Align Technology - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $995.2M (+1.8% q/q, +4.0% y/y) with GAAP EPS $1.39 and non-GAAP EPS $2.44; Systems & Services grew 14.9% y/y and Clear Aligner volumes rose 6.1% y/y, while ASP pressure from FX and mix weighed on margins; GAAP operating margin was 14.5% (non-GAAP 23.2%).
• Management guided Q1’25 revenue to $965–$985M (down q/q on seasonality, FX and scanner timing), and FY2025 to low single-digit revenue growth (≈2 pts FX headwind), mid-single-digit Clear Aligner volume growth, and non-GAAP operating margin ≈22.5% (GAAP ≈17%).
• Key puts/takes: Clear Aligner ASPs were below outlook due to a stronger USD and mix shift to non-comprehensive products; Systems & Services momentum continued on iTero Lumina uptake; restructuring charges in Q4 (≈$37M) and FX created GAAP headwinds; non-GAAP margins beat outlook.
• Tariffs are not in guidance; if a 25% U.S.-Mexico tariff were implemented, management sizes cost at ~$4–$5M per month, with shipping from Mexico still more economical than alternatives at those levels.
• Wall Street consensus (S&P Global) for Q4 was unavailable via our feed, so we cannot quantify beat/miss vs Street here; management said results were “in line” with their Q4 outlook (not Street) and margins were better than company outlook.

What Went Well and What Went Wrong

• What Went Well

  • Systems & Services revenue +14.9% y/y (Q4 $200.9M) on strong scanner volumes and upgrades; segment GM up 4.7 pts y/y on manufacturing and freight efficiencies.
  • Clear Aligner volumes +6.1% y/y driven by EMEA, APAC, and LATAM; teen/kids starts +9.8% y/y to ~216k; record total doctor submitters in Q4.
  • Non-GAAP operating margin 23.2% (+1.1 pts q/q) and above company outlook; management reiterated FY2025 non-GAAP OM ≈22.5% despite FX headwinds, reflecting restructuring benefits.
  • CEO: “Q4 total revenues, Clear Aligner volumes, and Systems and Services revenues were in line with our Q4 outlook and both GAAP and non-GAAP operating margins were better than our Q4 outlook.”.

• What Went Wrong

  • Clear Aligner ASPs were lower than outlook due to unfavorable FX and product mix; Q4 per-case ASP was $1,265, down $10 q/q and $55 y/y.
  • GAAP net income and EPS declined y/y (Q4 GAAP NI $103.8M vs $124.0M; GAAP EPS $1.39 vs $1.64) with a ~$0.14 EPS drag from FX revaluations; GAAP OM 14.5% (-3.4 pts y/y) also reflected restructuring expense.
  • Q1’25 guide implies a sequential revenue step-down ($965–$985M) on seasonality, FX, and scanner timing; Clear Aligner ASPs guided down q/q and Systems & Services guided down q/q.

Transcript

Operator (participant)

Greetings. Welcome to the Align Q4 and Full Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Shirley Stacy, with Align Technology. You may begin.

Shirley Stacy (VP Finance of Corporate and Investor Communications)

Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO, and John Morici, CFO. We issued Q4 and Full Year 2024 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 one 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 have posted historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliations, if applicable, and our Q4 and Full Year 2024 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Joe Hogan (President and CEO)

Thanks, Shirley. Good afternoon, and thanks for joining us today. On our call today, I'll provide an overview of our Q4 and full year 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 2025. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report that Q4 total revenues, Clear Aligner volumes, Systems and Services revenues were in line with our Q4 outlook, and both GAAP and non-GAAP operating margins were better than our Q4 outlook.

Q4 Clear Aligner ASPs were lower than our Q4 outlook due primarily to the impact of unfavorable foreign exchange from the strengthening of the U.S. dollar against major currencies from late October through December, as John will explain in his remarks.

On a year-over-year basis, Q4 revenues of $995 million increased 4%, reflecting 14.9% growth from Systems and Services revenues and 1.6% growth from Clear Aligner revenues. On a year-over-year basis, Clear Aligner volumes grew 6.1%, driven by increased shipments across all regions, with strength in EMEA, APAC, and LATAM regions, and stability in North America. From a channel perspective, Clear Aligner volumes in the Ortho and GP channels were up on a year-over-year basis, with a number of submitters and utilization among the highest in the past few years. On a sequential basis, Q4 revenue growth of 1.8% reflects continued momentum from sales of iTero Lumina scanners and increased Invisalign Clear Aligner volumes in the EMEA regions, especially from teens and growing patients, as well as growth from the LATAM regions.

Across the orthodontists and GP dentists, offset by Clear Aligner seasonality in APAC, mostly in China, which had a strong teen quarter in Q3. For the Americas, Q4 Clear Aligner volumes reflect a seasonally soft orthodontic channel, offset somewhat by strength in the GP channel in the adult segment. For the full year, 2024 total revenues of $4 billion and Clear Aligner volumes of 2.5 million cases were both up 3.5% year-over-year. We delivered fiscal 2024 non-GAAP operating margin of 21.8%, above fiscal 2023 and in line with our 2024 outlook. As of Q4 2024, we achieved several cumulative milestones, including 272,000 active Invisalign trained practitioners, 19.5 million Invisalign patients, including over 5.6 million teens and kids, and over 2 billion Clear Aligners manufactured worldwide.

For Clear Aligners in Q4, year-over-year volume growth in the Americas reflects strength in Latin America, as well as improving trends in North America, especially for GP dentists. In the EMEA region, Q4 year-over-year Clear Aligner volume growth reflects increased volumes from Core Europe, as well as strong growth from EMEA, Eastern Europe, Middle East, and Africa markets. From a channel perspective, EMEA Clear Aligner growth reflects strength in both Ortho and GP, as well as teens, kids, and adult patients. In the APAC region, Q4 year-over-year Clear Aligner volume growth was driven by China and Japan, as well as strong growth from our emerging APAC countries led by India, Thailand, and Korea. For Q4, APAC growth also reflects increased utilization and submitters in both doctor channels and growth in both patient segments.

