Align Technology Inc Q1 FY2025 Earnings Call

Good afternoon, and thank you for joining us. Joining me on today's call is Joe Hogan, President and CEO; and John Morici, CFO. We issued first quarter 2025 financial results today via Business Wire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately 1 month. 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 provided historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our first quarter 2025 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'd like to turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Thanks, Shirley. Good afternoon, and thanks for joining us today. On our call, I'll provide an overview of our first quarter results and discuss a few highlights from our two operating segments: Systems and Services and Clear Aligners. John will provide more detail on our financial performance and comment on our views for Q2 and full year 2025. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report first quarter revenues, operating margin, and earnings in line with our outlook. Fiscal 2025 is off to a good start with Q1 Clear Aligner volumes up both sequentially and year-over-year, reflecting strength in both the teens and adult patient segments across all regions, driven year-over-year strength across the Asia Pacific and EMEA regions and growth in North America. It's also worth noting that Q1 was the highest year-over-year growth rate for both adult and teen patients since 2021. From a channel perspective, Q1 Clear Aligner volumes in the orthodontic and GP dentist channels increased year-over-year with a record number of total submitters and utilization for GP dentists for the first quarter. For our Systems and Services business, Q1 revenues were down sequentially, reflecting Q1 seasonality as well as unfavorable foreign exchange. On a year-over-year basis, Q1 Systems and Services revenues were up slightly, reflecting continued adoption of iTero Lumina scanner platform, as well as the launch of iTero Lumina with restorative software at the end of the month. On a year-over-year basis, Q1 Clear Aligner volumes grew 6.2%, driven primarily by continued strength across EMEA and APAC regions as well as growth in North America, offset by lower volumes in the Latin America region. For North America, Q1 year-over-year increase in Clear Aligner volumes reflects continued adoption of Invisalign First for teens and kids, Invisalign DSP touch-up cases, and Invisalign Comprehensive Three and Three. On a sequential basis, Q1 North America Clear Aligner volumes primarily reflect growth from Invisalign DSP touch-up cases, Invisalign Palate Expander system, as well as Invisalign Comprehensive Three and Three. For the EMEA region, Q1 year-over-year Clear Aligner volume growth primarily reflects strength across the region in both the ortho and GP channels across teens, kids, and adult patients. On a year-over-year basis, Q1 EMEA volumes reflect continued adoption of Invisalign noncomprehensive cases, primarily driven by Invisalign Moderate, Invisalign DSP touch-up cases, as well as the initial launch of the Invisalign Palate Expander across EMEA region in Q1. On a sequential basis, Q1 EMEA growth was driven primarily by Invisalign DSP touch-up cases. For the APAC region, Q1 year-over-year Clear Aligner volume growth reflects increased utilization and submitters in both ortho and GP channels across teen, kid, and adult patients in nearly all country markets. On a sequential basis, Q1 growth reflects strength from China and many of our emerging markets, led by India and Korea. From a product perspective in Invisalign First, Invisalign Standard, and Adult products drove Q1 growth in APAC, both on a year-over-year and sequential basis. For Q1, we had over 85,000 doctors submitters worldwide for a record total for the first quarter, primarily reflecting a sequential increase in Clear Aligner volume for teens, kids, and adults in both noncomprehensive and comprehensive cases. In the teen and growing kids segment, approximately 226,000 teens and kids started treatment with Invisalign Clear Aligners during the first quarter, an increase of 4.5% sequentially and an increase of 13.3% year-over-year, reflecting growth across regions, especially from Invisalign First in the APAC and EMEA regions in North America, as well as growth from the Invisalign Palate Expander system in North America. For Q1, the number of doctors submitting case starts for teens and kids was up 2.1% year-over-year, led by continued strength from doctors treating young kids and growing patients. During the quarter, we continued to commercialize the Invisalign Palate Expander system with continued momentum for doctor submitters and shipments. In Q1, we announced that Align's Invisalign Palate Expander system was commercially available in Turkey, and today, we received confirmation of regulatory clearance in China. Along with Turkey and China, the Invisalign Palate Expander is available in the U.S., Canada, Brazil, Australia, New Zealand, Hong Kong, Japan, Singapore, Thailand, EU, U.K., UAE, and Switzerland, and is expected to be available in additional markets following regulatory clearances. This month, we announced the commercial availability of the Invisalign system with Mandibular Advancement featuring Occlusal Blocks designed specifically to address Class II skeletal and dental correction by simultaneously advancing the mandible while aligning the teeth. Class II malocclusion is one of the most common orthodontic issues, characterized by a discrepancy in jaw alignment, where the lower jaw is positioned too far back relative to the upper jaw. It represents approximately 30% to 45% of malocclusions globally. Left untreated, this condition can lead to functional, aesthetic, and other challenges for patients. The Invisalign system with Mandibular Advancement featuring Occlusal Blocks is a direct response to the needs of orthodontic practices and underscores Align's ongoing commitment to innovation in orthodontics that enhances clinical outcomes and the patient experience. By integrating occlusal blocks into the Mandibular Advancement feature, we are providing doctors with a powerful new tool that they have asked for to effectively treat growing patients with Class II malocclusions while maintaining the aesthetic and comfort benefits of Clear Aligner therapy. The Invisalign system with Mandibular Advancement featuring Occlusal Blocks is available to Invisalign trained doctors in the United States, Canada, Australia, and New Zealand. It was just launched in most EMEA countries this week, and we expect to be introduced in additional markets through 2025 pending regulatory clearance. Along with the Invisalign Palate Expander system and Invisalign First, the latest innovation supports the commitment to establishing a unique and differentiated portfolio that supports growing patients throughout their continuum of care. Dental service organizations, or DSOs, continue to present one of the fastest-growing channels in digital dentistry as they recognize the practice and patient experience benefits of digital workflows, enabled by our portfolio of products and services that make up the Align digital platform. This includes increased practice efficiency and profitability, as well as delivering shorter treatment appointment cycles for their patients. In short, DSOs are a force multiplier for practice growth in Invisalign adoption. For Q1, Clear Aligner volume from DSO customers worldwide increased sequentially and year-over-year, reflecting growth across all regions. Q1 iTero scanner sales growth was also strong with DSOs as they continue to invest in their member practices and end-to-end digital workflows. The DSO business growth continues to outpace that of our retail doctors, driven primarily by some of the largest DSOs in each region. Turning to Systems and Services. For Q1, year-over-year revenue growth primarily reflects scanner and wand revenue driven by iTero Lumina, wand upgrades, partially offset by lower scanner revenues and the impact of unfavorable foreign exchange. For Q1, we delivered more scanner systems and wands in a quarter than ever before. On a sequential basis, Q1 Systems and Services revenues were down, reflecting capital equipment seasonality, partially offset by higher iTero Lumina scanner wand upgrades. In Q1, we launched new restorative capabilities and our next-generation iTero Lumina intraoral scanner and a new iTero Lumina Pro dental imaging system with iTero NIRI technology to enable efficient restorative and multidisciplinary workflows and support the diagnosis of interproximal caries above the gingiva. The new storage capabilities of iTero Lumina improve GP dentists' ability to diagnose and develop treatment plans that deliver exceptional clinical outcomes while concurrently helping GPs collaborate more effectively with their restorative lab, deliver incredibly precise, custom-fitting restorations, and reach new levels of practice efficiency and growth. The iTero Lumina intraoral scanner with iTero Multi-Direct Capture or MDC technology sets a new standard with effortless scanning and superior visualizations, and feedback from doctors, labs and other stakeholders regarding our Lumina portfolio has been positive. Its intuitive design and ease of scanning are appealing and make everyday scanning more viable, especially when compared to other scanners. Like any breakthrough technology, it's important to ensure that doctors and their staffs are properly trained on scanning. Even the most experienced iTero users may need to unlearn previous scanning techniques. We are working closely with our teams to offer follow-up training for our customers and their staff. The iTero Lumina intraoral scanner delivers faster scanning speed, higher accuracy, superior visualization, and a more comfortable scanning experience. The iTero Lumina solutions include superior 3D and 2D visualizations that augment and amplify oral health assessment and patient communication using the Align Oral Health suite designed to increase patient engagement with greater visual understanding of their oral health conditions. Following regulatory clearances in applicable countries starting earlier this month, existing iTero Lumina scanner owners began upgrading to the new software, which includes restorative and diagnostic capabilities. We're excited about the continued technology evolution we deliver with iTero Lumina system and the depth of tools and features that it offers for imaging, diagnostics, treatment planning, visualization, restorations, and so much more. iTero has always been much more than a PBS replacement, and with iTero Lumina, it has truly become the gateway to digital treatment for orthodontics and any type of GP practice, from family dentistry to high-end aesthetic practices. With that, I'll now turn the call over to John.

