ALGN
#I'm very pleased to be here
Let's review our fourth quarter financial results
The total company revenue for the fourth quarter was $293.2 million, up 5.2% from the prior quarter and up 27.3% from the corresponding quarter a year ago
On a constant currency basis our reported Q4 revenue was reduced by approximately $3 million, both sequentially and year-over-year as a result of foreign exchange rate fluctuations due to the strength of the U.S
dollar
Fourth quarter clear aligner revenue of $251.5 million which now includes both Invisalign and Smile Direct Club aligner revenue was up 3.2% sequentially reflecting growth of Invisalign volume partially offset by lower Invisalign ASPs
Our Q4 shipment volume and revenue to Smile Direct Club were immaterial to the quarter
Our year-over-year clear aligner revenue growth of 17.5% reflected Invisalign case volume growth across all customers' channels and geographies
Q4 Invisalign ASPs were down sequentially $50 to ---+ from Q3 to about $1,230 reflecting higher promotional activity and the impact of foreign exchange rate
On a year-over-year basis Q4 Invisalign ASPs were down approximately $20, primarily due to promotional activity and again, the impact of foreign exchange rates which was partially offset by price increases
For the fourth quarter total Invisalign shipment of about 190,000 cases were up 6.9% sequentially refracting growth primarily from our EMEA and North American customers
Year-over-year Invisalign case volume growth was 18.5% driven by growth across all regions
For North American orthodontists, Q4 Invisalign case volume was up 3.2% sequentially and up 20.2% year-over-year
For North American GPs, case volume was up 9.1% sequentially and up 9.5% year-over-year
For international doctors, Invisalign case volume was up 9.1% sequentially and up 25% year-over-year reflecting continued expansion of our customer base, as well as increased utilization
Worldwide Invisalign utilization in Q4 was a record 5.2 cases per doctor, up from 4.9 in Q4 last year
North America ortho utilization was a record 11.3, up from 9.9 in the prior year
North America GP utilization was 3.2, slightly up from 3.1 in the prior year
And international utilization was 5.0, flat from Q4 last year as we continue to expand our customer base
In Q4 we added 3,700 new Invisalign doctors worldwide of which 1,420 were new North American doctors and 2,280 of which were new international doctors
This compared to 2,615 in Q3 and 2,670 total doctors trained in the same quarter last year
Note that the total number of doctors trained in Q4 includes 670 Invisalign Go doctors in EMEA that were recruited over the course of the year
Our scanner and services revenue for the fourth quarter was $41.7 million, up 19.3% sequentially and up 156.8% year-over-year
Moving on to gross margin; fourth quarter overall gross margin was 75.1%, flat sequentially and up 0.1 point year-over-year
Clear aligner gross margin for the fourth quarter was 77.5%, down 0.2 point sequentially, primarily due to lower Invisalign ASPs partially offset by cost leverage from higher volume
Clear aligner gross margins were down 0.4 point year-over-year primarily due to increased aligner's per case as we continue to treat more complex cases
Q4 gross margins for our scanner segment was a record 61%, up 3.9 point sequentially and 23.2 point year-over-year, both the sequential and year-over-year increases were primarily a result of higher ASPs and lower manufacturing costs of our iTero Element scanner relative to our previous scanner
Q4 operating expenses were $151.9 million, up sequentially by $4.8 million or 3.2%, primarily related to increased employee headcount which was partially offset by lower media cost and foreign exchange rate impact
On a year-over-year basis Q4 operating expenses were up 33.8% reflecting increased headcount and continued investment in our go-to-market activity, each critical to the growth of business
Our fourth quarter operating margin was 23.3%, up one point sequentially and down two and half point year-over-year
This sequential increase in operating margin related primarily to OpEx leverage from higher volumes and revenue
On a year-over-year basis decreased operating margin primarily reflects higher OpEx as we've grown into business
On a sequential and year-over-year basis, Q4 operating margin was minimally impacted by foreign exchange rates as we have a natural hedge between our revenue and operating expenses
With regard to our fourth quarter tax provision, our tax rate was 19.8%, up by approximately 1.4 point compared to Q3 of '16. Recall that Q3 was benefited by a change in our corporate structure as part of our ERP implementation
Commencing in the fourth quarter we also began to find aligners to Smile Direct Club
Revenue and cost for this activity are included in our operating profit and reported results although they were immaterial to the company
Additionally, we also report our share of Smile Direct Club's losses below operating margin in our tax provision and is entitled equity in losses of investee, net of tax
This Q4 loss, net of tax was approximately $1.2 million or $0.01 per diluted share
Fourth quarter diluted earnings per share was $0.59 compared to $0.63 reported in Q3 and $0.60 reported in the same quarter last year
