Let's go ahead and get started here. Welcome to the 2026 Goldman Sachs Healthcare Conference. Not quite kicking us off, but close enough as the second session. I'm very pleased to welcome John Morici, Chief Financial Officer of Align. Clearly, want to make this as interactive as possible, so please feel free, if you have a question, to raise your hand and we'll get a mic over to you as I believe this is being webcast.
John, thank you. I appreciate your coming. We'll kind of start maybe zoom out and zoom in a little bit on the business. Maybe let's sort of start with the outlook. 5%-15%, pretty wide range. Help us understand kind of just the basis for the outlook and what informs kind of the low end and the high end of the range.
I think when we look at that guidance that we've given from a long-range standpoint, we first start with the under-penetrated market. Vast majority of cases are done with wires and brackets, and that applies to everywhere across the globe, including the U.S. When we see the opportunities that we have where we're training more doctors, trying to increase that utilization with many of the new products, we can talk about that we have to be able to help take the products to those opportunities. Training doctors to be more clinically capable, to be able to treat patients on a digital orthodontic basis versus the analog. Then all the different things that we're doing to go to market.
We actually see a good double-digit growth in many markets as we look at international broadly, that we see now growing, which is about 55% of our business growing double digits. We talk a lot about our dental service organizations, we can get into that as you wish. Those dental service organizations, even in the U.S., are growing double digits.
It's really more the North America retail that we've seen some of that sluggishness, [and] that's what's kept us at some of the growth rates that we have. When you look at our business, the opportunities there, the products that we have to be able to go to those markets, then the capabilities that we can bring to our doctors to be able to treat those patients, we feel good about that long-range growth.
For much of the market that we operate in, we're at that level already. What you've seen over the last few quarters is getting into that 6%, 7%, 8% growth. We feel good about the progress we've made, knowing that we have a lot of other things that we can do to try to continue that.
I want to jump into some of the market growth, but maybe before we go into some of those details, you talked a little about the technology day you hosted two weeks ago, I believe. What are some of the highlights that you wanted people to take away from that? What are the products that you're most excited about that can really move the needle on growth?
On that technology day was really focused around some of the products that we have that are either in the market or just in the market and ones that are coming. First off, some of the products that we have on the orthodontic side, we've talked a lot about this comprehensive with no refinement. It's a comprehensive product that we have over a three-year treatment period. Many of our doctors want to have flexibility in terms of what type of refinements that they want to purchase in advance.
It's products like that where we have a comprehensive without refinements. We saw work in our DSOs and our large dental or ortho buying group, where they were able to see some of the effectiveness on this. If doctors need additional refinements, they can use it. We see some of the product, that capability, it's really a testament to the fact that we have technology that allows doctors to be able to treat these patients in the most effective way.
When we think about the orthodontic side, some of it's the existing products configured in a way that those doctors want to use our products and continue to use them. We've seen good uptake on products like that, not just in the U.S., but also in Europe and in APAC as well. In other cases, it's some of the new products that we've had that we're seeing good adoption with. When we think about phase I treatment, where a child, a six or seven-year-old, needs to have his or her upper palate expanded for permanent teeth to come in.
We've introduced that product in many cases just a year or some cases two years ago, where we've seen good uptake on that. You continue to find that utilization that those doctors have. [So] working through the existing portfolio of products that we have. When we talked about our technology day, as you think about that orthodontic utilization, kind of with the existing technology, there's a whole host of opportunities that we have with some of the direct fabricated products.
What we're talking about here on some of these products that I mentioned, they're more on the product is made traditional manufacture, where you vacuum form on top. It's the same type of thickness of the material for some of the products that we have. In this case, we can directly fabricate the product, don't need a mold, directly fabricate the product.
Now you have design flexibility. You can design the product in a way that orthodontists or dentists can add material in the back to move molars or make things thinner or thicker and have a lot of customization that they can provide. We talked a lot about some of the new technology that we have where we're starting to see where we had to create resin that was unique for this product and also a manufacturing process that was unique.
