愛齊科技 (ALGN) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Align Technology first quarter 2003 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, please press the one followed by the four on your telephone.

As a reminder, this conference is being recorded, Thursday, April 23rd, 2003.

I with now like to turn the conference over to Barbara Domingo, Director of Investor Relations for Invisalign Technology.

Please go ahead.

Thanks, April.

Welcome to everybody on the line.

If you haven't received a copy of the press release, please go to the investor relations page on our web site at www.invisalign.com.

Before we start the call today, I'd like to make some comments on forward-looking statements.

During this conference call, we may make forward-looking statements relating to Align's expectations about future events or future results.

Any forward-looking statements we make during this conference call are based upon information available to Align as of the date hereof.

Listeners are cautioned that these forward-looking statements are only predictions, and are subject to risks and uncertainties and assumptions that are difficult to predict.

As a result, actual results may differ materially and adversely from those expressed in any forward-looking statements.

Factors that might cause such differences include, but not limited to, risks that are detailed from time to time in Align's periodic reports filed with the Securities and Exchange Commission, including but not limited to annual reports on Form 10K for the fiscal year ended December 31, 2002, which was filed with the Securities and Exchange Commission on March 27th, 2003, and its quarterly report on form 10Q.

Align undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

Please also note that on this conference call, we will provide listeners with several financial metrics determined on a non-GAAP basis, which in the past we referred to as pro forma.

Most of these items, together with the [INAUDIBLE] GAAP numbers and the reconciliation to GAAP were applicable and are contained in the financial results press release, which we have posted on our web site at www.invisalign.com under Corporate Information, Investor Relations, Earnings Press Releases, and have furnished to the Securities and Exchange Commission on form 8K.

We encourage listeners to review these items.

With that said, I'd like to introduce Align Technology's President and CEO, Thomas Prescott.

Tom?

Thanks, Barbara.

And thanks to our shareholders in France who are listening via the phone and through our web site.

About a year ago, I was in this conference room announcing our results for the first quarter 2002.

Many of you on the call today were also on that call, and I thank you for your continued support.

We are pleased with the progress we have made as a company in last year and the Align team is energized about our prospects in the future.

We'll touch on that in a moment, but first let me give you an update on the business for the first quarter 2003.

As we announced in our press release, revenues in the first quarter increased 44% year over year from 17.1 million to 24 .7 million.

Additionally, our first quarter revenues increased 10% from last year's reported revenue of 22 -- from last quarter's reported revenue of 22.4 million.

We saw increases in both our U.S. orthodontist and GP dentist customer channels.

The ortho channel increased 6.5% from last quarter, with revenues of 15.8 million, while the GP channel generated revenues of 5.2 million, an increase of 23% from last quarter.

While the GP channel is growing steadily, we are still seeing the vast majority of our total revenues, about 64%, come from the U.S. orthodontist, who are specialists and our most important customers.

During the first quarter of 2003, we received orders for approximately 17,200 new cases.

An average of 272 cases per business day.

While we shipped approximately 15,400 cases to customers during the same period.

The imbalance between orders and shipments came from higher than anticipated customer participation in U.S. and European promotional programs, which resulted in a higher than desired case backlog.

This backlog will be worked out in our second quarter.

Eldon Bullington, our VP of Finance and CFO, will discuss our second quarter projections and the impact of the backlog in a couple of minutes.

Now, let me take the opportunity to share some statistics about our participating doctors.

Approximately 5500 total doctors submitted cases during the first quarter, compared to about 5,000 last quarter. 3300 orthodontists submitted cases, relatively consistent with the 3200 submitting last quarter. 2200 GP dentists submitted cases, compared to 1800 last quarter, reflecting the growth of the basis of certified GP's.

Of the 2200 GP cases, 700 were first-time submiters.

Additionally, 800 new GP's were certified in the first quarter, bringing our base of certified GP's to approximately 6200.

From inception, we have received approximately 107,000 cases into the business.

This is just the beginning, since there is a huge gap between the number of people that suffer from malocclusion and those that enter treatment.

North American orthodontists start around 2 million cases per year, however, there are over 72 million people in North America who regularly visit the dentist and are afflicted with malocclusion, that may potentially be treated with Invisalign.

The potential to close this gap and drive business growth is the cornerstone of the Invisalign business opportunity.

At this point, I'm going to turn the call over to Eldon.

Eldon's going to discuss the financials and provide guidance for the next quarter as well as fiscal year 2003.

After Eldon's finished, I'll come back and and talk a bit more about our strategy going forward, and we'll take questions.

Eldon?

Thanks, Tom.

As Tom said, we are pleased with the progress we have made this quarter.

Let me dive right in and take you through our GAAP and non-GAAP results.

Giving the changing and evolving reporting and communications standards, we will make reasonable efforts to discuss GAAP and non-GAAP results consistent with our published first quarter financial results press release.

As a reminder, the first quarter financial results press release and AK filing of the same document are available on our web site at www.invisalign.com in the investor relations section.

As Tom mentioned, net revenues for the first quarter 2003 increased 44% to 24.7 million dollars

from 17.1 million for the same quarter one year ago, and increased 10% sequentially from 22.4 million reported for the fourth quarter of 2002.

First quarter revenues by segment were 15.8 million for U.S. ortho, 5.2 million for U.S.

GP and 2.4 million for international.

These channels represent 64%, 21% and 10% of revenues, respectively.

Worldwide training and other revenues were 1.3 million.

As we expected, we saw the highest rate of growth in our GP channel as our growing base, the certified GP dentists, are beginning to submit cases.

Total case volume, as Tom mentioned, for the first quarter was approximately 15,400 cases, a 13% increase over the 13,600 cases shift in the fourth quarter of 2002.

Gross profit margins for the first quarter of 2003 under GAAP for generally accepted accounting principles were 12.9 million or 52.2% of revenue, compared to 4.6 million or 27% of revenues for the first quarter of 2002.

