Greetings, and welcome to Align Technologies Q3 2019 Earnings Conference 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. It is now my pleasure to turn the conference over to your host, Shirley Stacy, Vice President, Corporate and Investor Communications.
Thank you. You may begin.
Thank you. Good afternoon, everyone, 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 Marici, CFO. We issued Q3 2019 financial results today via GlobeNewswire, 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. A telephone replay will be available today by approximately 5:30 p. M. Eastern Time through 5:30 p.
M. Eastern Time on November 6. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 1,369,49,15 followed by pound. International callers should dial 2016 127415 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 Q4 of 2019.
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 statement. We have posted historical financial statements, including the corresponding reconciliations and our Q3 2019 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'd like to turn the call over to Align Technology's President and CEO, Joe Hogan.
Joe?
Thanks, Shirley. Good afternoon and thank you for joining us. On our call today, I'll provide some highlights for the Q3, 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 Q4. Following that, I'll come back and summarize a few key points and open up the call to questions.
For Q3, I'm pleased to report revenues, volumes and earnings above our Q3 outlook, driven by better than expected volume across the Invisalign portfolio in Asia Pacific and Latin America, reflecting record highs for both regions and improving trends in the North American orthodontics channel. Notwithstanding EMEA summer seasonality, we saw continued adoption from teens and especially young patients using Invisalign First across the board. Q3 Invisalign volumes were up 20.7% year over year, driven by the growth across the product portfolio as well as the expansion of our customer base, which increased by 5,900 new Invisalign doctors
for a total of
63,000 active doctors worldwide. The Itero scanner and services business was up 16.5% year over year, reflecting continued growth across each region and down sequentially as expected coming off a record second quarter. Now let's turn to the specifics around our Q3 results starting with the Americas region. For the Americas region, typical Q3 summer seasonality for adult cases starts in North America was offset by the growth in North American teen market as well as the strength from Latin American orthodontists. Q3 Invisalign case volume was up 2% sequentially and 13% year over year on tough comps.
Recall in Q3 2018 we had a teen and adult promotion that drove approximately 4 to 5 points of growth in the Americas. In Q3, we trained over 2,700 new doctors in the Americas region, of which nearly half were Latin American doctors. On a sequential basis, Q3 Invisalign volume growth reflects increased utilization for the Americas region overall, driven by the North American orthos at 19.1 cases per doctor, where we saw improved momentum throughout the quarter and good growth from teens and Invisalign First patients. North American GP volume was seasonally lower in Q3 and we're seeing improving trends into 4th quarter, reflecting benefit from our investment in sales resources added at the beginning of the year. New and existing reps are continuing to ramp up and we would expect further progress over the remainder of the year.
We also had continued strength across comprehensive and non comprehensive products in Latin America led by Brazil. Year over year, Q3 Invisalign volume for the Americas region was driven by continued growth from both the ortho and GP channels, including the DSOs. The DSO channel remains an important channel and consistently grows faster than non DSO practices. For international business, Q3 reflects increased growth in Asia Pacific, especially from our team segment in China, partially offset by sequentially lower volume in EMEA due to the summer holidays for Invisalign practices in most European countries. On a year over year basis, Invisalign volume increased 32.1%, reflecting strength across our product portfolio with continued expansion of our customer base.
In Q3, we trained over 3,100 new Invisalign doctors internationally with 60% in the Asia Pacific region. In EMEA, Q3 Invisalign volumes were down sequentially as expected, reflecting more pronounced seasonality in the first half of the quarter and strong momentum in the back half, led by Iberia in the U. K. Q3 volumes were up 29% year over year with broad based growth across the Invisalign product portfolio and continued momentum from Invisalign Go treatment. We also continue to see strong growth across our key expansion markets as well, led by Central and Eastern Europe and the Middle East and Africa.
In Q3, as part of our corporate structure reorganization, we relocated order acquisition for EMEA from the Netherlands to Poland. This site will serve as a centralized facility for order acquisition, local sales and support. In addition, this location will also offer treatment planning to support all of EMEA country markets except for Spain and Germany where we'll continue to support their local markets. For APAC, Q3 Invisalign volume increased 35.1% year over year led by Greater China and Japan. We continue to see strong growth from GP Dentist, which was up 53.2% year over year, especially in Japan, where adoption of Invisalign Go continues to exceed expectations.
On a sequential basis, Q3 Invisalign volume for APAC reflects continued momentum in China, especially from teen cases and growth from Taiwan and Korea. We also saw increased adoption of Invisalign First in Japan and ANZ in Taiwan as well as positive results from Teen Edge professional marketing programs, which are helping to drive Invisalign growth. During the quarter, we opened a treatment planning facility in Yokohama, Japan to better support Japanese doctors in local language and local time zones. APAC remains a huge growth opportunity for Align and this investment reflects our commitment providing our customers with continued support as we grow and scale our business across the region. Teens and kids continue to make up the largest portion of the orthodontic market and represent a huge growth opportunity for Invisalign treatment to replace metal braces worldwide.
Over the past 2 years, we introduced 2 product innovations to help doctors treat more patients in this segment. Invisalign treatment with mandibular advancement addresses roughly 45% of teen cases and is the only clear aligner to move the mandible forward while straightening teeth at the same time. Invisalign First treatment is the first clear aligner product designed with features specifically for growing patients as young as 7 years old and Phase 1 addresses 20% of the orthodontic case starts each year. Both products have continued to grow and help increase utilization for Invisalign treatment worldwide. In Q3, 130,000 teenagers and kids as young as 7 years old started treatment with Invisalign clear aligners, an increase of 31.5% year over year, reflecting continued adoption across all major regions, especially China.
