Google searches that have really rocketed for clear aligners over the last quarter or so, some heavy investing by SDC and also heavy investing by us, generating a lot of interest from a consumer standpoint in the market place. More and more we know we have a strong consumer brand and we'll reach out to consumers to try to drive that.
But again, I want to emphasize, we are a doctor kind of a product line. We work through our docs to get these things done. And we do want to establish a strong brand identity with consumers as they turn into patients. At the same time, we don't have a direct to consumer kind of model that we're pushing at the moment. That's exercised through SDC and our supply for
those kinds of things.
I hope does that help, Steve? Does that make sense, Steve?
It's loud and clear. Thanks, Joe.
Okay. Our next question comes from the line of Richard Newitter of Leerink Partners. Please proceed with your question.
Hi, thanks for taking the questions. And I will congratulate on a great quarter because it really was. Thanks, Chris. The first question I just had on SmileDirectClub, in the past we've heard some discussion from orthodontists, they're a little nervous what this might mean for their practice. I'm just wondering, can you update us on where the conversations have been at the respective conferences you've attended so far?
Clearly, initiatives you have in place from an advertising standpoint, they must be drawing in new patients. So I'm assuming orthodontists are getting comfortable that it's not going to cannibalize their business, but any update there? And then I have a follow-up.
Yes, Rich. I'd say, we announced July last year the SDC relationship that we have. There's a lot caused a lot of turmoil in the industry in the sense of what we did and why we did it. We continue to explain to our customer base in the sense of the logic behind that. Their business continues to expand and the market continues to expand.
So I think there I can't tell you that this will ever go away. There's still I would quantify it as a large amount of anxiety in the marketplace. I don't think that will change. What I do find though, Rich, is that customers that do a significant amount of Invisalign and have a good relationship with Align, tend to understand this more or accept it more. Ones that haven't and ones that stay more in the metals and brackets that I think have been more voice for us or more concerned than some of our now that's empirical.
I can't give you any statistics specifically on our customer base on that, but it's what I feel. But I overall, I think as time goes on and the orthodontic market continues to expand as well as the consumer market continues to expand. And the I think it generates, as we said before, a huge amount of business, both for the GPs and the orthos that use Invisalign. And we will continue to recycle patients that don't fit the protocols that STC has into the current consumer customer base that we have. So I'd just say we have to keep working it, Rich.
We're not out of the woods in the sense of the discomfort of our customers. But we'll keep driving the same message. We'll keep bringing business into those accounts to help those accounts grow. And hopefully, they'll reach a higher comfort level over time.
Okay, that's helpful. And then just one follow-up. On the distributor acquisitions you're doing internationally, wondering if you could just quantify the contribution that you saw in the quarter and what we should think going forward? And also, are there additional ones we should expect in future quarters aside from the ones you executed in 1Q? And if you could talk to the gross margin impact as well?
Thank you.
Yes, I'll take that one. Richard, this is John. The impact is very, very small. We just closed those deals in the Q1. So there's really not much of a material effect that we saw.
But it is in line with our overall strategy where we want to be able to have our own sales team go to work in those markets and try to grow faster. So it continues and is part of our strategy, but there really is a really small effect to start in the Q1.
Thank you.
Thanks, Rich.
Our next question comes from the line of Steven Valiquette of Bank of America Merrill Lynch. Please proceed with your question.
Thanks and good afternoon. I'll also congratulate you guys on some pretty strong results.
Hi, Steve. So the average selling price numbers look
pretty solid and probably reflects at least the price increase you took several months ago. But just on pricing in the market, we did notice that ClearCorrect announced a shift in their pricing at AAO over the weekend, where now practitioners can pay per aligner. This probably only has impact maybe on the low end of the market, but just curious if you have any thoughts about their pricing changes and whether it really matters for Align overall? Thanks.
Yes, Steve, I think I mean, I saw that too. It's pretty well presented by ClearCorrect. I think if you have the kind of product that they have, that's a pretty simple way to go to marketplace. And so we don't see that changing our strategy because of when you look at the sophistication of our product line and how it is directed towards certain malinclusions and the number of aligners associated with it, our pricing makes sense in that way. But if you're clear, correct, I'd say that was a simple way to go about it.
And I think it makes sense in that end of the marketplace.
Okay, got it. Okay, that's it for me. Thanks.
All right, Steve. Thanks, Dan.
Next question, please.
Our next question comes from the line of Jon Block of Stifel.
Great. Thanks, guys. Good afternoon. Good afternoon. I'll limit myself to 2 questions.
First one is just international. I mean, big, big numbers, diverse growth. EMEA was up 38%, Joe, it's a big acceleration from the 4Q 'sixteen number of up 20%. And I know 4Q 'sixteen had some sort of EMEA backlog moving parts, if you would. So just maybe your thoughts on how that market is growing?
Is the best way to look at it, I guess, what I'm asking somewhere in between that 20% deceleration that we saw exiting 2016 and the big 38% number that you put up in 1Q 2017?
