Align Technology, Inc. (ALGN) Q2 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the Align Technology Second Quarter Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded. It is now my pleasure to introduce your host Shirley Stacy, Vice President of Corporate Investor Communication. Thank you may begin.

Thank you everyone and thank you for joining us. Joining me today is Joe Hogan, President, and CEO; and John Morici, CFO. We issued second quarter 2020 financial results today via GlobeNewswire, which is available on our website at investor.aligntech.com. On April 1st, 2020 we completed the acquisition of privately held exocad Global Holdings GMBH exocad. To reflect this addition acquisition of exocad into our operations as of Q2 2020, we have renamed the Scanner and Services segment to Imaging System and CAD/CAM Services or Systems and Services. Today's conference call is being audio webcast and will be archived on our website for approximately one month. A Telephone replay will be available today by approximately 5:30 P.M. Eastern Time through 5:30 P.M. Eastern Time on August 5th. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13705887 followed by pound. International callers should dial 201-612-7415 with the same conference number. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We have posted historical financials including the corresponding reconciliations, including our GAAP to non-GAAP reconciliation as applicable. And our second quarter 2020 conference call slides are on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'd like to the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Thanks Shirley. Good afternoon and thanks for joining us. I am pleased to report Q2 results and continued progress across all regions and customer channels that reflect our COVID-19 recovery efforts, and those of our customers. Practices across every region have reopened and are seeing patients and many of those practices are embracing digital treatment in new ways and more purposely than ever before. In particular Invisalign providers are using the virtual tools we expedited over the last few months to minimize in office appointments and deliver doctor-directed personalized treatment that meets the needs of the moment, trusted, safe, convenient, and reflecting the digital option. The initiatives we have prioritized globally over the last few months, including support for doctors to ensure treatment and business continuity a shift to online education, and training, ramping availability of virtual tools to keep doctors and patients connected throughout the treatment, and continued investment in consumer marketing, and concierge program, and personal protective equipment or PPE are helping doctors navigate this evolving environment and come back stronger as their practices have reopened. We have received consistently positive reactions and feedbacks from doctors in support of our efforts over the last few months. While it's too early to know for sure how extensive and sustainable the digital transition will be. Interest in digital solutions is building even among doctors who were not early adopters or advocates prior to the pandemic. The positive feedback and momentum is not just around Invisalign treatment. It includes digital workflow around iTero scanners and general dentistry. Doctors are telling us that iTero is central to their practice and to their practice workflows and its key to driving digital treatment. With that let me turn to results. For Q2, total revenues were $352 million down, 36% sequentially and down 41% year-over-year reflecting significantly lower sales in Invisalign clear aligners and iTero scanners due to a full quarter’s effects of COVID-19 pandemic on practice closures. Revenues from clear aligners were $298 million and Imaging System and CAD/CAM services were $54 million. On a year-over-year basis while clear aligner shipments were 222,000 cases down 41% year-over-year, we are pleased with the continued progresses we seen from our recovery efforts throughout the quarter. For the quarter, we shipped Invisalign cases to approximately 48,000 doctors, of which 3,000 were first time customers, reflecting lower doctor activity due to practice closures primarily in Americas GP channel. We also trained approximately 3500 new doctors in Q2 including 2350 international doctors. While our inability to hold in person courses due to COVID-19 result in fewer trained doctors in the second quarter, we continue with a significantly larger number of Invisalign doctors through online virtual education courses, summits, and forums. For the teen market in Q2 71,000 teens and preteens started treatment with Invisalign clear aligners, representing 32% of total cases shipped, reflecting growth from APAC across comprehensive products. By the end of the quarter we started to see recovery in the Ortho channel with increases in Invisalign comprehensive treatments in the teens and preteens segment across most regions with positive growth predominantly in the APAC in the teen segment. Invisalign first continues to accelerate among young patients as well and reflects greater resiliency as parents continue to prioritize orthodontic treatment for their kids. Overall, both non comprehensive and comprehensive shipments were down, but with increased adoption of our moderate product among the Ortho channel. Last week, we held our Teen Forum-Virtual Edition, taking what was a popular teen-intensive program for orthodontists launched last year and recreating it as a virtual experience. 6:29 In order to facilitate broader attendance among our customer doctors, we scheduled two teen virtual events. The first took place on July 17th and the second will be held this Friday. The program is designed to help doctors understand the highly visual online and on-demand world of today’s teens and provides the know how tools and confidence to differentiate and grow their Invisalign teen practices. Approximately 800 customers have registered for this full day session that combines live and on demand sessions, clinical practice investor presentations, panel discussions, and invaluable insights from experts with successful teen practices. Now let's turn to the specifics around our second quarter results starting with the Americas. For the Americas region Q2 Invisalign case volume was down 53% sequentially and down 52% year-over-year reflecting significantly fewer Invisalign case shipments due to the impact of COVID-19. For Q2 reported utilization was down for NA Orthos and GP both quarter-over-quarter and year-over-year, however utilization increased in June especially among certain orthodontists doing more Invisalign treatments with teen shipments recovering faster in North America, in late May, and through June. As part of our recovery programs we enabled doctors to switch their patients into Invisalign treatment by buying their wires and brackets. This program was well received and as a result doctors converted approximately 2500 wires and brackets cases to Invisalign clear aligner patients. In the GP segment the timing of officer openings and case prioritization are slow to recovery in this key segment as compared to the orthodontic segment, but the GP segment is catching up. In terms of timing of the recovery in the Americas, the US continues to lead followed by Canada and LatAm corresponding to the timing of the pandemic related shutdown and reopenings in each region. For international business Q2 Invisalign case volumes were down 17.2% sequentially reflecting a significant decrease in EMEA again due to the impact of COVID-19, partially offset by growth from APAC which was ahead in the recovery curve in China, Taiwan, Hong Kong, and South Korea. On a year-over-year basis international shipments were down 27.1% reflecting a decline in EMEA partially offset by slight growth in APAC. For EMEA Q2 volumes were down sequentially 44% and down 46% on a year-over-year basis across all markets with more softness in the GP channel compared to. ortho We continue to see momentum within Invisalign first for Invisalign treatment in young patients. Overall we saw slower deceleration in teen shipment growth than adults driven by Germany and France. The expansion market had less decline and only accounted for five points decline in EMEA. We also rolled out a recovery 360 program in EMEA with over 3700 Orthodonists enrolled resulting in a stronger partnership perception by our customers including an increase in our Net Promoter Score or NPS. Using a combination of our adapt consultants which I'll be describing more later and territory managers, we held practices with the workflow and scheduling, increased our doctors engagement with their patients through the use of education, and communication tools, and provided business by ability, access sustainability materials to the doctors. In May over 1400 attendees from three regions, 75 countries participated in our virtual Invisalign scientific forum in EMEA. At the end of June we held a virtual GP growth Summit with over 1300 doctors from over 42 countries who signed up to gain insights on business, dentistry, health, and chain management. During the summit we launched our GP recovery program and we received great feedback on the tools and approach we provide to support business recovery. During the