Cumulatively, nearly 2,000,000 teens or younger patients have used Invisalign clear aligners. In Q3, we continue to see strong dental engagement with consumers, reaching over 4,500,000 unique visitors on Invisalign websites worldwide for a total of 62,000,000 visitors to date. Our digital approach to teen marketing continues to drive awareness and interested teenagers into Invisalign practices. Other key metrics show increased activity and engagement with the Invisalign brand and are included in our Q3 quarterly slides. In addition, we launched a new advertising campaign for North America at the beginning of the quarter.
The North American campaign was launched across all key media channels with a reach to over 140,000,000 consumers, combining a robust paid media strategy across prime broadcast cable and connected TV channels with paid search and social media. While still new in the marketplace and very early in the cycle, we're seeing a positive response from doctors and consumers. In the last few weeks, all KPIs metrics have shown strong momentum with more than a 50% increase in doctor locator searches and leads scheduled from our Smile Concierge service. Finally, as many of you may have seen, we recently announced a marketing relationship with several professional sports teams, including the San Francisco 49ers, the Toronto Raptors, the Carolina Hurricanes and the New England Patriots. Align is always looking for ways to evolve our brand marketing to be relevant to potential patients where they work, live and play.
Over the last few years, many sports brands have evolved their own brand programs to engage with fans in a variety of ways and through multiple touch points. Partnering with teams who have an omni channel approach to brand marketing and engagement gives us direct access to large loyal fan bases and helps us reach individual consumers and whole families through a variety of existing fan platforms. With the right team partners, we can create awareness for the power of winning smiles. And as always, the goal is the same for us, to build awareness and demand for Invisalign treatment and connect engaged consumers with Invisalign doctor practices and their markets. For Q3, iTero scanner and services revenue was down sequentially as expected and up 16.5% year over year, reflecting continued growth across all regions and customer channels, including large DSOs.
Year to date, iTero revenues were up 47.3 percent, reflecting continued adoption of digital dentistry. Cumulatively, over 18,000,000 orthodontic scans and 4,300,000 restorative scans have started with iTero scanners. Heartland Dental, one of our largest DSO partners, recently celebrated their millionth iTero scan, highlighting how important iTero and Invisalign workflow is to their doctor practices, which now includes 900 offices across the U. S. And is enabling them to add nearly 200,000 digital scans per month.
Use of iTero scanners for Invisalign case submission continues to grow and remains a positive catalyst for Invisalign utilization. For Q3, total Invisalign cases submitted with a digital scanner in the Americas increased from 78.7% to 71.9% in Q3 of last year. International scans increased 62.5%, up from 53.9% in the same quarter last year. Within the Americas, 92.9% of cases submitted by North American orthos were submitted digitally. We continue to expand the Itero portfolio to address doctors' needs and enable them to more easily adopt Invisalign treatment in their practices.
In August, we announced the commercial availability of the Itero Element 2 scanner in China, with the first made in iTero Element 2 produced in our manufacturing facility in Xi'an. The launch exemplifies Align's continued innovation and investment to advance digital dentistry in China. In September, we were announced a global distribution agreement for the iTero Element family of intraoral scanners with Zimmer Biomed Dental. The agreement enables us to leverage Zimmer Biomed Dental's extensive direct global sales force and network of dental clinicians and laboratories to help to further drive the penetration of Itero scanners and services in the growing digital restorative market. The collaboration also offers Zimmer Biomet Dental customers access to Invisalign clear aligners through the Itero platform to facilitate a comprehensive interdisciplinary treatment approach.
We know that a key differentiator in the evolution to a digital practice and dental ecosystem is clinical education. Through this collaboration, the Itero scanner becomes the exclusive intraoral scanner used in the U. S. And European Zimmer Biomed Institutes, which trains thousands of doctors annually in an interactive learning environment with the ultimate goal of improved clinical outcomes. We also joined Zimmer at the Japan Society of Oral Implantology meeting in Japan and at the EAO in Portugal where the iTero intraoral scanners were showcased.
With that, I'll now turn the call over to John.
Thanks, Joe. Now for our Q3 financial results. Total revenue for the Q3 was $607,300,000 up 1.1% from the prior quarter and up 20.2% from the corresponding quarter a year ago. Year over year revenue growth was favorable in all regions. For clear aligners, Q3 revenue of $516,300,000 was up sequentially due to Invisalign volume growth in most geographies and higher ASPs.
Year over year Clear aligner revenue growth of 20.9% reflects strong Invisalign shipment growth across all customer channels and geographies and higher ASPs. Q3 Invisalign ASPs were up sequentially by approximately $30 to $12.60 primarily due to price increases in all regions, partially offset by promotional discounts. On a year over year basis, Q3 Invisalign ASPs were up $30 primarily reflecting price increases in all regions, partially offset by promotional discounts and unfavorable foreign exchange. Total Q3 Invisalign shipments of 385,400 cases were up 2.2% sequentially and up 20.7% year over year. For Americas orthodontists, Q3 Invisalign case volume was up 5.6% sequentially and up 16.4% year over year.
For Americas GP Dentists, Invisalign case volume was down 4.1% sequentially and up 7.4% year over year. For international doctors, Invisalign case volume was up 2.5% sequentially and up 32.1% year over year. Our scanner and services revenue for the Q3 was $91,100,000 down 12.4% sequentially as expected, reflecting lower volume coming off another strong Q2, partially offset by higher ASPs. Year over year, scanners and services revenue was up 16.5%, driven by increased services revenue off a higher installed base and higher volume. Moving on to gross margin.
