愛齊科技 (ALGN) 0 Q0 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Align Technologies fourth quarter and year and fiscal 2003 results conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question and answer session. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded Thursday, January 29, 2004.

I would now like to turn the conference over into Ms. Barbara Domingo, Director of Investor Relations.

Thanks, Don, and welcome to everyone on the line.

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

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

During the conference call, we may make forward-looking statements relating to Align's expectations about future events or our 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 are subject to risks, 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 (indiscernible) include but are not limited to, risks that are detailed from time to time in Align's periodic report filed with the Securities and Exchange Commission, including but not limited to our annual report on form 10-K A for the fiscal year ended December 31, 2002, which was filed with the Securities and Exchange Commission on October 13, 2003 and our quarterly report on form 10-Q.

Align undertakes no obligation to a 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 financial measures.

Most of these items together with a core fund (ph) GAAP number and a reconciliation to the comparable GAAP financial measures where practical are contained in today's financial results press release which we posted on our web site at www.invisalign.com under corporate information, investor relations, earnings press releases and (indiscernible) Securities and Exchange Commission on form 8-K.

We encourage listeners to review these items.

Additionally, we have posted an 8-quarter GAAP and non-GAAP revenue model on our web site at www.invisalign.com under corporate information, investor relations, financial history.

Please refer to both of these downloadable Excel spreadsheets for more detailed line item information.

With that said, I'd like to introduce Align Technologies' President and CEO Tom, Prescott.

Tom?

Thanks, Barbara, and welcome to our shareholders and friends who are listening on the phone today and through our web site. 2003 was an exciting year for Align.

We realized improvements in manufacturing and production, sales and marketing and clinical education through key initiatives, facilitating record revenues, margin and for the first time, GAAP profitability in the fourth quarter.

We also generate cash for the third quarter in a row and ended the year with positive cash flow.

This is an exciting time for us and I look forward to sharing with you some of our accomplishments, as well as our plans to continue this progress.

Let me first give you some top and bottom-line highlights.

We reported $36.5 million in revenue for the fourth quarter of 2003 and $122.7 million for the full year.

This is a sequential increase of 7.4 percent over the third quarter, an increase of 75.5 percent over the same quarter last year.

On a full year basis, revenues increased 76 percent.

Additionally, in Q4, we reported our first profitable quarter on a GAAP basis.

Net profit was $2.5 million, or EPS or 4 cents.

Let me now take you through some key operating metrics.

Both the orthodontist and GP dentist channel revenues and cases continue to increase.

We continue to see a sequential increase in the ortho channel of 4.6 percent to 20.5 million, GP revenues sequential increase to 13.8 percent to 10.7 million.

Overall, 56 percent of total revenues came from orthodontist.

During the fourth quarter of 2003, we received orders for approximately 21,300 net new cases, an average of 344 cases per business day, which is an increase of 15 percent from the previous quarter.

We shipped almost 20,700 cases to customers this quarter, an increase of 4 percent over the previous quarter.

On a full year basis, we received almost 75,000 cases and shipped 73,700 cases.

We shipped almost as many cases in 2003 than we did in 2001 and 2002 combined.

Finally, I would like to share some case volume and channel statistics with you as we try to do on each call.

Approximately 7300 doctors worldwide submitted cases in the fourth quarter, compared to 6500 last quarter.

The number of orthodontists in many cases was just over 3700, up from 3500 last quarter and over 3500 GP dentist submitted cases compared to 3000 last quarter.

Additionally, we trained and certified over 1200 new GPs in the U.S. during the fourth quarter, bringing our base of certified GPs in North America to 9700.

And just over 80 percent of our North American clinicians and 79 percent of our certified doctors worldwide have submitted more than a case.

We have done a good job of getting clinicians initially trained and trained started in the Invisalign approach.

At this point, I would normally turn the call over to Eldon to discuss our financials.

Today, I will first provide a framework of our key strategic initiatives for 2004 and describe the plant in place to drive growth, increase margins and foster awareness of Invisalign.

