John F. Morici
Chief Financial Officer and Executive Vice President, Global Finance at Align Technology
Thanks, Joe. Before I go through the details of our Q4 results, I want to comment on two items in our fourth quarter financial results. Restructuring and other charges: During Q4 '22, we incurred a total of $14.3 million of restructuring and other charges, of which $2.9 million was included in the cost of net revenues and $11.5 million included in operating expenses. Restructuring and other charges included $8.7 million of severance related costs and $5.6 million of certain lease terminations and asset impairments, primarily related to right sizing operations in Russia, in light of business needs.
Second, non-GAAP tax rate. In Q4 2022, we changed to a long-term projected tax rate for our non-GAAP provision for income taxes. Our previous methodology for calculating our non-GAAP effective tax rate included certain non-recurring and period-specific items, that produced fluctuating effective tax rates that management does not believe are reflective of the company's long-term effective tax rate.
We have recast non-GAAP results for our provision for income taxes, effective tax rate, net income and diluted net income per share for each reporting period in 2022 to reflect this change. We did not make any changes to the results reported for 2021 as reflecting the change in methodology for the computation of the non-GAAP effective tax rate was immaterial to our 2021 results. Refer to the section in our Q4 press release titled "Recast of Financial Measures for Prior Periods in 2022 for Tax Rate Change" under Unaudited GAAP to Non-GAAP Reconciliation for further information
Now, for our Q4 financial results. Total revenues for the fourth quarter were $901.5 million, up 1.3% from the prior quarter and down 12.6% from the corresponding quarter a year ago. On a constant-currency basis, Q4 2022 revenues were impacted by unfavorable foreign-exchange of approximately $16 million or approximately 1.7% sequentially, and approximately $67.6 million year-over-year or approximately 7%.
For Clear Aligners, Q4 revenues of $731.7 million were flat sequentially, primarily from lower ASPs, mostly offset by higher volumes. On a year-over-year basis, Q4 Clear Aligner revenues were down 10.3%, primarily due to lower volumes and lower ASPs partially offset by higher non-case revenues.
For Q4, Invisalign ASPs for comprehensive treatment were flat sequentially and decreased year-over-year. On a sequential basis, ASPs reflect the unfavorable impact from foreign-exchange, partially offset by higher additional aligners and product mix shift. On a year-over-year basis, decline in comprehensive ASPs reflect the significant impact of unfavorable foreign-exchange, product mix shift, and higher discounts, partially offset by higher additional aligners and per-order processing fees
For Q4, Invisalign ASPs for non-comprehensive treatment decreased sequentially and year-over-year. On a sequentially basis, the decline in ASPs reflect product mix shift, unfavorable impact from foreign-exchange, and higher discounts, partially offset by higher additional aligners. On a year-over-year basis, the decline in ASPs reflect the significant impact of unfavorable foreign-exchange, product mix shift, and higher discounts, partially offset by higher additional aligners and per-order processing fees
As we mentioned last quarter, as our revenues from subscriptions, retainers and other ancillary products continue to grow and expand globally, some of the historical metrics that focus only on case shipments do not account for our overall growth. In our earnings release and financial slides, you will see that we've added to -- added our total clear aligner revenue per case shipment, which is more indicative of our overall growth strategy.
Clear Aligner deferred revenues on the balance sheet increased $56.4 million or 4.8% sequentially, and $171.9 million or up 16.2% year-over-year and will be recognized as the additional aligners are shipped.
Q4, 2022 Systems and Services revenues of $169.9 million, were up 7.8% sequentially, primarily due to higher scanner volume, services and exocad revenues, partially offset by lower ASPs and were down 21.3% year-over-year, primarily due to lower scanner volume in ASPs, partially offset by higher services revenue from our larger installed-base of scanners and increased non-system revenues related to our certified pre-owned and leasing and rental programs.