3rd quarter overall gross margin was 72%, flat sequentially and down 1.6 points year over year. Gross margin was impacted by approximately 0.3 points year over year due to unfavorable foreign exchange. Clear aligner gross margin for the 3rd quarter was 73.5%, down 0.2 points sequentially, primarily due to increased aligners per case, partially offset by higher ASPs and seasonally lower doctor training. Clear aligner gross margin was down 1.8 points year over year, primarily due to increased aligners per case, partially offset by higher ASPs. Scanner gross margin for the 3rd quarter was 64.1%, up 0.5 points sequentially and up 0.2 points year over year, primarily due to higher ASPs and increased manufacturing efficiencies.
Q3 operating expenses were $310,400,000 up sequentially 21.3% and up 25.9 percent year over year. The sequential increase reflects the benefit of $51,000,000 related to the Straumann litigation settlement recorded in the Q2. Additionally, the Q3 includes a $6,800,000 benefit from the early termination of our Invisalign store leases. The year over year increase reflects our investment in consumer advertising with a brand new North American campaign launched in August, continued and the continued investment in R and D, geographic expansion and go to market activities, partially offset by the benefit from the early termination of our Invisalign store leases. Our 3rd quarter operating income of $127,200,000 resulted in an operating margin of 20.9 percent, down 8.5 points sequentially and down 3.9 points year over year.
The sequential decrease in operating margin is primarily attributed to the $51,000,000 benefit related to the Straumann settlement recorded in Q2, partially offset by $6,800,000 benefit related to the Invisalign store lease terminations in the 3rd quarter. The year over year decrease in operating margin is primarily due to lower gross margin as described earlier and the increased investments in our geographic expansion and go to market activities, partially offset by the benefit from the early termination of our Invisalign store leases in the 3rd quarter. Operating margin was impacted by approximately 0.6 points year over year due to the unfavorable foreign exchange. Interest, other income and expense for the Q3 was $1,300,000 down $16,100,000 sequentially and flat on a year over year basis. The sequential decrease reflects the $15,800,000 gain related to the sale of our equity investment in SmileDirectClub during the 2nd quarter.
With regards to 3rd quarter tax provision, our tax rate was 20.2%. 3rd quarter diluted earnings per share was $1.28 down $0.55 sequentially and up $0.04 compared to the prior year. Moving on to the balance sheet. As of September 30, 2019, cash, cash equivalents and marketable securities, including both short and long term investments, were $782,400,000 an increase of $16,500,000 from the prior quarter, which is primarily due to higher cash flow from operations, partially offset by $200,000,000 used to repurchase approximately 1,100,000 shares of our stock. Of our $782,400,000 of cash, cash equivalents and marketable securities, dollars 513,900,000 was held in the U.
S. And $268,500,000 was held by international entities. Q3 accounts receivable balance was $531,800,000 up approximately 2.3% sequentially. Our overall days sales outstanding was 79 days, up 2 days sequentially and up 4 days from Q3 last year. Cash flow from operations for the 3rd quarter was $234,500,000 up $138,300,000 compared to the prior year.
Capital expenditures for the Q3 were $26,600,000 primarily related to our continued investment in increasing the liner capacity and facilities. Free cash flow for the Q3, defined as cash flow from operations less capital expenditures, amounted to $207,900,000 During Q3 2019, we entered into and completed an accelerated stock repurchase agreement, ASR, to repurchase $200,000,000 of our common stock, which was completed in September of 2019. We received a total of approximately 1,100,000 shares for an average price of $176.61 per share. We have $200,500,000 remaining available for repurchase under the May 2018 repurchase program. With that, let's turn to our Q4 outlook and the factors that inform our view, starting with the demand outlook.
Q3 was a solid quarter and momentum has continued to build into Q4 across all regions. For international, we expect Q4 volumes to be up sequentially, Q4 volumes to be up sequentially, reflecting strong uptick from EMEA as doctors come back from summer holidays. For the Americas, we expect Q4 volumes to be up sequentially, reflecting growth across all key country markets as well as momentum in North American ortho and GPs, along with increased media spend and the launch of our new consumer advertising campaign, as Joe described earlier. We expect our Itero business to be up sequentially in Q4 to reflect end of the year capital equipment purchases and investment in growing the Itero business across all regions. With this as a backdrop, we expect the Q4 to shape up as follows: Invisalign case volume is expected to be in the range of 400,000 to 407,000 cases, up approximately 20% to 22% year over year.
We expect Q4 revenue to be in the range of $640,000,000 to $650,000,000 up approximately 20% to 22% year over year. Our Q4 revenue outlook assumes no SDC volume compared to the same quarter a year ago when aligner supplies to SDC contributed about $5,800,000 to revenue. We expect Q4 gross margin to be in the range of 71.7 percent to 72.4%. Q4 gross margin is up 0.4 points compared to Q3 as we expect continued improvements in our manufacturing efficiencies associated with higher volumes. We expect Q4 operating expenses to be in the range of $318,000,000 to $323,000,000 Q4 operating margin should be in the range of 22% to 22.7%.
Our effective tax rate is expected to be approximately 24%. Diluted shares outstanding is expected to be approximately 79,400,000 dollars exclusive of Infinity share repurchases. Taken together, we expect our Q4 diluted earnings per share to be in the range of 1.35 dollars to $1.42 In addition, we expect to repurchase at least $100,000,000 of our stock in the open market in Q4. As we continue our operational expansion efforts, we expect capital expenditures for Q4 to be approximately $30,000,000 to $35,000,000 and we expect depreciation and amortization to be $22,000,000 to $24,000,000 Before turning the call back to Joe, I want to update you on our corporate entity reorganization. On January 1, 2020, our EMEA headquarters in the Netherlands will officially move to Switzerland.