Sequentially, this compares to gross profit of 10.6 million or 47.2% of revenues for the fourth quarter of 2002.

Cost of revenues for the first quarter of fiscal 2003 included 721,000 of noncash stock-based compensation, which I will refer to as stock-based compensation for the remainder of this discussion.

Subtracting the 721,000 of stock based compensation brings you to our non-GAAP gross profit margins of 13.6 million dollars, or 55.2% of revenue for the first quarter of 2003, compared to 5.6 million or 33% of revenue for the same quarter one year ago.

And 11.3 million or 50.6% of revenue for the fourth quarter of 2002.

Stock-based compensation charged the cost of revenues in the first quarter of 2002 was 988,000 dollars, and in the fourth quarter of 2002 was 745,000.

Our continuing improvement in margins reflects the benefits of cost reduction initiatives in our manufacturing process, and includes fixed cost absorption related to increasing volumes.

Total operating expenses reported under GAAP were 21.5 million for the first quarter of fiscal 2003, compared to 23.5 million for the same quarter one year ago.

And 24.3 million for the fourth quarter of last year.

Included in operating expenses for the current quarter were approximately 3.5 million of stock-based compensation, and 507,000 of restructuring charges related to the shutdown of operations in Pakistan and the United Arab Emirates.

Restructuring activities related to the discontinued operations in those countries are now complete.

Our non-GAAP operating expenses for the first quarter of 2003, which exclude the stock-based compensation and restructuring expenses I just referred to, were 17.5 million.

This compares to non-GAAP operating expenses of 18.9 million for the same quarter one year ago, which excludes stock-based compensation of 4.6 million.

And 17.8 million for the fourth quarter of last year, which excludes 3.1 million of stock-based compensation and 3.4 million of restructuring charges.

Operating expenses for the first quarter reflect spending in the range we expected after completion of our restructuring activities late last year.

Net loss for the first recorder as reported under GAAP was 8.8 million or 15 cents per basic and diluted share, compared to a net loss of 18.5 million or 40 cents for basic and diluted share for the same quarter a year ago, and a net loss of 13.9 million or 27 cents per basic and diluted share for the fourth quarter of last year.

Excluding the stock-based compensation and restructuring charges included in cost of revenues and operating expenses, which I outlined earlier, non-GAAP net loss was 4 million or 7 cents per basic and diluted share, compared to 12.9 million or 28 cents per basic and diluted share, for the same quarter one year ago.

And 6.7 million or 13 cents per basic and diluted share for the fourth quarter of last year.

EPS calculations were based on weighted average shares outstanding as reported for each period.

Cash at the end of the first quarter was 37.3 million in cash, cash equivalents and marketable securities, compared to 41.5 million at the end of the fourth quarter of last year.

Cash burn was 4.2 million for the first quarter, slightly lower than the 4.5 million burn rate we reported in the fourth quarter of 2002.

And better than the guidance we provided during the fourth quarter 2002 results call.

While the first quarter is typically the quarter in which we utilize the most cash for certain yearly payments, such as the NASDAQ listing and DNO insurance, we experienced better than cash collections during the quarter, as our day sales outstanding and receivables improved to 62 days from 67 days in the fourth quarter of last year.

And the timing of approximately 1 million of payments for capital equipment moved into the second quarter going forward.

We expect our day sales outstanding will be in the range of 65 to 67 days going forward.

Looking ahead, we will spend a few minutes updating our view of Q2 and full-year 2003.

Q2 revenues are projected to be in the 27 to 29 million dollar range.

Ortho channel, GP channel and international are expected to comprise 62%, 24% and 9% of Q2 revenues, respectively.

Case shipment volumes are projected to be in the range of 16.8 ti 18.2 thousand cases.

Q2 revenue projections reflect an increment of revenue related to reduction and rebalancing of our backlog.

As Tom mentioned, we incurred an unanticipated surge in case receipts related to international and North American customer promotions earlier in the first quarter.

The normalized expected growth rate for Q2, excluding the reduction and backlog, would be more in the range of 7% to 10%.

Q2 growth margins on a GAAP basis are projected to be in the 54 to 55% range.

We expect that gross margins will include approximately $700,000 of stock-based compensation charged to costs of revenues.

Excluding the 700,000 of stock-based compensation, gross margins on a non-GAAP basis were projected to be in the range of 56 to 57% for Q2.

Going forward, we expect stock-based compensation charge to cost of revenues to be approximately 700,000 each quarter for the remainder of fiscal 2003.

Operating expenses on a GAAP basis are expected to be in the 21.5 to 22.5 million range for Q2.

Operating expenses spiked between Q1 and Q2, primarily due to costs associated with our participation in the American Association of Orthodontists, a major annual orthodontist trade show held in May.

On a non-GAAP basis, operating expenses, which will exclude stock-based compensation, are expected to be in the range of 18 to 19 million for Q2.

We expect stock-based compensation charged to operating expense in Q2 to be approximately 3.5 million.

GAAP net loss, which includes stock-based compensation, is expected to be in the range of 6.7 to 8.2 million for Q2, while non-GAAP net loss for the quarter is projected to be in the range of 2.5 to 4 million dollars.

During the second half of the year, GAAP operating expenses are projected to be in the range of 20.5 to 21.5 each quarter, excluding approximately 3.5 million of stock-based compensation each quarter, non-GAAP operating expense is expected to be in the range of 17 to 18 million per quarter.

For the full year 2003, we are increasing our revenue projection to a range of 107 to 113 million from our previous guidance of 100 to 105 million.

Consistent with our prior guidance, the ortho channel, GP channel and international channel are expected to comprise 63%, 25% and 8% of 2003 revenues, respectively.

Case volume is projected to be in the range of 65 to 70,000 cases for the year.