Q4, we had 85,700 doctor submitters worldwide, a record total in a Q4, primarily reflecting a sequential increase in Clear Aligner volume for adults and non-comprehensive cases. In the adult Clear Aligner segment, we're pleased to see both year-over-year and sequential growth across all regions. In the teen and growing kid segments, approximately 216,000 teens and kids started treatment with Invisalign Clear Aligners during Q4, a decrease of 8.6% sequentially off a record Q3 teen season and an increase of 9.8% year-over-year, reflecting growth across regions, especially from Invisalign First in the APAC and EMEA regions. For Q4, the number of doctors submitting case starts for teens and kids was up 6.2% year-over-year, led by continued strength from doctors treating young kids or growing patients.

For fiscal 2024, total Invisalign Clear Aligner shipments for teens and kids reached a record total of 868,000 Invisalign cases and shipped up year-over-year up 7.7% compared to the prior year, comprising approximately 35% of the 2.5 million total Clear Aligner case shipments for the year. Teen-specific consumer marketing and sales programs, along with the continued momentum for Invisalign First for kids as young as 6 and Invisalign Palate Expander systems, help drive adoption globally. During the quarter, we continued to commercialize the Invisalign Palate Expander, with steady momentum for doctor submissions and shipments. In its first full year of availability in North America, Invisalign Palate Expander adoption followed a similar trajectory in Invisalign First, which launched in 2017. But Invisalign First did not require regional or country-specific regulatory approvals like Invisalign Palate Expander is required.

In Q4, we received the CE mark under the Medical Device Regulation to market the Invisalign Palate Expander system in most of Europe and also completed registration with the Medicines and Healthcare Products Regulatory Agency for the United Kingdom and overseas territory. Both approvals are for broad patient applicability, including growing children, teens, and adults with surgery or other techniques. These approvals mark a significant milestone in our efforts to enhance clinical outcomes and efficiency in orthodontics and enable us to commercialize the Invisalign Palate Expander across most of the major EMEA region in 2025. We are continuing to make progress in establishing the clinical efficacy and improved patient experience of Invisalign Palate Expander, which recently made the cover of the Journal of Clinical Orthodontics, or JCO, in an article published by Dr. Jonathan Nicozisis.

There have been multiple peer-reviewed studies published on the effectiveness of the Invisalign Palate Expander, as well as mandibular advancement. We also are receiving positive parental feedback, as reflected in the article, "Seven Reasons Parents Love the Invisalign Palate Expander System." Overall, the Invisalign Palate Expander system is gaining traction among orthodontists and patients due to its innovative design and user-friendly feature. As more clinical data becomes available and practitioners gain experience with the device and parents become informed, we believe adoption will continue to grow. Q4 non-case revenues were up year-over-year, primarily due to continued growth in retainers and our doctor's subscription program, or DSP, including non-Invisalign patients getting retainers. Non-case revenues, including our Vivera retainers, retention aligners ordered to our Doctor Subscription Program, clinical training, education, accessories, and e-commerce.

DSP also includes Invisalign touch-up cases, which includes up to 14 stages, is currently available in North America and certain countries in Europe, and was most recently launched in Brazil. For Q4, total Invisalign DSP touch-up cases were up nearly 37% year-over-year to more than 27,000 cases. For fiscal 2024, total DSP touch-up cases shipped were over 100,000, up 37% compared to 2023. Q4 Clear Aligner volume from DSO customers increased sequentially and year-over-year, reflecting growth across all regions. The DSO business continues to outpace our retail doctors globally. In the U.S., it's driven by our largest DSO partners, Smile Doctors and Heartland Dental, and also had strong growth in iTero scanner sales as DSO invested in their members' practices' end-to-end digital workflows. In December, we completed $30 million equity investment in Smile Doctors, the largest orthodontic-focused DSO in the U.S., with more than 450 locations in 32 states.

Smile Doctors has a rich history of developing and growing affiliated practices by providing tools and technology that allow their orthodontists to focus entirely on patient care, and we are continuously exploring collaboration with DSOs that share our vision of furthering the adoption of digital dentistry. Each DSO has a different strategy and business model. We're focused on working with and encouraging the DSOs aligned with our vision, strategy, and business model goals. Those DSOs that recognize the benefits of digital workflows enabled by our portfolio of products and services that make up the Align Digital platform, including increased practice efficiency and profitability, as well as delivering a better patient experience for shorter cycle times and proximity to their customers. Turning to Systems and Services, Q4 was another strong quarter with year-over-year revenue growth of 14.9%. On a sequential basis, Q4 Systems and Services revenues were up 5.2%.

In Q1 2024, we launched the iTero Lumina with orthodontic workflows as a new standalone scanner, or as a wand upgrade from our iTero Element 5D Plus scanner. Overall, we continue to be very pleased with the ongoing adoption of iTero Lumina scanner, and we're looking forward to building on its success with the launch of the iTero Lumina scanner with restorative capabilities. During Q4, we began a limited market release of our restorative software on the iTero Lumina scanner, and doctor feedback has been outstanding. Our iTero Lumina innovation represents continuous advancement in our mission to deliver unparalleled value to customers and dental professionals worldwide. Doctors can continue to purchase the current version of iTero Lumina scanner today, knowing that it will automatically update to the new version, free of charge, once it becomes available at the end of March.

With that, I'll now turn the call over to John.

John Morici (CFO)

Thanks, Joe. Now for our Q4 financial results. Total revenues for the Q4 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 2024 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 2024 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 2024 Clear Aligner revenues were favorably impacted by approximately $0.7 million, or approximately 0.1% from foreign exchange sequentially. Q4 2024 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 U.S. dollar unexpectedly strengthened in November and December. If foreign exchange rates in October had remained constant for November and December, then Clear Aligner ASPs 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 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 2024 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 U.K. 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 U.K. 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 aligners are shipped under each sales contract.

