ALGN - NASDAQ

Good day, and thank you for standing by. Welcome to the Align Technology First Quarter 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Please go ahead.

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 2 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 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 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 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

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 the -- each sales contract. Q1 Systems and Services revenue of $182.4 million were down 9.2% sequentially, primarily due to lower scanner systems revenue -- revenues 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 were 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, System 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 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 onetime 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 -- $275 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 the -- 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 key condition to be considered exempt from VAT. This outcome reaffirms our commitment to enhancing patient access to oral health, 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 for 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 Israel 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 -- Systems and Services year-over-year 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. Joe?

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 at iTero Lumina. All of us are aware of the global economic uncertainty and the headwinds that tariffs or changes in the 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 2 key variables: Doctor and patient efficiency. Less patient chair time and fewer patient visits increases 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 combines 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. Operator?

[Operator Instructions] Our first question will come from the line of Brandon Vazquez from William Blair.

Congrats on nice start of the year here. I thought maybe just to start, I 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?

Brandon, 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.

Our next question comes from the line of Vik Chopra from Wells Fargo.

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.

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.

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.

[Operator Instructions] Our next question will come from the line of 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 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.

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

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 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?

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.

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 1 question about ASPs this quarter and then 1 question about ASPs going forward. Hopefully, that's all blended, it counts as 1 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 FX is that impact that we have on a year-over-year basis. So we have unfavorable FX. I mean, on a year-over-year basis, the FX on the overall company is 3.1 points. And then remember, we started the VAT -- withholding the VAT a year ago in Q1. So on a year-over-year basis, it's already in the baseline numbers from last year.

Okay. And then on going forward, currency should switch to a positive contributor to ASPs. You mentioned the 310, I thought that was the top line impact, but just is that the flow-through impact ASPs as well, the 310 headwind in the first quarter? But going forward, FX switches to a positive tailwind. Any -- at spot rates, can you just kind of put us in the ballpark there? I can do my math later tonight, but I would love to hear your opinion there. And then if the HMRC doesn't appeal, can you reraise those U.K. prices? Would that actually be a contributor? Or do you stick at these prices? You just don't have to pay that VAT -- the providers don't have to pay that VAT tax. I guess, does that -- could that potentially switch to an ASP tailwind? And then lastly, just MAOB, the Mandibular Advancement blocks. I think I was hearing that that's going to be $100 add-on charge. If we start mixing more and more MA cases, does that theoretically then drive a little bit of ASP tailwind the way IPE and DSP is creating a little bit of ASP headwind right now?

Okay. Let me try to take these 3 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 have to hear back on whether HMRC will appeal and what they do. We have a lot of flexibility to that if we win. Either they don't appeal or win an appeal, we can always make changes to our discount and not discount as much. And if we do that, then that gives us a benefit in ASP going forward. That has not been contemplated in our forward-looking ASP. I'm just kind of taking the U.K. VAT impact completely out from a forecast. But it does give us flexibility, depending on what HMRC decides to do or if it gets -- works its way through. 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.

[Operator Instructions] Next question comes from the line of Michael Cherny from Leerink Partners.

Congrats on a really nice quarter in the guidance. I just want to make sure we have all the pieces right. I'm not going to do as much mental math as Jeff, names a little slower there. But in terms of the margin uptick that you now expect, nice margin expansion of the year, how much of it do you -- would you accrue to kind of better revenue expectations on an organic basis for operational changes? I know we've spent a lot of time talking about the ASP regarding the impact from FX there, but anything else you can allude to relative to the operating margin drop down, how much of it has been within your control versus how much is market conditions would be great.

I think when you look at our margin expansion -- and like I said in the prepared remarks, that's still net -- so 70 basis point improvement in op margin from 2024 to 2025 with the known tariff impact that we would have now. And where we're seeing the expansion and improvements is continuing to improve our manufacturing efficiencies with volume, with material savings, logistical savings, things that we talk about from an innovation standpoint when we do touchless ClinCheck, a lot of less activity for us, as well as some of the new products that we have that are at good margins. Some of them higher ASP like we talked about with MAOB and so on. 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 1 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 the line of Jason Bednar from Piper Sandler.