Thanks, Joe. Now for our Q1 financial results. Total revenues for the first quarter were $979.3 million, down 1.6% from the prior quarter and down 1.8% from the corresponding quarter a year ago. On a constant currency basis, Q1 revenues were unfavorably impacted by approximately $21.4 million, or approximately 2.1% sequentially, and were unfavorably impacted by approximately $31.1 million year-over-year or approximately 3.1%. For Clear Aligners, Q1 revenues of $796.8 million were up 0.3% sequentially, primarily from higher volumes, partially offset by the impact of unfavorable foreign exchange. Unfavorable foreign exchange impacted Q1 Clear Aligner revenues by approximately $17.9 million, or approximately 2.2% sequentially. Q1 Clear Aligner average per case shipment price of $1,240 decreased by $25 on a sequential basis, primarily due to the impact of unfavorable foreign exchange. On a year-over-year basis, Q1 Clear Aligner revenues were down 2.5%, primarily due to unfavorable foreign exchange of $25.8 million or approximately 3.1% and lower ASPs due to product mix shift to lower-priced products and discounts, partially offset by higher volumes. Q1 Clear Aligner average per case shipment price of $1,240 was down $110 on a year-over-year basis, primarily due to higher discounts, product mix shift to lower-priced products and the impact from unfavorable foreign exchange, partially offset by price increases. Clear Aligner deferred revenues on the balance sheet as of March 31, 2025 decreased $9.3 million or 0.8% sequentially and decreased $74.7 million or 5.8% year-over-year and will be recognized as additional aligners are shipped under each sales contract. Q1 Systems and Services revenue of $182.4 million was down 9.2% sequentially, primarily due to lower scanner systems revenue and unfavorable foreign exchange. This was partially offset by increased scanner wand revenues, mostly due to iTero Lumina wand upgrades. Q1 Systems and Services revenue was up 1.2% year-over-year, primarily due to higher iTero Lumina scanner wand revenues, partially offset by lower scanner systems revenues and unfavorable foreign exchange. Foreign exchange negatively impacted Q1 Systems and Services revenues by approximately $3.5 million or approximately 1.9% sequentially. On a year-over-year basis, Systems and Services revenues were unfavorably impacted by foreign exchange of approximately $5.3 million or approximately 2.8%. Systems and Services deferred revenues decreased $11.3 million or 5.1% sequentially and decreased $37.2 million or 15.2% year-over-year, primarily due to the decline in deferred revenues due in part to shorter duration of service contracts applicable to initial scanner system purchases. Moving on to gross margin. First quarter overall gross margin was 69.5%, down 0.6 points sequentially and down 0.5 points year-over-year. Foreign exchange negatively impacted the overall gross margin by 0.7 points sequentially and 0.9 points on a year-over-year. Clear Aligner gross margin for the first quarter was 70.5%, up 0.4 points sequentially due primarily to lower manufacturing costs and lower restructuring expenses, partially offset by unfavorable foreign exchange of 0.6 points. Clear Aligner gross margin for the first quarter was down 0.3 points year-over-year, primarily due to unfavorable foreign exchange, partially offset by lower manufacturing spend. Foreign exchange negatively impacted Clear Aligner gross margin by 0.9 points year-over-year. Systems and Services gross margin for the first quarter was 64.7%, down 4.7 points sequentially, primarily due to lower wand ASPs and unfavorable foreign exchange, partially offset by manufacturing efficiencies. Foreign exchange negatively impacted the Systems and Services gross margin by 0.7 points sequentially. Systems and Services gross margin for the first quarter was down 1.2 points year-over-year primarily due to lower scanner and wand ASPs and unfavorable foreign exchange, partially offset by manufacturing and services efficiencies. Foreign exchange negatively impacted the Systems and Services gross margin by 1.0 points year-over-year. Q1 operating expenses were $549 million, down 0.7% sequentially and up 1% year-over-year. On a sequential basis, we saw a $3.8 million decrease in operating expenses, primarily due to lower restructuring and other nonrecurring charges in Q1, which were partially offset by consumer marketing spend. Year-over-year, operating expenses increased by $5.3 million, primarily due to our continued investments in R&D activities. On a non-GAAP basis, excluding stock-based compensation, restructuring and other charges, and amortization of acquired intangibles related to certain acquisitions and legal settlement loss, operating expenses were $500.7 million, up 5.5% sequentially and down 1.1% year-over-year. Our first quarter operating income of $131.1 million resulted in an operating margin of 13.4%, down 1.1 points sequentially and down 2.1 points year-over-year. Foreign exchange negatively impacted operating margin by approximately 1.1 points sequentially and 1.4 points year-over-year. On a non-GAAP basis, which excludes stock-based compensation, restructuring and other charges, amortization of intangibles related to certain acquisitions and legal settlement loss, operating margin for the first quarter was 19.1%, down 4.1 points sequentially and down 0.7 points year-over-year. Interest and other income expense, net for the first quarter, was an income of $9.3 million compared to an expense of $3.4 million in Q4 '24, driven by favorable foreign exchange movements, partially offset by lower interest income and gain on investments from last quarter. On a year-over-year basis, Q1 interest and other income and expense were favorable compared to income of $4.3 million in Q1 '24, primarily driven by favorable foreign exchange movements, partially offset by gain on investments in the first quarter of the prior year. The GAAP effective tax rate in the first quarter was 33.6% compared to 26.3% in the fourth quarter of last year and 33.7% in the first quarter of the prior year. The first quarter GAAP effective tax rate was higher than the fourth quarter effective tax rate, primarily due to the tax expense recognized related to stock-based compensation and the release of uncertain tax provision reserves in Q4 of '24, partially offset by a one-time tax deferred tax adjustment in foreign jurisdictions in Q4 of '24. The first quarter GAAP effective tax rate was roughly in line with the first quarter effective tax rate of the prior year. Our non-GAAP effective tax rate in the first quarter was 20%, which reflects our long-term projected tax rate. First quarter net