John, that's a great question. They came back very strong in that sense. I would say that in this case, we continue to do incredibly well in Spain. You see us in the UK, both from a GP standpoint, orthodontic standpoint continues to grow and we're seeing great strength out of Germany, also France. So by country, when I look at that and again, I spent a lot of years over in Europe too, all those countries are so different when you see that kind acceleration in growth across each one of those countries.
The team is executing well on the strategy across all those different cultures. I honestly would say it's hard to explain exactly what happened in the Q4 in EMEA. I would tell you that internally we probably did not guess the vacation schedule as well as what happened in Europe. And we had some bleed over obviously from a case shipment standpoint. And I'd say in general, we as a company, we haven't anticipated well the turn down in the holidays in Europe and how that can affect case growth.
So I think behind your question, John, there's we're executing well over there. We're excited about it. Obviously, this expansion that we've done in the Middle East and Russia with this next distributor acquisition is something we know how to do. We've proven we really can grow from that. I'm confident we can continue to drive some pretty impressive numbers out of Europe as the team continues to execute there.
Okay, very helpful. And then the other one just specific to SDC, it seems like the cases that you guys are providing them are still at sort of an infancy stage. But Joe, I would love your thoughts on how that you came to the agreement 9 months ago or so, how that doctor directed at home market has progressed. And rather than cannibalizing a ton of aligned cases, I guess what I'm trying to figure out, is there a component of this where you have another player out there talking about Clear aligners spending marketing dollars? Is that helping to sort of stimulate the entire market, which could be a precursor for what happens when some of the other big ortho companies, if they do come out with their clear aligner products?
Thanks guys.
Yes, John. We think that this is helping to stimulate the whole clear aligner category. STCs, they spend a lot of money. They're very good in the sense of how they advertise. We see that as we go to marketplace too.
So I do think that's a component in the growth of the marketplace right now. I'd also caution you, John, as the other clear aligner companies come in, I don't expect big consumer spends. These are companies that normally just sell to orthodontists through their channels or through distribution channels. They're not used to massive consumer advertising campaigns and the associated expense associated with that. So I'm not so sure that the next list of competitors and you can reel them off as much as I can are going to come into the marketplace with that kind of gunpowder to go directly to consumer.
I don't think the SDC and our model will be broadly duplicated with the next round of competition.
Understood. Thanks guys.
Okay.
Our next question comes from the line of Jeff Johnson of Robert W. Baird. Please proceed with your question.
Thank you. Good evening, guys. Let me ask maybe 2 revenue questions and then I have a margin question as well. But Joe, on the revenue, the guidance you're giving for Q2 and then for the full year, it would seem to imply a slowdown in the second half to maybe 20% revenue growth. And given the strength this quarter, it's almost hard to imagine, which just a couple of quarters ago, that would have been a good number.
And so just trying to figure out if there is just conservatism in there, what's kind of how you're thinking about the second half playing out? And then on the international side, for a long time, we've kind of heard the story that you need to continue to invest in the international markets to really kind of sustain 30% growth. You'd tick up to 40% this quarter. Is that kind of should we be thinking about sustainability now above 30% in the international markets at least in the near term?
Okay, Jeff. This is John. I'll take the question. On revenue, what we've seen in the first half, as you saw, great performance in the Q1. We continue to see that as we head into the Q2, strong performance and we're guiding to the high side of what we had in our long term model of case shipments on our high side of 27%.
Our strategies are playing out. We're seeing that in what we've seen in volume and that's why we felt comfortable of taking it to the high end of our guidance to closer to that 25% for the year. And as we get through this quarter and the second quarter, we'll revisit that if volume continues to where we see it. So right now, it's not being conservative. We're just kind of calling what we see.
And then in terms of the growth that you saw that you were talking about, was it specifically for international or are you was it EMEA or APAC or?
Yes, pretty much just rolling international up altogether. We've kind of long thought of that as a sustainable 30% or 25% to 30 percent and you have to keep investing to maintain that kind of number. Now we see it up to 40%. Just wondering how sustainable is that here going forward?
Yes. I mean, so we definitely still have volume opportunities in these developing countries. So that is growth opportunities for us. We mentioned on the earlier part of this call about some of the volume, but we're still seeing a lot of growth and a lot of opportunities in places like China and parts of EMEA and so on. And we're going to continue to push for that growth where we can and we expect it to continue to keep growing like it has.
Yes, fair enough. And then just on the margin side, a couple of quarters here where margins have been down, Your guidance for the full year, obviously, flat to up slightly. So many initiatives going on at this point that's really helping support that top line. I guess, what gives you the confidence and where does the margin improvement come from I guess going forward with all this investment that you've got going on at this point?
Yes. I mean what we've seen, Jeff, so far is we've invested, as we have really last year and now into this year, upfront with a lot of our sales initiatives, some of our marketing expenses. Upfront, we're seeing that volume come through and that's happened in the Q1 and expected to continue into the year. And that's what gives us confidence in holding our margin rate flat to slightly up from last year. Fair enough.