Q4 2024 Systems and Services revenues of $200.9 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 2024 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 2024 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. Q4 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 Q4 was 70.2%, down 0.1 points sequentially due primarily to lower ASPs and restructuring costs, partially offset by lower manufacturing costs. Clear Aligner gross margin for the Q4 was down one point year-over-year due primarily 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 or on a year-over-year basis.

Systems and Services gross margin for Q4 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 Q4 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 Q4 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 Q4 was an expense of $3.4 million, compared to income of $3.6 million in Q3 2024, 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 2024 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 Q4 was 26.3%, compared to 30.1% in Q3 and 28.3% in Q4 of the prior year.Q4 GAAP effective tax rate was lower than the Q3 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. Q4 GAAP effective tax rate was lower than the Q4 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 basis, our non-GAAP effective tax rate in the Q4 was 20%, which reflects our long-term projected tax rate. Q4 net income per diluted share was $1.39, down 0.16 sequentially and $0.25 compared to the prior year. Our Q4 2024 EPS was unfavorably impacted by a stronger U.S. 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 2024 net income per diluted share was $2.44 for the Q4, up 0.9 cents or 0.9 sequentially and up 0.02 year-over-year. Moving on to the balance sheet. As of December 31, 2024, cash and cash equivalents were $1,043.9, up sequentially 2 million and down $106.4 million year-over-year.

Of our $1,043.9 balance 188.7 million was held in the U.S. and $855.2 million was held by our international entities. During Q4 2024, 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 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 orthodontic-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 three days sequentially and up approximately five days as compared to Q4 last year. Cash flow from operations for Q4 was $286.1 million. Capital expenditures for Q4 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 $10-15 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 ASPs to be zero for 2025. We currently manufacture Clear Aligners in Mexico and ship them to the U.S., primarily for our U.S. 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 for Mexico shipments to the U.S.

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 U.S. from Mexico, we believe it still would be more economically viable to ship Clear Aligners from the U.S. or to the U.S. 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 $965-985 million, down sequentially from Q4, primarily due to the impact from foreign exchange rates 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 two 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 one 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 two 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 two 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 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 Q4 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 Align common stock during 2024, we concluded the year with no debt and approximately $1,044 million 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.

Joe Hogan (President and CEO)

Thanks, John. In closing, 2024 was a year of solid progress across the business. Record full-year total worldwide revenues of $4 billion. Record full-year total worldwide systems and services revenue of $769 million. Record teen shipments and growth in both teens and adult markets.

Record 130,400 doctors shipped to, 19.5 million total patients treated, with 5.6 million teens and kids. We ended the year with over $1 billion in cash and equivalents after repurchasing 1.5 million shares for $353 million. In another year where the dental industry is down and we continue to grow, I feel good about where we ended the year, and I'm excited to kick off 2025 with a team focused on building the innovations introduced in 2024 that drive efficiency and growth for practices and that are committed in delivering the best customer and patient experiences in the industry. I want to highlight just a few of the Align innovations that we introduced in 2024 that we believe will continue to drive adoption and utilization.

In January 2024, we unveiled a breakthrough technology, the iTero Lumina Intraoral Scanner, with 3x wider field of capture and a 50% smaller wand that delivers faster scanning, higher accuracy, and superior visualization for greater practice efficiency and with orthodontic workflows. We look forward to introducing at the end of Q1 2025 the iTero Lumina Intraoral Scanner with software capabilities to enable efficient restorative and ortho-restorative workflows to help general practitioner dentists deliver exceptional restorative outcomes. The iTero scanner is the front end of the Align digital platform designed to give doctors the capability to run simulations and communicate with patients so the patients can see their smiles and the time that it would take them to get that outcome. It's also a big part of our growth algorithm, and we've had good accretive margin on the iTero Lumina Scanner product since its launch.

We also started rolling out ClinCheck in minutes, delivering ClinCheck treatment plans based on doctors' built-in personalized treatment preferences for almost touchless digital workflows, which will expand to more doctors this year, bringing an unprecedented level of speed and customization to digital treatment planning. Changing the paradigm for how doctors can treat growing patients is one of our biggest opportunities as we continue to deliver innovations that help doctors achieve more with treatment at younger ages, potentially decreasing the amount of orthodontic treatment that younger and teen patients need overall. As we continue to commercialize the Invisalign Palate Expander System, Align's first direct 3D-printed device that provides doctors with a solution set to treat the most common skeletal and dental malocclusions in growing children.

We anticipate introducing the next in a series of direct 3D-printed devices with a pilot for Invisalign First direct-printed retainers in the first half of 2025. We also have Invisalign Mandibular Advancement with occlusal blocks now in limited market release, giving doctors and patients a better option for Class II correction in younger patients while simultaneously straightening their teeth. We're also excited about the future of digital orthodontics, focused on growth opportunities as a company while driving margin improvement and our unique ability to leverage aggregated and anonymized data from approximately 19.5 million Invisalign cases to continue to gain more knowledge about the science of orthodontics to move the industry forward. And while we're now in our 28th year, in the same way, we're just at the beginning. It's that motivating and exciting for the whole Align team. With that, I thank you for your time today.

I look forward to updating you on our continued progress over the coming quarters. Now I'll turn the call back to the operator for your questions. Operator.

Operator (participant)

At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one one on your telephone keypad. A confirmation tone will indicate your line is in a queue. You may press star one one again if you would like to remove yourself from the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question will come from Michael Cherney from Leerink Partners. Your line is open.

Michael Cherny (Senior Managing Director / Healthcare Technology and Distribution Equity Research Analyst)

Good afternoon, and thank you for a ton of detail already.

Maybe if I could just dive in a bit to the guidance, especially on the Clear Aligner side. Is there any way to give a little bit more of a breakdown as you think about the dynamics on volume versus price? I hear you loud and clear on the ASP impact from FX, but curious how to think about the growth dynamics on aligners as a whole, especially coming off of the mix of obviously easier comps in 2024 versus what's still an uncertain macro environment. Thank you.

John Morici (CFO)

Yeah, Michael, this is John. When we talk about the kind of give the picture for the total year, we're looking at volume for Clear Aligners at mid-single digits, and that's kind of how we look at that. It'll vary.