Our new Swiss location will serve as the headquarters for all regional, commercial and operational activities in EMEA and will be supported by the existing network of local offices established across the region. Our new corporate entity, Align Technology Switzerland, GmbH, will assume all responsibility for the sale and distribution of the Invisalign system, iTero intraoral scanners and associated line goods and services in EMEA, previously provided by Align Technology BV. Our local and global teams have been working diligently to ensure a very smooth transition while supporting our doctors, suppliers and employees, many of whom have decided not to relocate to Switzerland, but will stay on in transitional roles as needed. I want to thank all of our employees for their hard work and dedication in supporting this major company initiative. While it is never easy to make this kind of change, especially when it impacts team members who have helped build the EMEA business and have contributed so much to our overall success.
We are very excited about our new operations in Switzerland. Now I'll turn the call back to Joe for closing comments.
Thanks, John, and thanks for joining our call today. Overall, Q3 was a solid quarter for us across the board with increasing momentum in APAC and North America that has carried us over into Q4. As you can see from the high end of our guidance, the implied full year growth rate for Invisalign volume is 23.5% with international growth in the mid to high 30s. Overall, our business remains very healthy with numerous growth drivers in a vastly underpenetrated market. We remain confident in both the enormous opportunity ahead to lead the evolution of digital orthodontics and comprehensive dentistry with our doctor customers
and
in our ability to execute our strategy to increase adoption of Invisalign treatment globally. With that, I want to thank you again for joining the call. I look forward to seeing many of you at our upcoming financial conferences and meetings, including the Invisalign GP Summit in November in Las Vegas. Operator?
Our first question comes from Erin Wright with Credit Suisse. Please proceed with your question.
Great. Thanks so much. In terms of the higher OpEx spend, are you seeing the returns from the North America, I guess, stepped up marketing and media spend as you expected? And how should we be thinking about that level of spend into the 4th quarter just based on the responses that you're seeing from the marketing campaign so far? And will this, I guess, contribute to the accelerating kind of volume trends in the 4th quarter as well as momentum into 2020?
Thanks.
Hi, Aaron. It's Joe. Yes, we're seeing, as you could tell from the statistics we just recorded, we have a real large take up when you think about doc locator searches, which is a primary, our concierge service and what they're handling. Remember the concierge service takes those customers and then directs them directly to doctors that we have a high degree of certainty that they'll actually convert them into Invisalign. As we move into the Q4, expect the same amount of investment.
Also in the Americas too, with the improvements you're seeing is also our sales force and the additions we put together. As we said at the beginning of the year, it usually takes at least 9 months, 6 to 9 months to seek some kind of traction, and we're seeing it with the sales force, too. So both the advertisements from a North America standpoint and the added salespeople, think are really contributing to that momentum we just reported.
Okay, great. And then a quick follow-up just on China. In particular, can you speak to what you're seeing across that market just given some of the commentary you had in the previous quarter around the softness in that geography? If you could give us an update there, that would be great.
Well, the momentum we reported in China that we when we had our announcement in the second quarter, it continued throughout the quarter. So I think we had 26% growth in China in the 2nd quarter. As we move into the 3rd quarter, we're in the upper 30% range. Overall, we're just seeing a good uptake. We had a good team season there.
We've hired 40% more people in China also. It takes them a while to actually become acclimatized, be trained and have them effective in China also. So we feel good about the momentum in China. I think the economic situation there with reporting the slowest growth we've seen in 30 years, we know we have a headwind there because it continues. It reported in the Q2 too.
But overall, we think we've made the right adjustments and we have the right focus right now to continue some good growth there.
Okay, great. Thanks.
And our next question comes from Steve Bausch with Wolfe Research. Please proceed with your question.
Hi, good afternoon and thanks for the time here. I'm sure there'll be a lot of questions about Invisalign and appropriately. So I want to go on a different direction and ask about a couple of other things. One is actually the Itero number in the quarter. I know it's normal seasonally to see things make a move like this, but I wonder as you saw trends for Itero in the quarter, there was actually a lot going on operationally given what you were doing with Zimmer, which I'm sure was a significant time investment for the sales force, and where you had a product launch coming in a key region.
Do you think there was any disruption in terms of the commercial effort around iTero during the quarter?
Hey, Steve, it's John. No, there's no disruption. I mean, we are if you look at Itero on a year to date basis, it's up 47%. You're going to have some timing that happens by quarter, but we feel very good where Itero is. It's the front end of our digital ecosystem, very critical to our business.
And you're going to have fluctuations by quarter, but we feel very good where Itero is so far this year.
Okay. And then, sorry, Joe, for leaving you out here, but I got a couple for John. One is on the transition in Europe. Can you speak to how much duplicative cost you might have been carrying between the Switzerland operations and the Netherlands operations? What that could mean for the tax rate over time as you change the domicile facilities manufacturing capacity utilization is going to be?
Yes. I think facilities manufacturing capacity utilization is going to be going forward on gross margins? Thanks so much.
Yes, Steve. In terms of the changes that we're making in EMEA, it's really to simplify some of the organization that we have. And in light of many of the tax changes and other structures that we had to create. So look at it from that standpoint, it simplifies things a little bit from an entity standpoint and gives us some flexibility to changes to our tax to taxes that happen globally. From a facility standpoint, we're putting in manufacturing where it makes sense.
