愛齊科技 (ALGN) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Align Technology second quarter financial results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, you will need to press the 1, followed by the 4 on your telephone. As a reminder, this conference is being recorded Wednesday, July 24th, 2002.

I would now like to turn the conference over to Mr. Thomas Prescott, president and CEO of Align Technology. Please go ahead, sir.

Thank you, Operator, and thank you all for joining us this morning to discuss the result of the second quarter and the positive track that we saw in that period, as well as providing additional input on our strategy and near-term priorities, so you can better see how we intend to build a great company.

On the call with me today is Steve Bonelli, our chief financial officer, and Roger George, an addition to our team. Roger’s our new vice president of legal affairs and corporate counsel. As we are now well into commercializing our [indiscernible] technology, we will be well-served beginning with expertise in-house, in fact, expecting better internal legal support and less cost to the company.

We will lead off with some remarks on possible forward-looking statements we may make in the call, and we’ll provide some details and the second-quarter results, and a bit more guidance on the remainder of this fiscal year, followed by a question-and-answer period. Now, I’ll turn the call over to Steve for some remarks on forward-looking statements.

Thanks, Tom, and good morning, everyone. Concerning any remarks that we may make about teacher expectations, plans, or price specs for the company during this conference call or that were made in our earnings press release, those remarks may constitute forward-looking statements for purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. These factors as well as other factors that could cause actual results to differ materially are discussed in more detail on Align Technology’s registration form, S1, our annual 10-K and 10-Q, and other filings that we may make from time to time with the Securities and Exchange Commission.

Thanks, Steve. I would like to welcome all of our shareholders and friends who have joined the call today. Many of you joined us for our conference call [technical difficulty], with elimination of positions in Santa Clara, a resizing of our international sales infrastructure, as well as the streamlining of our manufacturing operations, transitioning operations in Pakistan and the United Arab Emirates to our existing centers in Costa Rica. Many of those changes are well underway or completed as of today, and feedback concerning those actions has been consistently positive.

The strategic rationale and primary drivers behind these important actions bear repeating. Align has successfully entered and developed a foothold in one of the most exciting medical markets to emerge in decades. The fact is that we are alone in this market with no direct competitive technology on the horizon. That being the case, [technical difficulty], overnight, a special on consumer and physician feedback is overwhelmingly positive. Scores of technology companies situated right here in the Silicon Valley have demonstrated their risks in this [indiscernible], spread-thin strategy, in the hopes that growth and any cost would be rewarded.

I believe that with the [indiscernible] foundation of our business, redesigning processes around the customers, choosing markets carefully and applying measured investment with returns in mind will put us in a position to reach profitability and create a business that will accelerate and thrive in [indiscernible]. Our strategy is not to save our way to prosperity and then try to eke out growth. We’re [indiscernible] is to ensure we build a truly sustainable, profitable enterprise as a face and get about driving exciting growth from accessing the enormous markets our technology addresses.

We believe the high expectations for the Invisalign line product are justified. We intend to dramatically expand this new category of medical treatment, and our vision is that one day, Invisalign will be a highly valuable, unique, global brand.

Let’s get to second quarter. As we [indiscernible] on the July 10th call, results in the second quarter were generally validated. [Technical difficulty] 5 million reported in the second quarter of last year and overall revenues were up slightly compared to last quarter. During that July 10th call, I indicated overall revenue could be flat to up slightly due to a gap in training revenue. That is, in fact, what occurred.

This significantly understates our progress since sales in Invisalign during the quarter increased more than 10 percent quarter-over-quarter or said quarter compared to the previous first quarter. Training revenues decreased dramatically from last quarter due to the termination of our former dental distributor, and then subsequent [indiscernible] transition training from our formal dental distributor to conducting the trainings ourselves.

Our gross profit net of non-cash expenses was 7.3 million or about 42.5 percent, reflecting the continuing improvements in manufacturing efficiencies. Operating expenses, net non-cash charges, was 20 million, up a bit from last quarter’s 18.8. In a quarter, we incurred a net loss of 13 million again, made up of non-cash expenses as we continue to invest in the expense of our business.

[Indiscernible] the second quarter continued to be positive. In the U. S. and Canada to date, over 5,000 orthodondists and dentists just submitted one or more cases to us. New orthodondist case submissions are growing nicely. Although training in North America is still dramatic in the second quarter, we have about 35 dentists now trained. In a bit over two quarters since we really began training dentists in earnest, dentists now account for over 20 percent of domestic cases.