It varies like it does across different regions and different times of the year and so on, but we've looked at it that way, and that's the perspective that we have for the year. We were pleased with how we exited in 2024 with the volumes that we had, and that's the overall guidance that we have for the year.

Michael Cherny (Senior Managing Director / Healthcare Technology and Distribution Equity Research Analyst)

And just along those lines on the volumes, mid-single digits, obviously really solid number. How do you think about the competitive dynamics in the market now, and are there opportunities either in terms of other competitors exiting, or how do you think about the components of what drives that in terms of market dynamics, competitive dynamics, share gains, anything more to break down? That obviously strong number would be great as well. Thank you so much.

Joe Hogan (President and CEO)

Yeah, and Michael, it's Joe.

I think on the competitive dynamics, I don't see a big change in the dynamics when you look at 2024 and 2025. Overall, we feel our new innovation continues to put us ahead. Obviously, the Minute ClinCheck really drives our super users to a level of productivity they haven't had before. So I feel really good about our competitive ability all around the world, including China, including some specific areas about it. So as we move into 2025, I really feel that we're gaining momentum in that sense.

Operator (participant)

All right. Thank you. One moment for our next question. Our next question will come from Elizabeth Anderson from Evercore ISI. Your line is open.

Elizabeth Anderson (Senior Managing Director)

Hi, guys. Congrats on the quarter. Thanks so much for the question. Hi. I was wondering if you could talk about two things, maybe in regards to the Lumina and sort of the scanner business more broadly.

It looked like you obviously have the launch coming up in the first quarter. So if you could talk a little bit on sort of your expectations for that, maybe given what you've learned on the ortho side for Lumina. And then two, you talked about sort of the impact, obviously, of more leases and things like that versus perhaps capital equipment sales. Can you talk about sort of help us understand maybe on a unit basis how you're thinking about the growth in that business? I think that would be one thing that would be helpful. And then maybe if you could also help us sort of understand a little bit better that maybe some of the growth dynamics, particularly in North America and sort of DSO versus non-DSO customers. Thank you.

Joe Hogan (President and CEO)

Hey, Elizabeth, it's Joe. I'll take the first part of your question.

When you look at what we learned in the orthodontic release of Lumina, was that a product was everything we hoped it would be. I talked about the wider field of view, the speed. I didn't talk a lot about the optics, though. The image quality is fantastic on that product line. The lightness of the wand and all that was really important for the technicians that use that wand day in and day out because in the past, we had a lot of complaints in the sense of the heaviness and kind of bulkiness of the wands that are in the marketplace right now, particularly on the confocal imaging side. So as we move that into more of the restorative marketplace, remember we had a good take-up of GPs using that product line last year too.

This will complete the whole system for GPs because they can do the restorative work they had on it and not just the orthodontic side. So we're excited about it. We're looking forward to it. Obviously, we'll talk about it coming up at the IDS, and we look forward to launching it in March and then bringing it through Q2.

John Morici (CFO)

And as Joe said, kind of to your second part of the question, Elizabeth, look, this rounds out our portfolio. We've got a complete portfolio from the most advanced scanner and the latest with Lumina to all the other types of products that we have, all the way down to certified pre-owned. And so that portfolio is rounded out, but we also, as you mentioned, the leasing and other rental, we offer a lot of options for our customers.

Some customers want to buy, and they want that latest equipment. That's great. And they'll buy that new equipment through trade-ins or just add another scanner and so on. But some also don't want to put that capital up, especially in this environment. So we offer them a lot of different opportunities to lease that equipment, to use external financing that gets them at a good rate for external financing to purchase, or some just want to rent it. And so we feel like we can offer that customer any which way that they want to be able to utilize our equipment. And as we continue to release new products, we keep certified pre-owned in and so on. We're just expanding our base, which is helpful for our overall business.

Shirley Stacy (VP Finance of Corporate and Investor Communications)

Thanks, Elizabeth. Next question.

Operator (participant)

Thank you. One moment for our next question.

Next question will come from Glen Santangelo from Jefferies. Your line is open.

Glen Santangelo (Managing Director and Equity Research Analyst)

Yeah. Thanks for taking my question. Hey, Joe, I also wanted to follow up on this volume issue because it seems like in the Q4 and into 2025, you're forecasting some pretty decent volumes. And I'm kind of curious, could you put that in the context of where you think the overall ortho industry is now? Do you feel like you're kind of getting some share back? Because in 2024 and 2023, the theme was macro uncertainty, but you're not really talking about that anymore. And I'm just kind of curious if you think maybe the industry is getting a little bit better or some of these DTC offerings that maybe faded into the background. What's enabling you to improve your volumes, you think? And then I just had a follow-up for John.

Joe Hogan (President and CEO)

Yeah.

Yeah, Glen, that's a good question. I think we've been talking about stability for a while now too. And again, I think we stand on that platform also. Each one of these regions are different from what we've seen. We felt good about Europe in the Q4. We saw some momentum there. Felt reasonable about APAC in the sense I mentioned China and Japan and increases in Thailand and different in China, I mean, in different parts of the APAC region. When it comes to the United States, the orthodontic marketplace, Glen, has really been flat for the last three years. Now, I think we've made progress, good progress with the new products that we've had, but we've been challenging that segment. And I wouldn't call it so much competition as I would.

It's been a wires and brackets kind of regression in that marketplace because when doctors are seeing less patient throughput, they're looking to save margin, and it's difficult to really appeal to them with clear aligners when they're not at capacity in that sense. But counter to that, Glen, we've seen really good progress in GPs and good growth in GPs, not just in the US, but all over the world. And that's really helped us. And so remember, we changed our channel strategy years ago to make sure that we went to the GP channel with the GP sales force and Ortho with Ortho sales force too. And I think that's really helped us to give us insight into the industry and position our products properly for both those areas. So I hope that helps to answer your question.