quarter we also offered over 150 online and on-demand education events which reached over 20,000 GPs cumulatively. In July we launched the Invisalign Gold Plus system in UK, in Nordic, and Benelux which offers a wider treatment options, enables dentist to treat more patients with confidence, and can be easily integrated into a wide range of restorative treatments in their practice. For APAC Q2 volumes were up sequentially 41% reflecting improving trends as practices reopened and got back the business, as well as COVID-19 recovery measures we implemented in China. On a year-over-year basis APAC was up 3.4% compared to the prior year and was the only region up year-on-year. As mentioned earlier we saw positive growth in APAC in teen shipments led by China reflecting a strong uptick recovery programs. In the GP segment we saw growth in the non comprehensive cases with Invisalign Gold and the launch of [indiscernible] in China continuing to further demonstrate doctor confidence in treating young patients with Invisalign. Throughout the region Japan, Taiwan, and South Korea successfully managed recovery efforts and performed better than expected. During the quarter, we reached a major milestone with our 1 million Invisalign patient in APAC, an athlete in modern day and fencing who is being treated by Dr. Yogart in Tokyo, Japan. Earlier this month we held the Invisalign Teen forum in China in a virtual from broadcast of four venues in Beijing, Shunde, Wuhan to approximately 8000 participants. The forum focused on the innovations and applications of digital technology in clear aligners as well as theories in clinical practices for teen patients. The forum brought together outstanding orthodontists from leading dental colleges from approximately 30 academic institutions. We believe that our global clinical education programs are the best in the industry and we’ve been even more valuable to doctors throughout the pandemic. We launched a new improved digital learning environment for our doctors this year offering a comprehensive learning platform with role specific content for orthos, GPs, and their teams. They improved functionality enables more online learning opportunities with Spotlight features for what's trending now recommending learning paths based on doctors experiences in extended categories including digital treatment planning, comprehensive dentistry, and team education. To date over 85,000 doctors have access to recorded lectures and completed self pace learning models and watched how to videos and over 3 million sessions. Among the ortho channel over 30,000 unique users have engaged with the digital learning side with an additional 50,000 unique users from the GP channel. We are encouraged by the digital training utilization rates among our doctors which has helped them continue their Invisalign treatment learning journey during the pandemic. Feedback from the participants describes the courses as engaging, providing broader reach to online events, and a strong desire that Align continue to provide these virtually. They also acknowledged Align’s agility, and providing relevant tools and content to help them during the lockdown. We see this as an ongoing opportunity to enhance doctor learning to direct feedback and continuous improvement. Building on the benefit of clinical education and training today we announced a global launch of the Align digital and practice transformation or ADAPT service. This is our first customized consulting services in support offering for doctors and was developed based on years of learnings from practices that saw strong growth, and practice transformation when changing their practice to digital. Initially available to Invisalign and iTero doctors in select segments of the EMEA market and then in the US, the global program is now generally available in EMEA and APAC regions that will be available in the US in the second half of this year. The ADAPT program is an expert in independent fee based business consulting services offered by Align to optimize clinics, operational workflow, and processes to enhance patient experience, and customer, and staff satisfaction which will turn translate into higher growth and greater efficiencies for orthodontic practices That goal of ADAPT program is to support digital practice transformation for doctors and their staff. ADAPT is designed for orthodontists as approximately 200 total cases start per year who are seeking to build their future business. Driven by a team of independent business consultants, analysts, and program support specialists, ADAPT offers a customized on-site consulting service to each participating practice. The program combines a review of business operations and practice workflow data with Align's expertise and digital workflow optimization, practice support, business transformation, marketing, and clinical education support. The pilot version of the program has been successfully developed across EMEA, the United States, Asia Pacific region over the last 12 months. As a result of the ADAPT service participating practices improved profitability of 15% within six months of implementation and increased practice revenue up to 20%. Our consumer marketing is focused on building the clear liner category and driving demand for Invisalign treatment through a doctor's office. In Q2 we saw strong digital engagement globally with more than 70% increase in unique visitors as well on leads. Other key metrics showed increased activity engagement with Invisalign brand and are included in our Q2 quarterly presentation slides available on our website. We're pleased with our strong engagement and activity we have seen on our customer platforms over the last few months. I do believe it speaks to the strength of the brand, a consumer interest in treatment even doing a challenges the last few months. In Q3 we're coming into what is typically the strongest part of the teen season with teens and younger kids are home from the summer break and likely to start treatment before heading back to school. And while back-to-school looks very different this year in many countries including United States, this is still a time and practice is orthodontic practices are focusing on younger patients. Teens are the biggest, the most critical part of orthodontic practices and our huge influences and drivers of practice growth. That matters now more than ever as we partner with practices in this recovery. One of the most important ways we partner with customers is by creating demand for Invisalign treatment and to drive teens and parents to the practices for great outcomes and great treatment experiences. We have just launched a new Teen and month-focused consumer campaign designed to do this just that by reaching teens and moms where they are most engaged on digital platform, social channels and later this year national cable TV channels where they sped the most time like Instagram, Twitch for Teens, Instagram, Facebook and people.com for moms. We're going to leverage influences that teens and kids follow interest like Charlie D’Melio. We recently established a new partnership with Charlie, who is a really dynamic kid and accomplished dancer who has a combined following of over 90 million fans on TikTok and Instagram, she's about to become a new Invisalign patient and ambassador for our brand. She'll be sharing her treatment journey in a way that is relevant to teens across social platforms. And our new campaign will get the heart of what, it get to the heart of what Invisalign is and what it isn’t, using straightforward language that teens respond to. Our goal is to tell teens why parents and Invisalign is more of advanced and or more comfortable than traditional braces emphasizing that this is not your parent’s braces. We also want to ensure that they know that doctors are front and center in the Invisalign treatment because it's time to be very candid about the benefits of digital orthodontics and Invisalign treatment specifically. For our assistance and services business which now includes exocad Q2 revenues were down 22% sequentially. We are pleased to see the momentum with Element 5D Imaging Systems in North America and APAC along with sales of iTero element one scanner modeling China and significant sales of the flex scanners modeling EMEA. On a year-over-year basis, system and services revenues were down 48% were slightly offset by the inclusion of exocad CAD/CAM services. Cumulative the over 24 million orthodontic scans are 5.5 million restorative scans have been performed with iTero scanners. For Q2 total Invisalign cases in mid of the digital scanner in the Americas increased to 86% from 77% in Q2 last year. International scans increased to 72%, up from 61% in the same quarter last year. We're pleased to see that within the Americas 96% of cases submitted by North American orthodontists were submitted digitally. We also recently announced that the iTero Element 5D Imaging System was awarded best new technology solution for dentistry in the 2020 Medtech awards. The annual program honors outstanding health and medical technology products and companies. We also received an award for dentistry IQ naming the iTero, Element 5D Imaging System as number 10 of 14 products and services to help dentist rebound from COVID-19. With that I turn the call over to John.