During the quarter, we achieved several operational milestones, including a submission of our 50,000 case. That’s 50,000 since the inception of the business. [Indiscernible] of our two million a liner. That’s two million unique objects delivered to consumers. For the first time in the second quarter, we presented a broad range of clinical data to our clinicians at a national conference, American Association [technical difficulty], providing a scientific basis of evidence [technical difficulty].

In less than a month, we have ramped our production and employment in Costa Rica on schedule for four operations by this fall. They’ve implemented significant staff reductions domestically and have begun phasing out operations in Pakistan and the United Arab Emirate facilities. This process is progressing completely on schedule, and we do not expect any delays in accomplishing all of our restructuring goals by the end of the year.

Our philosophy in the training and certification of physicians going forward has also changed, emphasizing quality and results over pure volume. Getting orthodontists and dentists through training classes is a means to an end. Only with the proper follow-up and support will these practitioners become customers. We are shifting our focus from producing trained orthodontists or dentists to producing active users of Invisalign. This includes a refined training program, providing better, more clinically-oriented support materials, post-training project and support, and promotions to [indiscernible] cases.

We continue to get smart as it relates to how adoption occurs and how that adoption relates to the uptake in case submittals from individual practitioners. In general, the process seems to have roughly six levels: train, try, learn, adopt, accelerate, and optimize. In general, practitioners first attend a training course, second, try the submission of the first case, third, learn how easy and effective the technology is to use [technical difficulty] accelerate case submittal substantially, and finally, six, optimize their practice for Invisalign use, perhaps even opening up an Invisalign clinic in addition to their traditional practice.

Getting our physicians trained and certified to submit Invisalign cases is an important first step. Equally important is the sale from clinical support we had established, that all physicians learn, adopt, and accelerate these Invisalign in their practice. We believe that process and timing are just now becoming valid predictors of case volume growth and revenue expansion. As we get a bit smarter in this area, we again provide specific metrics for investors to assess the health of our growing business. In effect, we intend to report on that cycle of learning, adoption, and acceleration [technical difficulty] same-store growth in view of our business franchise.

In summary, though we have rationalized some of our efforts to expand internationally, streamline made it [indiscernible] and substantially refocused spending. There is no slowing down this market for the continued growth interest among both consumers and dental professionals. In spite of today’s unforgiving capital markets, Align has a great opportunity to deliver substantial growth in shareholder value. We believe that we have the right strategy for tapping into the extraordinary growth prospects all of these markets offer. We are certain our game plan for refocusing the company and creating a sustainable face will ensure the execution of that strategy.

And we are committed to providing the right amount of visibility and the key metrics, which will demonstrate the progress we’re making. And now I’d like to turn it over to Steve to give you a bit more detail on the second quarter and some thoughts for the quarters ahead.

Thanks again, Tom. Our net revenue for the second quarter of 2002 were 17.3 million. Non-core revenue was predominantly training. Cost of revenues was 10.8 million, including approximately 900,000 in stock-based compensation, which resulted in gross profit of 6.5 million or 7.4 million net of spot base compensation. Overall margins net of non-cash charges were about 42.5 percent versus 33 percent last quarter.

Our margins were in line with our projections. Invisalign margins less stock-based compensation and some accelerated depreciation that we talked about in the previous call are practically 46 percent. Moving on to operating expenses, sales and marketing expenses net of stock-based compensation was 10.8 million for the quarter, up from 9 million last quarter. Of this, less than a million went to media advertising spending.

All other expenses as a whole increased, [indiscernible] increases in other marketing programs as well as increases in professional training and head count.

General administrative expenses net of stock-based compensation decreased on a sequential basis to 7.1 million from 7.6 million the previous quarter. This is due mainly to a decrease in outside services related to implementing our structure outside the U. S. Research and development net of stock-based compensation was 2.2 million in the second quarter, consistent with the first quarter. Our net loss for the second quarter of 2002 was 18.8 million or about 40 cents a share for basic and diluted shares. This EPS number is based on 46.6 million average shares outstanding for the quarter or 28 cents per basic and diluted share.