I believe it will be far more meaningful for Eldon to lay out a view of our operating profile going forward with this framework in place.

Before I do that, let me tell you about some of our accomplishments in the fourth quarter and in 2003, besides turning profitable and generating cash.

Turning first to manufacturing, 2003 was a year of significant changes.

We completed over exit from Pakistan and the United Arab Emirates going into the year and transitioned all of our digital dental modeling, or what we call treat (ph) operations to Costa Rica.

The Costa Rica team has done a great job at scaling rapidly and delivering excellent treatment plans for our customers.

In September, we moved our operations to a new 50,000 square foot facility there while improving product flow and quality, all with zero interruption during the transition.

This new state-of-the-art facility will provide us with capacity to expand case volume for years to come.

Additionally, we were successfully recertified in ISO 9001 and ISO 1345 in both Santa Clara (ph) and Costa Rica.

And last, we continued our automation initiatives at out partners' facility in Juarez, Mexico.

We're using a flex link material handling system to connect and feed automation cells in our liner fab (ph) production process.

We're still early in this drive for manufacturing excellence, yet our vision is to fully automate and integrate the aligner fabrication and the (indiscernible) technology under one roof.

This will help us continue to improve gross margins and operating efficiencies.

On the R&D and clinical side, eight new papers were published in the fourth quarter, bringing the total for last year to 11.

We also launched five new recent studies in 2003 with major universities around the world.

While we cannot tell you what these projects entail just yet, we look forward to sharing results with you as these research partners begin to percent their findings.

And last, let me to you about some important achievements in marketing.

Looking back on 2003 was a year of remarkable progress in the marketing and clinical education front.

In the fourth quarter, we initiated over 100 clinical education events, bringing the total for 2003 to over 350 events.

These workshops, seminars and conference calls have helped us teach our customers more about our product, increasing their confidence in getting great outcomes and as a direct result, leading to increases in case admissions and therefore revenue.

We also hosted the third annual Invisalign Summit, bringing 1000 attendees together to hear about getting out of Invisalign.

We launched the Invisalign Clinical Education Center in April, which now has 18 full case studies that show doctors the varying types of cases Invisalign can treat.

In the fourth quarter, we launched 15 continuing education courses, offering (indiscernible) credits to our clinicians.

We expect (indiscernible) valuable clinically rich information to our customers that is highly regarded online media.

We conducted over 157 certification one courses during the year, enabling over 4300 GP dentists the opportunity to offer Invisalign treatment to their patients and to help us expand the market.

Additionally during the year, we published both the clinical monitoring guide and the clinical curriculum.

The clinical moderating guide will provide an overall framework to guide the use of Invisalign as well as tips and techniques to properly finish cases with great results.

And the clinical curriculum helps our customer select appropriate educational seminars and events to help accelerate their understanding of Invisalign and the path towards optimal patient outcomes.

We were also integrated into the New York University dental school curriculum and were able to certify our first class of graduating dentists.

We will now certify NYU students on an ongoing basis as part of the dental school's curriculum.

We also launched partnerships with Kodak and Hewlett-Packard, enabling doctors to receive preferential pricing on products and making it easier for them to submit Invisalign cases.

We had a presence in over 20 and orthodontic conventions, including the ADA and AAO national meetings.

We launched a team kit focusing on the treatment of teenagers and we're really starting to see that initiative pay off.

And last, we have launched a revised marketing co-op program helping doctors better advertise their practices much more effectively in their local market.

As I have said, 2003 was an exciting year for Align.

We demonstrated good execution on our plans and validated our business model.

This combined with better customer support has earned us an expanding role in our customers' practices.

With that said, let me move on to our plans for 2004 and describe several key initiatives that will ensure the robust systems, processes and capabilities are in place to support this rapidly growing enterprise.

Make no doubt, our goal is to be a great company.

A great company with a capacity for continued rapid and sustainable growth, driven by a desire to become the most important part of our customers' practices while we access an enormous market.

As we said on our last call, we will increase spending in key areas in order to extend the foundation for a stable and efficient operating platform so that we can better leverage the opportunities in 2005 and beyond.