Fourth quarter EPS was unfavorably impacted by a stronger U.S
dollar which amounted to approximately $0.08 per share, primarily due to the net realized foreign exchange losses related to the revaluation of certain balance sheet accounts addressing unrealized foreign exchange losses included in other income and expense
In conjunction with the implementation of our new international corporate structure in July we changed the function of currency of our Netherlands entity from euro to U.S
As a result, monetary balance sheet accounts are revalued into U.S
dollars and any impact from that is charged to the P&L
Prior to this change these impacts were charged to the balance sheet
We have now changed our processes to limit our exposure and the impact of these kinds of currency movement which we believe should not have nearly as large of an impact on earnings going forward
Moving on to the balance sheet, as of the fourth quarter cash, cash equivalents and marketable securities including both short and long-term investment were a record $700 million
This compared to $678.7 million at the end of 2015, an increase of approximately $21.3 million
Of our $700 million of cash equivalents and marketable securities, $241 million was held by the U.S
and $459 million was held by our international entities
Q4 accounts receivable balance was $247.4 million, up approximately 1% sequentially
Our overall DSA ---+ DSO was 76 days, down two days sequentially and up 14 days year-over-year
The year-over-year increase is a result of our new ERP system implemented in July 2016 and other related systems that impact the timing of our customer collective
As we indicated last quarter, we anticipate that our DSOs will remain above our historical average for several quarters as we work through these changes
Cash flow from operations for the fourth quarter was $81 million and free cash flow for the quarter defined as cash flow from operations less capital expenditures amounted to a record $66.8 million
Capital expenditures for the fourth quarter were $14.2 million, primarily relating to equipment purchases or additional manufacturing capacity as well as building improvement
During the fourth quarter we repurchased approximately 0.4 million shares of stock for $38 million under that April 2014 repurchase plan
Subsequent to year end we completed this plan, we purchasing the remaining $3.8 million
We still have $300 million available for repurchased under the 2016 repurchase plan which we announced last April
Before we move to Q1 outlook, I would like to make a few comments on the full year 2016 results
In 2016 we shipped a record 708,000 Invisalign cases of 21.5%
This reflects 32.4% volume growth from our international doctors and 16.4% volume growth from our North American doctor's
Shipments of iTero scanner were up more than three times over 2015 to nearly 4,000 units
Total revenue was a record $1.1 billion, up 27.7% year-over-year
Full year operating income of $248.9 million or 23.1% of revenue, free cash flow was $177.1 million
For the year we repurchased 1.1 million shares of Align stock for $96.2 million
In 2016 diluted EPS was $2.33. With that let's turn to our business outlook and the factors that inform our view
Starting with demand outlook; for our international market expect seasonally slower period for APAC with the Lunar New Year and for EMEA with winter holiday and vacation
For North America, seasonally up GP and Ortho
For our scanner business, Q1 capital equipment purchases are seasonally lower
With this as a backdrop we expect the first quarter to shape up as follow; Invisalign case volume is anticipated to be in the range of 200,000 to 203,000 cases, up approximately 22.2% to 24% over the same period a year ago reflecting continued strong demand across all channels and region
We expect Q1 net revenues to be in the range of $295 million to $298 million, an increase of 23.6% to 24.8% year-over-year with gross margins in the range of 74.2% to 74.5%
We expect Q1 operating expenses to be in the range of $162.5 million to $164.5 million, up quarter-over-quarter, primarily due to the increased headcount and increased marketing expenses
Q1 operating margin should be in the range of 19.1% to 19.3%
Regarding our tax rate; at the start of 2017 we adopted accounting standards update entitled improvements to employee share based payment accounting under this new standard excess tax benefit and deficiencies associated with employee share-based payments are no longer recognized as paid in capital on the balance sheet but instead recognized directly to income tax expense or benefit in the income statement for the reporting period in which they occur
Under this new standard we expect our Q1 effective tax rate to be approximately 1% to 2% which includes $12 million in extra tax benefit
We estimate the Q1 impact of the Smile Direct Club transaction will reduce earnings per share by $0.01 per diluted share, and diluted shares outstanding should be approximately $81.3 million exclusive of any share repurchases
Taken together, we expect our Q1 diluted earnings per share to be in the range of $0.64 to $0.67 which includes approximately $0.14 of excess tax benefit