Gross margins are expected to grow steadily throughout the year, driven by cost improvements and higher volumes.

On a GAAP basis, gross margins are expected to be in the 57 to 58% range by year end.

And are projected to average 54 to 56% for the full year based on projected revenue levels.

Correspondingly, non-GAAP gross margins, which exclude stock-based compensation charge to cost of revenues as noted earlier, are projected to be in the range of 59 to 60% by year end, and are projected to average in the range of 56 to 58% for the full year.

For the full year 2003, operating expense on a GAAP basis is expected to be in the range of 85 to 87 million.

Net loss is projected in the range of 23.8 to 26.8 million.

Full-year non-GAAP operating expenses, which excludes stock-based comp and restructuring charges, are projected to be in the range of 71 to 73 million.

For the full year non-GAAP net loss is projected to be in the range of 7 to 11 million dollars.

Full-year non-GAAP projections do not include stock-based compensation of approximately 2.8 million charge to cost of revenues, and 13.5 million charged to operating expense.

And 500,000 of restructuring costs charged to operating expenses.

We are projecting to achieve non-GAAP profitability during the fourth quarter of this year.

Let me move quickly to balance sheet projections.

Q2 cash utilization is projected to be in the range of 6 million to $8 million, reflecting growth in accounts receiveable commensurate with Q1 to Q2 revenue growth.

And as previously mentioned, our day sales outstanding and accounts receivable are projected to average in the range of 65 to 67 days. 2003 full-year cash utilization is projected to be in the range of 14 to 16 million, slightly lower than our previous guidance with cash burn approaching neutral by the end of the year.

Cash balances at year end are estimated to be in the range of 25 to 27 million, slightly higher than our previous guidance with no additional borrowings or drawdown of lines of credit.

Last year, we also provided guidance for 2004 and 2005.

I would like to just reiterate that guidance from last quarter.

Revenues are estimated to be in the range of 140 to 150 million for 2004, and 220 to 240 million for 2005.

Non-GAAP gross margins are estimated to be in the range of 60 to 64% and 65 to 70% for 2004 and 2005, respectively.

Non-GAAP net income for 2004 and 2005 are estimated to be in the range of 4% to 8% and 10% to 16% of sales, respectively.

Non-GAAP net income excludes approximately 9 million and 3.5 million of noncash stock-based compensation for 2004 and 2005, respectively.

To arrive at GAAP figures for 2004 and 2005 estimates, you will need to add back the stock-based compensation to the figures I just noted.

Now, let me turn the call back over to Tom.

Thanks, Eldon.

I just wanted to talk a little about our strategy and our plans going forward.

When I joined the company a year ago, the Invisalign product was starting to gain real traction in the market , yet Align was facing some tough issues.

Align had tremendous opportunities, yet lacked the consistent operating discipline to act upon them.

We began focusing our efforts to create a foundation upon which we could build a strong, growing and profitable company.

The essential elements of our strategy are to make our customers love us and their patients love the results, to become operationally excellent, and to build Invisalign into a global brand.

I'll talk first about our customers.

The orthodontist and GP dentist.

It's a privilege for Align to have these clinicians utilize the product and integrate Invisalign into their practice.

We've completed a number of projects this quarter to enable our customers to have a more satisfying experience with this product.

We have increased the scope and frequency of our training programs to help orthodontists and GP's become more successful in their practices.

For orthodontists, we will provide our workshops where we train them on more advanced cases and techniques, and have interactive sessions to spread those practices to the most experienced clinicians.

For GP's, we have extended the training program from one day to two.

We now focus GP's on less complex cases with a straightforward approach.

Gp's now walk out of training having already submitted a treatment plan and reviewing and approving a ClinCheck.

We also ensure our doctors have the information needed to market their Invisalign practices to the general community.

These programs have improved clinical results, practice expansion and ultimately patient satisfaction.

Additionally, our sales force is trained to stay with their customers every step of the way.

Many times, the sales rep is there when the doctors has his or her first Invisalign patient, helping them through the set up process and facilitating the creation of a treatment plan that will ensure positive, clinical results.

This makes it easier on the doctor, their staff, on the patient, and ensures customer success.

We know what it will take to make Align a world class company in terms of operational excellence.

In our view, operational excellence is defined by exceeding the performance of best in class companies across the full range of company operations.

As a young company, we're really very fortunate that we can drive improvement in almost every process and every area of our business.

Many of those initiatives are getting under way, and we continue to see visible progress, specifically in the area of gross margin.

Last, we are establishing Invisalign as an important high-quality product for dental professionals and consumers.

Our long-term goal is to extend this globally and build Invisalign into a unique, valuable global brand.

While we are currently focusing on building a strong, profitable base in North America, we'll take the lessons learned here and apply them globally.

Country by country, the markets around the world are different, and rather than trying to be everywhere, we'll concentrate on the most attractive country markets where we can best make a difference.

As I said, these three areas are the cornerstones of our business for now and in the future.

Achieving excellence in each area will help us attain our goals.

In 2003, we aim to drive our growth in North America, train 5,000 GP dentists, enhance manufacturing capacity and productivity via automation, and as Eldon said, drive the non-GAAP profitability to manage cash utilization to cash [INAUDIBLE] neutral, as we exit this year.

Beyond 2003, we have set some broader initiatives that we will discuss with you as the year goes forward.

We expect to drive market [INAUDIBLE] growth here in North America, grow our international market where we already have a presence in [INAUDIBLE] critical mass, and we expect to generate significant operating and financial leverage by growing business.

These are our goals for the future, and I look forward to updating you on the progress as we move forward.

With that said, I'd like to turn the call back to April, our operator, for some questions.

Thank you.

Ladies and gentlemen, if you would lake to register a question, please press the one followed by the four on your telephone.

You will hear a three-tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your registration, please press the one followed by the three.