Q4, 2022, Systems and Services revenue were unfavorably impacted by foreign-exchange, of approximately $2.7 million or approximately 1.5%, sequentially. On a year-over-year basis Systems and Services revenue were unfavorably impacted by foreign-exchange of approximately $11.2 million or approximately 6.2%. Systems and Services deferred revenues on the balance sheet was up $9 million or 3.4% sequentially, and up $42.9 million or 18.7% year-over-year, primarily due to the increase in scanner sales and the deferral of service revenues included with the scanner purchase, which will be recognized ratably over the service period.
Moving on to gross margin. Fourth quarter overall gross margin was 68.5%, down 1 point sequentially and down 3.7 points year-over-year. Overall, gross margin was unfavorably impacted by foreign-exchange on our revenues by approximately 0.6 points sequentially and 2.2 points on a year-over-year basis. Clear aligner gross margin for the fourth quarter was 70.8%, down 0.1 point sequentially due to lower ASPs, higher warranty and restructuring costs, partially offset by improved manufacturing absorption and lower training costs.
Clear aligner gross margin for the fourth quarter was down 3.4 points year-over-year, primarily due to lower ASPs, increased manufacturing spend, as we continue to ramp-up operations at our new manufacturing facility in Poland, and a higher mix of additional aligner volume.
Systems and Services gross margin for the fourth quarter was 58.8%, down 4.6 points sequentially, due to lower ASPs and higher inventory costs and manufacturing inefficiencies, partially offset by higher services revenues and lower freight costs. Systems and Services gross margin for the fourth quarter was down 5.9 points year-over-year for the reasons stated previously.
Q4 operating expenses were $505 million, up sequentially 6.2% and down 3.6% year-over-year. On a sequential basis, operating expenses were up $29.5 million, mainly due to restructuring and other charges and our continued investment in sales and R&D activities, along with higher consulting expenses.
Year-over-year, operating expenses decreased by $18.6 million, primarily due to controlled spend on advertising and marketing as part of our efforts to proactively manage costs as well as lower incentive compensation, partially offset by restructuring and other charges.
On a non-GAAP basis, excluding stock-based compensation, restructuring and other charges and amortization of acquired intangibles related to certain acquisitions, operating expenses were $459.7 million, up 3.7% sequentially and down 7% year-over-year.
Our fourth quarter operating income of $112.7 million, resulted in an operating margin of 12.5%, down 3.6 points sequentially and down 8.9 points year-over-year. Operating margin was unfavorably impacted by 0.9 points sequentially primarily due to foreign-exchange and lower gross margin. The year-over-year decrease in operating margin is primarily attributed to lower gross margin, investments in our go-to-market teams and technology as well as unfavorable impact from foreign-exchange by approximately 4.2 points.
On a non-GAAP basis which excludes stock-based compensation, restructuring and other charges and amortization of intangibles related to certain acquisitions, operating margin for the fourth quarter was 18.3%, down 1.9 points sequentially and down 6.4 points year-over-year.
Interest and other income expense, net for the fourth quarter was income of $2.7 million compared to a loss of $21 million in the third quarter, and a loss of $0.9 million in Q4 of 2021, primarily due to net foreign-exchange gains from the strengthening of certain foreign currencies against the U.S. dollar.
The GAAP effective tax rate in the fourth quarter was 63.8% compared to 40.7% in the third quarter and 13.2% in the fourth quarter of the prior year. The fourth quarter GAAP effective tax rate was higher than the third quarter effective tax rate primarily due to decreased earnings in low tax jurisdictions and an increase in the amount of U.S. minimum tax on foreign earnings. Our non-GAAP effective tax rate was 20% in the fourth quarter and reflects the change in our methodology that was discussed earlier. Our non-GAAP effective tax rate was 11.5% in the fourth quarter of the prior year in 2021 which does not reflect the change in our methodology
Fourth quarter net income per diluted share was $0.54, down sequentially $0.39, and down $1.86 compared to the prior year. Our earnings per share was unfavorably impacted by $0.04 on a sequential basis and $0.22 on a year-over-year basis, due to foreign-exchange. On a non-GAAP basis, net income per diluted share was $1.73 for the fourth quarter, up $0.10 sequentially and down $1.10 year-over-year. Note that the prior year 2021 non-GAAP net income per diluted share or prior year 2021 EPS does not reflect the Q4 2022 change in our methodology for the computation of the non-GAAP effective tax rate.