Finally, it should be noted that our Q1 CapEx will be larger than normal as we recently entered into a purchase agreement for the new ---+ for our new facility in San Jose, California
Accordingly Q1 CapEx should be approximately $70 million to $75 million
Now let me turn our view to the full year
We anticipate 2017 revenue growth to be above the midpoint of our long-term operating model range of 15% to 25%
We also expect Invisalign revenue and volume growth to be at or above midpoint of that model
As for our scanner business, recall that 2016 revenue and volume growth significantly benefited from the unfilled backlog carried over from 2015. And while we expect the scanner business to do well and continue to grow, we would not expect the same rate of growth of volume and revenue as we saw in 2016. We expect operating margins to be flat to slightly up over our 2016. Those investments will include geographic expansion both in countries and markets we already serve, as well as expansion into new territories including Latin America and India
And aggressive direct to consumer advertising campaign targeted directly at teen, international expansion of the Invisalign value chain including order acquisition and treatment planning to get closer to our customers as <UNK> mentioned
Commercialization of several new products including in class two and tubular [ph] advancement feature for international markets, Invisalign Go for North America and new iTero scanner features and functionality, and implementation of the CFM model in North America and APAC which was previously rolled out in EMEA
We believe these investments are key to the continued customer adoption and acceleration of our growth
Similar to last year, many of these investments will take time before they realize meaningful return
We expect the equity loss from our investment in Smile Direct Club would be two to three times the 2016 losses we recorded
We expect our tax rate for 2017 to be approximately 18% which includes $19 million of excess tax benefit
Finally, as typical, we expect our earnings power in the second half of the year to be stronger than in the first half with second half operating profit to account for somewhere in the range of 56% to 58% of our full year results
With that I'll turn it back over to <UNK> for final comments
Well, I mean out of everything our production right now is slowly and whereas in Mexico, and 60% of our production goes to North America and 40% goes overseas
Now you're asking me to comment on Trump's comments, I don't know which tweet you want me to address
I'd say all those tweets have different financial scenarios
Part of it also is going to be reduction of the corporate tax rate, it looks like it's come together maybe the 20% range or so; so it's really hard ---+ it's kind of washed that's been out right now
What I want to give investors' confidence that we're aware of it, and we'll make the new kind of changes from a flexibility standpoint, we could be nimble on what new to be done
But the last thing I'd say is, you know our Mexican facility, I don't want it to be looked as the low cost facility, this is an incredibly high tax credit ---+ incredibly important aspect to us and so we've invested tons of money over 20 years to bring this as a modern day production facility, it's the biggest 3D printing business in the world
This is really a valuable asset for us and we'll do all we can just to make that asset as productive as possible regardless of what we see
<UNK>, this is <UNK>
I think what we saw ---+ we saw a very good volume in Q4 and I think that's what led to strong shipments and strong revenue performance in Q4 and we've seen that continue into January and into 2017 that we feel very good about where we're at from a volume standpoint and that's why we've given the Q1 guidance and it helped strengthen where we think we're going to be at for 2017. Unidentified Analyst As you look back at order patterns over the last several months, do you think it might have been in part more of a timing issue where new orders were delayed upto the latter stages of the year and into January?
Yes, sure <UNK>
It's very minimal, we're definitely ramping up and growing with the Smile Direct Club but in our numbers it's very, very minimal
On your DSO question, I'd say don't misinterpret my answer on the DSO
You know, the DSOs, they have some pretty good targets in a sense that they could grow; they will get a commensurate kind of discount from Invisalign standpoint
What I'm saying is in the whole mix of products that we have in North America, don't overweight that thing falling down the overall total
But you will see the DSOs can grow aggressively, they will be rewarded for it and so we'll continue to grow that
From an ASP standpoint, I think you have to remember we've got price last year too and that helps us
FX didn't help us in the fourth quarter and that way also so we're playing in a bandwidth here, you know, price increases, FX of $20 or so and I have no idea…
Yes, international mix
So I think David continue to guide ASPs that we're pretty much constant from year to year
We still think about that but there is a lot of noises when we think about that from oceans that we do and mix like <UNK> mentioned
But we're counting on it pretty level as we go into 2017.