Once we combine those two together, which we feel we have a path forward. It's about new products coming out and trying to increase the utilization for those new products. We started and we talked a lot about the direct fabricated attachments that we need, that doctors use to attach on the teeth to be able to move teeth with the aligners.
We also talked about some of the new products coming with retainers, we'll have retainers that are being tested now, and we're starting to see the increasing utilization there. Ultimately aligners. We want to be able to have aligners that provide that direct fabricated capability. And those aligners would be, you'd start maybe with products that are more difficult for us to manufacture, are very manual to manufacture, like the attachments where we have buttons and others, or occlusal blocks, that there's a manual process that has to go into fabricating that product.
[And] direct fabricated will be able to help alleviate that. But you then start to see the scale-up. Once we see that scale-up, again, it's a product capability that it brings, but it's also productivity, a lot less material and so on. We talked a lot about kind of that orthodontic and direct fabricated benefit that we can bring. And then, at the technology review, we talked about some of the capabilities that we can bring to our general dentists and the labs that support them.
We talked about exocad ART or Invisalign Art, where we can provide the advanced restorative technology so that we can have doctors as they're moving teeth, or in some cases, just restoring teeth first without moving, how do we teach those general dentists through labs to be able to move teeth before you do the restorative work? It's really just an expansion of capabilities. But in the end, for the market, there's 2 million general dentists, and we only sell to about 100,000 of them. This capability gives them more opportunities.
That's U.S., the $2 million number?
The $2 million.
Global.
Global.
Okay.
Most general dentists do.
Are general dentists. Okay.
General dentists are doing restorative.
Yep.
Those general dentists do restorative, many times, they just don't have a lot of orthodontic procedures that they do. This gives them capability. This gives them some of that information through digital technology. They scan, they're able to provide some visualization to their patients, then we can find solutions for them to be able to move teeth before you do restorative. Really brings a lot of tech together.
It's the visualization, the treatment planning, the manufacturing. It's using our distribution network to be able to get to those potential doctors. It's a huge opportunity because majority of cases that are done on a restorative basis do not include any ortho, and we're trying to bring that to the market and give some capabilities. We think that going through labs is a way to bring those capabilities.
Great. Hey, to interrupt our flow, can I get the clock updated and running so we make sure I keep us on track here? Maybe we just jump into the geographic dynamics here, because there's obviously just an overwhelming focus on the U.S. You talk about double-digit growth in some markets, but there's still, as you know, the stock trades on the consumer sentiment data. There's a tremendous amount of focus on that North American business. Maybe just give us some perspective on what you're seeing year to date, how you kind of framed the guidance assumptions around this business, and then we'll kind of go into some of the details.
You're right. Much of the data comes out of North America. I think when you look at the overall market, it's about the same that we've seen for a number of quarters now. It might oscillate a little bit. I'm talking about consumer sentiment. It might oscillate a bit one month to the next, but you're in the 40s to low 50s.
That's not a good consumer sentiment, and that's been that way for a number of quarters. What we've been able to do is operate within that environment. It's about the same, when we talk about stability and so on, that's about what we've seen for the last number of quarters now, going back to the middle of next year. What we do is find ways to operate within that environment.
I mentioned that majority of market is outside the U.S., and I also mentioned that we have within the U.S., even within a poor consumer sentiment, the DSOs are operating in double digits. The last part of what we brought to the technology day and talked about is we doing in that market to educating doctors about different products that we have, different technologies, whether it's on the ortho or GP side.
In many cases, especially in that tougher market, it's what you do with those potential patients to be able to get them into the practice. We do a lot of education to educate both the potential patients as well as the doctors so that they can think about external financing. Are there ways that they can get that potential patient to use external financing to try to get them to overcome some of the challenges? Some of the partners that we work with, like an HFD and others, they're able to, for low money down, get those potential patients into treatment, sometimes at a lower FICO score, and then have no interest for a couple of years to be able to get those patients.
We find that 50% or more of some of those patients going through general dentists will want some external financing. I think, really starting to mid-year last year, we found a lot of good ways to be able to get external financing and ways to be able to help drive that conversion. Challenging market, yes. We are doing things, again, going back to it's an under-penetrated market.