This is necessary because we expect more growth in the future as we continue to train orthodontists and dentists and as they become more comfortable applying our product to a broader range of cases.

Reinvesting now in the systems, tools, core processes and customer-facing applications ensures that we will be prepared for this increasing influx of cases as our customer base grows.

At the same time, we will step up investments in marketing and advertising to create awareness among our customers and their patients.

Let me take you briefly through our plan in these areas.

Historically, spending in research and development, which includes engineering, has been a small part of our operating cost.

This year, we plan to increase absolute spending in R&D by 50 percent.

Yet even after that, it will constitute just over 9 percent of revenue, about the same as 2003.

The investment will go into programs such as software project improvement, product and materials research, data mining and increased automation of our production line.

As part of our efforts to continue to enhance our customers' experiences with Invisalign, we plan to make changes to our customer-facing software application we call VIP and ClinCheck.

Both of these systems will undergo upgrades to make it easier for our customers to view, track and interact with our cases.

We are also launching additional clinical research studies relating to the breadth of product applicability as well as broadening the patient base for our clinicians.

As part of that effort, we are evaluating and developing additional ancillary products that will help our doctors use Invisalign better and more easily.

These are still in the primary stages of development and it is too early to talk about them in detail but we would expect that these improvements, the overall clinical experience of Invisalign will be significantly enhanced.

Later on this year, we wanted to take a major effort to simplify the extraction of data from our cases, what we call data mining.

We believe this project will eventually lead to the largest and most valued database in the world with respect to orthodontic cases.

By enhancing our capabilities to interpret the vast amount of data we are accumulating, we will be better able to utilize predictive models, track progress and guide clinicians towards optimal approaches to treatment.

I'm going to move on to sales and marketing.

As we said on our last call, we plan to increase spending in this area, especially with respect to clinical education and direct to consumer, or DTC, advertising.

In 2004, we will continue and broaden our clinical education efforts.

We expect to increase the number of clinical education events while expanding on both the scope and content at these events.

Additionally, we expect to conduct over 150 GP certifications and five new ortho certifications.

This unprecedented effort will bring enormous leverage to better train customers that are confident of achieving great outcomes.

On the consumer side, we plan on increasing DTC and related consumer program spending since we've seen a direct correlation between focused, quality advertising and lead generation effectiveness.

We will probably spend 30-40 percent more on these consumer initiatives than we did in 2003.

While we will not change how we advertise to the consumer, you should expect to see more of us in 2004.

Longer term as we are successful in building a strong and profitable business base, this league-focused DTC approach will start to shift towards the strategic goal of building Invisalign as a global brand.

Additionally, we will continue to increase the number of salespeople we have in both the orthodontist and GP channels.

The added coverage will ensure that our customers are receiving the best support from us that they can.

Our last area of expansion in investment in 2004 is international.

We have said all along that we do intend to refocus on key international markets in the right way, at the right time.

Our international revenues in 2003 were above our expectations and the international teams are to be commended for their contribution to the business.

Now that our core business model and customer support approach has been validated in North America, we will carefully start to reinvest primarily in Europe.

This incremental investment will support expansion of the sales team, marketing programs and clinical education.

We intend to provide the same focus, support and great results for our customers outside of North America than we're able now to consistently deliver here.

The plans we have in place for 2004 will help us ensure that in 2005 and beyond, we will have the platform in place to deliver on our commitment to an expanding base of customers.

Over the past 18 months, we achieved progress faster than we had originally planned and we now must accelerate some of the programs we're expected to initiate late in 2004.

This is a wonderful problem, a direct result of meeting or exceeding our customers' expectations and experiencing rapid growth.

Our strategy of going deep into our orthodontists' practices, increasing utilization and expanding our number of trained GP dentists to create category growth is working.

The entire Align organization is committed to this strategy and the successful execution and will deliver gains and shareholder value.

With that said, I will now turn the call over to Eldon Bullington, our Chief Financial Officer.

After Eldon goes through our financials and our guidance for the first quarter of 2004 and the full year for 2004, we will take some questions.

