China's COVID-19 lockdowns ‘really hurt our business,’ Align Technology CEO says
Align Technology CEO Joe Hogan joins Yahoo Finance Live to discuss earnings, business in China amid a COVID outbreak, and the company's growth outlook.
Video transcript
JULIE HYMAN: Shares of Align Technology are tumbling some 20% today. That's after the company reported first quarter earnings that missed estimates for the first time in seven quarters, the company highlighting inflation, supply chain constraints, along with the ongoing conflict in Ukraine as key triggers for that miss. Align Technology CEO Joe Hogan is with us now. Joe, thank you so much for being here. Talk us through this quarter and some of those elements that I mentioned. And what happened?
JOE HOGAN: You know, last time we gave guidance was early February. And the market really changed dramatically for us. You know, Julie, what you teed up when you introduced me is, I didn't really point to the inflation or whatever. China, the shutdowns in China really hurt our business. We have-- China is our second biggest area. And the Shanghai shutdown and different shutdowns at different cities around the country, it's really hurt our business.
And then, secondly, we have issues around inflation, consumer confidence, and then also the Ukrainian conflict also in Europe. So it's affecting consumer demand in that sense. But I just want to highlight how the company is in great shape. We've seen this before. You know, we saw this at the end of March of 2020. We positioned the business well. We came back.
And it's because we're just-- we have such a strong market out there, an untapped market of only 10% market share from a digital standpoint in orthodontics and also a terrific opportunity with 500 million patients out there that need to have their teeth straightened. And you can only do it digitally. And our position there is extremely strong. So we're very optimistic about the future. We just look at a lot of uncertainty right now around the globe from a market standpoint.
JULIE HYMAN: So let's talk about those different areas of uncertainty. And I should mention you guys withdrew your forecast for the full year as well, or did not give one for the full year because of all of that uncertainty. Let's take the one that maybe is the most clearly temporary. I'm talking about China shutdowns there. Or are they temporary, right? Do you-- what kind of visibility do you have on the situation there?
JOE HOGAN: The visibility's tough in China, I think, with everybody, right? You just don't know exactly when those shutdowns will come back and where they'll be re-implemented, depending on what virus and what variant of virus is there. So but we're so well positioned in China. So we have our own manufacturing there. We can take care of our own demand. We have terrific treatment planning, a really good commercial force to be able to call it, and really, one, two, three, and four tier cities.
And so, again, I'm very optimistic about our business in China. We've been operating there for years. And we're confident there and well positioned. We just have to have a market that we can actually sell to and visit with doctors and be able to have those doctors see patients from a Chinese standpoint. And, you know, in the States also, you know, we see decent demand. It just hasn't been at the level that we forecasted at the end of February-- at the beginning of February of this year.
BRIAN SOZZI: Joe, is this the type of quarter where you start to look at how quickly you're investing in the business?
JOE HOGAN: You know, Brian, the investments in this business that are really important is our commercial force, as it faces customers, and also from a R&D standpoint, our digital platform that we have to build out. But we certainly watch our consumer spending from a standpoint of advertising, which is a big part of our budget. We'll watch our hires in the sense of how fast we add people or whatever. But there are several areas that we'll watch from an investment standpoint to make sure that we're getting a proper return. But again, you know, we're in a situation where we can manage that pretty well, as we prepare for the future.
BRIAN SOZZI: Is a 25% operating margin target, is that still in play?
JOE HOGAN: Yes, it is. It has been our target since the time I've been here. I've been here seven years now, and we still keep that in focus, along with the 20% to 30% revenue growth figure. That's been what we've been leaning into for years, and again, a reflection of the size of that market that we're talking about that's out there for digital orthodontics.
JULIE HYMAN: You mentioned market share and kind of the company positioning. So from that, should we infer that-- I guess, what I'm trying to get my arms around is whether this is something that affects the industry across the board and how much of it is stuff that you think is specific to align?
JOE HOGAN: You know, I don't think this is specific to Align itself. I think this is a market. Obviously, the shutdown in China can't be specific to Align. It's specific to anybody who does business. When you look at consumer confidence levels in the United States and also Europe, that's not specific to Align. That's going to be specific to so many consumer-based businesses, I think, in the short-term. So this-- I don't think this is something that's just about Align.
You know, one of the things that's interesting about this business-- and you know, I've been in many of them my career-- is, I call it a real-time business. We're the world's largest 3D printing business. And through our Invisalign product, which is over $3 billion a year, there's no finished goods inventory at all, and there's no distribution.
So we feel market tremors immediately in this business, like I haven't seen anywhere else in my career. So I honestly think that we're a reflection, a much better reflection, often, in where the market's going. And some of the issues that we've brought up for this quarter, I mean, other companies are facing it, and I think are going to face it in the coming quarters.
BRIAN SOZZI: Are you looking at more promotions, Joe, just to reaccelerate demand?
JOE HOGAN: From a promotional standpoint, we have new products that we just offered. We have two new in China, another one that we have in Europe that we just launched. We have some new productivity increased for products that we call ClinCheck Live Update for doctors that can do our product so much faster. So if you would call that a promotion, these aren't price promotion products, but they're more positioning to let doctors have more productivity and consumers have more choice on our product line.
BRIAN SOZZI: All right, we'll leave it there for now. Joe Hogan, Align Technology CEO, always good to talk with you. We'll talk to you soon.
JOE HOGAN: Yeah. Thanks, Brian. Thanks.