Those potential patients want to go into treatment. They see the benefit of it. It's just a matter of helping them drive the conversion, and that's what we call more the active conversion that we work towards. Like I said, I think we feel good about how we've operated in that environment for the last few quarters, and we'll update how we did in Q2 after the end of the quarter.
Okay. Maybe I'll just sort of dive in a little bit more onto the retail versus dental service organization side. As you do your market research, what are the real underlying drivers that's supporting the divergence in trends across the two segments, and what can you do to sort of better stimulate the retail side?
On that retail side, it comes with, if you're on the orthodontic side, some of those orthodontists, if they don't have a lot of traffic to their practice, if they haven't digitized their practice as much, they might revert back to wires and brackets because that upfront cost is cheaper than it is for Invisalign. We provide them capability to help them treat the entire treatment.
There is a lot less labor, but we're more expensive than wires or brackets to start. What we've learned from the DSO side are, like I talked about, the product portfolio where you have, maybe they don't need the comprehensive unlimited or even the three-in-three, that's three years of treatment with three refinements. We introduced that three and a half years ago, and what we've seen is that's our number one product now.
We took that further through the DSOs, and now it's being launched across the regular retail side, is a comprehensive without refinements. That just gives doctors more capability where they can treat that patient. They don't have to pay for the refinements upfront, so the upfront cost to them is less. Then, we get the benefit from the ASP, as they need additional refinements going forward.
It gives that doctor the flexibility to choose the product that he or she wants. We talk about when that patient's going to go into treatment, it's one or the other, wires or brackets or Invisalign. We want to be able to kind of win those gray areas, and this helps us do that. That's a product that was kind of born into the DSO type of organizations, and now it's gone into the mainstream.
The other part is when we think about what's happening on the general dentist side, those general dentists, those DSOs that are winning, and they're growing double digits even in the U.S. What are they doing? They're scanning every patient. Someone comes in for treatment or some type of restorative work. They scan those patients, get whatever work that they're going to get done there, and then at near the end of the treatment, the doctor will come in and say, "Here's a scan.
Here's how you look right now with your teeth and your smile, and here's what you would look like with orthodontic treatment." They might even show that before they do restorative. You have the as is, the ortho, and then the ortho restorative. What it does is it gets that potential patient excited about treatment.
[And then,] it comes down to what's that pricing to that doctor, to that patient, and if it's competitive pricing. Then, as I mentioned, if it turns into a type of financing that's attractive for that patient, usually sub-$100 a month, then you can drive that conversion. That's what's happening within the DSOs. We are working to try to take that further.
There's work that we can do product-wise and capability-wise on the ortho side, and there's things that we can do from a workflow standpoint to help on the GP side. Those are ways that we're going to market in this environment. Like I said, we've seen this for a number of quarters now. We're seeing some traction here, and we want to continue that. As the market gets better, great, that's a tailwind for us. We think we can operate in this current environment.
Do you think that, for lack of a better way to put it, downtrading from aligners to wires and brackets, like where are we in that downtrade cycle? Is it stable, intensifying, moderating?
It's hard to get an aggregate amount of data, in terms of some of the surveys that get done and so on. What we see is, I think it's much more stable. You see some of that happening. We would've seen that maybe in the past, I don't know, 6- 12 months ago. I think what helps is the product capabilities that we're bringing, where it helps stabilize that trade that doctors have. It's how they run their practice. We have to be able to operate within how they want to run their practice. The key is, just like all of us as consumers, you want to have options.
You want to be able to consume in a way that you want to, orthodontists and dentists are no different from that. I think what's key is we have products in our portfolio that allows us to go to market with choices. 10 years ago, when we introduced the Comprehensive Unlimited, that was five years of treatment, unlimited refinements.
It was more a reflection of the product capability. We had products that maybe could get to 60%, 70% of the cases, we had to convince orthodontists to be able to use this product. Up until three and a half years ago, it was our number 1 selling product. That was 75% of the market. I mentioned we have the Three-in-Three and some of these other more moderate products. Now that Comprehensive Unlimited is not our number 1 selling.