Thanks, and good morning everyone.

As a quick reminder, our fourth-quarter financial results press release and 8-K filing of the same document are available on our website.

The format today is first, I will provide Q4, then full year 2003 GAAP financial, followed by Q4, then full year 2003 non-GAAP financials.

We will also provide balance metrics prior to supply in Q1 and full year 2004 guidance.

First Q4 revenues.

As Tom briefly mentioned, fourth quarter revenues were 36.5 million, up 7.4 percent from last quarter and 7.5 percent for the same period a year ago.

Benefiting fourth-quarter revenue was approximately $500,000 of nonrecurring adjustments related to sales, credit reserves and case refinement revenue.

Fourth-quarter revenues by segment were 20.5 million for U.S. ortho, 10.7 million for U.S.

GP and 3.2 million for international.

These channels represent 56.2 percent, 29.3 percent and 8.8 percent of revenues, respectively.

Worldwide training and other revenues were $2.2 million.

Gross profit for the fourth quarter of 2003 as reported under GAAP was 23.6 million, or 64.7 percent of revenue, compared to 9.1 or 43.8 percent of revenues for the fourth quarter of 2002.

Sequentially, this compares to a gross profit of 20.6 million, or 60.5 percent of revenues for the third quarter of 2003.

The increase in gross margin, which was higher than our expectations, is primarily attributable to continued manufacturing process efficiencies in both our treat ops (ph) facility in Costa Rica and the aligner fabrication process.

As Tom mentioned earlier, we're seeing the benefit of investments to our automation strategy.

Additionally, margins also benefited from the nonrecurring revenue adjustments I mentioned a moment ago.

Total operating expenses reported under GAAP were 21 million for the fourth quarter of fiscal 2003.

This compares to 24.3 million for the same quarter one year ago and 22.3 million for the third quarter of 2003.

Operating expenses for the fourth quarter declined compared to the third quarter and were below our expectations due primarily to nonrecurring expense reductions totaling 1 million related to a favorable settlement of sales tax matters that we recorded in Q2 and discussed on our Q2 and Q3 conference calls and a reduction in bad debt reserve due to improvement in our accounts receivable aging profile.

In addition, the business benefited from the euro to U.S. dollar exchange rate, which contributed approximately $500,000 to profitability during the fourth quarter.

Net profit for the fourth quarter as reported under GAAP was 2.5 million, or 4 cents per basic and diluted share compared to a net loss of 15.4 million, or 30 cents per basic and diluted share for the same quarter one year ago and a net loss of 2.1 million, or 4 cents per basic and diluted share for the third quarter of 2003.

A quick note on the top and bottom line performances related to the case refinement restatement we announced in July.

The restatement contributed $2.3 million of revenue and associated income in the fourth quarter.

Full-year 2003 revenues were 122.7 million, up 76 percent over 2002. 2003 revenues by segment and percentage of growth year-over-year were 72.1 million for U.S. ortho, up 48 percent; 31.5 million for U.S.

GP, up 232 percent and 11.7 million for international, up 113 percent.

These channels represent 59 percent, 26 percent and 9 percent of revenues, respectively.

Worldwide training and other revenues were 7.4 million, or 6 percent of revenue.

Gross profit for 2003 as reported under GAAP was 71.2 million, or 58 percent of revenue compared to 24.7 million, or 35.4 percent of revenues for the full year 2002.

The increase in gross margin is primarily attributable to a combination of manufacturing process efficiencies and improved fixed cost absorption relating to increasing volumes.

Total operating expenses reported under GAAP for 2003 were 89 million, compared to 97.6 million for 2002.

Operating expenses declined 9 percent, primarily as a result of declining stock-based compensation costs and nonrecurring restructuring cost.

Operating expenses excluding these items were flat year-over-year as the Company made a concerted effort to manage costs, focus on spending priorities and execute to the initiatives announced during the restructuring in 2002.

With the restructuring completed in 2002 and a renewed focus on North American clinicians during 2003, we were able to control spending while maintaining a high level of support and customer service for our doctors.