If you are using a speaker phone, please lift your hand set before entering your request.

One moment please for the first question.

Our first question comes from the line of Bruce Jacobs of Deutsche Banc.

Please proceed with your question.

Thanks so much, and guys, congratulations.

Very nice quarter.

Thanks again for the comprehensive information as well.

Tom, can you first just start by telling us a little about the promotions that you talked about that led to the, I guess, you could call it a surge in case volume in the quarter, what exactly those involved and then also, if you could at all quantify the dollar amount of revenue?

I think I heard you say on a percentage, but just qualify the dollar amount of revenue in this quarter that will instead came in this quarter in terms of cases but will be shipped in the next quarter?

First of all, Bruce, thanks for your positive comments.

The promotions were very significantly focused around one specific area that we use as an investment to get new docs going.

And so it very significantly tracked the existing significant expansion of GP docs trained in Q4 and early Q1.

And those are what we call staff discounts, where orthodontists working with their GP partners and GP's that have been trained can get discounts for staff, hygenists, dental techs and the chairside people to develop experience, have firsthand experience in the office when patients come in and see them.

And it's part of our investment in market growth.

Given that we did have a significant strong finish to the training volume of docs late in the year and we had, frankly a little faster start-up that made those docs initiating first cases, these came crowding into very late in Q4, which filled part of the pipeline for Q1 and into early in January.

And we were scaling the business, but not quite to that rate.

So at a high level, maybe I'll ask Eldon to comment on a few of the numbers specifically.

But on the high level, we just -- the business grew faster than we expected.

We have been scaling linearly and it took us three, four to five weeks to get that going in the right direction.

So it's good news problem, but we really want to get back to our normal turnarounds because we did have some customers that experienced some slight delays a week or two than what they've gotten used to in the normal turnarounds from us.

So our goals are to get that backlog back to where our normal cycle times and we're close to doing that.

And we of course are going to have that as a tailwind in Q2.

That's just what happened, not really the plan.

So maybe, Eldon, you want to talk to the numbers people.

Bruce, to your question.

The impact to Q2 in terms of working that backlog down is, you know, in the range of around plus or minus 1300 cases.

That's about 1.8 million to 2 million revenue.

Okay.

Great.

That's very helpful.

And then just one quick clarification.

The submitting doctors that you mentioned, I think 3300 orthos, 2300 GP's, did that include the national orthodontists?

And if not, can you tell us what that number was as a subset of the bigger number?

Those were, yes, Bruce, those were our total submitting orthodontists for the period.

Now, in terms of GP, the vast majority of trained GP's are North American doctors.

So it's a very inconsequential amount.

Less than 100 docs internationally on the GP side.

As far as --

It's pretty much a footprint of North America more than anything else.

Yeah.

So effectively on the ortho side, the total was 3300 in the U.S., was approximately -- just a second, Bruce.

I just have one other question.

Maybe I'll ask that question while you are looking that up.

And that was, can you just comment on pricing, both your pricing to the orthodontist and GP's the promotion aside, and then end user pricing, any noticeable changes there?

And that's all I had.

So the straight question to ask in the context of us describing value from promotions, we've seen a little bit of mixed shift with some GP's doing simple cases, but our ASP has remained very consistent, and is reflected both in gross margins as well as the top line.

Again, these were planned promotions.

They feathered in well with our flow of business.

And we have not seen that needle move at all.

And so Tom, just to clarify, the promotions, you are not talking about broad discounting, it's literally just for the staff cases that are start-up cases, if you will, for the docs to get them going on people within their office, is that correct?

Absolutely correct.

That's why, so the two things that were different is, A, over roughly a five-month period as we ended Q3 and went into Q4, we trained a lot of GP's and got some orthos going again with the business.

On top of that, we -- we had a quicker start to first cases tried in that period.

So as we would normally time out a doctor going through training and when they would initiate their first cases, we actually saw, A, an increase in the number of Docs trained and B, a reduction in the average time where doctors tried to get their first cases going.

Beyond that, beyond that, we're talking about a promotion that said it's $500 off on their first case.

So it's not dramatic in the context of our overall pricing mix.

Bruce, to go back to your earlier question, where we quoted 3300 submitting orthos worldwide, 2500 of those were out of the U.S., 800 internationally.

And as I said on the GP's, the number that we quoted there of 2200, other than just a handful where those were all North America cases.

And does the -- the few that are international GP's does that go on your international revenue just out of curiosity?

It would go in international.

Our trained base of international gp's right now don't exceed 100.

Got it.

Bruce, the bigger issue there is there are -- there's far less distinction in many markets outside the U.S. between gp dentists and orthodontists.

Thanks, Bruce.

The next question will come from the line of Rick Wise with Bear Stearns.

Please proceed with your question.

Good afternoon.

Couple things.

First, just going back to the backlog, I just want to better understand it.

First of all, just you spoke quickly.

I want to make sure I understood the numbers.

You said there were 17,200 new cases, and you shipped, can you say it one more time?

15,400

15,400.

How did it evolve?

Did the cases come in late in the quarter?

And maybe could you comment on, was there any change in roughly three weeks of turn around time?

Rick, it actually was just the reverse.

Where we normally, frankly, had planned on slowing down at the end of the year, we actually saw the surge beginning in, again, we were generally offset.

We saw the volume growing and building rapidly at the end of Q4.

That coincided with the exact time frame when we were really ramping up, bringing on new people in Costa Rica.

And so, you know, a little bit of difference on the margin makes a pretty significant impact.

So as a result, we were still bringing on new people in Costa Rica.

We were not able to respond as quickly as we would have liked.

And so as we exited Q4, in effect filling the pipeline much faster rate than we would have expected and planned for Q1 revenue, our turnaround times did expand, as I talked about briefly.