income per diluted share was $1.27, down $0.13 sequentially and down $0.13 compared to the prior year. Foreign exchange negatively impacted our EPS by $0.08 on a sequential basis and $0.12 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.13 for the first quarter, down $0.31 sequentially and down $0.01 year-over-year. Moving on to the balance sheet. As of March 31, 2025, cash and cash equivalents were $873 million, down sequentially $170.9 million and up $7.2 million year-over-year. Of our $873 million balance, $133.1 million was held in the U.S. and $739.9 million was held by our international entities. During Q1, we repurchased the remaining $72.1 million of the $270 million open market repurchase initiated in Q4 of '24. In Q1, we initiated a new plan to repurchase the remaining $225 million of our common stock under our January 2023 approved stock repurchase program of $1 billion through open market repurchases. As of March 31, 2025, we had repurchased $129 million. Once completed, this open market repurchase will complete our $1 billion stock repurchase program approved in January of 2023. Q1 accounts receivable balance was $1.062 billion, up sequentially. Our overall days sales outstanding was 97 days, up approximately 7 days sequentially and up approximately 11 days as compared to Q1 last year and primarily reflects flexible payment terms we have extended as part of our ongoing efforts to support Invisalign practices. Cash flow from operations for the first quarter was $52.7 million. Capital expenditures for the first quarter were $25.3 million, primarily related to investments in our manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations minus capital expenditures, amounted to $27.4 million. Before I turn to our Q2 and fiscal 2025 outlook, I'd like to provide the following remarks regarding the U.K. VAT and U.S. tariffs as of April 30. As previously disclosed in our Q4 '24 earnings release and conference call, we anticipated receiving a ruling regarding the applicability of VAT to our Clear Aligner sales in the U.K. On April 24, 2025, we received a favorable ruling in which the tribunal determined that our Clear Aligners are dental prosthesis for the purposes of VAT in the U.K., which is a key condition to be considered exempt from VAT. This outcome reaffirms our commitment to enhancing patient access to oral health by leveraging digital technology. HMRC has until June 19 to appeal the tribunal's ruling. HMRC may also attempt to challenge the applicability of VAT on a different basis. Moving on to tariffs. Align Technology has Clear Aligner manufacturing operations in Mexico, Poland, and China. For the U.S. domestic market, we currently manufacture clear aligners in Mexico prior to shipment to the U.S. Align does not currently ship clear aligners from Poland or China to the U.S. We currently manufacture clear aligners for the Chinese market in China. Our clear aligners and intraoral scanners made in Mexico that are imported into the U.S. are compliant with the United States-Mexico-Canada Agreement, USMCA. As noted in President Trump's Executive Order dated April 2, 2025, USMCA-compliant goods are exempt from tariffs under the Executive Order. However, the U.S.-Mexico tariff situation remains fluid, and we are unable to predict whether USMCA-compliant products will remain exempt, whether there will be other changes to the announced Executive Order, or if other tariffs will be imposed in the future. We expect an incremental tariff, if implemented, to be applied to the transfer price on goods shipped from Mexico. With respect to our clear aligners made in China, all manufacturing for China takes place in China. We have assessed the potential impact of China's retaliatory tariffs and believe that we are able to mitigate most of the tariff exposure through adjustments in our supply chain. Based on the current situation, we do not expect a significant impact to our costs from these retaliatory tariffs. We have also assessed the potential direct impact of additional U.S. tariffs on China on our business and currently do not expect to realize a significant impact from these retaliatory tariffs. Our intraoral scanner manufacturing primarily occurs in Israel, with scanners shipped from there to worldwide locations. We produce a small number of scanners in China primarily for the market. Regarding tariffs on Israeli goods imported into the U.S., at the current 10% baseline tariff, we estimate the average monthly potential impact to be approximately $1 million, which we have considered in our guidance for Q2 and fiscal 2025. Moving on to 2025 business outlook. Assuming no circumstances occur beyond our control, such as foreign exchange, macroeconomic conditions, and changes to our currently known tariffs that could impact our business, we expect Q2 2025 worldwide revenues to be in the range of $1.05 billion to $1.07 billion, up sequentially from Q1 2025. We expect Q2 '25 Clear Aligner volume to be up sequentially and Q2 '25 Clear Aligner ASPs to also be up sequentially due to favorable foreign exchange at current spot rates, partially offset by the continued product mix shift to noncomprehensive Clear Aligner products with lower list prices. We expect Q2 '25 Systems and Services revenue to be up sequentially as we continue to ramp up the iTero Lumina scanner with restorative software. We expect Q2 '25 worldwide gross margin to be up sequentially, primarily from higher ASPs and Clear Aligner volume. We expect our Q2 '25 GAAP operating margin and Q2 '25 non-GAAP operating margin to be up sequentially by approximately 3 points for each GAAP and non-GAAP operating margins. For fiscal 2025, we expect 2025 Clear Aligner volume growth to be up approximately mid-single digits year-over-year. We expect 2025 Clear Aligner ASPs to be down year-over-year due to continued product mix shift to noncomprehensive Clear Aligner products with lower list prices and continued growth in our emerging markets where those products may carry lower list prices. We expect 2025 Systems and Services revenues to grow faster than Clear Aligner revenues. We expect 2025 year-over-year revenue growth to be in the range of 3.5% to 5.5% at current spot rates. We expect fiscal 2025 GAAP operating margin to be approximately 2 points above the 2024 GAAP operating margin. And we expect 2025 non-GAAP operating margin to be approximately 22.5%. We expect our investments in capital expenditures for fiscal 2025 to be between $100 million and $150 million. Capital expenditures primarily relate to technology upgrades as well as manufacturing capacity in support of our ongoing business. With that, I'll turn it back over to Joe for final comments.