Net loss for full year 2003 as reported under GAAP was 18 million, or 31 cents per basic and diluted share, compared to a net loss of 72.8 million, or $1.52 per basic and diluted share for full year 2002.

Now let me take you through results on a non-GAAP basis.

Non-GAAP financials differ from GAAP financials in that we exclude the effects of non-cash stock-based compensation and restructuring charges from cost of revenues and operating expense.

The reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is included in our financial data for the fourth quarter and fiscal year 2003 which are included in the press release attached to the form 8-K we filed with the SEC earlier today.

Again, I will first discuss non-GAAP financials for the fourth quarter of 2003 followed by the full year.

Total stock-based compensation for the fourth quarter of 2003 was $3 million, compared to 3.4 million in the third quarter of 2003 and 3.8 million in the fourth quarter of 2002.

Additionally in the fourth quarter of 2002, we also recorded 3.4 million of restructuring charges and operating expense.

Non-GAAP gross profit for the fourth quarter of 2003 was 24.1 million, or 66 percent of revenue.

This compares to 9.9 million, or 47.6 percent of revenues for the fourth quarter of 2002 and 21.2 million, or 62.4 percent of revenues in the third quarter of 2003.

Non-GAAP gross profit for the fourth quarter of 2003 excludes approximately $500,000 of stock-based compensation.

Non-GAAP operating expenses were 18.5 million for the fourth quarter of 2003, compared to 17.8 million for the same quarter one year ago and 19.6 million for the third quarter of 2003.

Non-GAAP operating expenses for the fourth quarter of 2003 exclude 2.5 million of stock-based compensation.

Non-GAAP net profit for the fourth quarter of 2003 was 5.6 million, or 10 cents per basic and 9 cents per diluted share.

This profit compares to a net loss of 8.1 million, or 16 cents per basic and diluted share for the same quarter one year ago and a net profit of 1.2 million, or 2 cents per basic and diluted share for the third quarter of 2003.

Non-GAAP net profit performance for the fourth quarter was impacted by the same revenue, gross margin and expense issues I discussed a few moments ago in conjunction with GAAP performance.

Now for the full year 2003.

For full year 2003, total stock-based compensation was 15 million and restructuring charges were $500,000, compared to 20.3 million and 5.2 million, respectively, for full year 2002.

Non-GAAP gross profit for the full year 2003 was 73.7 million, or 60.1 percent of revenues.

This compares to 28.7 million, or 41.2 percent of revenues for full year 2002.

Non-GAAP gross profit for 2003 excludes approximately 2.5 million of stock-based compensation compared to 3.4 million, or $600,000 of stock-based compensation and restructuring charges, respectively, for 2002.

Non-GAAP operating expenses for the full year 2003 were 76 million, compared to 76.1 million for 2002.

Non-GAAP operating expenses for 2003 exclude 12.5 million of stock-based compensation and $500,000 of restructuring charges compared to 16.9 million of stock-based compensation and 4.6 million of restructuring charges for 2002.

Non-GAAP net loss for 2003 was 2.5 million or 4 cents per basic and diluted share.

This compares to a net loss of 47.3 million, or 99 cents per share in 2002.

Let me briefly summarize the full-year impact of the case refinement restatement we announced in July.

The restatement contributed 1.5 million of revenue and 1.9 million of associated income for 2003, compared to a reduction of revenue of 5.7 million and an associated increase in net loss of 4.7 million for the full year 2002.

Now let me spend a moment on the balance sheet.

Cash, cash equivalents and marketable securities at the end of 2003 was 47.7 million, compared to 41.5 million at the end of 2002, our last fiscal year-end, and 42.7 million at the end of the third quarter of 2003.

Our cash resources and marketable securities increased $5 million sequentially and 6.2 million year-over-year.

Contributing to the increase for the fourth quarter was better-than-expected bottom-line performance and cash collections.

Additionally, DSO for the fourth quarter averaged on a net basis 52 days.

Just a quick update on Discus (ph).

As we stated in our press release, a three arbiter panel for the American Arbitration Association issued an interim ruling in connection with our arbitration with Discus Dental Impressions, or Discus.