Thanks John, now for our Q2 financial results. Total revenue for the second quarter was $352.3 million, down 36.1% from the prior quarter and down 41.3% from the corresponding quarter a year ago. For clear aligners, Q2 revenues of $298.3 million was down 38.1% sequentially and down 39.9% year-over-year due to volume decreases across most regions. Driven by North America and EMEA and LATAM partially offset by APAC. Clear aligner revenue growth was impacted unfavorably from foreign exchange of approximately $6 million or approximately one point year-over-year. Q2 Invisalign ASPs were flat sequentially at $1,255 primarily due to promotional discounts and unfavorable foreign exchange mostly offset by increased revenue from countries with higher list prices and increased other case and revenue revenues. On a year over year basis Q2 Invisalign ASPs increased approximately $25 primarily reflecting price increases in all regions and additional line of revenue, partially offset by promotional discounts and unfavorable foreign exchange. One example of our crisis recovery program that we have implemented in Q2 was a switch program that enable doctors to switch wires and bracket patients into Invisalign clear aligners. Total Q2 Invisalign shipments of 221.9 thousand cases were down 38.3% sequentially and down 41.2% year-over-year. Our system and services revenues for the second quarter was $54 million down 22.2% sequentially and down 48.1% year-over-year due to volume decreases across most regions except APAC. Promotional discounts and a decrease in service revenue partially offset by exocad revenue. Moving on to gross margin. Second quarter overall gross margin was 63.7% down 7.9% sequentially and down 8.3 points year-over-year. On a non-GAAP basis, excluding stock-based compensation expense and amortization of intangibles related to exocad, overall gross margin was 64.4% for the second quarter down 7.4 points sequentially and down 7.8 points year-over-year. Q2 gross margin reflects Align’s decision to maintain our head count and salaries across our operations in anticipation of a volume pick up as the COVID-19 pandemic subsides. This decision also enabled us to manufacture nasal tests swabs for hospitals and PPE for use by our own employees as well as our doctors as they reopen their practices. We also postponed iTero subscription fees for one month in the US and parts of APAC. On a year-over-year basis Q2 gross margin includes approximately 0.7% impact from unfavorable foreign-exchange. Clear aligner gross margin for the second quarter was 64.5%, down 8.5 points sequentially and down 9.2 points year-over-year due to lower volumes driving higher cost per case and increased freight costs from higher international shipment mix. On a year over year basis, the decreased in the clear aligner gross margin was partially offset by an increase in Invisalign ASPs and continued in efficiency improvements. Systems and services gross margin for the second quarter was 59.2%, down 2.6 points sequentially and 4.4 points year-over-year due to lower ASPs and lower volumes with higher cost per unit and amortization of intangible assets related to the exocad acquisition partially offset by lower service support part. Q2 operating expenses were $297.3 million, down sequentially 8.4% and up 60.2% year-over-year. The sequential decrease in operating expenses reflects lower travel spend, decreased compensation related to commissions and lower marketing and media spend, partially offset by higher exocad acquisition cost. Year-over-year, operating expenses increased by $41.5 million, this is mainly caused by the $51 million favorable litigation settlement received in Q2, 2019 offset by cost controls measures in Q2 of 2020. On a non-GAAP basis, operating expenses were $265.6 million down sequentially 11.9% and down 7% year-over-year due to the reasons as described above, offset by exocad cost. Our second quarter operating loss was $73 million, down 204.4% sequentially and down 141.4% year-over-year. Our second quarter operating margin was negative 20.7% down 33.4 points sequentially and down 50.1 points year-over-year. The sequential decrease in operating income and operating margin are primarily attributed to lower revenues and gross margin as a result of lower volume from COVID-19 impacts. Operating margin was unfavorably impacted by approximately 0.9 points year-over-year from foreign exchange. On a year-over-year basis the decrease in operating income and operating margin primarily reflects lower gross profit on lower volumes from the impact of COVID-19 in addition to the prior-year quarter included the $51 million favorable litigation settlement. On a non-GAAP basis which excludes stock -based compensation, acquisition-related costs and amortization of intangibles related to exocad, operating margin for the second quarter was minus 11%, down 28.1 point sequentially and down 35.6 points year-over-year. Interest and other income and expense net for the quarter was an expense of $0.5 million including a $1 million hedge loss related to the exocad acquisition excluding the hedge loss interest in other income and expense net was 0.5 million income on a non-GAAP basis. With regards to the second quarter tax provision, our GAAP tax rate was 44. 8% which includes a tax benefit related to the impact of changes in the jurisdictional mix of forecasted income to GAAP profits recorded last quarter. The second quarter tax rate on a non-GAAP basis was 27.8% compared to 33.2% in prior quarter and 25.3% in the same quarter a year ago. The second quarter non-GAAP tax rate was lower than the first quarter’s rate primarily due to changes in jurisdictional mix of forecasted full year results. Second quarter net loss per diluted share was negative $0.52 down $19.73 sequentially and down $2.35 compared to prior year. On a non-GAAP basis, net loss per diluted share was negative $0.35 for the second quarter down $1.08 sequentially and down $1.84 year-over-year. Moving on to the balance sheet. As of June 30th, 2020 cash and cash equivalents were $404.4 million, a decrease of approximately $386.3 million from the prior quarter, which is primarily due to the acquisition of exocad partially offset by a free cash flow improvement. Of our $404.4 million of cash and cash equivalents, $160.2 million was held in the US and $244.2 million was held by our international entities. Q2 accounts receivable balance was $473.3 million down approximately 11.2% sequentially. Our overall days sales outstanding, DSO’s was 121 days, up 34 days sequentially and up 44 days as compared to Q2 last year due to doctor office closures that resulted in slower accounts receivable collections. We expect DSOs to remain relatively high has doctor’s offices return resume normal business activity. Cash flow from operations for the second quarter was $59.9 million. Capital expenditures for the second quarter were $34.4 million, primarily related to our continued investment in increasing aligner capacity and facilities. Free cash flow defined as cash flow from operations less capital expenditures amounted to $25.5 million. Under our May 2018 repurchase program, we have $100 million still available for repurchase of our common stock. Now let me turn to our outlook. Since the last time that we talked, the orthodontic and dental market had continued to evolve in response to government regulations and safety guidance from local, regional and national health officials. We believe that all of our markets have bottomed out and are recovering, albeit at different rates and different times corresponding with regional outbreaks and recoveries from COVID-19 preventative measures as we're now seeing improvements in consumer and doctor activity. Nevertheless, we're mindful that the demand environment remains uncertain. There may be additional waves of infection and governments around the world may strategically choose to shut down cities, states and countries again forcing people to shelter in place and practices to close again therefore we're not providing any forward-looking guidance. While our management team understands the markets remain fluid, we continue to focus on taking care of our employees, customers and shareholders for our employees we are committed to protecting our employees, and do not intend to implement furloughs or salary reduction. For our customers we will continue to be supportive of our customers who are impacted by COVID 19 and are committed to helping slow the spread of virus by providing PPE to doctors. We continue to release products, tools, and promotions to help our doctors recover from the crisis. For our shareholders, we will continue to invest in our strategic initiatives to grow in a vastly underpenetrated market and position our company to capture growth as the market returns to normal. This includes continued investment in Align’s end to end digital workflow as well as increased investment in the Invisalign brand and consumer demand creation as you heard Joe described earlier. We will continue to add resources in markets that give us a good return. I’m very proud of what Align is accomplished while maintaining our financial discipline during this pandemic. We finished Q2 with $404.4 million in cash and cash equivalents, closed the purchase of exocad for $430 million and still delivered free cash flow of $25.5 million despite having the lowest volume Align has had in a very long time. Our cash flow reflects the strength of our business model, the strength of our balance sheet, and our strong operational focus. I’m also pleased to share that we have established a new line of credit of $300 million with a consortium of banks led by Citibank. This new land replaces our line of credit with Wells Fargo. As a market leader in clear aligners and digital dentistry we are well positioned to continue investing strategically for the future. With that I'll turn it back to Joe for final comments Joe.