What's moved it up in its place is options that orthodontists and general dentists have migrated to. Again, that's the capability that they have. We're bridging the gap between wires and brackets and Invisalign from an upfront pricing standpoint, and really trying to suit the needs that those orthodontists and general dentists have. It's a simple saying, but we talk about a lot, is just sell the way the customers want to buy. That's what our product portfolio has gone to, and it gives us many more options, not just in the North America market, but across the globe as well.
On that point, [why], as you generate margin expansion in your business, why not in this environment share some of that with your customer and cut price?
Well, it's not just about cutting price on the existing product, and we've been able to have some stability in our ASPs as a result. It's just the product itself. If you have a product that has fewer refinements, lower treatment time, and so on, it's just at a different price. You see that a lot. When I talk a lot about ASPs, the ASPs for our business are driven really by two parts to this.
One is if you expand internationally, especially in some markets where you just have a lower list price, it's Latin America, or it's Turkey, or it's India, the list prices are lower just to be able to serve those markets. You also have product differentiation as well. Some products are just at a lower list price.
It might be a touch-up case that you do, and it might be $500 or $600 for that case, because it's only a few sets of aligners. The gross margin rate is great. Anything that we have on a product that has a lower amount of refinement is better gross margin for us.
We see the gross margin rate better, and you could look at last few quarters where you start to see more mix of these comprehensive without refinements or even non-comprehensive without refinements. You start to see some of the gross margin rate benefit, and we're very pleased to see how we started the year. [But] that's a reflection of some of that product mix that we have. It's also a reflection of some of the productivity things that we do. We want to manage both.
We want to be able to manage our pricing, on a product level and country level, you're going to get mix. You're going to get some countries going faster, some countries have certain products that they use, and the ASPs are different, we manage that. The equation that we have, and we continue to drive for the business is you've got to get submitters, you've got to keep your submitters active. Sell to more doctors, keep the ones that you have from churning out, and then ultimately get them to increase their utilization.
Actively lowering price to stimulate demand in this environment is not a direction you're going to go.
That's what much of our competition has done, and I think what it's caused them to have to do recently is raise price. It's leading with price. I think that's just trying to grab market share. I think that's what our competition on the clear aligner side has done. We go at it with technology that we bring to those doctors and apply it to the products that they use.
We can be at a lower list price for, like I said, with the comprehensive but no refinements, but it's a reflection of the technology that we've put into it. If that doctor needs a refinement, great. They'll buy a refinement from us in the future, but they don't have to pay for it upfront. That difference in that mindset of whether you buy something with service upfront versus later is kind of that mind shift. It's something that it helps us win in those gray areas. Again, our focus in this business is to go after the wires and brackets business.
Got it.
The orthodontic case starts that happen every year is 22 million orthodontic case starts. 17 or 18 million of them are done with wires and brackets. It's less about share shifting to try to, from a competitive standpoint, it's more about how do we increase the utilization for those doctors. Selling to more doctors who are going to be part of that 22 million orthodontic case starts, and how do we get them to do more and more cases?
I want to talk about the second quarter specifically in a second, but maybe just sort of, you talk about OUS. How do you get visibility on the growth there? Because I think we all get there's a boatload of people, it's under-penetrated, but you also have a ton of local competition in a lot of some of these more attractive markets, namely China. [How do you], what metrics are you looking at, and how do you get clarity and visibility on the sustainability of growth?
You look at China to start with. Most of our business is private, 85% of our business there is private, and the out-of-pocket is that somebody's going to have to pay for that treatment. What we find is there's a huge population of people who need treatment and are willing to pay for it. Our business in China has been double digit for a number of quarters. We feel very good about what we're doing to go to market.
In China, as an example, our sales team is all local there. We've got treatment planning is local, manufacturing is local. We're in China for China, and we feel that gives us a competitive advantage there to be able to go to market. When I think about international, it starts with under-penetrated market.