Although the panel's interim ruling found the determination of our marketing agreement with Discus was wrongful, the panel awarded Discus damages in the amount of only $1.

In addition, pursuant to the terms of the original contract, the prevailing party on the arbitration is entitled to its reasonable attorney fees and costs as determined by the panel.

This gives us requested that the panel awarded $2.6 million and attorney fees and costs and we have disputed this amount.

We expect the panel to issue its final ruling, including determination of reasonable attorney fees and costs payable to Discus prior to filing our form 10-K for fiscal year 2003.

If the final ruling is made prior to the filing of the form 10-K, we will include a charge relating to the arbitration in our 2003 financial statements in accordance with GAAP.

In addition, we expect to issue a press release with updated 2003 financial when the ruling is issued.

Now I will spend a minute or two on the first quarter and review our guidance for full year 2004 and 2005.

Q1 revenues were projected to be in the 37.5-39.5 million range for the first quarter.

Ortho channel, GP channel and international are expected to comprise approximately 52 percent, 33 percent and 10 percent of Q1 revenues, respectively.

The remaining 5 percent approximates training and ancillary product revenues.

A (ph) shipment volumes are projected in the range of 22,400-23,700 cases.

Q1 gross margins on a GAAP basis are projected to be in the range of 62.5-64.5 percent.

We project that gross margins will include approximately $500,000 of stock-based compensation charge to cost of revenues.

Excluding the projected stock-based compensation, gross margins on a non-GAAP basis are projected to be in the range of 64-66 percent for Q1.

Operating expenses on a GAAP basis are expected to be in the 24.4-25.4 million range for Q1.

On a non-GAAP basis, operating expenses which include -- excuse me -- exclude projected stock-based compensation of approximately $2.4 million are expected to be in a range of 22-23 million for Q1.

GAAP bottom-line performance, which include stock-based compensation, is expected to be in the range of a loss of 2 million to breakeven for Q1 while non-GAAP net profit is projected to be in the range of $1 million-$3 million for the quarter.

A few moments ago, Tom discussed a number of initiatives for 2004 that entail increased spending and investment in the business, particularly in R&D and sales and marketing.

In addition, I discussed approximately 1.5 million of nonrecurring items benefiting Q4 results that will not be repeated in Q1.

Beyond Q1, we expect that revenues may see a greater sequential increase in the second half of 2004, leading to full year revenue projection in the range of 160-170 million.

The orthodontist channel, GP channel and international channel are expected to comprise 48 percent, 36 percent and 11 percent of full year 2004 revenues, respectively, with the remaining 5 percent approximating training and ancillary revenues.

Case volume is projected to be in the range of 96,000-102,000 cases for the year.

On a GAAP basis, gross margins are expected to average 64-66 percent for the full year based on the projected revenue levels.

Correspondingly, non-GAAP gross margins, which excludes stock-based compensation charged to cost of revenues as noted earlier are projected to average in the range of 65-67 percent for the full year.

For the full year 2004 operating expense as Tom mentioned, we expect to increase R&D spending by approximately 50 percent year-over-year through a percentage of revenue or -- excuse me -- as a percentage of revenue, we expect R&D spend to remain relatively constant at approximately 9 percent.

Additionally, we expect sales and marketing expense to increase as we invest more on clinical education and DTC and related consumer spending.

On a GAAP basis, full year operating expense is expected to be in the range of 104.1-107.6 million.

GAAP bottom-line performance is projected in the range of 2.5 million net loss to 4 million net profit.

Full-year non-GAAP operating expenses, which excludes stock-based compensation, are projected to be in the range of 97.5 to $101 million.

For the full year, non-GAAP net profit is projected to be in the range of $5.5-$12 million.

Full-year non-GAAP projections do not include stock-based compensation of approximately 1.4 million charge to cost of revenues and 6.6 million charge to operating expense.

Let me move onto the balance sheet projections for 2004.

Over the last three quarters, we have made a positive cash contribution to the business.