I think our new technology too gives us a lot of confidence, specifically in that orthodontic channel in the sense of offering differentiation, those early patients that we talked about. We feel we have the three products I mentioned in my script. We feel we have something that's special in the orthodontic community in the sense of that younger patient piece. And you'll see us push that really hard as we move into 2025.

Glen Santangelo (Managing Director and Equity Research Analyst)

Yep. That's awesome. And John, maybe if I could just follow up with you on this ASP issue, right? I mean, obviously, everyone's focused on the fact that ASPs will be down, and you highlighted FX and you highlighted mix shift. I was wondering if you could just unpack that a little bit to tell us.

I'm sorry if I missed this exactly how much FX is playing a role here on that ASP number in 2025.

John Morici (CFO)

Yeah. Yeah. That's a good question, Glen. Overall, when we look at 2025 in terms of how we've guided, we have about two points of FX headwind on a year-over-year basis. It's just the strengthening of the dollar. We saw that as it came out of October, and it continues to be strong November, December, January. We're basically forecasting what we see now on a spot rate standpoint and expecting it to be strong. That impact is about two points unfavorable on a year-over-year basis.

Glen Santangelo (Managing Director and Equity Research Analyst)

Okay. Thank you very much.

John Morici (CFO)

One moment. One moment for our next question. Our next question will come from John Block from Stifel. Your line is open.

Jonathan Block (Managing Director)

Thanks, guys. Hey, Joe.

First one, the 1Q25 revenue guidance is down around 2% at the midpoint. The full-year revenue guidance is up low single digits. And I think some of that is the 1Q comp, I believe also the scanner timing, if you would, due to the Resto launch. But I think it's an important question, Joe. Can you talk about other reasons why the rest of the year you're arguably up, call it low to mid-single digits versus the down 2% in 1Q25, again, at the guide? And then I think what people are going to be worried about is, is there an embedded assumption that things pick up in the guide, or is it just sort of the moving parts again of the comp, the Resto launch, etc.? And I'll sort of pause there, and then I'll

Joe Hogan (President and CEO)

ask my follow-up. John, I'd say we obviously introducing the restorative scanner in March.

We don't get the full benefit of that in the first quarter. And you're accurate in a sense of reflecting that in your comments overall. I would say we're not talking about a build as we go through the year. I think you have to look at exchange and that whole thing. And John can explain that in the sense of how we've baked that in overall. But obviously, you have a full year of IPE coming in this year. We have the regulatory approvals for that going into Europe and different parts of Asia too, and we think we'll hit mainstream in that end too. And mandibular advancement with occlusal blocks too is another one that we think is going to be a specific grower for us also. I mean, that's how I'd pretty much tackle that, is that we have new technology rolling in.

You have the iTero Restorative coming in also. And John, what would you add to that?

John Morici (CFO)

Yeah. And we're not expecting, John, any real overall improvement in the macro economy. If it happens, great. That'll be good for the entire business. But we're not expecting an overall improvement there. We did see as we came out of Q4, I mean, just the 6% growth in volume in Q4. That's the highest growth that we've seen in three years on a year-over-year basis. So that's good to see. We want to continue to see that momentum. And like Joe said, we're doing everything we can with new products, new innovations, new ways to go to market to be able to continue that.

Joe Hogan (President and CEO)

Yep. No, we'll beat on EPS and guide it ahead on EPS for Q1.

Jonathan Block (Managing Director)

I get that. And then just second question.

I think, Joe, this one's for you, but for a couple of quarters now, at least two, maybe more. We've heard you detail, call it the faster growth from the DSOs, and so a couple of questions here. Joe, what does the DSOs call it as a part of your North American business, if you could just give us a rough number, but more importantly, the plays that you run with the DSOs, and we've heard of some of those, the marketing support, pardon, this is my language, not yours. They might be more sophisticated with your help. Are those transferable to the fragmented GP market, and if so, how long does that take to go ahead and manifest on your part? Because clearly, if you could extrapolate that faster growth to the individual practices, that'd be certainly a positive and something to get excited about.

So maybe your comments on, again, the percentage of their weighting of your biz, and more importantly, can you see yourself running the same plays with the individual practices?

Joe Hogan (President and CEO)

Hey, John, it's a great question. Really, first of all, I talk about it internally too. I look at DSOs as a force multiplier. They can actually take our technology, what we learn in the sense of efficiency, what we learn from the sense of brand, from a demographic standpoint on brand you can apply to. And they just have an ability to be able to disseminate that within their teams much better than doing that individually door-to-door like we do with our normal sales force, which is kind of obvious. But that doesn't preclude us from what we're taking to the DSOs in the sense of what we know and what they incorporate.

Our salespeople, many of them with us for many years, they understand that also. They just have to find the right orthodontist and the right general dentist who really want to implement those procedures in their marketplace. That's why I was talking about the sales kickoff the other day down in Dallas. And it said that we have the longest or the hardest last mile of any company I've ever worked with because you are calling on these individual family-driven practices. And not that they're stupid or anything like that. They're very smart, but they're not necessarily business-minded always. They're clinically minded, and it takes a while to gain their confidence and move it forward. DSOs help to accelerate that, John, is the best way I can explain that. John, you have anything on your end?

Jonathan Block (Managing Director)

Got it. Thanks for the color, guys.

Joe Hogan (President and CEO)

All right, John. Thanks.

Jonathan Block (Managing Director)

Thanks, John.

Operator (participant)

One moment for our next question. Our next question will come from David Saxon from Needham. Your line is open.

David Saxon (Managing Director)

Oh, great. Good afternoon, Joe and John. Thanks for taking my question. Yeah. Had a couple of follow-ups on the guidance for Clear Aligners. So mid-single digit volume growth for Clear Aligners. Joe, based on your answer to a previous question, it sounds like U.S. volume growth should probably be slower than international, but just wanted to confirm that's how you're thinking about it. And then on the ASP side, so down year-on-year for the full year, first quarter ASPs look to be down high single digits year-on-year based off of the first quarter ASP guidance. But you have this price increase starting in Q2. So just I'd love to hear how we should think about pricing in Q2 through Q4 on a year-over-year basis.