In regards to cash bound, since we ended the quarter with approximately $35 million in cash, short- and long-term investments compared to approximately 49 million at the end of the first quarter. Looking ahead, we expect that the company’s revenues will grow at between 10 and 15 percent over the next two quarters, between 5 and 10 percent each quarter in 2003 as the new strategy unfolds, and that total revenue for the year 2002 and 2003 are expected to be between 73 and 76 million, and between 100 million and 105 million respectively.

Margins will steadily grow through the rest of this year and 2003, resulting in growth margins and net of non-cash charges of between 62 and 64 percent by the end of 2003. Operating expenses should be reduced dramatically as a result of the new strategy, although the positive effects won’t be fully felt until early 2003 as we work through additional expenses and one-time costs associated with the new strategy.

We expect the additional expenses and one-time cost to be approximately seven to 9 million, and will be spread mostly over the third and fourth quarters. We also expect that a significant portion of these costs will be non-cash in nature. Accordingly, the company will [indiscernible] losses in the third and fourth quarter of 2002. We expect that the company will still lose money in the first three quarters of 2003, although the losses will be much less. They can quickly evaporate with any meaningful [indiscernible] in revenue.

The company expects to reach profitability and private cash flow in fourth quarter of 2003. More specifically, the third-quarter revenue should be between 18.5 million and 19.5 million, which, of course, includes summer vacations in the U. S. and the traditional holiday period in Europe is generally considered one of the softer periods in orthodontic case starts.

Margins net of non-cash charges will be up a bit in the 44 to 46 percent range, but will be tempered by the increase in training revenue, which has lower margin and the aforementioned costs associated with carrying out this new plan. As discussed, operating expenses will likely include some extra costs and some one-time charges associated with the shutdown of facilities in Pakistan and the UAE as well a facility move in Santa Clara that we will undergo in the third quarter. We’re still assessing the scope of these charges, but the third quarter should see the bulk of the total seven to $9 million charges previously mentioned.

This could potentially bring the total operating expense of including one-time charges cost well past 25 million for the third quarter. Fourth quarter revenue should be between 21 and 22 million. This will also include a moderate amount of training revenue less than $1 million. Margins will be in the 50 to 52 percent range, mostly from the impact of efficiency projects and partial reduction of redundancy. It also is a result of higher product volume.

Operating expenses will include some extra costs and some one-time charges associated with the shutdown of the facilities in Pakistan and UAE, but should be down significantly from third quarter levels. As previously mentioned, 2003 will see revenues in the 100 million to 105 million range. Margins should steadily increase throughout the year, driven mainly by higher volumes. Operating expenses should level out. Again, the company will likely lose money in the first three quarters of 2003, although any meaningful uptick in revenues could [indiscernible] profitability in a quarter or two. The company expects to reach profitability, though, and private cash flow in the fourth quarter of 2003.

Regarding cash, while the company certainly will incur some charges in association with carrying out our new strategy, the resultant lowering of the expense run rate will allow the company to significantly reduce its cash burn over the next several quarters. In addition, the company’s in the midst of attempting to secure some asset-based financing. We hope to have some good news for you in this area very soon.

The combination of these two programs should allow the company to avoid the need to raise capital before it becomes cash flow positive late in 2003. And now I’d like to turn the call back over to Tom for a few final words.

Thanks, Steve. Before we open the line up for questions, I’d like to emphasize several important points. [Indiscernible] technology is well received by physicians and consumers. We see the tremendous potential and intend to tap into it from a position of financial strength. Align has grown very fast. We are taking significant attempts to ensure a solid base to achieve profitability next year and to avoid the need for additional equity-based financing.

Our product, Invisalign, is an intimate of each patient’s life experience and a significant factor in each active physician’s practice. It is our goal to dramatically exceed their high expectations. We are still a young company, and there is much to do. However, the talented employees here at Align are committed to great execution, and in so doing, delivering outstanding results for our shareholders.

Operator.

Ladies and gentlemen, if you’d like to register for today’s question-and-answer session, you will need to press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If you are using a speakerphone, you will need to lift your handset before entering your request. One moment, please, for the first question.

Your first question comes from Bruce Jacobs, Deutsche Bank Securities. Please go ahead.

Thank you. Hi, guys. I just have a couple of really small questions. The first is on the GP. I’m wondering if you could just give us an update on where you stand in terms of the build-out and the distribution to GPs and then also in terms of those trained, how many of those that have been trained are now submitting cases? And are you still on track to train 5,000 over the course of the year?