Thanks John. In summary we're pleased with our progress last quarter and by the customer responses to the actions we’ve been taking to support their practices and patients. We have developed a careful recovery approach that accounts for the safety of our employees, our customers, and their teams, and their patients, and are committed to helping doctors navigate this evolving environment, and be successful. One of the biggest lessons we have learned over the last few months is about the critical importance of digital technology. Align has always been a proponent of digital treatment to think about all these things that digital platforms and virtual tools have enabled during the crisis. The people in the businesses, and the customers who stayed connected, the way we’re able to adapt to working from home, the rise of tele consults, the AI that modeled the virus patterns, and informed health experts, and so much more. Consider also the companies that have thrived, most of the companies that are digital with their core, Amazon, Apples, Zoom and Netflix just to name a few. The advantage of digital are much more magnified to practitioners and consumers. This became even clear in our industry when practices were shut down for months. Over and over we heard I‘ve been able to help my Invisalign patients progress in progress, but I had to just try to keep my patients in a holding pattern with wires and brackets. Treating orthodontic cases has amplified the clear benefits of digital technology in clear aligners. This is a method self serving. This pandemic has emphasized the benefits of digital technology across many facets of our lives and businesses. Our acquisition of exocad adds additional digital workflows that play in the GP space and lab space. We're all excited about the exocad team and what our investment brings to this new world of the digital dentistry. Align’s digital platform has made it possible for thousands of doctors and patients to continue Invisalign treatments throughout the global disruption. Thanks to the digital orthodontics of Invisalign aligners, iTero digital, records, and simulations, digital treatment planning, and virtual monitoring, and care. At Align we have always believed that digital orthodontics is the best option for teens and adults. As you can see from a peak at our current teen campaign, we’re going to feature this going forward. What’s clear to us is that the momentum we’re seeing in the business and in the dental and ortho practices reflects more than just one thing or one new products or tool or one program or action. It reflects continued improvement and continued execution of our core strategy across our business in every region. We’re going to continue to stay the course while remaining vigilant and agile. We feel good about the progress that we have made and as we continue along the recovery phase of COVID 19 crisis in many regions we are focused on what we can control and impact. We are in a unique position to continue investing to a huge underpenetrated market, to extend our lead, and accelerated growth. With that I want to thank you again for joining our call. I look forward to updating on our progress as the year unfolds. Now I’ll turn the call over to the operator for questions. Operator?