We traditionally have committed to three weeks in terms of cycle time for doctors, and we went out substantially over that in this period.

We are back about to that point now.

Exacerbating that whole dynamic was the fact that we operate in -- significantly in Mexico, where we shipped the liners from and Costa Rica, where we create the treatment plan to ClinChecks.

Those are both countries that very seriously observe the entire schedule of Christmas holiday.

And as a result, we were facing into this at a tough time to respond flexibly and get over on time and all that.

So we've absolutely responded.

We're rolling now.

The backlog is going to be shed through this period.

I think as Eldon said, our shipments this quarter will be just the reverse.

It will be greater than our expected case volume coming in.

So --

And when you look at the, Tom -- when you look at the, you know, you're talking about the 17,200 new cases coming in, was that evenly distributed over the quarter?

Was there an upward slope and obviously, the factory closing issue again, but might you encounter the same kind of thing in the second quarter?

Are you ready to deal with that if it happens now?

Let me answer that maybe in a couple of practical ways.

We look at our forecast every week and understand what the implications are in terms of coordination and synchronization throughout our whole manufacturing platform.

Our cycle times are -- and our ability to respond to those are based on our ability to grow our operations in Mexico and Costa Rica.

We are well ahead of that curve now.

Again, the driver here was that A, we planned and traditionally was a softer period as we exit December.

B, it was at a time where we were bringing on a substantially new number of people on a training mode.

And C, on top of that you had in those environments, you know, people that observed the Catholic religion, and there was much more difficult to have normal flexibility we would have in terms of overtime and excess staffing and the like.

So then the practical mater is, are we sized today?

Yes, if that same, for lack of a better term, incremental surge into our plan occurred today, we would be in a far better position to deal with it.

We don't really want a backlog growth situation.

We managed a little bit of expansion and contraction over time in that, but what we're really driving for is our committed time frame for turnaround to our doctors.

As our business grows, our net backlog and cycle and capabilities grow, our total cycle of what we call work in process in the pipe will expand with it.

But the real driver here is, are we within the two to three weeks that our doctors normally expect from us in terms of logical turn around?

That's really what we've built capacity around and scaled the business to.

Yeah.

And just one last one for the moment.

Thanks for all that detailed information.

I think it's very helpful, but, so, I hate to push you for one more.

Is there a way to think about sort of your either high volume accounts or same-store sales?

Just some sense of, are you seeing more orders coming from your highest volume accounts, or to what degree was it skewed towards the newer guys?

You know, this is an area we're still learning and growing in.

And as a young business, I would hesitate to kind of try and put some specific dimensions on it.

I realize it would be illuminating.

We do track very carefully practice by practice, doctor by doctor, case submission rates over time, weekly, monthly, quarterly, et cetera.

We have -- there's a whole range of cycling that occurs at different levels of submission.

What I would say in very general terms is, we don't see any fundamental change in the makeup, the flow, and the of construction of that pool.

We don't see any change in the basic revenue model that says, you know, if you take orthodontist for a moment, you know, we have a broad-based -- 65% of our revenue from orthodontists comes from 35% of our customers.

And of those highest volume customers, we're not even dominant in their practice.

They still have practices that are much, much larger than our Invisalign practice.

Some of these doctors may do up to 300 cases a year.

So literally, it's all over the map.

We have orthodontists that submit one per quarter.

We have orthodontists that submit more than that.

But what we generally see is those tiers kind of move up, not in lock step but in general, as people are starting to get on the bandwagon.

What I would say in general is, doctors that have never used us or tried us maybe once, two or three years ago, and never come back.

We're not spending a lot of time to try and get them back in.

We spend most of our energy trying to help doctors be successful in their practice that have used it, done some cases, and help them grow their business.

Beyond that, we see some doctors that have dramatically expand their practice and have gotten great clinical results.

And in this economic time have indicated they've dramatically grown their practices, even in the face of what some people are calling a very tough economy at the consumer level.

Thanks, Tom.

The next question comes from the line of Adam Galian with JP Morgan.

Please proceed with your question.

Thanks.

A couple of quick questions.

The first you alluded to somewhat during Bruce's questions, but I was hoping for a little more detail on how the two distribution channels in North America is planning out.

I think the hope is that the GP's would do all of the easy cases and refer all of the harder ones to the orthodontists.

Is that in fact what's happening?

Can you just give us a little more detail on how that relationship is playing out?

And also, could you tell us what's on tap for at Academy meeting.

I think a few years ago, the focus was introducing the product, and last year really driving the orthodontists' perception of the applicability of the product.

Is that the same message that will be offered this year?

And anything else you can offer about the Academy meeting.

So let me take the first question, which is how the details are playing out.

We have been pursuing the same strategy for a while here.

We now have two distinct sales forces and we're trying to drive what we're calling a coordinated the market model, where we first look for those positive referral patterns in each market for the orthodontist and GP, and in fact we've had a number of orthodontists that have actually paid for the course for their GP referral sources to go to and have helped them do those simpler cases.

And have helped them do some harder cases.

What I would say is, our trained program has evolved very, very significantly and we rolled that out in the first quarter.

And it's now a two-day program for GP's.

We actually have tools to help them to isolate really what we think is probably most appropriate for that level of training, which is class one, you know, mild crowding.

Probably less than six millimeters, and tools to assess the degree of crowding.

And on a very organized framework to go approach that case.

At the same time, we try to have the GP rep and ortho rep coordinate with the orthodontists to help them have success.

What we have seen anecdotally is, those markets where we've been able to successfully create that coordinated approach, A, we seem to be attracting -- basing the attractive patients that are truly incremental that we're not seeking treatment at the hand of the orthodontist, but that are coming through practice getting their teeth cleaned and basic work done.

And B, we're seeing in general milder cases, because that's what we're reinforcing for them is most appropriate to do.

