Align Technology, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Q2 Results Overview: Mixed results with Systems and Services up but clear aligners down. Consumer interest in Invisalign strong, but conversion issues led to lower case starts. Impacted by U.S. tariff turmoil, less affordable financing, and dental industry trends of reduced patient traffic and elective procedure hesitancy.
• Segment Details: Systems and Services revenue growth due to iTero Lumina wand upgrades and favorable foreign exchange. Clear aligners had volume growth in some regions but declines in Americas. Achieved record number of doctors shipped to in Q2.
• Business Actions: Plan to streamline operations, realign business groups, reduce global workforce, optimize manufacturing footprint, and dispose of certain manufacturing assets. Addressing U.K. VAT appeal and U.S. tariffs, with adjustments to invoices and prices for clear aligners and retainers.

Segment Performance

• Systems and Services: Q2 '25 revenues were $207.8 million, up 13.9% sequentially and 5.6% year-over-year. Driven by stronger scanner system revenue and favorable foreign exchange, though offset by lower scanner system sales. The iTero Lumina Scanner makes up a majority of the iTero Scanner systems mix.
• Clear aligners: Q2 '25 worldwide volumes were up slightly sequentially and year-over-year. Year-over-year, growth in APAC and EMEA regions offset Americas decline. Product-wise, Invisalign First, DSP touch-up cases, palate expander, and retention contributed to growth. Americas volumes down slightly but saw growth in Latin America teen segment. EMEA and APAC regions saw volume growth, with EMEA driven by adult segment and APAC by China's teen and kid patients.

Guidance

• Q3 2025: Worldwide revenues expected to be $965M-$985M, down sequentially. Clear aligner volume down due to seasonality, ASPs slightly up from favorable foreign exchange but offset by product mix shift. Systems and Services revenues down sequentially due to seasonality.
• Fiscal 2025: GAAP operating margin expected 13%-14%, non-GAAP slightly above 22.5%. Incurrence of onetime charges of $150M-$170M in second half. Capital expenditures $100M-$125M.
• Fiscal 2026: Expect GAAP and non-GAAP operating margins to improve by at least 100 basis points year-over-year.

Risks

• U.K. VAT Appeal: HMRC appealed VAT exemption ruling for clear aligners, impacting invoices and prices for U.K. customers from August 1, 2025.
• Macroeconomic Uncertainty: Tariffs, inflation, interest rates, and consumer confidence affecting demand for clear aligners and new iTero Scanning Systems.
• Manufacturing Restructuring: Onetime charges from write-down of assets, accelerated depreciation, and restructuring, with potential disruptions to manufacturing operations.

Question and Answer Q: Elizabeth Anderson on case conversion and brackets/wires.

A: Joe Hogan discusses Q2 conversion issues, noting June didn't materialize as expected, and orthodontists using brackets/wires due to inventory and profitability concerns.

Q: Jon Block on Q3/Q4 guidance.

A: John Morici talks about Systems and Services growth from full scanner systems and clear aligner volume growth in second half with products like Invisalign First.

Q: Jeff Johnson on restructuring and manufacturing.

A: Joe Hogan explains internationalizing production, retiring less productive technologies, and moving closer to customers to lower transportation costs.

Q: Steven Valiquette on software volume and market share.

A: Joe Hogan states no significant competitive shifts, but notes Chinese competitor pressure and a competitor raising prices not seen as a dynamic.

Q: Jason Bednar on patient volumes and buckets.

A: Joe Hogan and John Morici discuss reluctant consumers and doctors pushing patients to brackets/wires, with a mix of potential volumes that may release in the future.

Q: Kevin Caliendo on strategic focus on GP vs ortho.

A: Joe Hogan highlights Align's focus on GP with dedicated sales force and products like iGo, emphasizing different workflows in GP practices.

Q: Michael Ryskin on Analyst Day and future outlook.

A: Joe Hogan states they stick to the vision from Analyst Day, projecting growth despite short-term setbacks and focusing on driving conversion and consumer confidence.