[Operator Instructions]. Our first question comes from the line of Nathan Rich with Goldman Sachs. Please proceed with your question.

Thanks. Good afternoon. Thanks for the question. Joe you highlighted the improvement that you saw in June. I understand sort of the rational for now providing guidance for 3Q kind of given kind of the situation, but can you maybe help us better understand kind of where the business kind of you and so just we have better sense of what the jumping out point is as we think about the back half of the year?

Yeah I mean we saw dramatic improvement between April and June. Obviously we were kind of in the jaws of COVID 19 with all the shutdowns in April. May was little better and then we’ve seen strong momentum as we’ve moved into June. So I think you can look at that as a significant improvement in our business overall.

Okay great and then you highlighted the 3000 customers that were new to Invisalign this quarter. Can you maybe just talk about how that compares to maybe what you see in a typical quarter and kind of what you’re doing was going to ensure that those doctors become kind of longer term customers of Invisalign?

Yeah I mean that’s. I mean when you think about COVID 19 and what the business has really faced in that. 3000 customers thus for us was terrific in that way. You don't actually look for new customers coming in on that. You’re looking for utilization rates on your current base. I mean we felt and I felt really great about the 3000. Obviously that got stronger as the quarter went on.

Thank you. Our next question comes from the line of Elizabeth Anderson with Evercore. Please proceed with your question.

Hi. Can you talk about. Do you think Asia is a good path to think about in terms of the recovery or do you see sort of significant differences in that geography that should prevent this from extrapolating?

Yeah I think Asia is so diverse in itself. It’s hard just to extrapolate Asia Elizabeth. .I mean obviously China was kind of first out of this thing, but China has had bumpy road also with the recent issues in Shanghai and different areas, so every one of these regions has its own unique footprint in its own unique model in a sense of how they’ve dealt with the virus, but obviously it in our transcript, but we’ve seen significant improvement in really every region around the world.

Okay and I think you commented also in terms of your cost structure, in terms of not furloughing in place. Is there any other major changes to the cost structure in the third quarter maybe just in the back of the year generally that we should think about as we’re updating our models?

Hi Elizabeth this is John. We continue to believe in our model. It’s a vastly underpenetrated market. We're going to make strategic investments to better grow in that market. Whether it’s R&D, sales, and marketing we’re going to continue to make those investments where we see a return.

Thank you. Our next question comes from the line of Steve Beuchaw with Wolfe Research. Please proceed with your question.

Hi good afternoon. Thanks for the time here. I wonder first Joe, could you give us any more color on the breadth of uptake of some of the new digital tools that you referred to and the extent to which practices are making these changes and converting over to something of a virtual experience. I mean is this. Is this 2% of your customer base? Is it a lot bigger than that? Any color is really very helpful there?

Steve when we talk about digital platform, you really start with iTero on the front end and even in a downturn like we saw with COVID in the capital equipment business. iTero showed up well and particularly with 5D in different areas, but that’s the front end of this whole piece that we talk about on digital platform, then you move through our obviously our treatment planning, and all, but what we added had when you think about the whole breadth of a global digital platform we added virtual care, that knew about and we came out so that. Doctors could talk to our patients remotely and be able to track treatment and actually we had several doctors actually close treatments cases remotely with our virtual treatment capability. And that really extended the effectiveness of the doctor's, and the effectiveness of the digital treatment in that sense too. There is a lot of imaging that we do now in our treatment planning and all too, so it’s not just tracking patients, it's also having images and different things that you can share with the patient is a sense of where they should be around treatment in those types of areas. So it's a broad kind of a digital platform we're talking about. I mean we had tens of thousands of people on our virtual care platform as we rolled that thing out in a matter of 30 days and all around the world. And we’ll continue to update that platform with AI. We’ll make it much more predictive so that doctors don't have to look at every patient. We have a strong roadmap in that sense too Steve so it’s just, it’s the breadth of the digital platform, and how it covers everything from starting with the consumer, turning them into a patient from iTero all the way to the back end up being able to monitor, and treat those patients.

Just one more from me. What I'm trying to get to here is some perspective on what the underlying trend is and I appreciate that you don't want to talk about the exit rate leaving 2Q and you're not going to give guidance for 3Q, but what if I said let's imagine a scenario where we don't have another wave of lockdowns where practices are operating, and what is admittedly a challenging environment, but we don't have any sort of government level, or professional society level. You’ve got to stop doing cases or stop engaging in practices. If that's the operating environment we’re in I mean can you grow in 3Q or the back half of the year? Can you speak at all to what the business would look like in that situation if we don't get more lockdowns? Thank you.

Steve I’d say we're incredibly optimistic in this scenario that you painted where we don't see another COVID shutdown on a major market that lasts a long period of time. Based on the recoveries that we’ve seen in the latter half of May and then the strong recovery in June, we feel really good about the future of this business in the third and fourth quarter and beyond. John anything to add?

That covers it.

Okay thanks a lot.

Thank you. Our next question comes from the line of Jon Block with Stifel. Please proceed with your question.

Hey guys. Good afternoon hey. Joe I hope you can hear me okay. A similar line of questioning, just sort of emendated with e mails about sorts of trends so let me try to frame it this way. I think with slide 8 you guys have increase in North America utilization for June. I think first part of the question is I just want to be clear. That was for both orthos and GPs up the slide. It was hard to tease that out and if that’s the case Joe was that pure. In other words I’m getting questions on practices reopened in May and obviously there is a lot of backlog, so you’re saying North America grew in June, but was it pure or? Was it a benefit of backlog and maybe you could comment if that growth continued into July would be very helpful for North America?