We believe we have been operating and expect to continue to operate as a cash sustaining business, meaning that we expect our cash collections to sustain our operations.

Additionally, we have also been decreasing our debt.

While there may be quarter-to-quarter cash utilization fluctuations positive or negative, we believe that over the next year, we will be able to sustain our cash position.

With that said, cash balances at year-end 2004 are estimated to be in the range of $44-$47 million.

DSOs are expected to average in the range of 56-58 days.

We project capital expenditures in the range of $9-$11 million for the year spread relatively even throughout the year.

Depreciation and amortization is expected to be in the 2.1-2.3 million range for the first quarter of 2004 and $10-$11 million for full year 2004.

At this time, we're not changing our 2005 guidance.

To reiterate, revenues are estimated to be in the range of $220-$240 million.

Non-GAAP gross margins are estimated to be in the range of 65-70 percent, non-GAAP net income for 2005, it is estimated to be in the range of 10-16 percent of sales.

Projected non-GAAP net income excludes approximately 1 million of non-cash stock-based compensation.

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

Okay, now we will take some questions.

Operator?

(Operator Instructions).

Bruce Jacobs, Deutsche Bank.

Thanks guys.

I wanted to ask you to spend a little bit more time talking about the marketing and DTC spend.

Is there any way you would be willing to quantify what the spending levels might look like in 2004?

And then also, historically, one of the things I think the company struggled with a little bit is the connection between sales and marketing spend, and there has not always been the direct connection I think we all would have liked to see.

Could you talk about if you have the model figured out, such that you expect a much greater return on that spending than we have seen in the past?

Maybe I will start in reverse order there and talk qualitatively about the process, and then I will walk around to the level we're comfortable in talking about how granular we can get.

The Company had a belief from the very beginning as you know, Bruce, that tremendous push or creating pull at the consumer level would pull all the way through to physician decisions to use Invisalign, and that did not work for a number of reasons, even with substantial consumer interest.

The reason was that we did not have properly supported, trained and confident orthodontists out there in the market that were comfortable in saying this solution works for you.

And so in combination -- with the refocusing over the last year and a half to two years to make sure in every practice, our clinicians are comfortable in using Invisalign for the right range of cases, we have very slowly incremented up our DTC efforts and we've gotten greater productivity out of it as we have improved everything from placement approach to tuning of the actual creative to working through the chain of influence to ensure that leads are properly gathered, not lost and that they're able to be in many cases even hot transferred to practices that are prepared to handle them.

So we absolutely are certain that increments in spending return very positively.

There is roughly a quarter or a six-month lag in affect from a revenue perspective when you have that.

But we have spent a lot of effort over the last year and a half working on the models, working on the approach, improving call centers, improving the chain of influence, tracking and managing the process so that we're comfortable that increments pay off.

That said, when we say we are going to increase spending, what I'd say in total is the reason we call it consumer is our total consumer spend last year, we haven't been real granular about it, but that includes not just the direct to consumer advertising;; it also includes some costs that our call center that scale up with the volume of ad placement in media as well as the fulfillment costs in terms of packaging, sending out, etc.

So we were in consumer last year, somewhere between $5-$7 million.

That spend is going up by 30-40 percent this year and it is absolutely narrowly focused and we're absolutely sure that results in more at leads, better leads and more case starts.

So we are absolutely sure there is good payback there.

Speaking of payback, Tom, I have not run through the math, but it looks like you have inched up your '04 guidance delivered a little bit on the top line and have higher gross profit margins, but it sounds like incremental spending, even from the last time we talked, that you have not really done anything with your '05 guidance.

And I guess my question is to your last point -- when do we see the payback in terms of the case submission rates, and have you kept your numbers conservative on '05, or do they fully anticipate the impact from these incremental spending efforts?

What I would say, Bruce, just stepping back a bit, we have raised our guidance a bit, about $5 million from 155 to 165, which was pretty consistent with the call we had over the last couple quarters to a high end at 170 -- 160 to 170 now -- and that is ranging up from (ph) 5 million.

What I would say is we have not adjusted '05 at this point.