We've talked a lot about China manufacturing that continues to ramp up. Treatment planning globally be closer to our customers. That's very important to us. There's always a transition period in terms of that productivity as they become more and more productive. But we feel very good about the investments that we've made and the gross margin that we see now and what we're forecasting.
Thanks, Steve. Next question please.
Our next question comes from John Kreger with William Blair. Please proceed with your question.
Hi, thanks very much. Joe, what's your sense about the underlying health of consumer spending on orthodontics at this point? Is it getting better or worse? And I'm curious if you think the all the money going into some of the direct to consumer oriented models like SDC, Is that proving to be a net benefit to Align or a little bit of a detriment as you weigh sort of awareness versus any competitive shifts? Thanks.
Hey, John. First of all, I think you picked up in your survey and other people do too and we pick it up is we see good consumer spending right now from an orthodontic standpoint. Align stands out in that spending when you look at it specifically. As far as how that's driven, obviously, we've put a lot more into consumer advertising and some of the DTC competitors have done that also. I do think that that raises consumer brand awareness, no question.
I think the consumers go to the Internet to try to answer those questions. They'll go to their doctors to try to answer those questions too. So I can't deny, John. I think that our advertising and some competitive advertising in that sense probably does raise all boats to a certain extent.
Great. Thanks. And then one quick follow-up. The utilization among your North American GPs has been kind of flat over the last couple of years. What is your thinking about the best way to drive that higher over the next year or 2?
First of all, John, I think you know that you've been with us for a long time. We had so many GPs every year, 150,000 of them we train, significant numbers of them each year. And so you end up with a dilutive effect in that sense. So the numbers that we reported, it always is around 3.4 to 3.6 from quarter to quarter. But back to your question, I think the way to do this is one, obviously our DSO approach is a good one because as I talked about it being a force multiplier before, you work with these strong DSOs.
They have their own training for their groups. They help to quantify workflow and do different things that, for years in this business, I think we thought we just needed one product, but we've learned over time like a product like iGo really isn't a product, it's a system. It's a system that really works with GPs to identify patients that qualify for this. Fits well with their workflow. It allows them to be confident when they're in front of patients that they can handle those cases and we stand behind them.
So overall, it's right products, right systems, working with DSOs have helped us to become drive better penetration too.
Great. Thank you.
Thanks, John. Thanks, John. Thanks, John.
Our next question comes from Ravi Misra with Berenberg Capital Markets. Please proceed with your question.
Hi. Thanks for taking the question. Can you hear me okay?
Yes, sure. Yes.
Hey, great. So, just a question on the gross margin, not to pick it too much, Ed, why I think it was a pretty good quarter. Just why aren't we seeing given the kind of pricing uptick that looks like it emerged in the 3 quarter, Q3, Why aren't we seeing more of a flow through on the Clear Aligner gross margin in the 4th quarter? And maybe if you could help us think about pricing in the 4th quarter for the ASPs. I think last quarter you said it would be about even with the Q2 and it's pretty much a lot better than that.
So do you feel more confident in your ability to take price here? Thank you.
Yes, Ravi, this is John. As we discussed, I mean, we've taken price up in the Q3 and you see that show up in ASPs. We're also investing to in our manufacturing treatment plan, it'd be closer to our customer, Sometimes that offsets and in Q3 there was not much change from Q2. Q4 we talked about our guidance, which is up sequentially in gross margin, it's a reflection of more volume, productivity that we expect to continue to see at these manufacturing sites and we'll continue to see that benefit. When you look at the ASPs, as you mentioned, like I said, at $12.60 was a good increase, dollars 30 from Q2.
We were able to when we think about the forecast to that, it will come down slightly. The mix was really high from a comprehensive standpoint in Q3. So when we take it down to Q4, it will be we think, closer to $12.45 which is very consistent that we've talked about as being essentially flat as we go through this year.
Great. And then if I can just maybe squeeze in a follow-up to the implications on teen there with the comprehensive. Just if you could confirm or maybe provide some color, as that as you get deeper penetration at that market, it looks like you've been doing 30% growth here the last few quarters. How should we think about the mix shift on the pricing? That should be kind of a good guy, right, with the more comprehensive cases?
Thanks.
Yes, Robbie, it's Joe. Yes, you're right. It's a mix shift. Remember from a teen growth standpoint, and we're reporting really good above 30 percent teen growth globally, but we're still the our utilization rates in that marketplace are way below what our clinical entitlement, I would say. Today, we can handle almost all teen cases.
So with that in mind, though, it is a mix up. It is primarily a comprehensive marketplace. It's primarily an ortho marketplace and how it works. We feel really good about our portfolio to be able to address the team patients right now. And long term, we see that as a counterbalance on ASPs that we all think about.
Thanks, Ravi. Next question, please.
The next question is from Jon Block with Stifel. Please proceed with your question.
Great. Thanks guys and good afternoon. Joe, maybe first one for you. Just any comments, maybe I missed it, but sort of on comprehensive versus non comprehensive growth this quarter. And then with the GP Summit approaching next month, is there any plan to more aggressively sort of pursue, call it, those lower acuity cases through that channel?
And then I've got a follow-up.
Yes. I mean, John, honestly, I mean, from a comprehensive standpoint, obviously, still 70% of our portfolio more goes that way. But with the introduction of light, iGo, products like this, we made an adjustment in E5 this quarter, E7, all these other products. I mean that part of our product line has traditionally been growing faster and what the comprehensive thing is. Now it's a lot of small numbers versus large numbers, but we do see increased growth in that area.