Let me take those in trust, Bruce. First of all, thanks. Good morning. First of all, we are on track, and we do expect to train a bit more than 5,000. That’s a pretty good number. Secondly, we have 19 sales reps in place on the ground today, and the sales reps, and they’ve been fully trained and they’re running. They have all the tools necessary to do their job. Those locations where those reps are represent where 85 percent of the total training of the GPs have been conducted. So again, our first goal was to cover those markets where either Invisalign direct certification is worked on or our formal dental distributor had connected us, those trainings.

And I’d like to ask Steve to—the date is not as granular as we would like it, but perhaps I can ask Steve to comment in general on how many of those GPs that might have been trained, have submitted.

Yeah. I don’t have the exact numbers in front of me here. We have about 3,500 dentists trained in the U. S. as we mentioned before. And I’m guessing that about half of those have submitted a case at this point, essentially [technical difficulty].

And just following up, can you just comment on the reaction you’ve gotten from the orthodondists in terms of this [indiscernible] GP even now that it’s been a few quarters here since you announced it? Have we seen the full impact of any agitated ortho customers, and just what’s happened on that front, please?

Sure, that’s a fair question. I think there are a whole set of effects around this. One, that the most important one, the way we felt that both the market was being taken was not the right one, and that, we believe, was the largest creation of [technical difficulty] in turn in this market. Our view is, and this is what we have articulated to the orthodontists and to the GP dentists, is that this is such a large market, that this is not at all some zero gain, and that the company is committed to continue to expand the category. GP dentists have a broad range of potential patient candidates in their practice, husbands and wives and children. They have great opportunities to bring people into orthodontic care with appliances like Invisalign that normally would not have sought out orthodondists directly or that would have felt compelled to get braces or brackets with mild to moderate or moderate problems.

Those are classically great fits for a GP to add to their practice. In the meantime, as they do that, they are, in fact, many of these GPs are actually seeing increased referrals to orthodontists for more significant serious changes. So many orthodontists that have embraced working with GPs in that area have been getting an increased source of referrals from those GPs.

So our view is with the enormous number of people that suffer from malocclusion, for the GPs and the orthodontists who have been fighting over the roughly 1.8 million existing orthodontic starts that exist today in the U. S. or North America doesn’t make a lot of sense. So again, the feedback has been substantially more positive than it was three to six months ago, and as we continue to conduct ourselves in a professional way and to promote growth in the market and to work to find collaborative ways for the GP and orthodontists to all benefit from this growth in the market, we believe that there is also growth in the orthodontist space.

Okay, great. Last question, and I’ll jump back in. I just wanted to ask on pricing. Have there been any notable changes in your pricing to your customers, and then what are the trends to the end users?

We have not had any pricing changes. We continue to have a mix of promotions over time. There’s not a change there from a kind of steady state basis. In terms of end user pricing, I think it’s too early to speak to what GP dentists ultimately will—where that will sort itself out.

But there really have been no significant changes from our perspective at the end user pricing level or the ortho market.

Great. I’ll jump back.

[Technical difficulty] Do you think gross margins can get up in this area? As you ponder and analyze the effects of your actions, where should we imagine that gross margins could be, maybe as you exit ’03 or when you look out beyond that.

Good morning, Rick. Thanks. Tom here. I’ll start, and then I’d ask Steve to put some maybe timing around some of these.

We had originally projected exiting. In fact, in my first call, we originally projected exiting the fiscal year of Q4 with margins approaching 60 percent. We revised that a bit when we did our July 10th call, and are generally confirming that on this call with margins that are a bit lower as we exit the year because we are still carrying at facility level some excess capacity. We won’t fully have the benefit of this manufacturing straight lining until the end of Q1 and Q2.

So we believe there are some significant things that will change that margin and direct the margin on an upward track as we get into Q1 and Q2 of next fiscal year. Over the very long term, there’s no reason why this product category and our manufacturing process can’t see kind of 70 percent gross margins with reasonable volume. So as a long-term number, that’s a pretty good place to be, and in the shorter term, what I’d like Steve to do is maybe lay out how we see—confirm, obviously, the remainder of this year, and there may be with the volumes we’ve described, step through the four quarters of next year.

Yeah. The story really for the remaining part of this year is reducing the redundancy, which we’ve talked about now. We’ve outlined our program, and really putting in place, I wouldn’t say the last of the big efficiency programs, but we have put some big efficiency programs in place already. There’s a few more that go online here in the next quarter, and so margins in the next couple of quarters will really improve mostly for those reasons, redundancy and efficiency projects.