Joe Hogan (President and CEO)

Hey, David, I'll take the first part of your question, which, yeah, our forecast for next year does imply a slower U..S. than the rest of the world. And to me, we're just projecting what we saw in 2024 into 2025. But we don't have any data right now that would make us change that in some way from a consumer confidence industry or any kind of change in the last several quarters, I would say, that would be different going. As far as the ASPs go, John.

John Morici (CFO)

Yeah. Look, ASPs, they're heavily impacted with our business. Over 50% of it outside the U.S., they're impacted by a stronger dollar. And I just tried to make it very clear in terms of our guidance based on what those spot rates are as of now and saying this is how it's going to play out in the future.

Obviously, it changes, but at least give you a reference point to jump off of. So when you look at Q1, you'd see that ASPs will be down. It's a reflection of the foreign exchange, and that's the primary driver of that. It'll change as it goes through each of the quarters. I mean, by the end of the year, it kind of catches up. And that strength of the dollar that we saw in November and December won't have as much of a year-over-year impact, but in Q1, it has that impact.

David Saxon (Managing Director)

Okay. All right. That's helpful. And then maybe sticking with you, John. So operating margin down year-on-year in Q1, but guiding to expansion for the full year. So I'd love to just hear kind of the puts and takes that drive that ramp. And maybe it'd be great if you could talk about quarterly cadence.

Thanks so much.

John Morici (CFO)

Yeah. When you think of the op margin that we'll have, we did actions last year to be able to get our op margin in a place from a cost standpoint to be able to provide that margin accretion. Q1 is one where, as you start to ramp up, usually Q1 op margin is, on a rate standpoint, the lowest or one of the lower for the quarters as it builds as you go through the year. It's based on volume. As we have more volume coming through our facilities, we generate additional productivity, and that shows up. We have new products, as Joe described, with the Lumina restorative, different products where we're expanding out and so on that help us drive additional margin as we go through.

Joe Hogan (President and CEO)

So we've got the levers that we can pull and adjust as we go through the year to be able to generate that margin accretion on a year-over-year basis. And that is margin accretion that we talked about at 22.5%. That's despite unfavorable FX on a year-over-year basis. So you can tell some of that margin accretion that we're talking about, but it's all about driving productivity through volume that you have and being smart about the other investments that you're making.

David Saxon (Managing Director)

Great. Thanks so much.

Joe Hogan (President and CEO)

Thanks, David.

Operator (participant)

One moment for our next question. Our next question will come from the line of Jeff Johnson from Baird. Your line is open.

Jeff Johnson (Managing Director and Senior Research Analyst)

Hey, Jeff. Hey, thanks. Hey, Joe. How are you? Good afternoon, guys. So look, we're all dancing around kind of this 1Q, trying to understand it relative to the rest of the year.

The one thing I haven't heard, and maybe I just missed it, but you guys are talking about a 200 basis point headwind for the year from currency. I think that is pretty much the flow through to ASP as well, about a two-point headwind to ASP for the year as well on the Clear Aligner side. But I haven't heard you quantify Q1. My math and my currency math is terrible, but my math would put currency at almost a three, three-and-a-half-point headwind in Q1 to both ASPs and global revenue. Am I close on that? Is it bigger in Q1?

John Morici (CFO)

Yes. That's the right way to phrase it, Jeff. It is bigger just based on what the dollar was doing last year compared to this year. So there is a bigger currency effect in Q1 than on average for the year.

Jeff Johnson (Managing Director and Senior Research Analyst)

Ballpark? Am I close on that three, three-and-a-half?

John Morici (CFO)

Yep. Yep. You're close on that. Yes.

Jeff Johnson (Managing Director and Senior Research Analyst)

Okay. Okay. And then just my other question is really kind of the same kind of FX question, but on the gross margin side or sorry, on the company margin side, on the operating margin side. You're guiding to 70 basis points of year-over-year improvement at the op margin line on a non-GAAP basis. How much is currency weighing on? I don't care if it's gross margin or operating margin, however you want to provide the answer, but how much is currency weighing there? And then how much are the incremental direct fab investments potentially weighing this year on gross or overall margin?

Just, it seems like this could have been a year if currency neutral and you didn't have the direct FAB incremental investments, that we really would have started to see a recapture back towards those pre-COVID numbers. So just trying to understand all those moving pieces. Thank you.

John Morici (CFO)

Yeah. Jeff, when you talk about the FX impact on op margin, it's over a point. You're right. It's two points at revenue on a year-over-year basis, falls to just over a point on an op margin basis. So a large part of that falls through. So you're right. Calling a 70 basis point improvement year-over-year, that's despite having a point of op margin pressure from an FX standpoint. And then, of course, all the other things that we're doing to invest and so on, there's some offsets to that in terms of scaling up our growth platforms and so on.

But that's all in the number that we have at the 22.5%. So if FX was going the other way, you would see even more margin accretion. And we'll see how that foreign exchange plays out as we go through the rest of the year.

Jeff Johnson (Managing Director and Senior Research Analyst)

Understood. Thank you, guys.

John Morici (CFO)

Thanks, Joe.

Operator (participant)

One moment for our next question. Our next question will come from the line of Brandon Vazquez from William Blair. Your line is open.

Brandon Vazquez (Equity Research Analyst)

Hey, everyone. Thanks. Hey, guys. Thanks for taking the question. Joe, maybe for you on the IPE side, I think we're a little bit over a year after the launch of that product now. Curious if you could comment on maybe two things. One, what's the adoption curve looking like relative to your expectations now that we're about a year in?

And then two, is this a product that could maybe be a catalyst within the teen market to let you get that next incremental leg of adoption, given that that's kind of the sturdier end market that you guys are under penetrated in?

Joe Hogan (President and CEO)

Yeah. Hey, Brandon, first of all, I mean, the adoption curve has been good. As I mentioned in my script, it falls in Invisalign First. And Invisalign First is what we call a dental expansion product. It's kind of moving your teeth, but it's not moving bone in that sense. In this case, with IPE, we're moving bone. And so that's why the regulatory things and all that I mentioned that we have to go through each region in order to move that through. I feel really good about it. It's such a breakthrough product and a different product.