Hey John this is John. Some of that is, some of its backlog, and some of it is additional growth that they would have, so the utilization has improved as those doctors have come back to work and they’re seeing patients, and that’s true in North America and that’s true in all countries where we see those doctors’ offices opening up, so it's hard to tell how much is backlog versus how much is more run rate going forward, but we’re a combination of both.

And the second part of the questions is Joe I’ve got you. That increase or the year over year growth in North America does that continue to the month of July?

That momentum continued to be strong John.

Okay fantastic and the second part of the question, go from very near term next month to sort of 18 months out, 24 months out. John just as we think about the model longer term I think there Street has you guys from a 2021 perspective. Revenue is higher in 2021 to 2019. Let put away 2020 for a whole host of reasons, but let's look at 2010 versus 2019. Structurally if revs are higher by ex %, should the margin structure also be higher. I look back to 2019, you had someone timers and legal et cetera. You reset the base, but if that were the case I'm just trying to figure out do you think the margin profile would also follow when we look at the earnings power? Thanks guys.

Yeah, thanks John. So as we look at investing our believing in our long-term model, a long term growth model and that has up margin at the 25+% so that's how we look to keep investing. As you get some benefit through the expansion and other things you might get some leverage as you go but we believe in that long-term model and that's how we look forward on our investments.

Okay. Thanks guys a follow up, I appreciate it.

Thanks Jon.

Thank you our next question comes from the line of Ravi Misra with Berenberg Capital Markets. Please proceed with your question.

Hi thanks for taking the question, I hope everyone is well. So it is just first I wanted to ask you gave us some sort of inclination about what the COVID impact was in Q1, anything that you can provide color-wise on that for Q2?

Yeah I think Ravi was [indiscernible] you know obviously April was tough as you came out of March into April, you know we saw some stabilization in May and then good progress in June overall so it just a complete kind of beginning and end of the quarter overall and like we just mentioned by John is that’s what continued into July also.

Okay I guess and I guess it's going to be hard to get a dollar figure out of you guys. How about just on a ADAPT I'm curious about the business model here when you're talking about kind of increase in utilization, can you help us think about how you plan on monetizing that is there some sort of profit-sharing or revenue-sharing that comes to the increased caseload and when does that kind of start to kind of flow through the P&L should we expect this as a 2021 event or when is this a small program that shouldn't really ever material impact to revenue. Thanks.

Ravi this is John, so you talk about that ADAPT program that we spoke about?

Yeah.

Look, we believe the digital transformation and this is the way we see that in testing that we have done to be able to help practices be more efficient moving from analog to digital, we believe in the platform and believe in that process and these are initiatives that will take to help the fact. It will be a service for a fee and those doctors, those practices will see the benefit we have seen it time after time on those practices that they have seen improvement in their efficiency and profitability and we want to be at a provide that service.

What kind of a upfront payment?

Well I think you know the way we have built that will be probably different by region but it is not an easy transition for practitioners to go from analog to digital and we have known that’s been one of the fictional point for customers wanting to obviously go digital from a dentistry standpoint, orthodontic standpoint so we have learned a lot and we're using those learnings for customers to reach out and really want to make a commitment for digital transformation and we know we can help, we filed last year in every region and we rolled it out full force now.

Thank you. Our next question comes from the line of Steven Valiquette with Barclays. Please proceed with your question.

You guys mentioned the, that braces buyback program which had some success with 2500 patients which is I guess I was curious whether that program as something started turn into substantially larger numbers in the remainder of 2020 or that can maybe a smaller part of the overall picture, also did you do that just in North America or you planning to do that in most regions thanks?

We have been doing that program in different countries in Asia for a while so I mean how to implement it. We thought of the good time in North America obviously because some doctors being trapped with the large and brackets patients and their inability to be able to help them so, we'll continue that, we’ll continue through this quarter if we, whether we continue or not, it was really based on what consumer needs are and what doctors need are but will make that decision when time comes, we just trying to help in the moment and in the sense of doctors being able to control the practices and I help the patients.

Okay, finally my pre-teen daughter was wondering if you can say hi to Charlie D’Melio for when you get a chance.

Got it, got it surely better than what I will be important for us okay.

Thank you our next question comes from the line of Matt O'Brien with Piper Sandler. Please proceed with your question.

Good afternoon, thanks for taking that question. Just for a starters, just as we think about the recovery here in Q2, I look at the adult number on a worldwide basis as it was down 45, teen was down 32 per my math, but obviously in the US or North America that number was much lower so with the higher unemployment rates with more people kind of staying at home, how does the adult market in the US recovered during the back half of the year?

You know I think it's honestly hard to call them and obviously which are playing out our teams here, and this is a seasonal time for teens and we know we'll get a strong signal here in the third quarter. But we're a lot optimistic about adults, I think there is a lot of just talking to different people in marketplace and you noticed to this seems to be a lot of people with time on their hand, wanting to do elective procedures that they didn't have time to do before, we’re picking this stuff all around the country. So unlike 2008 where a lot of things folded up because people are worried about their personal wealth, people are sheltering in place, socially distancing and especially our demographic that we work through right now, seem to have more time on their hands to be able to pursue these kinds of things so we're also be optimistic on the adult segment going forward third and fourth quarter also.

Okay. Thanks and then a follow-up question. Joe just to your point about all this enthusiasm that you are seeing going forward in holding SG&A higher, gross margins and taking a hit right now because you are keeping folks in place, you got all this optimism. The doctoring number was down a little bit but obviously that’s COVID related, so can you just illuminate a little bit more where all this enthusiasm and optimism comes from as we start thinking beyond this year, we are touch points on the dockside in terms of virtual in person way higher, I guess what everybody's trying to get their hands on because of COVID, do you think this could accelerate the adoption of clear aligners versus traditional practices and wires given all the benefits of less office visits et cetera?

