John Morici
Executive Vice President of Global Finance and Chief Financial Officer at Align Technology
Thanks Joe. Now for our Q4 financial results. Total revenues for the fourth quarter were $995.2 million, up 1.8% from the prior quarter and up 4% from the corresponding quarter a year ago. This reflects an increase in clear aligner volumes of 1.9% sequentially and 6.1% year over year and revenue growth from systems and services of 5.2% sequentially and 14.9% year over year on a constant currency basis. Q4.24 revenues were favorably impacted by approximately $0.8 million or approximately 0.1% sequentially and were unfavorably impacted by approximately $0.9 million year over year or approximately 0.1% for clear aligners. Q4.24 revenues of $794.3 million were up 0.9% sequentially, primarily from higher volumes, geographic mix shift to higher priced countries and lower net revenue deferrals, partially offset by product mix shift to lower priced products and higher discounts. Q4 Clear Aligner revenues were favorably impacted by approximately $0.7 million or approximately 0.1% from foreign exchange sequentially. Q4.24 Clear Aligner per case shipment of $1,265 was lower by $10 on a sequential basis primarily due to product mix shift and higher discounts, partially offset by favorable geography mix and lower net deferrals. Even though FX had a minor impact on our reported quarter over quarter results, our Q4 guidance did not forecast any substantive change from the October spot rate foreign exchange rates. However, the US Dollar unexpectedly strengthened in November and December. If foreign exchange rates in October had remained constant for November and December, then clear aligner ASVs would have increased approximately $10 quarter over quarter or the equivalent of $14 million on a year over year basis. Q4 clear aligner revenues were were up 1.6% primarily from higher volumes, lower net deferrals, price increases and higher non case revenues partially offset by lower ASPs reflecting the impact from unfavorable foreign exchange of $0.7 million or approximately 0.1% product mix shift to lower priced products and geographic mix. Q4.24 clear aligner per case shipment of $1,265 was down $55 on a year over year basis due to the impact of UK VAT of $13 product and geographic mix and higher discounts partially offset by lower net revenue deferrals and price increases. During Q4 we reached a favorable outcome with the UK tax authorities regarding cumulative assessments of approximately $100 million for unpaid VAT related to certain Clear Aligner sales made during the period of October 2019 through October 2023. In Q4 we received a full refund of this $100 million from UK tax authorities. This settlement also relieved us of any potential assessments for sales through mid October 2023. As a result, we have approximately 7 million of VAT paid for periods up to December 2023 that are still in dispute. We expect a ruling by the UK courts in the first half of 2024 for this remaining VAT amount. This ruling will also give clarity whether a 20% VAT is required to be applied to all Clear Aligner sales in the uk. Going forward, we believe that Clear Aligner should continue to be exempt from vat. Clear Aligner deferred revenues on the balance sheet as of December 31, 2024 decreased $51.3 million or 4.1% sequentially and decreased $92.1 million or 7% year over year and will be recognized as additional liners are shipped under each sales contract. Q4.24 Systems and Services revenues of $200 million were up 5.2% sequentially primarily due to higher scanner volumes, higher NON systems revenue driven by Itero Lumina upgrades partially offset by lower scanner ASPs. Q4.24 systems and services revenue were up 14.9% year over year primarily due to higher scanner volumes, higher ASP and increased non systems revenues mostly related to upgrades and leasing rental programs. Q4 24 Systems and Services revenue impact by foreign exchange was approximately $0.1 million or flat sequentially on a year over year basis. Systems and services revenues were unfavorably impacted by foreign exchange of approximately $0.2 million or approximately 0.1%. Systems and services deferred revenue on the balance sheet was down $4.1 million or 1.8% sequentially and down $40.3 million or 15.5% year over year primarily due to the recognition of service revenues which are recognized ratably over the service period. The decline in deferred revenues both sequentially and year over year primarily reflects the shorter duration of service contracts applicable to initial scanner purchases. Moving on to gross margin fourth quarter overall gross margin was 70%, up 0.3 points sequentially and flat year over year. Overall total gross margin was not significantly impacted by foreign exchange sequentially or on a year over year basis. Clear aligner gross margin for the fourth quarter was 70.2%, down 0.1 points sequentially due primarily to lower ASBS and restructuring costs, partially offset by lower manufacturing costs. Clear alliana gross margin