Moving on to the balance sheet. As of December 31, 2022, cash and cash equivalents and short-term and long-term marketable securities were $1 billion, down sequentially $99.5 million, and down $255.1 million year-over-year. Of our $1 billion balance, $387.9 million was held in the U.S. and $653.7 million was held by our international entities.
In October 2022, we purchased approximately 848,000 shares of our common stock at an average price of $188.62 per share through a $200 million accelerated share repurchase under our May 2021 $1 billion stock repurchase program. We have $250 million remaining available for repurchase under this program and we plan to repurchase this remaining amount starting in Q1 2023 through either or a combination of open market repurchases, or an accelerated stock repurchase agreement, completing the repurchases in Q2 2023
Q4 accounts receivable balance was $859.7 million, flat sequentially. Our overall days sales outstanding was 85 days, down 1 day sequentially, and up approximately 7 days as compared to Q4 last year.
Cash flow from operations for the fourth quarter was $144.7 million. Capital expenditures for the fourth quarter were $53.2 million, primarily related to our continued investment to increase aligner manufacturing capacity and facilities. Free cash flow defined as cash flow from operations less capital expenditures amounted to $91.5 million. We exited fiscal 2022 with a strong balance sheet, including $1 billion in cash and investments, a healthy cash flow position and no long-term debt.
As we announced with our earnings, Align's Board of Directors has authorized a new $1 billion stock repurchase program to succeed the current $1 billion program. This new $1 billion program reflects the strength of our balance sheet and our cash flow generation as well as management's and our Board's continued confidence in our ability to capitalize on large market opportunities in our target markets and trajectory for growth while concurrently returning capital to our shareholders.
Now, turning to our outlook. As Joe mentioned earlier, we are pleased with our Q4 results and what appears to be a more stable environment in North America and EMEA. We are cautiously optimistic for continued stability and improving trends as we move through the year. However, the macroeconomic environment remains fragile and given continued global challenges and uncertainty, we are not providing full-year revenue guidance. We'd like to see improvements in the operating environment and consumer demand signals including stability in China before revisiting our approach.
At the same time, we are confident in our large untapped market opportunity for digital orthodontics and restorative dentistry and our ability to make progress towards our strategic initiatives. We intend to focus on the things we can control and inputs, which includes strategic investments in sales, marketing, technology and innovation.
For full-year 2023, assuming no additional material disruptions or circumstances beyond our control, we anticipate our 2023 non-GAAP operating margin to be slightly above 20%. With this backdrop for Q1 2023, we anticipate Clear Aligner volumes to be down sequentially, primarily due to weakness in China from COVID, partially offset by some stability from our Americas and EMEA regions. We anticipate Clear Aligner ASPs to be up from Q4 2022, primarily due to higher pricing and unfavorable -- and favorable foreign-exchange rates. We anticipate iTero scanner and services revenue to be down sequentially, as the business follows a more typical capital equipment cycle.
Taken in total, we expect Q1 2023 revenues to be about flat to Q4 of 2022. We expect our Q1 2023 non-GAAP operating margin to be consistent with our Q4 2022 non-GAAP operating margin as we continue to make investments in R&D and other go-to-market activities. For 2023, we expect our investments in capital expenditures to exceed $200 million, capital expenditures primarily relate to building construction and improvements as well as additional manufacturing capacity to support our international expansion.
With that, I'll turn it back over to Joe for final comments, Joe?