When we look at the GP channel, we do look at the GP channel as a way to get at patients, what we call kind of a subacute kind of in a patient base to do that. So I mentioned iGo on the last call also as being a system that allows us to do that. Obviously, light does that also. So you'll see us, John, increasingly focused on that channel, but also think about working really closely with GPs on not just the product line, but the system itself with iTero, how to be able to do treatment planning quickly and to give the GPs confidence that when they adopt these cases that they'll finish and they'll finish well. Those are the 3 critical variables we know we have to hit to really drive significant growth.
Got it. Very helpful. And then just to pivot, John, the reorg for this year, is there sort of a refined number? Is that 1.5% or 2% or is it still in that range? And then sort of part B to that question is follows up on Ravi's.
Just to be as specific as possible, the gross margins in sort of flattish 3Q to 4Q, is it a globalizing the supply chain headwind or is it more liners per case headwind? And I'm asking that because the more liners per case that probably continues with teen etcetera, but the globalizing supply chain that seems more of a 2019 event than a 2020 event. So any more detail you can give around gross margin would be helpful. Thank you.
Yes, John. It's really both. I mean, when you look at especially as we do and work with our doctors in more and more complicated cases as comprehensive grows and Invisalign First and teen and so on, those end up being more aligners and end up impacting our gross margin. The globalization that we're doing, that's much more short term. As we've said, getting close to our customers is very, very critical to us, treatment planning, manufacturing.
But as you get more and more capacity there and scale that, you see productivity improvements.
Thanks, John. Next question, please.
Our next question is from Kevin Caliendo with UBS. Please proceed with your question.
Kevin, are you there?
Yes. Hi, sorry. I apologize.
Did you take the same price increases internationally as you did domestically? First quick one. And then just looking at the trend, quarterly trend in case growth and overall revenue growth, is seasonality shifting as international sales grow as a percentage? And how should we think about that going forward?
Hey, Kevin, Joe. On the pricing piece, yes, it's about same. I think there's some mix and tucks on light versus comprehensive, but basically the same price increase globally across the board. On the revenue growth, the seasonality of it, I think the biggest thing that you can think of there's really a couple of trends in this business is one in North America, you move into the Q3, it's teen season and GPs tend to decline some. But the biggest mix is in Europe, where you basically go down for vacation.
I mean, lights go out for us for a long period of time, and then obviously come back in September. And then get China on the other side that kind of compensates for that in the past. So those are the big, I would say, countercyclical or cyclical movements that we have in the business. Okay, great.
Thanks for your
help. Thanks. Next question, please.
Our next question comes from Richard Newitter with SVB Leerink. Please proceed with your question.
Hi, thanks for taking the questions. I have 2. Joe, just the first one, just last quarter you gave a little bit of color on anecdotally what seeing out in the field from doctor directed competition and some of the discounting that might be taking place. I was just curious if you could comment on the trend into the current quarter and what you're seeing there? And anything that's surprising you or different from what you saw last quarter on those?
And I have a follow-up.
Hey, Richard, on the with that comment I made last quarter had to do with Doctor. Direct to the DYI model and primarily North America and some kind of young adult segments. We actually saw that stabilize and actually start to improve in the Q3 from an order standpoint. So actually saw good momentum in the right direction there.
Okay. And I was just referring to the more traditional competitors that recently started launching products where there might be some trialing. That's what you're referring to as improving, not the DTC?
No, actually, I'd say both. I mean, the traditional competitors that are out there, we acknowledged them last quarter, which we thought we had to. But there's no fundamental change in that, what we saw in the Q2 versus what we saw in
the Q3.
Okay. And then just on China, Joe, I get the sense that you just have improved visibility relative to kind of where you were sitting at this time last conference call. Is that the right kind of directional takeaway from the call as you see the trends into the Q4? Clearly, it picked up in China in the Q3. And what would you say your long range plan top line greater than 20% growth for the foreseeable future?
What would you say your confidence level is kind of today versus maybe 3 months ago, particularly with now that you have more data points in hand on China and some of those North American trends last quarter that were in focus? Thanks.
Richard, I'll keep my comments kind of in this year, but I'd say what China is shaped up
to be is pretty much what
we called in the Q2. We said the teen seasons were going to come in China. We thought that would be a lift. We hired these salespeople. We're looking for that to take hold and be able to move the business forward.
And so to say we have better visibility, I think we have the same visibility that we had quarter to quarter. Actually from an execution standpoint, I just think the steps that we've taken with some of the pressure on consumer demand that we reported in the Q2, the operational steps that we took in China on the ground, we're seeing a good result for it. And we feel good about it.
Thanks Rich. Next question please.
Thank you.
Our next question comes from Brandon Couillard with Jefferies. Please proceed with your question.
Hey, thanks. Good afternoon. Maybe just a couple of housing items. Joe, any update on the timing of the U. S.
Approval for the 5D scanner? And then any color you can share with us as far as mandibular uptake in the U. S?
Hey, Brenna, on a 5 d scanner, the FDA is the FDA, and we feel confident we'll get through here. Early part of next year would be the my best forecast in that sense. I can tell you from a 5 d standpoint, the uptick around the world has been good. The caries detection piece, to be able to see cracks or deterioration in teeth has been terrific. And so it's really been a changing aspect to the clinical GP practice to be able to see caries in a way that you really can't see them without a near infrared technology.
So we're actually really excited about that, and we're excited to get into North America.
Thanks, Brandon. Next question, please.
Our next question comes from Jeff Johnson with Robert W. Baird. Please proceed with your question.