for the fourth quarter was down 1 point year over year due primarily due to lower ASP and restructuring costs, partially offset by lower additional aligners. Overall, clear aligner gross margin was not significantly impacted by foreign exchange sequentially on a year over year basis. Systems and services gross margin for the fourth quarter was 69.4%, up 1.9 points sequentially due to lower manufacturing and freight costs partially offset by lower scanner ASPs. Systems and Services gross margin for the fourth quarter was up 4.7 points year over year due to manufacturing efficiencies and lower freight costs and service costs and higher scanner ASPS. Overall Systems and services gross margin was not impacted by foreign exchange sequentially or on a year over year basis. Q4 operating expenses were $552.8 million, up 6.4% sequentially and up 11% year over year. On a sequential basis, operating expenses were $33.3 million higher due primarily to restructuring costs. Year over year operating expenses increased by $54.8 million primarily due to restructuring advertising and marketing expenses. Q4 Restructuring charges related to severance for impacted employees were higher than anticipated. On a non GAAP basis, operating expenses were $474.7 million, up 0.4% sequentially and up 6.3% year over year. Our fourth quarter operating income of $144.1 million resulted in an operating margin of 14.5%, down 2.1 points sequentially and down 3.4 points year over year. Operating margin was favorably impacted by foreign exchange of approximately 0.1 points sequentially and unfavorably impacted by 0.2 points year over year. The effect of restructuring on GAAP operating margin was approximately 3.7 points. Q4 non GAAP operating margin was 23.2%, up 1.1 points sequentially and down 0.6 points year over year. Interest and other income and expense net for the fourth quarter was an expense of $3.4 million compared to income of $3.6 million in Q3.24 primarily due to unfavorable foreign exchange movements of $15.3 million, partially offset by higher interest income and gain on investments on a year over year basis. Q4. 24 interest and other income and expense was unfavorable compared to income of $1.3 million in Q4 2023 primarily due to unfavorable foreign exchange movements partially offset by higher interest income and gain on investments. The GAAP effective tax rate in the fourth quarter was 26.3% compared to 30.1% in the third quarter and 28.3% in the fourth quarter of the prior year. The fourth quarter GAAP effective tax rate was lower than the third quarter effective tax rate primarily due to the release of uncertain tax position reserves partially offset by one time deferred tax adjustments in certain foreign jurisdictions. The fourth quarter GAAP effective tax rate was lower than the fourth quarter effective tax rate of the prior year primarily due to the release of certain tax position reserves partially offset by one time deferred tax adjustments in certain foreign jurisdictions on a non GAAP. Our non GAAP effective tax rate in the fourth quarter was 20% which reflects our long term projected tax rate. Fourth quarter net income per diluted share was $1.39, down $0.16 sequentially and $0.25 compared to the prior year. Our Q4.24 EPS was unfavorably impacted by a stronger US dollar which amounted to approximately $0.14 per diluted share to net foreign exchange losses related to the revaluation of certain balance sheet accounts on a non GAAP basis. Q4.24 net income per diluted share was $2.44 for the fourth quarter, up 0.9 dollars sequentially and up 2 cents year over year. Moving on to the balance sheet as of 12-31-2024, cash and cash equivalents were $1,043.9 million up sequentially $2 million and down $106.4 million year over year. Of our $1,043.9 million balance, $188.7 million was held in the US and $855.2 million was held by our international entities. During Q4.24 we initiated a plan to repurchase $275 million of our common stock through open market repurchases. As of December 31, 2024, we had purchased approximately 0.9 million shares at an average price of $222.94 per share for an aggregate of approximately $202.9 million. The remaining $72.1 million of the $275 million was completed in January of 2025. As of January 30, 2025, $225 million remains available for repurchases of our common stock under our stock repurchase program approved in January of 2023. As Joe mentioned earlier, during the quarter we completed a $30 million equity investment in Smile Doctors, the largest Ortho focused dental support organization in the U.S. q4 accounts receivable balance was $995.7 million down sequentially. Our overall day sales outstanding was 90 days, down approximately 3 days sequentially and up approximately 5 days as compared to Q4 last year. Cash flow from operations for the fourth quarter was $286.1 million. Capital expenditures were for the fourth quarter were $23 million, primarily related to investments in our manufacturing capacity and facilities. Free cash flow defined as cash flow from