We will later in the year roll out a second level of certification for those GP's that are committed to continuing to learn to deal with more complex cases.

But we would love to see this market evolve so that the orthodontists are the specialists here.

There are many other areas of health care where as a practice expands, you bring new people into it.

The front line GP's can help attract those people in, and the specialist practice can grow as well,l as they take the more complex cases.

That's what we're trying to do and that's actually what we're starting to see.

But it's very early in the process.

I think there was a second question and I think it was about what are our primary themes for AAO?

Right.

We're continuing some of the same messages from last year, really, is that we're seeing great results on a broader applicability of cases.

We're spending a lot of energy and effort in sharing and spreading the kind of things we do at provider workshops, where doctors are sharing their results and their techniques to finish, because one of the things that happens with the private office practice physicians, there aren't that many great opportunities for them to learn from peers that have done two or three, four times as many cases.

So we're trying to use opportunities like this, like our Invisalign Summit and Invisalign workshops, to help speed that spreading of knowledge and experience and help the doctor who's doing, you know, one or two a month, learn how they can both do more cases and broaden the applicability of the practice.

So we're continuing some of the same themes from last year, frankly, and having good residents there.

One other question, you know, a key to the future would be to penetrate the, you know, younger, less rigid, more tech savvy docs.

In doing so, maybe get Invisalign married into the residency programs for orthodontists.

What role does Invisalign currently play in those programs, and what kind of proactive, you know, things have you guys done?

Sure.

It's a great question.

It's really getting at the source of new trained docs.

We have a series of initiatives going on, and we haven't given a lot of voice to it.

So I will take a very high level discussion here, but we already are plugged into a number of teaching programs both at the dental schools as well as a handful of orthodontic schools.

What I would say is, we are not a mainstay today in any way in the orthodontic and major orthodontic teaching centers.

It is our intention to become that.

It is a very contemporary treatment appliance and approach, and our goal over time to become recognized as such at the major academic centers and be involved in those programs.

So this is a big effort.

We're with not going to try to do it overnight.

We're trying to build the right relationships in major academic centers and become involved with those doctors.

Additionally, we do go ahead and invite them to come into certification when they complete their process and typically for graduates that got training in their programs, we provide a couple of free cases when they get started in wherever they land for practice.

So it's a long-term program.

You know, I'm not prepared to go into a lot more detail at this point.

But long term it's the right way to train the docs of the future.

Thanks.

The next question will come from the line of Shakar Baso with Greenburg Healthcare.

Please proceed with your question.

Thanks.

Congratulations on a great quarter.

Can you just answer a question?

The Invisalign device is used for the entirety of the time or the duration where you have your teeth straightened out for a two-year process, or I hear that you need it for a certain portion of it.

And the majority of the alignment is acquired -- is done with the other devices.

I'm just wondering how that's working out?

Are the orthodontists are happy with that or are the parents happy with switching devices, adding to the total costs of the Invisalign technology in addition to the other technology?

Sure, Shakar.

Thanks for your positive comments.

You know, I'm a realist.

My first reaction when I hear something solves every problem, I usually don't believe it.

Invisalign is no different.

Invisalign is an absolutely great appliance that does certain kinds of movements for teeth better than conventional wires and brackets.

There's also movements that are harder for Invisalign to perform, and so what I would say, the only way to answer your question is to say it depends.

It depends on the clinician's skill and experience with a given set of appliances, whether those be a certain kind of brackets or wires or Invisalign.

It also depends on the kind of case and the treatment approach they are using.

So for example, for what most orthodontists would say Invisalign does best,, and just being conservative here for the moment, would be class one kind of crowding cases, mild to moderate crowding.

And that's probably right in Invisalign's sweet spot.

In general, we would expect, and the doctors would expect, that Invisalign can treat that patient through the full course of treatment with no other appliances used.

That's fundamentally what we see happening.

And that's a significant portion of our case volume.

There are a number of other doctors that have really pushed the envelope and done extremely complex cases, upper and lower vertical bicuspid extraction where they are closing large spaces, doing large scale distillation where they are making large body movements.

Those are hard cases for conventional wires and brackets and braces to do as well.

They are difficult cases.

So what I would say in general is during the course of those cases, an orthodontist will put different appliances and brackets configurations on and off during the case.

It's not so visible to the patient when they are doing that because they are going in and out, they leave, they might have a couple of new sectionals or a new type of appliance on, but they still see wires and brackets on their mouth.

So it's not so obvious.

With Invisalign, when they finish Invisalign, if they have to put a sectional on, or if they have to move to wires and brackets and braces in a complex cases, it's much more obvious.

Sure.

And that said, let me finish, two seconds.

Sorry.

We are seeing some doctors present in very complex cases, where a patient might be looking at two to three years of treatment with conventional appliances, presenting them with an [INAUDIBLE] approach that says, let me put clear brackets on you for eight months, say, and make some of the major movements that those appliances do best, and let me finish the case with Invisalign for say, 12 to 14 months and give you in effect a full set of treatment in a different way, and charge you more for it than I might have done with the conventional treatment.

We're starting to see some of that.

Right, right, right.

And I just wondered in terms of pricing flexibility and pricing power, having been in the business now for about a year, year and a half, right?

What sense do you have as to how much pricing power there might be to elevate prices a little bit?

Well, you know, I don't know.

I -- pricing power, my view is, we work really hard to ensure we're delivering the value.

We've got a product that is expensive for a clinician to use.

It saves them a substantial amount of time and practice, used properly, and I think it creates real practice leverage for them, but we have to earn it.

We have to help them get great results.

There are no kind of -- our offerings are going to continue to evolve, and -- but we don't really see that we're going to be raising prices and trying to exercise that at this point.

And I think what I would say in general, we're going to have a broader set of offerings that both address very simple indications that a GP might do for mild or moderate crowding, and at the same time, a very high end case a complex case that the doc might try to do with Invisalign alone or in combination, as I said earlier, clear brackets for one of the major manufacturers.