I wanted to first start on two financing topics. We saw higher rates, credit denials were an issue over the past year or so. You've got a new preferred financing partner in HFD. Just curious if you're seeing that help resolve any of the challenges with consumers early on in that relationship? And then on the provider side, John, I think you said that you attributed the rise in DSOs to expanding financing or better favorable terms to practices. I just want to understand what's going on there, if you could double-click, just -- to be blunt, it's a pretty big increase in DSOs for a policy you've had in place for multiple years. So just wondering what's changed just in the last few months that would materially shift that line higher?

Yes. I think really, you highlighted kind of the components about how people pay in general. So you have some patients that just paid directly, and they paid 100% of the cases that -- the treatment that they want. So that happens in many markets, and that continues. Maybe it's less of that because of some of the pressures that they might be facing. So the other two ways that HFD patients will pay is some will utilize some of the doctor financing. So they'll kind of pay as you go through the doctor. That's where really it helps to have favorable terms with those doctors so that we can provide a little bit a longer time for them to pay. And we continue that effort so that those doctors can take a little bit more time to pay us back so that they can use their balance sheet or their working capital to help kind of that patient financing that they'll provide. And then the third way is external, and HFD is 1 of them. There's 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 -- may be facing 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'd say we haven't seen anything material in that sense it changed so far. And I can't really speak of our -- most of our competitors' supply lines. It's a lot of intricacies in the sense of manufacturing whatever. But obviously, some of them are going to be very disadvantaged. We don't know to what extent. But we just continue to operate in the marketplace, focus on what we can focus on, like I mentioned, our product capability, our digital platform, iTero Lumina and just the efficiencies that we really can gain with doctors. So we'll let the tariffs kind of take care of themselves. We'll see how that goes. But we really feel good about our position in it, and we'll continue to execute.

[Operator Instructions] Our next question will come from the line of Steve Valiquette from Mizuho Securities.

So one of my questions was just answered on the tariffs. I think I'll just hold off on that one. But one of the things that you mentioned, you said that you assessed the potential impact of China's retaliatory tariffs and you believe you're able to mitigate the tariff exposure through adjustments in your supply chain. I guess my high level thought was that if you're manufacturing in China for the Chinese market, you would essentially have 0 impact from tariffs. But -- so I'm not sure if I'm reading too much into your wording there, but just hoping that you can provide a little more color on the dynamics on making adjustments to your supply chain?

Yes, you're right, Steve. From a product movement between China and the U.S. and vice versa, there's no movement across it. There are some raw materials that -- for our China manufacturing location, there are some raw materials that come from U.S. as well as other places. That's the piece that we're adjusting from a supply standpoint so that it should not impact us from a tariff standpoint.

[Operator Instructions] Next question will come from the line of Elizabeth Anderson from Evercore ISI.

Thanks so much for the question. So I see what you're saying about the 2Q guidance, and I understand what you've been saying in some of the math about the FX slip in things. You're talking about in the 2Q guidance, cases, volume being up sequentially. Can you set us -- but obviously, a lot of the 1Q results happened sort of BT, before tariffs. Can you sort of talk about the demand? Are you starting to see any impact on demand? Would you characterize the demand since sort of the tariff announcement as broadly stable? Like, I guess, any sort of color you could help provide on that would be helpful just as people kind of put through the puts and takes of the current macro choppiness. And then I have a follow-up.

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. And as a follow-up, obviously, you've launched the restorative iTero at IDS, you're at lead in the quarter. So I would assume that there's almost no benefit in the first quarter from that. Can you sort of help us think through sort of the uptake for that and sort of how you expect that based on sort of prior launches to come across as you sort of launch the new products like the -- with the Lumina ortho version last year?

The second version is a restorative scanner. Obviously, as you know, Elizabeth, and so it's broadening a GP segment that we're focused on right now. Obviously, we'll deliver to our channels, so it will deliver globally. We feel really good about some of the capability of that from a storage standpoint. It's -- we're seeing images right now that -- most of these images will go to labs, and it's a restorative procedure. And we're pretty excited about the degree of detail and specificity that Lumina has because of its multiprojection type of a system. So I can't tell you what the exact growth is going to be. I can tell you we'll take it to the marketplace. We'll take it from the lab side and the GP side. And we feel really good about our competitive positioning. Much stronger we feel in the restorative way than some of our scanners in the past. I hope that helps.

[Operator Instructions] Our next question will come from the line of 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? And maybe 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?