operations, less capital expenditures amounted to $263 million. Before I turn to our Q1 and fiscal 2025 outlook, I'd like to provide the following context around pricing and potential new tariffs. On March 1, 2025, we will raise the list price of Clear aligners by about 3% on average in the Americas and EMEA regions. At the same time, we will remove the 10 to $15 per order processing fee for all new Clear Aligner orders, all new Clear Aligner refinement orders from past cases and non DSP Vivera cases. We expect the net effect from these two actions on ASVs to be zero for 2025. We currently manufacture Clear Aligners in Mexico and ship them to the US Primarily for our US customers, with the remainder eventually shipping to other international locations. The U. S Mexico tariff situation remains very fluid and we are unable to predict whether new tariffs will go into effect in the future. We are monitoring events closely. Our Clear Aligner cogs include material labor, overhead and freight costs. We expect an incremental tariff if implemented to be applied to transfer prices from Mexico shipments to the US These transfer prices would not include treatment planning costs, freight and other overhead and similar costs. Align's global operations have evolved significantly over the past several years and we have greater flexibility to support our global business. However, assuming a new 25% tariff on shipments to the US from Mexico, we believe it still would be more economically viable to ship clear aligners from the US or to the US From Mexico due to a variety of factors including the incremental additional freight costs incurred where we ship from our Polish facility. Regarding China, we currently manufacture our products in China for the benefit of our customers in China. With that as a backdrop, assuming no circumstances occur beyond our control, including foreign exchange and new tariffs for Q1 2025 and fiscal 2025, we provide the following outlook. We expect Q1 worldwide revenues to be in the range of 965 million to 985 million down sequentially from Q4 primarily due to the impact from foreign exchange rates and at current spot rates and lower capital equipment sales reflecting historical Q1 seasonality. We expect Q1 clear aligner volume to be up slightly sequentially and expect Q1 clear aligner ASPs to be down sequentially primarily due to unfavorable foreign exchange at current spot rates as well as continued product mix shift to non comprehensive clear aligners. In addition to seasonality, we expect Q1 systems and services revenue to be down sequentially due to the timing of commercial availability of our ITERO Lumina scanner with restorative software which is expected at the end of March. We expect our Q1 2025 GAAP operating margin to be below Q1 2024 GAAP operating margin by approximately 2 points, primarily due to unfavorable foreign exchange at current spot rates. We expect our Q1 2025 non GAAP operating margin to be below Q1 2024 non GAAP operating margin by approximately 1 point, primarily due to unfavorable foreign exchange at current spot rates. For fiscal 2025, we expect 2025 year over year revenue growth to be in the low single digits which reflects approximately 2 points of unfavorable foreign exchange at current spot rates. We expect 2025 clear aligner volume growth to be up approximately mid single digits year over year compared to up 3.5% year over year in 2025. We expect 2025 clear aligner ASBs to be down year over year due to unfavorable foreign exchange at current spot rates and continued product mix shift to non competitive, non comprehensive clear aligners. We expect 2025 systems and services year over year revenues to grow faster than clear aligner revenues. We expect 2025 GAAP operating margin to be approximately 2 points above 2024 GAAP operating margin and we expect 2025 non GAAP operating margin to be approximately 22.5%, which both reflect the impact of unfavorable foreign exchange at current spot rates, partially offset by the benefits from restructuring actions we took in Q4 to improve profitability and give us margin accretion in 2025. Even as we scale our next generation direct 3D printing fabrication manufacturing, we expect our investments in capital expenditures for fiscal 2025 to be between $100 million and $150 million. Capital expenditures primarily relate to building, construction and improvements as well as manufacturing capacity in support of our continued expansion. Overall, I am pleased with our fourth quarter and fiscal 2024 results, particularly the year over year clear aligner volume growth, the record number of submitters, the continued momentum from our systems and services business, and our operating margin improvement after repurchasing $353 million of aligned common stock during 2024, we concluded the year with no debt and approximately $1,044,000,000 in cash and cash equivalents. Our goal, as always, is to deliver value to our shareholders. Now I'll turn the call. Now I'll turn it back over to Joe for final comments. Joe.
