ALIGN TECHNOLOGY INC Q1 FY2025 earnings call

• First quarter revenues, operating margin and earnings were in line with outlook. Fiscal 2025 started well with Clear Aligner volumes up sequentially and year-over-year.
• Clear Aligner volumes in Q1 were up in orthodontic and GP dentist channels, with record submitters and utilization for GP dentists. Q1 was the highest year-over-year growth rate for adult and teen patients since 2021.
• Systems and Services revenues were down sequentially due to seasonality and unfavorable FX, but up slightly year-over-year driven by iTero Lumina adoption and launch of iTero Lumina with restorative software.
• DSOs continue to be a fast-growing channel in digital dentistry, with Clear Aligner volume from DSO customers growing sequentially and year-over-year, and iTero scanner sales growth strong with DSOs.
• Launched new restorative capabilities and next-generation iTero Lumina intraoral scanner and iTero Lumina Pro dental imaging system with iTero NIRI technology. Introduced Invisalign Palate Expander system and Invisalign system with Mandibular Advancement featuring Occlusal Blocks.

Systems and Services: Year-over-year revenue growth in Q1 primarily reflects scanner and wand revenue driven by iTero Lumina, wand upgrades, partially offset by lower scanner revenues and unfavorable foreign exchange. Sequentially, Q1 Systems and Services revenues were down due to capital equipment seasonality, partially offset by higher iTero Lumina scanner wand upgrades. Clear Aligners: Q1 Clear Aligner revenues were $796.8 million, down 2.5% year-over-year, primarily due to unfavorable foreign exchange and product mix shift to lower-priced products and discounts, partially offset by higher volumes. Year-over-year, Clear Aligner volumes grew 6.2%, driven by strength in EMEA and APAC regions and growth in North America, offset by lower volumes in Latin America. Revenue contribution: Clear Aligners contributed a significant portion, with Systems and Services making up the other segment.

• Q2 2025 worldwide revenues expected to be in the range of $1.05 billion to $1.07 billion, up sequentially. Clear Aligner volume expected to be up sequentially, ASPs up sequentially due to favorable FX partially offsetting product mix shift to lower-priced products. Systems and Services revenue expected to be up sequentially. Worldwide gross margin expected to be up sequentially. GAAP and non-GAAP operating margins expected to be up sequentially by approximately 3 points each.
• Fiscal 2025: Clear Aligner volume growth expected mid-single digits year-over-year. ASPs expected down year-over-year due to product mix shift to lower-priced products and growth in emerging markets. Systems and Services revenues expected to grow faster than Clear Aligner revenues. Year-over-year revenue growth expected in the range of 3.5% to 5.5% at current spot rates. GAAP operating margin expected approximately 2 points above 2024 GAAP operating margin. Non-GAAP operating margin expected approximately 22.5%. Capital expenditures for fiscal 2025 expected between $100 million and $150 million.

• U.K. VAT: HMRC has until June 19 to appeal the tribunal's ruling that Clear Aligners are dental prosthesis for VAT exemption in the U.K., and may attempt to challenge on different basis.
• Tariffs: U.S.-Mexico tariff situation fluid, uncertain if USMCA-compliant products will remain exempt; potential incremental tariff on goods shipped from Mexico; China's retaliatory tariffs assessed to be mitigated through supply chain adjustments but U.S. tariffs on China currently not expected to have significant impact; 10% baseline tariff on Israel goods imported into U.S. estimated average monthly potential impact of approximately $1 million, considered in Q2 and full year guidance.

Q: Congrats on nice start of the year here. Thought maybe to start, was pleasantly surprised that kind of the strength in the quarter and the strength of the guide, given historically, we've relied a lot on - and we've talked a lot about the ties of consumer sentiment and to the dental space. So again, kind of a nice surprise in this quarter. I was hoping you guys can just spend a little time talking -- we saw consumer sentiment come down, but it seems like the business is doing well. So talk a little bit about maybe why that's decoupling and what kind of confidence that gives you in the guidance on a go-forward basis, even though in April, we were seeing sentiment go down?

A: It's Joe. Thanks for the question. We saw good volume. It's great to see North America grow again. It's been a while, as I mentioned. We have good strength in APAC overall, including China. And Europe, really across the board in Europe, we saw good demand also. And obviously, the Lumina scanner coming out now with restorative capability gives us a tailwind in that sense, too. So -- and what I would love also was the teen, you saw teens grow, but you also saw adults grow also. So when I just end that comment by saying we saw breadth in the sense of the growth, whether it was product line or whether it's by country or region and also by our different segments, including iTero.

Q: Can you hear me? Thanks for taking the question, and congrats on a nice quarter. Maybe just 2 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.

A: 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 1 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.

Q: 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 3 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.

A: Yes. That is accurate, the way you phrased that, John.

Q: 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 2-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?

A: Yes. Jon, first of all, I like the breadth of what you saw in teen. We saw it across each geography, too. Obviously, IPE is a big part of that, but it combines well with Invisalign First. We see that. Some doctors specified immediately, some in sequence. But overall, that's just a great -- we call it kids' product. We have it in the teen segment. But those 2 products function very well together. You're right about Mandibular Advancement with the occlusal blocks. It addresses the twin block kind of a system that's been out there for years is kind of an invasive system. And we've done that before, Mandibular Advancement, but not to the extent that these strong occlusal blocks will be able to address the Class II, like I mentioned before. So I feel -- and I feel good about our distribution capability in each geography to take that kind of technology forward. There's a lot of specificity in stuff like IPE. And obviously, occlusal blocks is you need a great distribution team to be able to explain and help to integrate in doctors' offices. So I hope I have answered your question, Jon. But overall, it's not just like 1 region or 1 product. It's really good synergy in our portfolio across the different regions.