Matthew you asked the million-dollar question right or the billion dollar question all right. We think, obviously our story has always been, we’re way underpenetrating this marketplace based on what consumers want, based on what our technology can do from a clinical standpoint. The consumer experience that's going on, I think we all think that COVID is really shine the light on this of much less invasive treatment, much easier in this sense location standpoint, much better workflow for doctors to keep track of their patient. So, we think if anything this is a time if this could happen, we're not telling you that this is a tipping point in entire thing but we certainly see this isn't hurting our story and it certainly being supported out there not just in United States but broadly around the world.

Got it, thank you.

Thank you our next question comes from the line of John Kreger with William Blair. Please proceed with your question.

Hey John.

I just following up on Matt's question just if you could give us your sense of how you view the attitude of the consumer right now, they have the sort of forced deferral as practices shut down but now the practices are reopen, what is your sense about the willingness of the consumers sort of step up and make this purchase, does it fell like business is normal or still very much in a wait-and-see mode?

Well it feels like you know to it a teen season, we talked about this before John, we call this elective procedures but Teens have a certain clinical window that they fit into and it's always a timeframe with parents and we're very optimistic that that kind of Team focus and growth will continue in the third quarter, in China too, in United States and different places. But also this is a different, John this is different than 2008 from what we feel is consumers seem to have more optimism in the sense of economy you see it in the stock market right now we're see it there and they have more time on their hands with many people not working from offices. And so we're optimistic again that there is money out there and there is a willingness of patient to pursue this electric treatments and I think you also have to look at the static market from a surgical standpoint and see what’s going on there too. It seems it support that kind of an idea also. So it’s, this is different than what we have seen in past recessions for sure, I am not a registered economist, neither is John, we're good at visualizing in this business and that's where we can only just a reiterate to you the signals we are seeing in the marketplace. But right now as this comes back, we know that all dental offices are not completely up to speed but that is not necessary based on demand, that’s based on the way that they have to actually face this patients through their practices and make sure that they keep their staff safe and they keep patients safe too.

Great. Thank you and then one last one, you mentioned being still very much committed innovation, can you give us an update there, how is an mandibular advancement being adopted and any update on palate expansion?

Yeah it’s hard to take a second quarter on MA and give you a trend because it was a pretty hard hit overall, obviously bringing shock on my numbers. You know I would say overall mandibular advancement continues to go well, we pair with our team first product, Invisalign first product line which is doing extremely well also and so yeah what you really find around the world, John as you find some doctors just glued to amend that advancement, they would love it, they use it every day, other ones are trying it out, that they have had it on some patients and watching through it. On the first product line, they got to combine that together and so we see significant increase in what I call a clinical penetration because we can do those kinds of cases that we could really have done, you know every two years ago at all. So I would say, the way to look at that is our Teen first product, Invisalign first being the most uptake and a fastest uptake with mandibular advancement right behind it.

Great and any update on palate expansion?

We have all the protocols we know how to do it, we're trying to find manufacturing capabilities that can scale with what we have been in middle out there, that sounds trivial but in a business like this where you have credible amount of volume you have to put through, we still have some work to do in that skillet more.

Great thank you.

Thanks John.

Thank you our next question comes from the line of Jeff Johnson with Robert W. Baird. Please proceed with your question.

Hi Jeff.

So what the qualifying questions here if I could, when I saw that like John Black's question on the North American number, it depends on how you read the sentences in your slide deck, was North America up year-over-year in June and then if I take your April, May, June comments and May a little bit better than June a significant better. It seems like June on the kind of global revenue basis had to be down only 10% to 20% or so I don't know if you’ve talked to that at all but when I look at street down 20% in 3Q, it seems like you sitting pretty comfortable with the street kind of the $486 million revenue number where that right now, so just any help you can give us again we want to make sure we get kind of that 3Q at least ballpark accurate?

Yeah just a top year over year, not just total not from a June standpoint. Not just quarter-over-quarter but June year-over-year, so this is a pretty strong signal.

Is that year-over-year in June?

Yes.

Okay, and the [indiscernible] down 20% in the third quarter from a global revenue perspective, it sounds like your June kind of globally was probably down less than that 20% if I cannot see April, May, June comments. So just kind of your comfort at that $486 million number where the 3Q I know that you're not guiding but I would assume you don’t have too many concerns on that number?

We'll give you an A for trying. That’s a good one Jeff.

That’s was good one John. No, we are not guiding but trying to give you as much information on people doing surveys and other work as well you can up trying a little around it but just I want to give out for the things we talked about, don't want to give on future guidance. Jeff you're not being Q here, it’s hard to read signal, two noise right now and that's okay.

Totally understood, last question. Just on the virtual tools as some doctors come back we are talking to on the therapy and hey I have had patients that I haven't seen in three months are so progressing wow, there may be going to go to a Q3 month instead of every two months follow-up schedule with their clear aligner patients in that. I mean it seems like to me we're getting here if I’m down on even some of these really messed up teen cases o three hours, four hours for tools may be take that lower time, just talk of the efficiency and throughput advantage of that’s going to have braces even that's going to be the real driver even more sale than others digital and what have you it's just the efficiency improvements are getting so good here in clear aligners.

Yeah, I would say when we say all that digital, it’s just that what allows them to drive the efficiency you're talking about, just so when you have this kind of digital tools, allow you to monitor patients to communicate with patients one on one or you know any kind of AI they can tell patient if they're off-track or on track and we know that interaction also encourages patients with the most important variable Invisalign treatment is compliance, making sure that they have their aligners intact and if doctors are watching and we are keeping up, in that sense it helps also. And so what doctors find out overtime is that they can -- they will have to see these patients like every three weeks, like they do with wires and brackets, they don’t have to -- the obviously the PPE and everything else associated with their staff and all working through these patients. And, if the patient doesn't have to come in from a clear aligner standpoint, you either give them all their aligners upfront or you give them more aligners that allow them to continue to treatment, without having an actual doctor’s visit. So, it’s just tools, they are kind of tools that we use now and from a business standpoint that we have, but it is applied from a clinical standpoint to keep track of patients and to allow doctors to be more productive for sure.