First of all, from a teen conversion standpoint, I wouldn't say we're hitting critical mass or something like that. But I mean, what you see is in that preteen or kids stage, we do have a very strong portfolio in that Phase I area that orthodontists talk about. Obviously, they're excited about it because there's a group of products that are much simpler from a patient standpoint, a lot less painstaking, I'd say, than before. And so we see, really all over the world, a good uptake and interest in those product lines as we expected. And I'd say that includes Mandibular Advancement, that also happens. So it will take time for that penetration piece. There's nothing about this market that moves really quickly in the sense it's an individual doctor's office piece by piece all over the world, but we certainly feel really good with the momentum of those 3 products in general in kids. Overall, from a -- when I look around a world right now, I just think from a -- we have good momentum, like I mentioned before, in every region that we've had. We haven't seen this since 2021. The teen growth overall being double digits is terrific. So the penetration rate is improving. But I think we have to take this thing quarter-to-quarter and report to you on it. I hope that helps.

[Operator Instructions] Our next question will come from the line of 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 what we saw in the first quarter, obviously, we're looking for that is there's some kind of consumer backlash. We haven't really experienced that at all. We had a good quarter in China across the board. And so as far as where we stand today, we haven't seen that kind of an issue. And again, I think we're -- we're an in-China, for-China type of company there, too. And then obviously, we're a Western company, but we don't deliver from a Western sense. We deliver within that country, the technology, the manufacturing, the treatment planning and all those things. And so it's very local in the sense of how we operate there.

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. There's -- with the FX, favorable FX, there's a slight improvement in our op margin as a result of that. But we have that as well as being able to offset some of the tariffs and so on. So that's the components that show up in op margin. But we're pleased with the start of the year in terms of our op margin. We're showing -- guiding to sequential improvement into the second quarter. And if FX rates stay stable as they are now, we will end up with a good accretive op margin for 2025.

Okay. And then a quick one, if I could squeeze in a third, just sort of a technical question. Some of the disclosures, you mentioned you're not giving DSP anymore. It looks like -- unless I'm missing it, you're not giving Americas versus international Clear Aligner net revenues. Is it just sort of the new disclosure going forward? Is that something we'll find in the 10-Q? Or just sort of what's the rationale behind that?

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.

[Operator Instructions] The next question is come from the line of Kevin Caliendo from UBS.

Thanks for getting me in, I appreciate it. I want to go back -- I want to go back to the ASP question. It was down 8%. 3% FX, I think, is how to think about it, which would imply that between discounting and mix, it was down sort of 5%, right? And I don't think that any of your expectations are going forward that ASPs are going to decline 5% to perpetuity. So what gets better, in your minds, between either mix, either customer mix or product mix or discounting programs? Or are you anticipating -- and I don't know that I've contemplated this until right now. But is there -- it used to be every July, there would be price increases. Are you thinking that you have the ability to do that, broadly speaking? And that helps. And I guess it's a short-term question, but it's also sort of a long-term question when we think about the ASPs because if we're going to get back to sort of the kind of growth that we think the business can do it, we don't want ASP to be a huge overhang in that on the Clear Aligner side?

Yes, I think you have to look at it when you think about it, Kevin, where we're growing. Certain countries grow faster. They're just at a lower list price product that they have there or some of the product growth that we have is lower. And we certainly saw some of the shift where we starting this year, have introduced DSP in several markets and other new products with IPE and some of the other clubs that we've had, whereas we didn't have those in the past. So I think some of it is just the products and the locations that impacts the mix. And then you see as doctors, we sell to more and more doctors, record number of first quarter doctors that we sell to. Many of these doctors that come in are just -- they're at an ASP product, a list price that are -- maybe not the comprehensive and they're lower list price type products. But that's the expectation that you have. We have things that we can be able to mitigate with some of the new products we have, some of the additional pricing like we have on MAOB and others to be able to get us to that stability in ASP. And then, of course, as you work your way down the P&L, we're very mindful of making sure that gross margin is accretive and being able to drive the gross margin and ultimately, to op margin. And that's what we look at as we work our way down the P&L.

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, and thank you, everyone, for joining us today. As a reminder, 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, you visit our website, aligntech.com, and that -- or you can contact Investor Relations. If you have any other questions, we look forward to hearing from you. Thanks, and have a great day.