As the year progresses and we see what develops, we're going to come out and call like we see it.

In general, the increased spending I think as I said is a good problem for us.

We have earned our way to opportunities that we thought we would have to embrace in the second half of '04 even later.

And what we're really doing is preparing enterprise (ph) in a number of areas so that we can support on much greater volume growth in the future.

So maybe it's not a direct answer, but the practical matter is -- we still see '05 the way we've described, we see margins increasing, we see really starting some multi-year programs in '04 that we're really going to kick off late in '04 and really building (indiscernible) the base of business that will carry us out of '05 and well beyond that.

Thanks, guys.

(Operator Instructions).

Bruce Jacobs.

I didn't realize I would be back that quickly.

Just a couple more questions.

Now that you have all of '03 under your belt, is there anything that you have learned about seasonality in terms of case submissions that you can share with us, or are you still going too fast to make any sense of that factor?

We think there is some seasonality, and it is really related to two things.

We think there is a bit of the seasonality around the holidays and it relates directly to when our docs are not working, it's pretty simple.

When they are not seeing patients, they cannot do starts.

We were very pleased by the pretty solid showing in Q4 when we kind of expected it tailing off and we had good, consistent run rates, even late into December.

And so we are mindful of the fact that in quarters where there are extensive holidays or in regions like Europe where there are extended holidays where much of the countries go away for extended periods of time, there will be explicitly seasonality.

The two most specific effects that we were usually observed in North America are around the holidays, Christmas, New Years, and the second one is really in mid to late Jane, early July timeframe, where the bulk of the new patient starts for kids starts occur in orthodontists' offices all over the country.

That affect puts pressure on orthodontists that have even Invisalign as part of their practice because as soon as the kids get out of school and junior's going to get braces, they schedule a multi-hour appointment when they have the time to do it.

And if you go into an orthodontist's office at 10 a.m. in the latter part of June, it's mayhem.

So we do expect -- in fact, we see that anecdotally from our customers.

We have not seen it show up so much completely in received cases rates.

But I think as we get a bigger and bigger penetration, we might get a little bit more exposed to that.

A couple more quick ones.

Would you be willing to tell us where you are, in terms of the sales force size on the orthodontic and GP channels in the U.S.?

We're going to have this to some level in the proxy and the 10-K anyway.

So we are in the U.S. sales force in total, we have about 80 people between GP and ortho.

That includes managers, that includes sales reps, a little more on the GP side than the ortho side.

That continues to grow incrementally as we look at adding resources to territories, making regions smaller for bandwidth of managers, etc.

Expectations of where that might go in '04?

We are going to increment that up probably by on the high-end 15 percent.

We (multiple speakers) 15 people, maybe a bit more.

Anything you can say about any changes there might have been on the end-user average selling prices?

We haven't seen much going on.

Again, the bigger dynamic is as Invisalign gets penetration in a given market, we see Invisalign generally head towards braces pricing versus much higher positioning when it doesn't have as much position in the market.

As that happens, it kind of tends to stabilize.

So we have not seen a lot of change.

Again, there's significant regional difference here, just like there are for other medical procedures or cosmetic procedures.

Again, where there's significant penetration for Invisalign, there tends to migrate very close to wear braces (indiscernible).

The last question I had on the manufacturing front, I know company's long had a desire to as you said, have everything under one roof.

Any guidance on reasonable timing expectations for I guess further increases on automation to allow you to do just that?

I would say as soon as we are able to tie the whole thing together, we will.

And I would say its' probably not the time to describe that in detail, but not in '04 for sure.

I think we may comment in our annual report and what not that that could happen in '05.

Great guys thanks again.

Gentlemen, there are no further questions at this time.

I would now like to you.

Please proceed with closing remarks.

Thank you very much for listening and for being part of for us (indiscernible) a terrific year.

We're just getting started, we're working really hard, we're committed to making this just an outstanding product for our customers and for them to be successful with their patients and we look forward to reporting our progress to you in the coming quarters.

Thank you very much.

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

We thank you for your participation and ask that you please disconnect your lines.