Thank you. Good afternoon, guys. Joe, I want to go back to China. Just you did talk last quarter that you would lose that kind of teen tailwind as you go into the Q4 and mix kind of normalizes back to some adult patients and all that. But it sounds like, as you've said on this call, you're starting to see some good traction with some of the sales force adds and other efforts in that area.
So should we look at 2Q as kind of that 26% number that you brought up again this quarter from 2Q? Is that kind of where the baseline should be from here? And do you think at least going forward somewhere in there or above given some of these recent efforts?
Hey, Jeff. Obviously, we feel we think we did well in the Q3 in China. Some of it was obviously the teen season, but actually we had some pretty good adult growth too. We're moving out of teen season there as we talked about the momentum going into the 4th quarter has been good there too. As far as the baseline Jeff goes or whatever, hey, China is a growth market for us.
We wouldn't be putting manufacturing in over there. We would be putting treatment planning in. We wouldn't make the investments we're making unless we feel that China is going to continue to be the 2nd largest market that we're growing with. So I think that's the way you have to think about it going forward.
Okay, Jeff, next question?
Go ahead, Jeff.
All right, Jeff. Go on. What is it, Jeff?
Was he off? Brandon, I think you got the same thing.
There you are. Hang on. Sorry. What did you say?
I said, Shirley has got a quick hook tonight. Thank you for keeping me on for a follow-up. I appreciate it.
We're trying to get to as many analysts as we can,
but go ahead. She's upset about
that Wisconsin loss too, Jay.
Well, as an Illinois fan, I won't comment on that.
That's pretty bad.
Joe, I do want to ask on the direct kind of channel in the Q3. Obviously, you've seen some states enact your hurdles for some of those models and all that. I'm sure too early to see anything like that in your number or numbers. But I'd be interested kind of what are you doing with your doctors kind of try to combat some of that competition? Are you having any success in kind of helping these doctors understand where they need to be price point at?
Is there other channel support you can provide? Just what are you doing to really kind of combat that direct to consumer angle?
Jeff, I first of all, when we think about things that you're talking about, having a doctor in the center of this thing, having an x-ray that you're moving teeth through bone. People think that I think majority of people or patients out there think that teeth just hang from gums. They don't actually stand at the teeth or bone. And actually seeing what's going on in the bone is a pretty good indicator of if you should go through orthodontic treatment or not. But with that said, with the GPs, I talked about it in previous, caller, is the iGo product really is the best platform that we have right now in the sense of how to really educate doctors to go after these patients.
And what I'm hearing more and more from GPs is they're having more and more of a dialogue with their patients. Their patients are coming in, they're asking questions now. They're saying, hey, what's this mean? What can you do for me? What's your price point for being able to straighten my 6 anterior teeth?
And we are trying to give them as many tools as we possibly can as far as workflow tools, which we have with Itero and iGo and then products that they can really have a lot of confidence in. So I would say our initial push on that in the United States has been improving significantly. You'll see at the GP Summit what we're rolling out and the kind of focused areas we have around that. But obviously, we'll have a very strong focus in that area, Jeff.
Thank you.
Yes, you're welcome.
Our next question comes from Elizabeth Anderson with Evercore.
A lot of my questions at this point have been taken, but I just wanted to know if you could comment on the rise in inventory in the quarter. It seems like it just ticked up a little bit quarter over quarter, but sort of has been rising year over year. And I just wanted to know if that was if there was something in what you guys were doing or something else behind that?
Hey, Elizabeth, it's Sean. Really nothing out of the ordinary. When we look at the inventory, it's primarily on the Itero side. And it's really how we manufacture a much more level loading from a manufacturing standpoint. And really the rise that you saw in the Q3 is really anticipation of the volume that we expect in the Q4.
So that's all it is.
Okay. That makes sense. Thank you very much.
Thank you. Next question please.
Our next question comes from Matt O'Brien with Piper Jaffray. Please proceed with your question.
Hi, guys. This is Drew on for Matt and congrats on the nice quarter. I wanted to touch on consumer financing. I know you've talked about a little bit in the past and you're working through a 3rd party provider. Are you hearing any demand from customers asking for more options there?
And would you have interest in expanding that program further?
Yes, Drew, this is John. Of course, we want to do whatever we can to try to help turn those consumers into patients at a doctor. So financing is a piece of it. And we're working with companies not just in the U. S.
But other places as well to try to remove some of that friction, give more options to those consumers, understand what the monthly payments are, how much down and so on. So there's a lot more that we can do there. We're making some progress and you'll see new ways that will be coming to help again remove some of that friction from those consumers.
Okay. And thanks. And then
just on the deal with Zimmer, maybe you could provide some thoughts on sort of why you chose them as a partner than maybe some of the geographies you'll be focusing on early on? Thank you.
Hi, Matt, it's Joe. On the Zimmer, we're really pleased to have them as partners. And you look at the history of that company from an implant standpoint, they're one of the leaders out there. They actually needed a digital front end and that's what Itero really supplied to them. When you look at our product line in conjunction with that, when you look at modern kind of treatments like that, implantology, is there's often a lot of space creation that has to take place in the sense of if a tooth is out of a mouth for a period of time, your teeth start to move over to fill that space.
And more and more dentists do not want to remove enamel to put that implant in. So using aligners to be able to separate those teeth and allow an implant to be able to be a lot less invasive than it would be if you didn't account for that spacing. So overall, we're excited about it. I mean, they're obviously strong all over the world. They complement us in so many places, including China.
And so we're really excited about having a partnership, and we think we're starting off pretty well in the sense of the training and all that we reported.
Thanks very much. Next question, please.
Our next question comes from Steven Valiquette with Barclays Bank. Please proceed with your question.
