How good was Align Technology (NASDAQ:ALGN) in 2017? All you have to know is one thing: It was the best-performing stock in the S&P 500 index last year.

But the book wasn't closed on 2017 until Align reported its fourth-quarter results after the market closed on Tuesday. Yet again, Align smashed previous revenue records, but this time there was a surprise with the company's bottom line. Here are the highlights from the orthodontic-device maker's fourth-quarter performance. 

Dental professional next to patient pointing to her teeth

Image source: Getty Images.

Align Technology results: The raw numbers

Metric 

Q4 2017 

Q4 2016 

Year-Over-Year Change

Sales

$421.3 million $293.2 million

43.7%

Net income from continuing operations

$10.3 million $47.6 million

(78.4%)

Diluted earnings per share (EPS)

$0.13 $0.59

(78%)

Data source: Align Technology.

What happened with Align Technology this quarter?

Let's first address what appears at first glance to be a big problem for Align. Why did earnings plunge in the fourth quarter? You can blame President Trump and the U.S. Congress. Or you could thank them. Align's bottom line deteriorated because of one reason: tax reform.

The company reported a one-time $86.6 million tax expense in the fourth quarter, which translated to $1.06 per diluted share, as a result of the tax reform legislation recently signed into law. Without this negative impact, Align's net income would have more than doubled compared with the prior-year period. The great news, though, is that the company's tax burden will decrease in 2018.

Throughout 2017, Align repeatedly broke revenue records. The company repeated this trend in the fourth quarter. And once again, Align had positive news on all fronts. Invisalign sales in the fourth quarter jumped nearly 45% higher than the prior-year period to $364.2 million. Scanner and services revenue increased 37% year over year to $57.1 million.

It's always interesting to see exactly where Invisalign sales are growing the most. Align reported that North American shipments increased roughly 25% year over year in the fourth quarter. International shipments, though, jumped 52% higher than the fourth quarter of 2016. Align's average selling price for Invisalign increased around 6% overall.

What management had to say

Align Technology president and CEO Joe Hogan said:

Overall, the fourth quarter was a strong finish to another outstanding year for Align, with better than expected revenues, volumes and operating income. Record Q4 revenues were up 43.7% year over year driven by increased Invisalign volumes across all geographies and customer channels, as well as by record iTero scanner revenue. Q4 Invisalign volume was up 34.2% year over year reflecting strong international growth from increased utilization and expansion of our customer base which included over 4,000 new customers for the third consecutive quarter. Notwithstanding this strong performance, our Q4 results were impacted by the new U.S. Tax Cut and Jobs Act, which reduced our reported net income and EPS. However, Q4 operating income was a record $109.6M or 26%.

Looking forward

Align thinks net revenue in the first quarter of 2018 will be between $400 million and $410 million, a year-over-year increase of 29% to 32%. The company expects Invisalign case shipments will be between 264,000 and 269,000. The midpoint of that range reflects a 28% increase from the prior-year period. Align also projects that first-quarter diluted EPS will be between $0.94 and $0.98, a 13% jump at the midpoint of the range. 

Investors have plenty of things to watch in 2018. Align launched its first major Invisalign brand platform and marketing campaign in 2017. That effort could pay off this year as more dental patients become aware of Align's clear aligners. In addition, the company opened its first Invisalign treatment planning facility in China last year. International markets, particularly in Asia, should continue to be a major source of growth for Align.

Align also hopes to win FDA approval for its Invisalign Teen with a mandibular advancement feature. It's the first clear aligner solution for Class 2 correction (in which the lower first molar is more toward the back of the mouth than the upper first molar) in the teen and "tween" market.

There's no guarantee that Align Technology will again stand as the No. 1 stock in the S&P 500 in 2018. But the company's business model continues to be solid and demand for its clear aligners and intra-oral scanners should grow. That's a winning formula over the long run.

 

Keith Speights owns shares of Align Technology. The Motley Fool owns shares of and recommends Align Technology. The Motley Fool has a disclosure policy.