I think what we want to do is evolve our offerings to best fit their needs rather than trying to crank up the price there.

And a clinical question, marketing developing question.

Are you developing any clinical development activities like trials of certain types of crowding, where clinical data's awaiting publication and presentation and certain conferences, where the docs are becoming more comfortable with the success and that type of crowding, which would perhaps have an impact on the business going forward?

Yes.

The short answer is absolutely.

We have a whole set of programs and a whole various types of academic institutions.

We already have 22 or 23 papers that have been published and presentations held.

We have some major pieces of work coming out of the University of Florida, which is a very respected center, and others.

So this is a significant part of our long-term goal to drive broader clinical application and applicability.

Okay, thank you.

Thanks very much.

Ladies and gentlemen, as a reminder, to register a question, please press the one followed by the four on your telephone.

The next question comes from the line of Wade King with Wells Fargo Securities.

Please proceed.

Hey, Tom, congratulations on the quarter.

Question on utilization metrics.

I know you had a prior question, I think, trying to direct you in this regard.

Is there anything that you can say amongst your active users, those that you consider to be consistent, regular users of Invisalign, as it relates to utilization metrics?

Let me talk in very, very broad terms, Wade.

You know, there's nothing that would make me happier than to provide what someone earlier described as having same-store growth.

I hate to project the orthodontics or GP dentist office as a store, because there's a lot of things going on in there, but we would love to be able to share with you our views of utilization, but we want to make sure before we go in that direction that we are comfortable.

This is still a young business that our models work as we think about them.

What I will say in very, very general terms is we see -- let me think of it this way.

If I take our top 20% of docs from our orthodontics -- and let's not use GP's for long, because we're still very fresh in that business.

If I go back eight quarters, almost without fail, every single one of those doctors has increased utilization.

They invite us to become a bigger part of their practice over those last two years. [ talking at once ] It hasn't been dramatic, but been very consistent.

Broadly, I can make that statement absolutely.

It's not the same when you get -- there's more turnover for people that do low volumes.

They may go and do 5.25 or they may do 2.25.

Once you start getting to

where it's becoming a more important part of the practice, it's a steadily increasing kind of growth.

There is a bit more churn in the layers below that.

Again, we're not prepared to go into much more detail than that.

Okay.

Very good.

There are some things that appear in the Department of Health and Human Services, electronic notifications about optical scans as it relates to class, various classes of devices.

Does this affect you at all, Tom?

No.

We're a class one device.

We are -- we continue to ground ourselves in the kind of requirements issues.

This is not an issue for us.

Okay, very good.

Could you give us an update on personnel in Costa Rica, Mexico that are working for you on a, you know, employee basis, giving you references for particular areas?

What are those figures?

Let me make sure I understand the question.

Are you talking about our employment base in those markets, or are you talking about how we cover those markets with distribution resources?

I'm talking about your employment base.

I know that, you know in Mexico, it's something you said you used a variety of contracting workers for a specific period of time.

Could you talk about your employment base there?

Sure.

So, we in Mexico we have a great partner in Juarez, and at one point, we probably had you know, or they had, close to 400 to 500 employees there.

That base now is probably 125, as we've increasingly automated all of the processes there.

In Costa Rica, these are employees.

We have an important operation for the company.

These are incredibly talented, high energy, a lot of them young people, dental technicians, dentists and orthodontists.

Again, Costa Rica was chosen because of its proximity to the western United States, where you can get there, its time zone framework, which is equivalent to central time for us, and the fact that they have an excess population of dental techs and dentists because of their training programs there in the market.

We have today at the end of the first quarter a little over 300 -- around 300 employees in round numbers there, and they are doing a bang up job coming up the curve very, very fast.

Okay, very good.

Lastly, Tom, the one area that over the years in talking to clinicians, we have found the greatest reservations actively in terms of treatment plans has been in the adolescent population.

From our checks, we find a little bit more interest and exploring late adolescent cases with Invisalign, certainly starting would be, you know, central and moderate cases.

Can you describe what's happening in the channels from the sales force perspective at a line as it relates to targeting the late adolescent population?

Sure.

Thanks.

Good question.

We -- the company undertook over the last 18 months a series of studies, both out in what I call commercial practice clinics that have large populations as well as some centers, research focus centers.

The two issues there were compliance and effectiveness.

And I said it tongue in cheek, but it's absolutely accurate.

The compliance rate, in other words, are they wearing the appliance for the appropriate amount of time to get the right results, was far higher with adolescents than with investment bankers and venture capitalists, which were compared as a group.

That's probably fair, huh?

That plus the results we've seen for effectiveness, we presented those results to a series of docs at our Invisalign Summit.

We've since initiated a whole team marketing program for those more mature teens that we describe in very significantly detailed clinical terms for the offices so they can select those cases that will be effective.

And their treatment coordinators and doctors present that option in the right way, whether the responsibility's on the teen and the family to comply, or they're going back to the option their brother or sister may have had.

We're seeing very good results with that.

It's still pretty early.

We've only got into it in the first quarter, but we're seeing very, very positive results.

One last question, if I may.

In the case of some other businesses that have had a significant cosmetic element to them, for example, laser vision correction, several companies participate in their surges in the first quarter and case volume domestically when people have their health care spending account money anew available to them as of January.

Do you think that this is something that impacts your business in any significant way or no?

Well, you know, we are doing a lot of consumer work, Wade.

It's a great question because a number of dental plans, a number of insurance plans for companies are now starting to allow, you know, -- so the whole question is timing.

Starting to allow people to use flex spending balances for elective procedures.

So that might range for something on the cosmetic side like Botox, or it might be that would not be covered under the insurance program but would be otherwise out of pocket for the consumer.