Understood, thanks.

Yeah, thanks Jeff.

Thank you. Our final question comes from the line of Richard Newitter with SVB Leerink. Please proceed with your question.

Hi thanks for taking the question. I was just curious, the Switch program that you guys launched this quarter, has it been more effective in teens or adults and then I have a follow-up.

Yeah, Rich, this is John. It is a program as Joe said that we had in Japan and other places as well, it is something that our doctors and many of their patients who were stuck in treatment and teeth were moving wanted to make a switch to this. It is not necessarily a teen versus adult, it's just patients who want to progress with treatment and did not want the uncertainty of the current environment that they are in or future environment and went to their doctors and their doctors wanted to be able to switch them over and we made it so that they could do so.

I think Richard, what you are hearing from both of us is, in this case we're not quite sure exactly how many teens and adults were on Switch program, it is a good question, but you got to guess statistically the orthodontic market in the United States is 80% teens and 20% adults. So you can guess the majority of Switches were probably teens, but that is – let me get that data back to you.

And the bigger question there that I'm trying to get at with some of the things that you're talking about in a post COVID world and all of the benefits that now kind of pile on to aligners versus wires and brackets. I was trying to ask the question through the Switch program to see if it would -- to test [indiscernible] but it would seem that teen doing the conversion with adult - the conversation with adults and being able to get teens and the parents over the finish line, you have an added level of sell now. Is that what you're actually seeing in the marketplace and is it fair to say that maybe COVID has - has resulted in the much anticipated inflection point for teens, is that fair.

Well it's fair that it helped. I cannot tell you that the inflection point is here, but we certainly see a lot of uptake and interest and a digital workflow and our digital methodology in light of COVID-19, our experience has been when doctors can really convert most of their practice and that's why ADAPT, once you get over 50%, 60% digital, your practices change significantly and the consumers like it better, doctors tend to like it better, what we talked about you have higher margin and also a dramatic increase like 20% increase from a revenue standpoint. So, yeah, this is certainly - a COVID is certainly been a push for this. We are cautious, we don't want to talk about a crisis that’s just terrible for people, actually enhancing our business, but the fact is it does promote a workflow and a capability that's much more convenient at this point in time given the COVID threat.

Thank you.

Thank you. Our next question comes from the line of Michael Ryskin with Bank of America. Please proceed with your question.

Hi there, thanks for taking the question guys. I have a couple of quick ones. In your prepared remarks Joe and John, you obviously talked about third quarter, how that's typically the strongest part of the teen season, typically you see the nice little bolus, in the summer as everyone kind of stays home. I'm just curious with the strength that you saw in 2Q, do you think there could have been any sort of pull forward in teens in the quarter, just looking at for the last couple of months everyone’s been home anyway. So any expectations of maybe a little bit of a lull in 3Q or should we expect further pickup from current levels.

I think Michael when you ask a question like that and you need to think of our business and how broad it is and global it is today. There's a lot of mitigating factors, right, so we cannot tell you if there is a backlog of patients that have come in sooner or whatever. We just know it’s teen season in United States and its Canada and I mean, I'm sorry in China, Canada also and we're June was indicative of a good increase in the sense of teens looking for treatment and we think that will continue.

Great, thanks, and then another quick one. I realize you don't want to talk about the exit run rate or anything like that, but I think a lot of the assumptions is go forward are that there are no further lockdowns, there are no further sort of quarantine measures implemented, but I just want to ask in the recent weeks [indiscernible] in the Sunbelt, Texas, California, Florida, have you seen any fluctuation in volumes, any early indications there. I guess I am kind of asking of on the one hand you have a full recovery of the economy, on the other half you have full locking out, what if we were somewhat in the middle, are you seeing any indications there?

Mike, I think you look at – every area is different, we are seeing a different pace of recovery for the various regions and locations and practices, some practices they are open but then somebody within the practice develops COVID and it shuts down so it varies across. We're doing everything we can to make sure that those doctors have their PPE, they have promotion, they have things in place to be able to help drive volume, but it's very dependent on those specific areas not just in the U.S. but we're seeing this across the other regions as well.

Mike, right, it is back to Joe again too, I just want you to know we have great enthusiasm for teen and no matter where it is around the world but we can't tell you if there is a surge of teen patients based on a lot of teens not being in school, we cannot tell you if it's a backlog or whatever, but we can tell you we're enthusiastic about the season and that June was a good indication that it's heading in the right direction.

Great, thanks. Can I ask a quick clarification, okay just this has come up a dozen times in the past five minutes. Your response to Jeff's question on June, do you mean absolute case volume was up in North America in June or utilization is up in June.

Utilization.

Okay, thank you so much, thanks.

Thank you. Our final question comes from the line of Brandon Couillard with Jefferies. Please proceed with your question.

Joe or John, just a question on China, if you could speak to growth specifically in 2Q I know it is still down year over year, were there any other reasons kind of outside the three that you listed, Japan, South Korea, and Taiwan that were ahead of kind of your internal expectations?

No I cannot say that there was really, I mean we didn't talk a lot specifically about that but Japan, Taiwan, and Korea were exceptions because there were hardly a blip in a sense of what we saw and how they were affected with COVID but really every other country in APAC and most countries around the world we say except for the expansion markets in Asia and obviously COVID was a big impact on them.

Okay.

And then balance of the question John, I think so.

John, any chance you could share with us the exocad contribution in the second quarter or to results or should we just wait for the [Q4] for that.

Yeah, I think we talked about been in the scanner and services segment that we have and I think you can wait for the Q on that but it's - we acquired and it is part of our business and we will put more details into the Q.

I think that's the last question. So thank you everyone for joining us today. This concludes our conference call. If you have any follow-up questions, please follow up with Investor Relations. Have a great day.