Great. Thanks. Good afternoon everybody. So not to beat China to death here, but when you talked about some of the things you did to improve results over there, whether it was the investments in the GP dentist sales force, sales program centered on Invisalign Go or even just the increased consumer marketing spend. I guess I'm curious if any one of these variables really stood out as a driver of the improvement or was it a little bit of everything?
And then also do you have any sort of high level data points just on cases per doc in China, either on an absolute basis or even sort of relative to the rest of the line overall? Thanks.
Hey, Steve. On the variables of improvement, unfortunately, we're a multi variable equation when you get to aligners. Things are seldom binary here. But I think you got to point to the 2 big ones, which would be just an increase in consumer focus and then the sales force that we put in place. That's our GP effort.
We're just really moving into that too and we're arranging that properly also. But those efforts we think are contributing also. But I'd say it's a mix of those three variables. I can't weigh them for you really.
Okay. What about the cases per dock in China? Any color on that?
No, we don't want to give any color on that one. Right now, it's just I'd say you have to look at it as we're driving penetration there and we're training a lot of doctors as we ramp up in China.
Okay, got it. Okay, thanks.
Thanks Steve. Next question please.
Our next question comes from Nathan Rich with Goldman Sachs. Please proceed with your question.
Thanks. Just two quick ones here. First on ASPs, I think guidance would put you at something like $12.50 for the year. Do you think you can kind of maintain that level of ASP going forward? And can you kind of just talk through what kind of the key factors would be as we think about ASPs going forward?
And then just a very quick follow-up. John, just wondering if there was any catch up benefit to cases in the quarter kind of post that ClinCheck disruption that you highlighted in 2Q?
Well, I'll start with that one first because there was really no catch up or no benefit from that. As we had said in the Q2 call, it was really de minimis. There wasn't much of an effect that affected the quarter. So there really wasn't an impact in the Q3. In terms of ASPs, there's going to be puts and takes.
And we've talked a number of times about what those puts and takes are. As we grow in comprehensive like we had a strong comprehensive quarter in the Q3, ASPs are higher. Growing internationally, generally at a higher ASP. But then you also have significant growth in the low stage and that can affect the mix as well. So what we've said all year and as we look at things, we thought it'd be relatively consistent.
The puts and takes would kind of offset, notwithstanding any FX changes, we thought the puts and takes would offset. And we saw that in the Q3 and we are guiding that in the Q4.
Thanks, Nate. Operator, we'll take one more question, please.
Absolutely. Our next question comes from Michael Ryskin with Bank of America. Please proceed with your question.
Thanks. Thanks guys for squeezing me in. I'll try to be brief. First, just one quick follow on on the ASP. Obviously, really nice improvement in the Q3.
I was wondering if you've got any I realize it doesn't show up in the numbers, but maybe you got some qualitative pushback or feedback from docs on the price increase sort of what was the response there because this was the biggest quarter over quarter move in quite some time? And also maybe if you saw some divergence in results from some of your highest utilization docs that are getting the advantage discounts that can absorb it versus some of the lower tier docs that are paying more close to the full price, and therefore maybe weighing some of the other doctor directed options?
Hey, Michael, it's Joe. On the ASP piece, obviously, we raised price. John talked about some exchange aspect and kind of whatever. But I think one thing I want the analysts to follow us to remember, like we said before, ASPs will fluctuate, but sometimes our ASPs going down mean our gross margins go up. Our lower end products actually have a higher gross margin than our comprehensive product line.
I know it's counterintuitive, but that's actually how it works. So I mean, I think keep that in mind going forward. If you see some of that lumpiness from an ASP stamp start heading down, don't think that is a trajectory for lower gross margin. It's just those 2 are separate in that way. And John, do you want to add anything on your end?
Yes. I mean, and so like we said, you're going to have some offsets, but we're trying to grow, from a all the way from low stage, the more simple cases all the way to the complicated cases. And we believe in those traditional orthodontic case starts that we have product that can help move teeth. But the market expansion and some of that market expansion is going to be at those lower stage products that are at a lower ASP, but we look at that as incremental business for us.
Thanks. And on the quick follow-up on the EMEA headquarters move, you mentioned in your prepared remarks, you're expecting some turnover in personnel. Any expectation for disruption to the business in early 2020? Sort of how are you bracing for that? How are you preparing?
And just to make sure that it's a smooth transition going into January next year?
Yes. It's Joe again. Look, what we did in EMEA, which was fortuitous in a sense, about 3 years ago, we began to decentralize. We had a really big headquarter staff out of the Netherlands. It dictated a lot of what the regions did and had to do that because it's a relatively small business back then and we needed to keep specialization at headquarters.
Over the last 3 years, we really moved that out into the countries, moved into France and Spain and Germany in different areas. And so, we've really embedded in those countries some real talent that we I feel has good continuity we'll take them through. Now there's some overall headquarters talent that we don't want to lose, that we're working hard to save, but I don't see it being a big disruptor for the business at all.
And this has been something that, Mike, this has been going on all year. We have a complete transition plan, very clear as to who's moving and how things are happening. So that come January 1, it's very clear. So it's something that as we've talked about on these calls since the beginning of the year, we've talked about this move and we feel really good about the plan that we have now and be able to hit the ground running in 2020. Thanks.
Thanks, Ken.
Thanks, Michael. Yes. Well, thank you, everyone, for joining us today. This concludes our conference call. We look forward to seeing you at upcoming conferences and, of course, at the GP Summit in November.
If you have any follow on questions, please contact Madeleine Helmick in Investor Relations.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.