At that point, we really have set up, and that’s why, I guess, our original projections of sort of 60 percent exiting this year have gone down a bit because we’ve lowered our volumes. But then we’ve really set it up for great margin improvement based on volume, and that will be mostly the story in 2003, and we should be able to get to the low sixties exiting the year mostly on volume. But any increase really shoots our margins up even more dramatically.

So yeah, ultimately 70-plus percent margins we think are very attainable.

In the quarter, you talked a little bit about breakdown, the mix and sales. You talked about the training, but can you break out a liner in [indiscernible] revenues?

We sort of talk about Invisalign revenues sort of all in one number now, and there was a question asked earlier about any change in pricing. We haven’t changed the sort of the dollar amount of pricing, but we actually have changed the way we invoice the professional. Instead of sending out an invoice for [indiscernible] and an invoice for our liners separately, two invoices, we’re going to now just send out one.

So we’re going to talk about revenue regarding Invisalign as basically just one thing from now on. That revenue went up about 10 percent during the quarter from roughly, I think, 14.6 or so last quarter to about 16.5, 16.6 or so this quarter.

Okay. A couple of—one last question. First of all, a large question. We talked about the positive consumer feedback. Can you expand on that a little bit and maybe expand it as well on the comments about Bruce’s question about the orthodontists’ and the general practitioners’ reactions to these new programs. Do you think that these are some of the people who were submitting cases and they stopped as a result of some of these changes? Could you give us an appreciation of what’s going on there as well?

Really, as I described impact in a general way when I tried to answer Bruce’s question, I was speaking in several dimensions. First, I think as we talked about what would happen this quarter, we felt there would be some opportunity cost of redirecting some of our ortho sales force to touch and cover GP dentists that had been trained and yet had no support because of the termination of our prior [indiscernible] distributor. We felt we had to do that even though it was going to mean our orthos were going to get in the short term less support and touch just because they had paid, the GP guys had paid for training, were prepared to initiate cases, and had no infrastructure or support to go reach, and we felt that was simply the right thing to do. That said, we knew we were going to have a little bit of a blip in volume from ortho, and that’s exactly, on a relative basis, what happened.

At the same time, because of the churn around the way that go-to-market strategy was—it was not planned this way, but the way it leveled out, where [technical difficulty] many of the orthodontists did feel that there was kind of a sum zero world going on. I’m going to get at the orthodontist field source and based in revenue. There was some question and reaction from the orthodontists. I have spent a substantial amount of my personal time over the last three months talking with a full range of orthodontists and GP dentists, and I think there are still orthodontists out there that have good, serious clinical questions about the long-term efficacy of this.

We intend to address those questions over time, and I think that’s a debate that occurs in every area of technology, so there are really doctors. There area mainstream commercial physicians that have great vital practices, and there are academic clinicians that take the most stringent view of what technology is effective and appropriate. And so with each group of potential users, we are engaging them in the right kind of discussion. I would say consistently, across the board, we have made real progress in terms of level of debate. There is now a good clinical debate raging in the community, in the journals about the technology and what it’s useful for, and everything else, and we view that as a very, very positive dynamic, and, in fact, kind of a marker that product is starting to move more towards the mainstream of orthodontia.

At the same time, the GP dentists, I believe, are affected by mainstream orthodontists utilizing the technology and seeing that it’s appropriate and effective. And I think the early view is that the GP dentists have started to use the Invisalign at a rate that’s substantially quicker than we saw in the early days [technical difficulty] around the broad applicability of the appliance [indiscernible] Invisalign is appropriate. We think it’s a good thing. We enjoyed it with a serious kind of journal-quality peer review research and articles, and we’re continuing to do so, and we think that’s a good thing for the industry.

Oh, yeah, and I have one last question.

[Indiscernible].

Are you measuring the response, qualifying the counter-response for dollars spent yet, and are you having any success in sort of the coop advertising approach with the orthodontists and GPs? Thanks.

Yes. The short answer is, to the last question, is yes, we have increasingly shifted some of the mix on our advertising programs to be localized in a coop program for orthodontists and GP dentists that are [indiscernible] this to be a key part of their practice, and there area a lot of programs that are showing great traction, including kind of patient referral programs, local advertising, and the like.