Thanks guys. All right, Jeff.
See
you. Our next question comes from the line of Robert Wlodgielle of Credit Suisse. Please pardon any mispronunciation. Please proceed with your question.
I think that's me. You mentioned the ERP process is driving that DSO number higher. You say it's kind of a several quarter phenomena, but can you give us any granularity around that, that it's getting to be a larger number. So when's a reasonable timeframe to see that number turn over and see the cash start to improve?
Yes, Robert, it's something that we've worked on. We've worked hard within the company to try to improve. It's not the ERP implementation we had was last July, but we've also been putting on additional entities and going live on our new ERP. And that has caused us to struggle a little bit in terms of getting some of those collections and moving from one system to another, getting customers and our collectors to kind of be in sync. We expect that it's going to start to come down as we go through this year and some of the initiatives that we have to be able to really focus on those collections and also work on our ERP to make sure that we're able to pick some of these issues that we have, but we expect it to start coming down.
Okay. And there's no bad debt experience of consequence?
Yes. What we've seen is, as we've tested and it's gone through, it's taking longer for us to collect, but it's not turning into bad debt. It's just a slower pain that we normally experience, but the bad debt has not increased.
Thank you.
Thanks, Rob. One last question, please.
Our next question comes from the line of Brandon Couillard of Jefferies. Please proceed with your question.
Thanks. Good afternoon. Not to disparage the results at all, but I'm curious if the North American GP experience in the Q1 was in line or maybe better than your plan. It just seems that it was more in line, I suppose, with typical seasonality, whereas we saw the rest of the business really pick up in the Q1 versus historical trend. Chris, your thoughts there?
Hi, Brandon. Hi, Brandon. It's Joe. I'd say it's in line to trending up, maybe slightly stronger than what we thought. I'd say it's straight probably came from like we mentioned DSOs more than anything in our work with them.
So we felt good about the quarter in that sense. And so not dramatic, but I'd say trending up.
And then one more, curious if you have any data or if you even track this terms of like the new iTero shipments last year was a big year in terms of how many of those go to non Invisalign docs and kind of what the uptake trajectory or trend might be from docs who get one of the new scanners sort of translating those into pull through for new case starts?
That's always kind of the magic question around the table here is we do know that we do see an uptick in uses of Invisalign when we sell Invisalign to an account. Usually that account has already been associated with Invisalign in some way, Brandon. So but we haven't been able to quantify that. Sometimes it's a blip, sometimes it's bigger. Sometimes it tends to kind of fall back down to the initial line as an underlying customer at some point.
But we certainly know that once a customer does get an Invisalign scanner, they tend to do more Invisalign cases. And frankly, we can bring more power to that really start to build in with the iTero scanner. As far as how many we sell to non Invisalign accounts, I really don't have that data. I don't think we've kept track of that data at all.
Fair enough. Thank you.
Operator, we'll take one more question, please.
Not a problem. Our last question will come from the line of John Kreger of William Blair. Please proceed with your question.
Hi, thanks very much. Joe, given the nice uptick in growth, what is your sense about the underlying market on the ortho side? Are your customers reporting any changes in their sort of typical case start growth? Or is this all share gains on your part?
Well, I mean, we're seeing an increase of orthodontic patients through the orthodontists that we track and we talk to. So do have a healthy orthodontic market behind us, there's no doubt. I think our teen expansion shows us that we're taking significant share in that area too. So look, it's wonderful to have a stronger market behind you like that. But this is a story of a strong market and a share shift at the same time.
Thanks. And what do you view as the underlying market growth? We'd sort of put it maybe at about 4% on a unit basis. Would that be in sync with what you hear from your customers?
Yes, right on.
Okay, great. Thanks. And then one other one, the very good growth in DSOs, I assume that's primarily in North America. Can you just talk a little bit about what your strategy has been to drive that? Or has it really been just as those entities get bigger, they viewed Invisalign as a good same store growth driver?
Just curious what you're seeing.
John, you've had the question really well. I mean, it's kind of story at a DSO level. As soon as they join a DSO, it's all about growth, right? And they're trying to transfer best practices on growth and efficiency across all the different units that they have. Invisalign is a great story because you can attract more patients with Invisalign.
You have a different revenue source and you tend those patients you attract with Invisalign, you tend to keep them over time too. And so we incentivize these customers, we train them as much as we possibly can. We work to make it as easy to use Invisalign as possible. And it's worked out well. Obviously, Heartland has been a good partner for us and several other DSOs that we have out there.
And it's a good business partnership in that sense, but a lot of work we have to do to work together to get the right advertising in place, demographics from a patient identification standpoint, the training is necessary for each one of those. But DSOs can really help to facilitate that based on
are no further questions over the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.
Well, thank you, everyone, for joining us today. This concludes our conference call. You have any follow-up questions, please contact Investor Relations. Have a great day.