Thanks, John. I'm pleased with the results of our first quarter, the strength of our Clear Aligner business, including the return to stability in the United States and the response to our recent innovations such as Invisalign Palate Expander system and iTero Lumina. All of us are aware of the global economic uncertainty and the headwinds that tariffs or changes in consumer sentiment might bring. Align is focused on what we can control. As I mentioned last quarter, that means building on the innovations introduced in 2024 that drive efficiency and growth for our customers' practices while delivering the best customer and patient experiences in the industry. First, through our digital scanning technology. While iTero has long been valued in the orthodontic and GP practices as much more than a replacement for PBS impressions, our next-generation iTero Lumina solution with comprehensive dentistry capabilities provides transformative solutions for GP dental practices to enable diagnostics, restorative and multidisciplinary ortho restorative workflows, including NIRI technology and the iTero Lumina Pro dental imaging system. With iTero Lumina, we truly have a gateway to any type of digital orthodontic and dental treatment. Second, driving practice transformation to fully digital practices must address two key variables: doctor and patient efficiency. Less patient chair time and fewer patient visits increase practice profitability. We're helping customers drive efficiency and create more time and capacity in their practices with our digital treatment planning software, delivering ClinCheck in minutes for most treatment plans. The latest innovations in the ClinCheck Signature experience combine automation of each doctor's clinical preferences with AI-powered tools that deliver customized treatment plans in near real time. Based on doctors' building personalized treatment preferences or prepopulated templates, a doctor chooses our almost touchless digital workflows, ClinCheck in minutes technology, which is revolutionizing treatment planning for doctors and enabling chair side treatment planning, improving patient conversion and getting patients started in treatments within days. Next, we're building on the world's most advanced Clear Aligner system to make it even more effective and efficient for all patients with innovations such as the Invisalign system with Mandibular Advancement featuring Occlusal Blocks that expands Align's Class II treatment portfolio for growing patients with a comprehensive solution for treating growing patients in Class II malocclusions caused by mandibular retrusion. Finally, we're delivering on the promise of 3D technology that is part of Align's DNA with direct 3D-printed orthodontic devices, demonstrating our commitment to pushing the boundaries of digital orthodontics. The first example is the Invisalign Palate Expander system, a series of removable devices that expand a patient's palate without traditional metal expanders and screws in a way that is both effective clinically and comfortable and easy to use for kids and parents. This is the first direct 3D-printed appliance Align has commercialized. With others in development, we believe direct 3D printing will give doctors new levels of precision and appliance fit and shape and deliver the best possible outcome for patients. As we celebrate 28 years of digital innovation this year, we're also proud to be grateful and highlight that we've met a significant milestone with over 20 million Invisalign patients treated globally, representing 20 million smiles, 20 million stories, and 20 million lives transformed, a testament to the passion and purpose of our employees, our doctor customers, and their patients. With that, I thank you for your time today. I look forward to speaking with you at our Investor Day meeting next week. Now I'll turn the call over to the operator for questions.

