Align Technology is market leading provider of clear aligner trays, listed on the NASDAQ. The business is known as the inventor of Invisalign, but also provide digital dental solutions via their intraoral scanners, iTero, and dental software, ClinCheck and Exocad. [1]

Investment Thesis

• Population growth and rising middle classes are driving growth in the orthodontic industry.
• Clear aligners are stealing market share from traditional metal braces.
• Invisalign holds a dominant position as the premium operator in the clear aligner market, due to their IP developed over the last 25 years in the industry.
• Align Technology’s ancillary digitalproducts will furtherdevelop a moat around Invisalign and add another fast-growing revenue stream.

Products

Align Technology split their portfolio into two divisions: Clear Aligners and Scanners & Services. Clear aligners make up 85% of group revenue via the Invisalign product. Invisalign trays are a premium alternative to traditional metal braces and differ from in that they can be fitted by dentists (not just orthodontists), are removable, are more aesthetic/comfortable and require less consultations/maintenance.

Clear Aligner brands vary in the complexityof malocclusion cases (misaligned teeth) that they can correct. Invisalign, as the most advanced solution, dominates the clear aligner market with 81% market share. This isbecause each case is overseen by a dentist or orthodontist (referred to here on out as doctors) allowing Invisalign to solve 90% of malocclusion cases.Invisalign is sold directly to doctors who pay an upfront ‘lab fee’ per patient of c.$1,200.

Align Technology generate 15% of group revenue through the scanners & services (S&S) division. 10% of group revenue is derived through the sale of iTero scanners and 5% through recurring sources such as software subscriptions, PPE disposables, device rentals and pay-per-scan contracts.

The iTero is a handheld oral scanner that creates 3D images of a patient’s mouth. Scanners are a cheaper and more efficient way of making moulds and their images are used to identify areas of decay, design templates for restorative items (such as crowns, veneers, etc) and submit clear aligner cases for Invisalign. The iTero is the most common scanner amongst dental practises in the USA, with c.40% market share, andwill only submit clear aligner cases for Invisalign, not rivals.

KPI’s

The business provides the total number of cases (split into the Americas and RoW) and the number of active doctors (prescribed at least one case of Invisalign in the 12-month period).

Total Invisalign case numbers have increased at a 5-year CAGR of 23%, driven by international expansion. Revenue per case, or the lab fee,hasdeclined as doctors receive discountsdepending on the number of cases submitted.

The active doctor base has expanded at a 5-year CAGR of 16%, while also generating 7% more revenue per doctor. Revenue per doctor has increased due toadditional cases per doctor and iTero sales/software subscriptions.

Route to Market

To prescribe Invisalign, doctors must attend a one-day course. To-date, the business has trained over 190k doctors, 102k of which were active in 2020. Doctors are ranked on the MyInvisalign App depending on the number of cases submitted in a 6-month basis. Top ranked doctors receive the highest customer traffic and discounts on lab fees/iTero machines of up to 46%.

Align Tech’s current focus is on partnering with Dental Service Organizations (DSO’s). DSO’s are large collections of dental practises that are consolidating the market. In 2018, UBS estimated that DSO’s represented 14% of all dental practises in the US but was expanding at a CAGR of 15%. DSO’s are generally more profit focused than individual practises, so Aligns ability to offer bulk discounts on an end-to-end digital platform makes for an appealing exclusive partnership. So as DSO’s expand, so does Invisalign’s monopoly.

Align Technology has partnered with LendingPoint, a digital direct lender.This gives doctors the ability to offer patients finance plans for Invisalign. These plansincrease sales and TAM by bringing in users who previously were offput by the large upfront cost. It also makes Invisalign more appealing to doctors by removing the hassle of collecting payments from patients and reducing the time needed to re-coup the costs of the upfront lab fee.

Doctors

The WHO list the total number of dentists worldwide as 2.5m with 900k in OECD countries.[2]With 190k trained as of FY20, the business has trained 7.6% of their global TAM. 

Clear Aligners

The clear aligner market was estimated to generate $2.6bn of revenue in 2020 and grow at a CAGR of 27.3% until 2028.[3] Invisalign generated $2.1bn from clear aligners in 2020, suggesting a revenue market share of 81%.

Management estimate that15m people start orthodontic work annually. 11m, or 73%, of these starts are teenagers and 4m, or 27%, are adults. Management estimate that their current market share amongst annual starts is 6% for teens and 30% for adults. The expansion into the teen market is key area of growth for the business.