On a broader basis, we are too early to fully assess, because we’re really now just ramping up advertising in conjunction with a new consumer call center partner that’s giving us actually much better visibility to patient data tracking and what ultimately happens to that call. And again, we’ll be commenting on that probably much more fully when we talk to the next quarter, so roughly three months from now, but we’re very encouraged with what we’re seeing with a much more measured advertising approach. So at this point in time, it does look very encouraging.

Thank you.

The next question comes from Stephen [Indiscernible] with JP Morgan. Please go ahead.

Sure, hi, two questions. First, just an overall business model strategy type question. Obviously, one of the hardest things that has been to predict from the previous model, which was a push-pull advertising model, was to figure out what would be the uptake related to the advertising spin.

Obviously, you’ve got to shift into focus to the physician or dentist away from the patient. And the question here is that you’ve talked about developing new metrics to track the business for investors, and also, I imagine, to project where the business is going to go. If you could just give us some more visibility there as to what you think are the most important drivers and most important metrics that you’re developing that would be helpful for investors to monitor and project the business.

Sure, Steve, thanks. I guess, you know, what we’ve described, is we are absolutely committed to laying out the right metrics. We’re not quite there yet, and I would really expect that to have—to introduce a few of those in our next quarter call. What I would say in general is we really haven’t gone away from advertising and creating pull at the consumer level.

What we’ve tried to do is create what I’ll call balance, you know, trying to go solely at the professional level and let individual practitioners try to expand and grow the market on a [indiscernible] basis is a very long, slow path. At the same time, ignoring the professional and those channels and the value they can create with the patients they own at the GP level or the communities they are respected in at the [indiscernible] level, and only creating consumer awareness and pull, also doesn’t get fully rewarded. So what we’ve done is to adjust, change the mix, and pulled out our spending. We are still investing significantly upstream in expanding the category and advancing beyond awareness and development of understanding the product to calling consumers to action.

So if you see the latest ads, they’re longer. They’re much less expensive to run. They’re done on national cable in blocks, where the actual timing they run, we don’t spec, but the cable deliverer can actually fit them into a variety of different blocks based on what else they’ve sold. And as a result, they’re much less expensive for us. But the only results are that these longer, more detailed ads, if you will, kind of meaning informational, are much more effective at qualifying those consumers and getting them to take specific steps: who to call, what to do, whether or not they’re potentially a patient.

So what I would say in general, Steve, is we are—we’re trying to achieve balance between professional channel development, relationships with doctors, training and support, and in shifting some of the broad consumer demand creation to more localized coop, patient referral programs that go directly back to those positions.

Sure. One more question in a different area. Your international push here, obviously, you’re pulling back in terms of the overwhelming expansion that had been originally predicted and focusing on [indiscernible] areas where you think you should have the biggest benefit. If you could, just expand on which area you’re focusing on, and also, if you could, give us a sense in terms of guidance as to what percentage of revenues this year and perhaps next year can be expected from international sources.

We really—I guess it’s easy to say since we significantly have pulled down our spending and gone in our infrastructure, we really haven’t pulled back from the market we’re in, and what I would say is the priorities are still, you know, Western Europe, the major countries of Europe are very, very important to us. And we really have only been doing business there for a bit more than a year in Germany, for example, and just started in Spain and Italy and the UK, and just incubating in Scandinavia. What we’re really saying is we are pulling back from this kind of pell-mell race to train and certify everybody, instead focusing a reduced spending level on developing users that have already been trained. So much of the infrastructure was really around market development in terms of new countries, finding new partners, training on a wholesale basis literally every other weekend and every other week, and instead taking the resources we’ve got, which are very adequate, to build volume and utilization.

Instead of just having trained doctors, we want physicians that submit cases and really utilize [indiscernible], which is really the goal. And that’s what we’re doing. All that said, we, this year, international will be around 10 percent. I [indiscernible] as a North American company say, you know, North America is 90 percent, and the rest of the world is 10. But we’re really—much of our near-term growth opportunity for the least incremental spend is really in North America. So we have really no better place to spend incremental dollars on marketing, sales force, et cetera. in the U. S. than in North America today.

Over—so over into 2003, we’re still going to be—probably be a little bit under 10 percent, because of the increments of resource are going to generate higher relative revenue rate than Germany, France, Spain, et cetera. Those countries, those regions are still very, very important to us. We have not exited. We have not shut down country infrastructure. We are really just getting started, but frankly, since we’re just getting started, our infrastructure stands way out ahead of what any reasonable revenue ramp could probably be.