Our first question will come from Brandon Vazquez from William Blair.

Congratulations on a strong start to the year. I was pleasantly surprised by the quarter's performance and the outlook, especially since we have historically relied on consumer sentiment in the dental sector. It was a nice surprise this quarter. I would like you to elaborate on the fact that while we saw a decline in consumer sentiment, the business seems to be thriving. Can you discuss why this decoupling is happening and how it affects your confidence in the future guidance, especially considering the drop in sentiment we observed in April?

Brandon, it's Joe. Thank you for the question. We experienced solid volume, and it's encouraging to see North America grow again after some time. There is overall strength in the APAC region, including China, and we also saw strong demand throughout Europe. Additionally, the launch of the Lumina scanner with restorative capabilities is providing us with a positive boost. Furthermore, it's noteworthy that not only did we observe growth among teens, but adults also showed growth. In conclusion, we experienced a broad range of growth across product lines, countries, regions, and various segments, including iTero.

Our next question comes from the line of Vik Chopra from Wells Fargo. China and Europe, really across the board in Europe, we saw good demand also. The Lumina scanner, now with restorative capability, provides us with a favorable boost in that area as well. Additionally, while we noticed growth among teens, we also saw an increase in adult users. To summarize, we experienced broad growth across various product lines, countries, regions, and different segments, including iTero.

Can you hear me? Thanks for taking the question, and congrats on a nice quarter. Maybe just two for me. I appreciate all the color you provided on the tariff front. But can you just talk about plans to potentially mitigate this by moving production to different locations or putting in some price increases? And then I had a quick follow-up.

Vik, it's Joe. Look, obviously, we're, I think, pretty well situated right now when you look at how the tariffs would affect us. We're in China for China. And as John said, there's some material movements in all that we'll take care of it. We don't see much of an impact there, if anything. We're good with Mexico right now. We feel pretty solid on that, and our Poland plant is fully operational and working well in Europe. I guess the only issue we really have is iTero, a lot of the shipments are coming out of Israel, but we have some plans, we'll be able to address that. But as you can see in our forecast, we're planning on holding our margin that we've committed to. And so we think we'll be able to mitigate that. So overall, I feel fortunate. I think we positioned ourselves as a truly global business, meaning we have global supply lines in each one of those specific regions that we can maximize and work through. And so we feel good about the situation right now. But as I mentioned in my comments, too, is there's a lot of volatility out there, but we feel we're well positioned in the sense of what we've seen so far.

Got it. That's super helpful. And you're hosting a much-anticipated Investor Day next week. I'm just wondering if you can just provide some insight as to what we can expect next week?

I think what you can expect is we'll give you a good portfolio look at the company, a good demand, what we think the next few years look like in a sense of how we're positioned overall from a technology standpoint and also a commercial standpoint. It's been a while since we've been with our investors. So we're really excited to share with you. We've developed a lot since the last meeting, and we look forward to the time in New York.

Our next question will come from Jon Block from Stifel.