That's not broadly doing it, but we're seeing a number of carriers do that in the dental area.

Some people have defrayed some of the costs for Invisalign that way.

Given the timing of our volume growth, it was really more of an end of fourth quarter, which goes into our first quarter shipment, you know, wormed, and early, very early first quarter.

So I don't think that's the answer for us.

It was really more driven by a significant step up in trained doctors getting going on their first cases.

And you know, those were the two effects I talked about earlier.

But we continue to work pretty hard to understand what's going on at the consumer level.

I wouldn't say we've had any revelations yet, but we're getting a better handle on how this product is positioned with the consumer they value it relative to some other choices they've got in their lives.

All right.

Thanks, guys.

We may have one or two more questions before we're out of time here.

The next question will come from the line of Bruce Jacobs with Deutsche Banc.

Please proceed with your follow-up.

Thanks, guys.

Just a very quick follow-up, or actually two of them.

Tom, can you comment at all on the perception of the applicability of the system and how, if at all, it has changed.

That would be one of your issues with the orthodontists.

And secondly, you haven't talked too much about your marketing campaign.

Just perhaps talk about the advertising you're doing and whether you've been able to measure its effectiveness in any quantifiable way.

So the first question is, at one point, I think the company wanted to believe we could do everything, that Invisalign could solve every problem.

As I said earlier, when I hear that as a consumer, I don't tend to believe that, either.

I think what we've done is provided clinical and almost at a bioengineering level data to our clinicians about the predictability of certain kinds of movements and certain setups for certain kinds of cases.

What we really want to do is give them the facts and information and help them select the right cases, to get the right results.

We're not best served if a doctor tried to make Invisalign work on a case we that may not be able to help them finish just on Invisalign alone.

There's such a huge population of patients and potential patients out there, that we want to have them select the right cases.

So my starting point, Bruce, is that I'd rather have them be more conservative than less conservative.

And as we can demonstrate, absolutely demonstrate effectiveness of treatment, we will earn the opportunity to be used much more broadly applicably.

At the same time, a lot of this market growth we're seeing are people coming in that have the more moderate to mild cases.

So I'm okay with that.

We'll prove over time our ability to deal with those tougher cases.

And really, we would rather the doctor be concerned than us.

We'll continue to work that.

And as we have the facts and data, I think we can move that needle even more.

The second question was about marketing.

We took a little bit a time-out late in the fourth quarter on, you know, on I think you're probably referring to advertising, both presses as, you know, media as well as others, because we have a series of programs that run all year, program -- co-op programs with doctors with channel support and specific practice support.

That goes on almost all year with a whole set of programs that we continue to evaluate and tune and measure effectiveness on.

We restarted some advertising on the middle part of January after kind of the holidays were over, and have had good reaction to that.

Again, we're doing that at a metered way.

For the year, we probably won't spend more than maybe $7 million in all in for the total year.

And we're getting very, very good results and we're measuring that very -- in a very statistical way, and our costs per lead have come down dramatically as a result of that.

I'm not prepared to share that with you, but we are getting more and more effective with that approach.

Now that said, we don't look at that as the driver for growth.

We look at that, to both provides hot qualified leads for docs, and at the same time to grow awareness out there for consumers.

So we're not expecting TV advertising to be responsible for growth.

It augments the things we're doing out in the professional channels.

That's helpful.

Thanks very much, guys.

One more.

One more question and the operator's telling us we have to get off in a moment.

The next question comes from Lenny [INAUDIBLE] with [INAUDIBLE].

Please proceed with your question.

You slipped underneath the wire, guys.

You get off in a moment.

Lenny, just for you.

I was holding my breath.

I wanted to ask you a little about the guidance based on the guidance for the year and for the next quarter, if looks like the second half of the year may be flatish sequentially.

Did I read that incorrectly?

I wouldn't call it flatish, Lenny from a standpoint of, you know, the one thing that I tried to make sure they are talking about, you know, the clean up and backlog of kind of a trajectory of around 7% to 10% discounting that number in the second quarter on a go forward basis.

So if you look at our projection for the quarter, it says that number and the first quarter and then you look at the total year projection, you will see growth in the second half.

The guidance for the next quarter was 29 million?

Did I get that right?

Second quarter, the revenue range was 27 to 29.

Okay.

And answering Bruce Jacobs' question, it was around 1.8 million to 2 million of catch up or backlog.

All right.

And then the year was 113?

107 to 113 million.

All right.

That was my question.

And are there any new products coming to market any time soon?

Upgrades and such?

We -- you know, what I would say, Lenny, is we do a lot of focus group work with our doctors.

We share new ideas, new technologies and new, both the next step as well as some very different concepts all the time.

So from time to time, I hear little bubbles out there about that but we're continuing to drive forward.

We've got a great product.

We wouldn't talk about that on a perspective basis.

Okay, guys.

And great job.

Any news on any additional news on the Cyrom litigation?

Just to say that, you know, we don't comment on any pending or active litigation.

You know, just doesn't make a lot of sense.

If you have a specific question about something procedurally, I might be able to have our general counsel answer, but we don't comment in general on anything going on in that area.

Okay, guys.

Keep it up.

Thank you.

Lenny, thanks for your interest.

Thanks for calling in.

Operator, I do have one quick comment just to correct something I misspoke about when someone asked me about.

So before we close here, someone asked me about our operations.

There are, in fact, our partner Elomax has in Juarez roughly 200, 250 people not 125.

Again, those are in the Align employees, those are Elomax employees and they do a great job for us.

Thank you, sir.

There are no further questions on the phone.

Please continue with your presentation or closing remarks.

Great, thanks, operator.

I would just, again, like to thank you for being on the call today and continuing to support the company.

If you have any further any questions, we can reached at 408-470-1000.

And probably the right place to start is Barbara Domingo, Investor Relations.

Thanks very much.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you