We've got a direct sales force to be able to go after that market, training new doctors, trying to minimize churn so that you can get those doctors to continue to do cases. International growth has been double-digit for a number of quarters. If I just look back at first quarter, it was strong double-digit across all places. It starts with the under-penetrated market. How do we go to market with our direct sales team and so on? We're very local in terms of treatment planning, being in the time zone, the language, and so on. We've really set this to be able to grow globally, and international has been a big part of our growth.
Okay. I'm going to just pause, see if there are any questions from folks. Yeah, go ahead.
Consumer financing.
I can repeat the question, too. Is consumer financing an opportunity ex-U.S. as well as it is within the U.S.?
Yeah. What we find is consumer financing is an opportunity everywhere. Every market has this opportunity. Not every market is as far along as maybe the U.S. is. That is one, when we think about the last mile to try to get that potential patient into treatment, consumer financing is a big piece of this. Those patients don't want to pay a lot up front, and they don't want to pay interest and pay a lot as they go forward.
That consumer financing potential is everywhere. We're working with some of the local banks and other organizations to be able to help drive this in other markets. It's something that we see as an opportunity, and our doctors tell us that is the one big piece that we can bring. We love those opportunities.
It's not something that's on our balance sheet, we're just kind of the facilitators of that. It is one where it gives many opportunities to be able to help drive that conversion, and we're actively looking country by country where we can make sense out of this. Look with local providers to help give those options to those potential patients, and we feel that we're just scratching the surface on this. This is one where we think will help every country.
Maybe we could just turn to very near-term dynamics. If you look at your second quarter, you've guided to about 1% sequential growth compared to Q1. I think historically, you've been a little higher than that, in the 2%-3% range over a multi-year period. Talk us through some of the factors that went into your guidance as you thought about the second quarter, and what are the upsides and downsides relative to that baseline?
Well, like you said, our typical cadence that we have from 1Q - 2Q is up, say, 3% plus from a revenue standpoint, just kind of talking. You say, "Why is that?" Well, 1, you go up in iTero. We talked about Q1's kind of seasonally low as you come out of Q4, which is a bigger equipment business. Q1 comes down, Q2 comes back up, just based on the seasonality of things. You also go from 1Q- 2Q, you get into ortho season. It's bigger in the U.S. You start to see this in Western Europe as well. You start to see that sequential improvement.
What we wanted to do, just kind of at the Middle East and everything else going on at the time, we said, "Look, let's put to what we call more of a prudent look to our numbers to make sure that we put that out there." It was a 1% at the midpoint, and that's just to reflect some of the uncertainty that we have in the market, and we're doing everything we can to be able to help continue to grow and achieve that.
[But] that's just from a guidance. Same way from a margin standpoint. We essentially put flat from an op margin standpoint on a non-GAAP basis from Q1- Q2. Typically, you'd see some sequential improvement, but with uncertainty around oil prices, logistics costs, and so on, we wanted to be able to give that guidance at that point. Like I said, we'll work our way through the second quarter and be able to report on our progress.
I think the data points a lot of us are sort of living with, both in your direct categories as well as, I think, healthcare consumption more broadly, is that you did see enhanced seasonality in Q1. February is better than January, March better than February, April better than March. What did you see in your business and what was you sort of had April behind you when you issued guidance almost? What were you seeing at that point in time?
Well, look, I don't give out the monthly in terms of where our progression is. I think you would say that we gave typically Q1- Q2 goes up by 3%, and we guided to 1% at the midpoint. We just talked about all the different things that we're doing to drive conversion, whether it's product related or as we go to market or some of these conversion opportunities with financing and so on, and that we've been able to operate in that. If you look back at last year, even the challenges that we had in Q2, sequential was 3%. I'll leave it at that.
Okay. I think if you look at the P&L, you're guiding to about 100 basis points of margin expansion. You did go through sort of a cost restructuring last year. How should we think about kind of the shape of the P&L between gross margins and operating expense leverage?
We want to be able to maximize our gross margin and also our op margin. There's really two aspects to this. One is the product portfolio that we talked about, where you have a lot of products that come through just at a better gross margin rate. Some of these lower refinements, whether on the comprehensive or the non-comprehensive side, gives us a better gross margin rate.