The first one, John, will have some sort of detailed questions on the 2025 revenue guidance. So I think I got it right. You raised it from low single digits to 4.5% at the midpoint. The language around ASPs didn't change. I still expect it to be down low single digits year-over-year. The Clear Aligner language didn't change. The ball is still expected to be up mid-single digits year-over-year. So maybe it's a pretty straightforward question. But like any more color on the ASPs? Are the ASP thoughts basically, call it unchanged from three months ago, but now we should be thinking like down 1 and the prior was down 3, that both fits the LSD narrative with that 200 basis point delta sort of specific to just updating for the spot rate? And let me know if that came across well.

Yes, that is accurate, the way you phrased that, Jon.

Okay. That was an easy one, concise. So I'll get another one. Joe, I'd love to spend time on teen. I mean, this was always sort of like the holy grail, and it went to the moon during COVID and then you had some tough comps, and here you are with new products and the double-digit growth of 13%. It was a pretty good beat on teen versus where we were. The two-year stack is mid-20s. It wasn't up against an easy comp. So the 13 off the 12. Maybe just elaborate on that? Like what are you seeing with IPE? Clearly, that's helping the balls, but are you seeing the IPE to alignment pull-through, which I think we would still be in the early stages of that? And maybe I'm getting a little bit aggressive here, but can we think about teen as this low double-digit plus grower going forward as long as the innovation continues to step up and you got MA with occlusal blocks first hitting the market?

Yes. Jon, I appreciate the diverse response you've seen in the teen segment, which is evident across various regions. IPE plays a significant role in that, integrating well with Invisalign First. Some doctors are adopting these products right away, while others are implementing them gradually. Overall, we refer to it as a kids' product and include it in the teen segment. These two products work effectively together. You're correct about Mandibular Advancement and the occlusal blocks. This approach addresses the twin block system that has existed for years, which tends to be more invasive. We've previously explored Mandibular Advancement, but this new iteration of strong occlusal blocks is better suited to tackle Class II issues, as I mentioned. I’m confident in our distribution capabilities in each region to advance this technology. The specifics of IPE and occlusal blocks require a strong distribution team to effectively convey and integrate these innovations into doctors' practices. I hope I've clarified your inquiry, Jon. Overall, it's not limited to a single region or product; we have great synergy across our portfolio in various regions.

Our next question will come from the line of Jeff Johnson from Baird.

So let me ask, I guess, Jon's ASP question, but let me kind of dig down a little bit more. If I can ask one question about ASPs this quarter and then one question about ASPs going forward. Hopefully, that's all blended; it counts as one question. But John, I think ASPs were down 8.2% year-over-year, not sequentially, 8.2% year-over-year this quarter. Can you just remind us how much the VAT, the price discount you had to give to normalize that VAT impact to the U.K. got, how much that contributed out of that 8.2% and how much FX contributed as a negative headwind? I think that was 200 basis points by my math, but just trying to confirm that?

Yes, the foreign exchange impact affects us on a year-over-year basis, and we are experiencing unfavorable foreign exchange. Overall, the foreign exchange effect on the company is 3.1 points year-over-year. Additionally, keep in mind that we began withholding the VAT a year ago in the first quarter, so it is already reflected in last year's baseline numbers.

Going forward, currency is expected to positively impact ASPs. You mentioned the 310; I initially thought that referred to the top line impact, but does that also reflect the flow-through impact on ASPs for the first quarter? However, moving forward, FX will become a positive contributor. Can you give us an idea of the current spot rates? I can do the calculations later, but I would appreciate your insights. Additionally, if the HMRC does not appeal, will you be able to increase U.K. prices? Would that make a difference, or will you maintain the current prices? The providers won't have to pay that VAT tax; could that potentially lead to a higher ASP? Lastly, regarding the Mandibular Advancement blocks, it seems there will be a $100 add-on charge. If we start incorporating more MA cases, could that potentially create a positive ASP impact, similar to the headwinds we are currently seeing with IPE and DSP?

Okay. Let me try to take these three ASP questions, Jeff, on this. So MAOB, yes, slightly higher price, that would help our overall ASP as we sell more of that premium product on our comprehensive cases, and we'd add to that for the pricing on that. Regarding the U.K., we need to await HMRC's response on whether they will appeal and their subsequent actions. We have significant flexibility if we win. If they either choose not to appeal or are successful in their appeal, we can adjust our discounting strategy. By doing so, this would lead to a favorable impact on our average selling price going forward. I am currently excluding the U.K. VAT impact from our forecasts, but it does provide us with flexibility based on HMRC’s decisions or the progression of the situation. And then regarding overall FX, yes, it turns into now at current spot rates, a slight benefit on a year-over-year basis. And then you still have what we've talked about before, just that list price, lower list price products, which would be comprehensive as well as some of the other growth in certain countries just at a lower list price. But gross margin, as you know, is in many cases, favorable as a result of those lower-stage products because the cost to serve for us is less. But that's how the dynamics shape up for ASPs.

Next question comes from the line of Michael Cherny from Leerink Partners.

Congratulations on a strong quarter and guidance. I want to ensure we have a clear understanding of everything. I won't go into as much detail as Jeff, but regarding the expected margin increase and the nice margin expansion this year, how much of it can you attribute to better organic revenue expectations or operational changes? We've discussed the impact of foreign exchange on the average selling price, but could you elaborate on the operating margin fluctuations? Specifically, how much of it is within your control and how much is influenced by market conditions?