Currently Invisalign can be used in 90% of malocclusion cases, suggesting a TAM of 13.5m annually.As clear aligner technology improves to handle increasingly complex cases, its TAM will expand stealing market share from traditional metal braces. With 1.65m cases achieved in 2020, Invisalign sells to 12.2% of current applicable annual starts.

60-75% of the world’s population, or c.5bn people, currently suffer from malocclusions. However, most live-in places where orthodontic work is unavailable/too expensive or they are put off by the idea of traditional metal braces. Management estimate that beyond the 15m starts annually, there is an additional pipeline of 500m potential customers in developed countries who can afford clear aligners but would not use braces.To date the business has sold trays to 10.9m patients, suggesting 2% penetration of their maximum market. 

Unit Economics

ASP has declined at a CAGR of -1%. Gross Cost per case increased in 2018-2020 due to an upgrade in material used and additional trays per patient. This is in line with the businesses plan to expand TAM by fixing more complex malocclusion cases. On averagefixed costs have been 34% of revenue, though have trended downwards from 2016 due to economies of scale. The rise in 2020 is a result of lower-than-expected volume sales.

Finances

Going forward management have guided for 3-5 year growth targets of:

• Revenue Growth 20-30%
• Operating Margin 25%-30%.
• Free Cash Flow Margin 20%-25%.

The balance sheet is relatively clean with $5.4bn of total assets and $2bn of liabilities. The business has no long-term debt instruments and $1bn of cash. The business does not pay dividends but engages in share buybacks.

Conclusion

In our opinion, Align Technology is a high-quality business with a strong defensive edge that operates in a fast-growing, underpenetrated industry.

As the innovator of clear dental aligners, the business utilized their first mover advantage to achieve scale and, in the process,become the largest 3D printing operation and highest valued dental business in the world. This monopoly allowed investment into ancillary products, so the business is now pivoting from an orthodontic device manufacturer to anend-to-end digital dental platform that monetises patients at every stage of their restoration treatment.

While Invisalign is dominant in the clear aligner market, the majority of malocclusion cases are still handled by traditional metal brackets. Hence, there is significant room to expand both amongst the 500m potential customer pipeline andthe 15m recurring annual starts.   

[1]Quick video overview of the business at the bottom of the page here https://www.aligntech.com/about

[2]https://www.who.int/data/gho/data/indicators/indicator-details/GHO/dentists-(per-10-000-population)

[3]https://www.grandviewresearch.com/industry-analysis/clear-aligners-market

Disclaimer

This document and all is contents remain the property of Middleton Enterprises Ltd and should not be copied or passed to any third party without prior permission. The contents of this document are for general information and use only and are not intended to address the particular investment or other requirements of any recipient. In particular, the information provided does not constitute any form of advice, representation or recommendation regarding any investments and does not constitute an offer to buy or sell the securities of any company. This document is confidential and is intended solely for the person or entity to which it was addressed. Further Middleton Enterprises Ltd does not warrant or guarantee the accuracy of the information provided and cannot be held responsible for any use of the document in whole or in part or the information it contains.

Music Is Universal

Universal Music Group (UMG) is the world’s leading music label and production company. UMG own more than 50 labels that identify and develop recording artists assisting in the production, distribution, and promotion of their music. The business owns the rights to ~1/3^rd of recorded music in the world and currently represent8of the top 10 artists.

Investment Thesis

• The rise of streaming has returned the Music Industry from decline to a growth.
• Streaming remains in its infancy with low penetration rates globally. There is a 20 year+ runway of growth in the streaming category.
• Universal Music is the largest and most successful record label in the world with more than 50 labels under its umbrella. UMG own the rights to irreplaceable content and have a consistent track record of signing the world’s best stars. UMG currently represent 8 out of the top 10 artists.
• Labels benefit from economies of scale and UMG is a significant market leader with ~50% more market share than the number 2 competitor.
• Music is an irreplaceable, recession proof industry. 83% of people regard entertainment as a vital necessity (Vivendi, 2019).Music industry revenue has a low correlation to the macro environment.
• The business model is extremely predictable, capital light, scalable and defensive.

The Business

UMG’s record labels identify and develop recording artists and songwriters. UMG assist in the production, distribution, and promotion of their artists music. In return for their services, UMG receive a percentage of the royalty revenues over the life of the asset. 80% of UMG’s revenues are derived from recorded music royalties across streaming and physical sales. The remaining 20% of revenues are from publishing royalties and merchandising.