So in other countries where we already have relationships established with key positions, we are going to try and incubate growth and get started, develop awareness, begin some cases, do some training with key doctors, and set ourselves in positions as the company gets on a profitable track, we can really then go in and enter properly in those countries. In fact, the worse thing to do would be just to put a flag in a country, claim it as your own, and then not be in a position to support physicians and consumers properly.

That’s where we were headed if we had just really gone too fast. So I would say the exception here in all this is probably Japan. I think earlier on July 10th and in our first call, the first quarter, we really talked about Japan as being a very important strategic market. We don’t expect it to contribute materially to revenue in the near term, but it does offer very, very large growth prospects for long term, both because of the volume. It has a structural approach to the market, and secondly, because of a pricing opportunity in the Japanese market.

So we all try to make tracks towards finding the right partnership and approach to enter the Japanese market. Do not expect we have to have really major investments to do that, because we will be bringing price, working with a partner there. I think in overall, going back to your first question about visibility to these metrics, we would like to be able to introduce a couple of metrics in the coming quarter or two that allow you to get at a meaningful view of how physicians learn, adopt, accelerate, use Invisalign in their practice, and then be able to report on that consistently with the right—across the right slice of physicians in our pool.

So that’s where we’re headed. We’re not there quite yet. We have to get a bit smarter about our own data, but we think ultimately that will give you the kind of visibility you need and your investors need to assess really what we’re doing to build this franchise.

Great, thank you.

Thanks.

Ladies and gentlemen, we do have time for one more question. Your final question comes from Jay [Indiscernible] with Goldsmith and Harris. Please go ahead.

Gentlemen, I was a little confused. What was the cash burn in the quarter?

We started the quarter with about 49 million in cash, and ended the quarter with about 35.

And the difference between your pro forma condensed statements and the consolidated statement, the one on the following page? Is that all due to stock-based compensation?

Well, let’s see. It depends on what columns you’re looking at, but in every quarter, there’s a stock-based compensation charge that we back out from the condensed to the pro forma.

How many shares of stock did you create during the June quarter, and what is the significance of the first number on the balance sheet?

The change in the number of shares from quarter-to-quarter was not dramatic at all. It basically didn’t change. The effect of stock-based compensations on the balance sheet is—well, I mean, you know that you basically take a charge for—there’s a fair market value difference between the options you grant and the price that you grant them at, and so there’s sort of an obligation or a deferred charge on that that you carry until you basically have exhausted that, so that’s where that would show up.

Well, if you’re issuing—you didn’t issue much stock, so why is the deferred stock base compensation number changing?

This is a—well, the way you calculate it is based on the—it’s based on the—a little bit on the fair market value of the stock, and each quarter, the number changes, because you have to recognize the expense sort of over time. It didn’t really change a whole lot from quarter-to-quarter.

It would be helpful, I think, since you have your balance sheet available and your P&L statement, when you issue your P&L statement, to put out an application of funds. I might have been able to cut down the length of my inquiry. What do you think your cash burn is going to be in the third quarter?

Well, it’s a little tough to tell, frankly. We’ve got this new plan that we’re sort of putting in motion, and there’s going to be some shutdown costs and some things associated with that, but, you know, some—you know, again, it’s hard to tell, but it’s probably somewhere between, you know, ten and 15 million. We’re also trying to work in an asset-based financing that we should get some funds back in on, so—

What was your depreciation charge in the quarter?

Depreciation charge in the quarter, I don’t have that number handy, but it’s probably about $2 million.

I see that your net assets since the beginning of the year is down $1.5 million. Did you have some capital expenditures in the first six months?

Yes, we did, but the depreciation was higher than our capital expenditures.

So the depreciation is about two million and a quarter?

About two million and a quarter.

And when you complete your asset-based financing, how will that affect your quarterly depreciation charge?

It shouldn’t affect it at all.

It’s just secured debt?

Right.

Okay. Thank you very much.

Thanks.

Gentlemen, I am showing no further questions. Please continue with your presentation or your closing remarks.

Okay, Operator, thank you very much. For all of you listening in and following our progress, we thank you for joining the call this morning, and we look forward to continuing to report on our progress, and we look forward to reporting to you at third quarter. Thank you very much.

Ladies and gentlemen, this does conclude your conference for today. We thank you for your participation and ask that you please disconnect your line.