I believe our margin expansion shows a 70 basis point improvement in operating margin from 2024 to 2025, despite the known tariff impact. We are seeing this expansion due to better manufacturing efficiencies achieved through increased volume, material savings, and logistical savings. Innovation efforts, including touchless ClinCheck, have reduced our workload, and several of our new products are performing well with favorable margins, particularly those with higher average selling prices like MAOB. So it's really a host of initiatives that we have. It's what we continue to do in the business. And with this forecast, we're pleased to report that as we know tariffs now, we can still get to our margin targets that we have because we're seeing productivity in other areas.

Got it. Just one really quick last follow-up. Could you give the DSP number for the quarter? I apologize if I missed it in the slides or anywhere else.

No, we did not give the DSP. But as we've said in our prepared remarks and what we see is this helps grow the low stage part of our portfolio. It's rolling out in other areas, and we're pleased with the performance.

Our next question will come from Jason Bednar from Piper Sandler.

I wanted to start with two financing topics. We experienced higher rates, and credit denials have been an issue over the past year. You mentioned a new preferred financing partner in HFD. Are you seeing any benefits in addressing the challenges with consumers early in that relationship? Also, on the provider side, John, you noted that the increase in DSOs was due to expanding financing or more favorable terms for practices. Could you elaborate on that? It's a significant increase in DSOs for a policy you've had in place for several years, so I'm curious about what has changed in the last few months to cause this rise.

Yes. You pointed out key aspects of how payments are made. Some patients pay directly and cover the full cost of their treatments, which is common in many markets and continues to happen, although there may be a decline due to certain pressures they face. Additionally, some HFD patients use doctor financing, allowing them to pay gradually through their physician. It’s beneficial to have good terms with doctors to extend the repayment period, enabling them to manage their finances better and assist with the patient financing they offer. And then the third way is external, and HFD is one of them. There are many different companies that provide this, but we're seeing a good combination of finding the right way to get to HFD, meeting the requirements that they have. Or others that are providing this and getting those potential patients into financing. So we're seeing a good combination of this, but we know that how much things cost and how much they have to pay over a monthly basis is important. And this is a good way to offset that.

Okay. All right. Understood. And then just maybe real quick on some of the tariff dynamics and not necessarily as it influences what you have to pay, but more so from a competitive standpoint, it seems like you might have some competitors that may get dislocated or may have to face higher costs as they have to import or reconfigure their supply chains. It seems like this is a good opportunity to lean in with your business. But I want to ask, are you seeing any dislocation with doctor customers? Is that happening where you're now, call it, relatively more favorable from a cost perspective than maybe what you were pre-tariffs?

It's Joe. I would say we haven't observed any significant changes in that regard so far. I can't really comment on most of our competitors' supply chains, as there are many complexities in manufacturing. However, some of them may be at a considerable disadvantage. We are unsure about the extent of that disadvantage. What we can control is our focus on our product capabilities, our digital platform, iTero Lumina, and the efficiencies we can achieve with doctors. We'll let the tariffs resolve themselves and see how that unfolds. Overall, we feel confident about our position and will keep executing our strategy.

Our next question will come from Steve Valiquette from Mizuho Securities.

One of my questions was just answered regarding the tariffs, so I'll hold off on that for now. However, you mentioned that you evaluated the potential impact of China's retaliatory tariffs and believe you can reduce tariff exposure by adjusting your supply chain. My general thought is that if you're manufacturing in China for the local market, you shouldn't be affected by tariffs at all. I'm not sure if I'm interpreting your comments correctly, but I would appreciate any additional insights you can share about the adjustments being made to your supply chain.

Yes, you're correct, Steve. There is no product movement between China and the U.S. and vice versa. Some raw materials used in our manufacturing in China come from the U.S. and other regions. We are making adjustments in our supply chain to ensure these changes do not affect us in terms of tariffs.

Next question will come from the line of Elizabeth Anderson from Evercore ISI.

Thank you for the question. I understand your concerns regarding the second quarter guidance and the effects of foreign exchange. You're mentioning that in the second quarter guidance, cases and volume are expected to increase sequentially. However, many of the first quarter results occurred before the tariffs were implemented. Could you discuss the demand? Are you starting to notice any changes in demand? Would you say that the demand has remained generally stable since the tariff announcement? Any additional insights you could provide on this as we navigate the current economic fluctuations would be appreciated. I have a follow-up after this.

Yes. No, Elizabeth, this is John. Look, we were pleased with our volume and our performance in Q1 despite some of the choppiness that people allude to and so on. When we look at how we're guiding and what we're using, it's the normal process that we go through to be able to come up with guidance. And we're showing that we expect that sequential improvement from Q1 to Q2. I think I would just remind everybody that it's a global business. There's a lot of different parts to our business and various products as well that I think sometimes gets a little bit lost. So I think if you look at the global breadth of our business, the strength that we saw in EMEA and APAC, and the stability that we saw in the Americas, there's always something about tariffs and some of the noise around that, but we're guiding for that increase in and it's based on the data that we see.

Got it. As a follow-up, you've launched the restorative iTero at IDS and you're leading in the quarter. I assume there won't be much benefit from that in the first quarter. Can you help us understand the uptake for that and how you expect it to compare with prior launches, like the Lumina ortho version last year?

The second version is a restorative scanner that expands the GP segment we are currently targeting. We will be delivering it through our channels globally. We are confident in its storage capabilities. At the moment, we are observing images that will primarily go to labs for restorative procedures. We are excited about the level of detail and specificity that Lumina offers due to its multiprojection system. While I can't provide exact growth figures, I can assure you that we will bring it to the marketplace from both the lab and GP perspectives. We believe our competitive positioning is significantly stronger in restorative applications compared to some of our previous scanners. I hope that clarifies things.