We also see on the gross margin side a lot of cost opportunities that we've started to continue to execute from last year of some of the restructuring in terms of retiring some extra equipment or upgrading some of the equipment to be able to put the latest in. Reduces our material cost, reduces some of the labor costs. We also find that we're able to move closer to our customers to reduce our freight costs.
All that helps our gross margin. We saw that as we exited last year with some of those activities, and we certainly saw it in the first quarter. We were up ex-FX, up 200 basis points in gross margin. Really good growth drivers from some of those. As you work down to op margin, we're always looking at our OPEX to be able to make sure that we have the right structure.
Do we have the right span of control? Are we able to pivot as we need to, especially on the R&D side? We've spent a lot on the R, now it's moving to the D side of the R&D. We start to see efficiencies there where now you have products that are coming to market, some of the prefabricated attachments, some of the retainers and so on.
You spend less on the R&D and more you get the benefit of the revenue that comes through. We get that leverage as well. When we talk about what we're thinking about for the year and how that's why even with some of the scale-up of some of the direct fabricated and others that might hurt on that per product basis, we look at our overall expansion and up that 100 basis point. We are very focused on driving volume, driving revenue in the business, and above this 5%, and in the last few quarters, in the mid to upper single digit growth.
We want to continue that, but also do it at a way that is profitable. We want to drive to the bottom line. When you look at other companies that are in our space, whether they're pure play or a part of another company, they're losing money on a net margin basis. We've got that focus of grow and drive that volume and revenue, but also do it in a profitable basis.
I'll just open up for any other questions for I have a couple more, but all right. As you look at the environment today and you talk about some of those efforts around margins, it's really tough. Obviously, we can see the direction of raw material input costs continue to move higher. At what point do these efforts become running faster to stand still versus give you air cover to continue to expand margins?
I think we've always, being the company that we are, to be able to expand in the market, we've got to do it in a profitable way. We've got to be able to have initiatives to be able to drive productivity, to be able to meet the customer where they're at. Sometimes it's product related, sometimes it's other ways to be able to help drive that conversion. We've got to look at this holistically.
We've been around for almost 30 years. We created this market, we want to be able to continue to drive. In the end, it's a wires and brackets market, sadly, still, after 30 years. We're going to do everything we can from a product standpoint, from a go-to-market, financing, all the different ways to be able to help drive increased conversion here. You have strategies to be able to do that, you execute it on a quarterly basis.
Maybe let's close with any comments on capital allocation. This is a very dislocated equity market now. You have cash, you generate cash. How are you thinking about use of the balance sheet here, whether that's internal reinvestment, buybacks, M&A, et cetera?
Well, we first start out with a model that is cash. It's a good model to have that we can still grow in the business, grow volume, grow revenue, but do it in a profitable basis that we just talked about and generate the op margin that we do. We're also fortunate to be a company that doesn't have debt, being able to not have to take that on.
Our cash, much of it is outside the U.S., we're working to try to make sure that the allocation is right to bring it back to the U.S. where we can. Obviously, we can use that for our buybacks and so on. What we have is a market opportunity to be able to grow as much as we can, use our capital for that.
We generate healthy free cash flow. Any excess goes back to buyback. We're actively looking at, we've got an open market repurchase in the market now. We're executing on that. When we look at other opportunities that we have to be able to bring back cash, to be able to put that back into the market. We strongly believe in our business and what we can bring to the business, and we'll do the capital allocation that reflects that.
Also balancing that we haven't had debt. We've gone this long without debt. What's the right time or is there a right time to do something different than that? We think that we're driving that cash generation and putting that back to our shareholders in terms of buyback. If I look at my almost ten years here now, I think I started and we had about 82 million shares outstanding, and right now we're under 72 million.
I've been committed to being able to use those buybacks to be able to reduce our share count, and we've reduced our share count maybe 15% or so in total over those ten years. We want to be mindful of that, but we also want to be mindful of the cash that we can generate to help drive the business.
Excellent. It's a great place to wrap up, John. Thank you for making the trip to Miami, and we'll look forward to another update here in July and August.
Great. Thanks, Dave.