It takes doctors a while in a number of cases to become comfortable with it. We have wonderful feedback from patients in the sense of the comfort of the product line. And many of the patients or parents have gone through the Hyrax device and the wrench and those kind of things. And that makes parents a little more susceptible to wanting the Invisalign palate expander too. So I feel good about it. We've had some things too on the release. We didn't have full visualization from a scanning standpoint when we first started. There were some attachment pieces that we had to improve in the sense of how you attach. And then there's also some just wearability aspects about how long you wear this. But we've come over those, and we're making good progress in that sense. So I'm very optimistic about it.

It's great to see it really go from a regional standpoint to a global standpoint now. But we have a great one-two punch in that marketplace with Invisalign First. And that's also, Brandon, worth mentioning too. We're seeing many doctors, as they do the upper palate expansion, they use Invisalign First on the bottom in order to expand the teeth to make sure that they're in line with the sense of the bite that they're setting in their upper arch too. So it's good to see a synergistic effect on those two products. I hope I'm answering your question, but that's the momentum that we're talking about.

Brandon Vazquez (Equity Research Analyst)

Yep. Maybe as a quick follow-up on a separate note, international has been more durable for you guys than the Americas these days. Is that simply a result of just being earlier in the adoption curve and so things are doing a little bit better there? Or is macro international just doing a little bit better than the Americas? Trying to understand how durable international outperforming should be as we go into 2025, even if macro in Americas stays relatively muted. Thanks.

Joe Hogan (President and CEO)

Yeah. It's hard to be discrete on that answer. Overall, Brandon, I would say there's certain areas where obviously it's the initial penetration of our product line in a certain area, but I certainly wouldn't say that about Latin America. We've been down for many years, and we see continued growth in that sense. Middle East, Africa, and those areas too. Some of the places of Africa are new, and they'll hit a certain inflection point. But overall, I feel like we face better economies in those regions.

They didn't necessarily, I think, overextend their economies the way we saw in the Western world, which has affected a large part of Western Europe and also the United States, and specifically in Asia, outside of China, the other countries in Asia just came back out of COVID in better position than we were before, but some of those countries are penetration. Some of those countries are just expansion too, so I think overall, it's just a good mix there, Brandon, and I like that. It's good to have, and then as you roll out these new technologies, remember, it offers you new opportunities in those countries too so that expansion piece can continue.

Shirley Stacy (VP Finance of Corporate and Investor Communications)

Thanks, Brandon. Hey, operator, we want to try and get through the covering analysts that are still on the line. And if I can ask the folks to limit to one question so we can get through everyone's questions, please.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from the line of Jason Bednar from Piper Sandler. Your line is open.

Jason Bednar (Managing Director and Senior Research Analyst)

Hey, good afternoon. Thanks for taking the questions. I'll try and be quick here. Hey. I really want to ask on just maybe thematically reducing frictions. And I'm sorry, Shirley, I'm going to pack kind of a combo in here, but is there a way to reduce frictions within the teen channel and really address what has been maybe a bit of a challenge or sluggish ortho environment? Anything that you can do from a marketing initiative to really create better demand pull effect?

And then also on the friction side, maybe help with the business rationale of removing that $10-15 processing fee while neutralizing it with price increases. Has that pushed back on the processing fees? Has this caused friction with doctors that you're trying to remove? Thank you.

Joe Hogan (President and CEO)

Yeah. Hey, Jason, that's a good question. First of all, the friction in the teen channel is a lot of it has to do with the economics in an orthodontist's office today. We talked about the orthodontic offices in the United States haven't really, in North America, seen really any substantial growth in the last three years. And so again, they're individual practices, and I think they're trying to maximize their bottom line as much as they can. And so I think they're being very cautious from a business standpoint.

The friction you talked about with our processing fees and all, those are real. We had a pushback, not as much in Asia. We had a lot of pushback in Europe and the U.S. on that. And we decided to roll that back with that aggregate price increase. And we have good response from our doctors in order to do that. And that is a friction piece. And to me, it was an annoyance to the sales team to have to kind of fight through that when they had to talk through doctors and either joining what we were doing or having been with us for a while and explaining those things. So I think that's very helpful. John, I'm sure you have an idea too.

John Morici (CFO)

I mean, in the end, we want to focus on driving this business, driving this category, driving our products through, and less about some of the other minor things like this with processing fees and so on. So this was a good opportunity to kind of put this together, get it in the right place, and talk about the future of the business versus some of the other past expenses like this. Yeah.

Shirley Stacy (VP Finance of Corporate and Investor Communications)

Yeah. Thanks. Thank you.

John Morici (CFO)

Thanks, Jason.

Operator (participant)

One moment for our next question. Our next question will come from Steven Valiquette from Barclays. Your line is open.

Steven Valiquette (Managing Director)

Thanks, everyone. Thanks for taking the question. So obviously, there's a lot of puts and takes related to the evolving tariff situation.

One area I was just hoping to get your thoughts on is, given that there's a large competitor, Chinese-based, that some investors are watching closely, as that competitor tries to establish a larger market share in the U.S. market, really with this new political backdrop for the next four years under the new administration, I'm wondering whether some practitioners in the U.S. may be a little more hesitant to want to buy into the ecosystem of really any competitors that are headquartered or based outside the U.S., just given the heightened risk of trade wars, etc. So perhaps that could play into your hands favorably, at least in the U.S. market, which I think is still your biggest market. So just at a high level, just curious to get your thoughts on that potential dynamic. Thanks.

Joe Hogan (President and CEO)

Hey, Steven, it is just to confirm, the U.S. is still our biggest market in the world in that sense. Remember, I just talked about the orthodontic market not really growing for the last three years too. So we have had competition. Obviously, we know that your comments really refer to AngelAlign or maybe some other Chinese suppliers coming in. I think overall, you first win with customer service, and you win with technology, you win with relationships. And that's what our sales force is really talking about. We've felt that the Chinese have come in on unsustainable prices. When you look at, we kind of know the prices you have to charge in order to have a decent return. And we think that always takes care of itself one way or another. And we've seen that with other competitors in the marketplace also.