Our next question will come from Erin Wright from Morgan Stanley.

I'll ask them both upfront here. On teen, I guess, any metrics that you have on the actual conversion rates of Invisalign First and Palate Expander and how you're seeing that translate into growth there? I know it was asked earlier at a more higher level, but curious if we are hitting that inflection point and what some of those metrics may be? I know it's just too early. And then the second question I have is just on direct fab and your latest thoughts on contributions, where you're at with sort of the initiative and how that should progress? And maybe we wait for Investor Day on that, but the potential contributions there?

From a teen conversion standpoint, we're not at critical mass just yet. However, in the preteen or kids stage, we have a strong portfolio in that initial phase that orthodontists are discussing. They're enthusiastic about it because these products are simpler and less cumbersome for patients compared to what we had in the past. We observe a positive response and interest in these product lines globally, just as we anticipated. This includes Mandibular Advancement as well. The penetration will take time because the market moves slowly, operating through individual doctor's offices worldwide. Nevertheless, we feel optimistic about the momentum of these three products in the kids' segment. Overall, we have good momentum in every region we operate in, something we haven't seen since 2021. The double-digit growth in the teen category is excellent, indicating that the penetration rate is improving. We will need to evaluate this on a quarter-by-quarter basis and provide updates. I hope this information is helpful.

Our next question will come from Mike Ryskin from Bank of America Merrill Lynch.

Appreciate you squeezing me in. A couple of small ones, just kind of following up on prior points people brought up, so I'm shooting real quick. You talked about tariffs; you talked about China. I kind of want to talk about the indirect impact of tariffs, the trade war. There's a lot of thoughts of maybe indirectly, China will try to punish American companies by sort of pushing people towards local brands even more, the question, how much they can really do that. But just from that perspective, are you seeing anything? Obviously, you've got a local competitor there. So just thoughts on that? And what have you kind of assumed for rest of the year if that trade war continues to escalate?

Yes, Mike, based on our observations in the first quarter, it appears there is no significant consumer backlash. We had a strong performance in China overall. Currently, we have not encountered any such issues. Additionally, we operate as a company that is focused on local delivery in China. While we are a Western company, our services, including technology, manufacturing, and treatment planning, are tailored specifically for the Chinese market. Our operations are very much localized.

Okay, great. And then you talked about FX on revenues in ASP. What about on margins? I mean, it's just a pretty big swing in terms of how rates have gone. Is there any impact on margins? I see that you're keeping your full year op non-GAAP up the same. So just anything we should keep in mind in terms of how that flows through the P&L?

Yes. The favorable foreign exchange has contributed to a slight improvement in our operating margin. We have managed to offset some of the tariffs as well. These factors are reflected in our operating margin. We are satisfied with the beginning of the year in terms of our operating margin and are guiding for sequential improvement in the second quarter. If foreign exchange rates remain stable, we anticipate a solid increase in our operating margin for 2025.

I have one more technical question. You mentioned you're no longer providing DSP. It seems you're also not disclosing the Clear Aligner net revenues for the Americas versus international. Is this a shift in your reporting approach? Will this information be included in the 10-Q, or what is the reasoning behind this change?

We're always looking to simplify and provide information. We get a lot of feedback that we provide so much information, and it gets a bit confusing as to what's really driving things. So we try to give the best information that helps you and others be able to understand and analyze the business. And we look to make changes that make the most sense to help provide more clarity to the business.

The next question will come from the line of Kevin Caliendo from UBS.

Thank you for letting me speak; I appreciate it. I want to revisit the ASP question. It decreased by 8%, with about 3% attributed to foreign exchange, suggesting that the actual decline related to discounting and mix was around 5%. I don't believe any of your expectations for the future indicate that ASPs will keep declining by 5% indefinitely. What improvements do you foresee regarding either customer mix, product mix, or discounting programs? Or have you considered the possibility of implementing price increases again, as has been the practice every July in the past? This question pertains to both the short term and long term, especially in terms of ASPs, as we aim to achieve the kind of growth potential we believe the business has without ASP being a significant obstacle, particularly on the Clear Aligner side.

Yes, I believe it's important to consider where we're experiencing growth. Some countries are growing more quickly, but they offer products at lower list prices, which affects our overall growth. This year, we have started introducing DSP in various markets and additional new products with IPE and other clubs, which we didn't have before. The mix is influenced by the products we offer and their locations. We're selling to an increasing number of doctors, with a record number in the first quarter. Many of these new doctors are opting for products at lower list prices rather than the more comprehensive offerings. However, we have strategies in place, including new products and adjusted pricing for MAOB and others, to stabilize our average selling price. As we analyze our finances, we're also focused on ensuring that our gross margin improves and contributes positively to our operating margin as we progress through our financial statements.

Thank you. I'm not showing any further questions in the queue. I would now like to turn the call back over to Shirley for closing remarks.

Thank you, everyone, for joining us today. We are hosting an Investor Day meeting next Tuesday, May 6, in New York City. If you would like more information about that or to register, please visit our website, aligntech.com, or contact Investor Relations. If you have any other questions, we look forward to hearing from you. Thanks, and have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.