The diagram to the right shows the distribution of the average $10 customer monthly spend on a streaming service. The label takes the largest share of revenue (~38%) followed by the streaming platform (33%) and then the artists (17%).

KPI’s

Our investment thesis relies upon the growth of streaming services. We use the total number of streaming subscribers globally as our KPI.

Over the past 3 years subscribers have grown at 36% CAGR and revenue per subscriber at -9% CAGR. Revenue per subscriber has declined as developing market growth has outstripped developed market growth where the price point for streaming services is higher.

Over the next 5 years we expect the streaming industry to grow at low double digits and revenue per sub to remain relatively flat.

Market

Between 2000 and 2010 the US recorded music industry declined by more than 50% due to the shift from physical music sales (CD’s) to illegal downloading. Since 2010 streaming services have gained traction, offering consumers a high-quality product at a low price point, negating the use of illegal downloads.

The industry in the US is now estimated to generate in excess of $23bn per annum having grown at 9% CAGR over the past 5 years.Streaming accounts for more than 54% of industry revenue, meaning that moving forward the market growth will start to trend in line with streaming growth.

Streaming revenue in the US has grown at 37% CAGR since 2015, from $3bn to $13bn. Goldman Sachs expectglobal music revenue to more than double between 2019 to 2030 to $142bn with almost all growth driven by streaming (8% CAGR).

Competitive Advantages

1. UMG has the most powerful content in the industry. Universal own the rights to almost a 3^rd of all music. This is significant and irreplaceable IP that a competitor cannot replicate. These assets have along useful life as songs from 50+ years ago are still listened to today. More than half of industry revenue is derived from back catalog music.

2. UMG has a scale advantage over main competitors Sony and Warner. UMG has 2x the market share of Warner but operates with a similar operating margin as UMG has decided to invest in building a global footprint where Warner hasn’t investedto the same extent, for long-term growth. UMG cover 180 markets compared to Warner’s 71. This investment is discovering artists in regions outside of the US that are becoming global superstars. The number 1 and 3 most streamed artists on Spotify are from Latin America and signed to Universal.

3. UMG has the best brand image in the industry. Their track record in delivering top talent has created a flywheel where other talent would rather be signed by Universal than other labels, as they are most likely to be successful under UMG.8 out of the top 10 artists in the world are signed under UMG’s label.

4. UMG has strong supplier power. The label has more power than the streaming service and set the royalty share. UMG can distribute its music without a single platform and still generate revenue whereas Spotify’s product becomes redundant without the labels.

Penetration Analysis

In 2021 there was an estimated 563m paying streaming subscribers worldwide, representing less than 7% of the population. Subscribers are forecast to increase at 14% CAGR to 1.6bn by 2030 representing ~3x growth over the period.At this point this would represent ~20% of the global population, far lower than comparable consumer services, such as social media which have >30% global penetration.

Streaming penetration in developed markets is already>30% but remains low in China at ~6% and even lower in other emerging markets at ~5%. The most penetrated region in the world is the Nordics with a penetration rate of 41%, and still growing.

If we assume that over the long term developed markets (NA, Europe, Australasia) can reach the current penetration of the Nordics and that developing markets can achieve just half the penetration, then this could suggest 1.8bn paying users more than 3.3x the current level of paying users.

Finances

Going forward we expect the business to achieve the following growth targets:

• Revenue Growth – 8-10%
• Operating Margin 15%+
• Earnings growth 13-17%

The balance sheet is relatively clean with $12bn of total assets and $5bn of liabilities. The business has a low level of leverage at just 1.2x EBITDA.

Conclusion

UMG are uniquely positioned to take advantage with the global move towards streaming, a market expected to more than triple paying users over the next 10 years.

UMG are the leading company in the industry with irreplaceable IP and a market leading brand reputation giving them a defensible competitive edge. The business is predictable, has recurring revenue and is capital light. Middleton Enterprises see UMG has a quality long term compounder.

Disclaimer

This document and all is contents remain the property of Middleton Enterprises Ltd and should not be copied or passed to any third party without prior permission. The contents of this document are for general information and use only and are not intended to address the particular investment or other requirements of any recipient. In particular, the information provided does not constitute any form of advice, representation or recommendation regarding any investments and does not constitute an offer to buy or sell the securities of any company. This document is confidential and is intended solely for the person or entity to which it was addressed. Further Middleton Enterprises Ltd does not warrant or guarantee the accuracy of the information provided and cannot be held responsible for any use of the document in whole or in part or the information it contains.