So I can't really speak for 10,000 orthos or GPs that are around the United States and how they feel about international politics or anything they do. But our job is to make sure that we keep our heads down, we deliver the best technology, best productivity, the best brand, all those things, and make sure we win in the marketplace. And we'll let that other piece decide for itself.

Steven Valiquette (Managing Director)

Okay. Got it. Thanks.

Joe Hogan (President and CEO)

One moment for our next question. Our next question will come from Kevin Caliendo from UBS. Your line is open. Thanks for the question.

Dylan Finley (Equity Research Analyst)

This is Dylan Finlay on for Kevin. Thanks for the question. A quick question on direct fabrication. You guys previously have talked to potentially commercializing products this year, I believe starting with a retainer product.

So any update there on commercialization of products and maybe detail on the P&L too into both revenue and investment into costs into the manufacturing capabilities that you can call out?

Joe Hogan (President and CEO)

Hey, first of all, I'd say our IPE device is 3D printed, but it's not the Cubicure process. It's not the resin that we'll use for the Cubicure process. As I mentioned in my script, we will begin just with limited release and Invisalign First Retainer. Invisalign First Retainer is a very complicated. It has to have a high modulus. It has to have a huge amount of variability in the sense of how you structure that depending on where that person's arch is at that point in time. It's the perfect fit for us as we try to ramp up and we ramp up our new Cubicure process with our new resin too.

So again, like I mentioned, you'll see just the beginning of that in the first half of this year. And then the second half of this year, we should begin to get ourselves more ready for a general release in third and Q4s of that product line. That's the beginning. After that, we'll move into what we call mandibular advancement. But any kind of aligners that have auxiliary types of things that you would have to have printed on those or difficult cases where wall thicknesses need to be different in some ways. So yeah, we're really excited about the efficiency of that particular technology, but also the design and incredible design capability and design freedom orthodontists will have in order to do that. So that's about as well as I can do for you now.

Shirley Stacy (VP Finance of Corporate and Investor Communications)

Thanks. Next question, please.

Operator (participant)

One moment for our next question.

Joe Hogan (President and CEO)

Our next question will come from Michael Ryskin from Bank of America. Your line is open.

Michael Ryskin (Research Analyst)

Hey, thanks for scooting me in, guys. Just one quick one for me, hopefully. John, appreciate the commentary you had on tariffs to Mexico and realized there's still a lot of moving pieces, but I just want to make sure I understood that. Just to comment on transfer prices, I mean, I hear you on overhead and freight costs, treatment planning not being included. How should we think of that as a percent of your COGS? I think if you just go through the P&L, it's something like $375 COGS per case, roughly. Is the transfer how much would be impacted? Is it 50% to 75% of that? And just walk us through the transfer price math just so we can game plan.

John Morici (CFO)

No, it's a good question. You're right.

I tried to give a perspective of, look, you start with COGS, and then there's some parts of COGS that have nothing to do with what we're doing in Mexico, freight and treatment planning and other things, specifically the value add and the work that's being done there, then that transfer price. I guess to put it in perspective in terms of, I know there's been a lot of people thinking about what this could be just based on your question and so on. But on an average month, that tariff, if it's at 25%, might impact us $4 - 5 million of cost, or that might be the cost perspective of this. So that gives you an idea of how this kind of fits into this.

This is something, as I said in my prepared remarks. Look, if at that amount of tariff, 25%, if that ever was implemented, it's not a big enough cost on tariff for us to switch some of the manufacturing and move from perhaps manufacturing in Mexico to Poland. But we'll evaluate that as we go forward. But I just want to kind of size that for you. We'll evaluate as we go forward. We'll understand more as these days come about. We hope there's not anything, but we have a perspective in terms of what it means from a cost standpoint, and we will make decisions based on that. And that'll impact us what we do in the short and long term.

Michael Ryskin (Research Analyst)

Thank you. Thanks.

Shirley Stacy (VP Finance of Corporate and Investor Communications)

Operator, we'll take one last question.

John Morici (CFO)

One moment for our next question. Our last question will come from the line of Erin Wright from Morgan Stanley. Your line is open.

Erin Wright (Health Services Analyst)

Great. Thanks for squeezing me in. Just to follow up on that last one, just to clarify, so there's no buffer kind of embedded in your guidance as it stands today from a tariff perspective and just on China, just the environment there, not necessarily from a tariff perspective, but just more so from demand trends, landscape in China from a competitive standpoint, I guess expectations for the balance of the year, if you could touch on those. Thanks.

John Morici (CFO)

Oh, that's great, Erin. I'll take the first one on tariff. We're not in our forecast and what we've given for guidance at that margin of 22.5%. There's no additional new tariffs that we've contemplated in that number. We'll see how things come about.

But in the framework, if there is a tariff, and it should be 25% from Mexico to the U.S., it's $4-5 million, depending on volume per month from an expense standpoint. And then on China, I don't know if you want to give Joe any other perspective on kind of the market there.

Joe Hogan (President and CEO)

I'd say the China market, we were pleased with Q3. The Q4, obviously, is always less in China what Q3 was. There was nothing in that quarter that made me think that anything was different in China in terms of the trajectory of the business from what we've seen. So overall, I'd call China stable right now.

Erin Wright (Health Services Analyst)

Okay. Thank you.

Joe Hogan (President and CEO)

Thank you. You're welcome.

Operator (participant)

And I will now turn the call over back to Shirley Stacy for any closing remarks.

Shirley Stacy (VP Finance of Corporate and Investor Communications)

Well, thank you, everyone, for joining our call today.

We appreciate it. If you have any follow-up questions, please reach out to Investor Relations. We look forward to seeing you at our next industry events, including the Chicago Midwinter Dental Show coming up here later in February. Hope everyone has a great day.

Operator (participant)

This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation. Everyone, have a great day.