愛齊科技 (ALGN) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Align Technology first quarter 2004 conference call.

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

Afterwards, we'll 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 22, 2004.

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

Please go ahead.

Thanks, and welcome to everyone on the line.

If you haven't received a copy of our press release, please go to the Investor Relations page on our Web site at www.aligntech.com.

Before we start the call today, I would 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, 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 difference 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 its annual report on Form 10-K for the fiscal year ended December 31, 2003, which was filed with the Securities and Exchange Commission on March 9, 2004 and its quarterly report on Form 10-Q.

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 financial measures.

Most of these items together with the corresponding GAAP numbers and a reconciliation to the comparable GAAP financial measures when practicable are contained in today's financial results press release, which we have posted on our web site at www.aligntech.com, under corporate information, investor relations, earnings press releases, and refers to the Securities and Exchange Commission on Form 8-K.

We encourage listeners to review these items.

Additionally, we have posted a nine-quarter GAAP and non-GAAP revenue model on our web site at www.aligntech.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?

Thank you Barbara.

And welcome to our shareholders and friends who are listening today on the phone today and through our web site.

We

now to a very good start in 2004.

Eldon will go more deeply in the financials in just a few minutes, but let me start with some top and bottom line highlights.

We reported $39.2m in revenues for the first quarter of 2004.

This is a sequential increase of 7.4% over the fourth quarter and an increase of $70.8m, are up 71% with the same quarter last year.

We also reported our second GAAP profitable quarter at a penny of EPS.

Net profit was $557,000.

Let me first take you to some key operating metrics and follow up with some statements about our strategies and key priorities.

On the revenue side, both the orthodontist and GP dentist channel revenues and cases continue to increase.

We saw a sequential increase in the ortho channel of 5.2% to $21.5m.

GP revenues sequentially increased 18.1% to $12.6m.

Overall, 55% of total revenues came from US orthodontist.

During the quarter, we received orders for approximately 23,700 net new cases.

This was an average of 376 cases per business day, and increase of 9% from the previous quarter.

We shipped over 22,000 cases worldwide to customers this quarter and an increase of 8% over the previous quarter.

Finally, I would to like share some case volume and channel statistics with you.

Approximately 7,700 doctors worldwide submitted cases during the first quarter, compared with 7,300 last quarter.

The number of orthodontist submitting cases went up slightly to almost 3,800. 3,950 GP dentist submitted cases compared with 3,550.

That's 3,950 GP's submitting versus 3,550 last quarter.

Additionally, we trained and certified over 700 new GP's in the US during the first quarter, bringing our base of certified GP's in North America to 10,400.

And we've done a solid job of having doctors initiating these lines of practices and return for additional case starts.

Just over 82% of our North American clinicians and 80% of our certified docs worldwide have submitted more than one case.

Let me turn now to some key activities and accomplishments in the first quarter.

To start with, the first quarter has been a bit slower in terms of key events such as training, seminars and conferences for Align.

While we did host a number of clinical education events, we expect to increase that significantly in the quarters to come.

One addition we made in the first quarter was to launch a new advanced Invisalign Provider Workshop or IPW.

The IPW 2 Seminar is an advanced workshop for orthodontists.

It's more clinically intensive and trains orthodontists on cases such as extraction and surgery.

This seminar is for highly experienced docs.

We believe we'll extend the applicability of the product by submitting cases with a higher degree of difficulty thus expanding our market reach and penetration.

We also negotiated a marketing partnership with Care Credit.

Care Credit is one of the leading third-party financing organizations that offers flexible payment options to patients.

We assisted in negotiating preferred discount rates for the doctors using Care Credit to finance Invisalign cases for their patients.

This enable them to care for the entire patient fee apart from Care Credit at a lower merchant fee while their patients have a variety of payment options to choose from.

doctors that the most popular product has been the 12-month no-interest loan.

For Align, we believe this will help doctors expand their practices because they are able to charge a lower down-payment, avoid collection cancels and enable patients who are reluctant to enter treatment because of cost realize their dreams of having straight teeth the Invisalign way.

As part of our additional efforts to increase our presence in the North American GP market, we continue to expand our GP sales force.

This expansion brings our overall domestic field organization to approximately 75 people.

On the manufacturing side, we continued our automation improvements with the FlexLink material handling system.

This has proved to be a significant enhancement in our line of fabrication process.

As we continue integrating FlexLink and other related technology into our manufacturing processes, we expect continued improvements in flexibility, scalability, and gross margin.

Moving forward in 2004, we'll continue to invest in programs that will insure robust operating platform and create leverage from the growth in cases we expert to continue.

As developments occur, we'll spend time talking about them with you.

Right now we're in the beginning stages of implementation, and it will be sometime before we see quantitative results from that hard work.

We still have a lot of work to do.

Our product Invisalign has an incredible market opportunity and we have ways to go to ensure that we're the most predictable, reliable, customer-friendly solution possible, which will compel our customers to continue prescribing this treatment.

Let me just step back for a second.

We have a number of new shareholders listening to the call today who may not fully understand our market opportunity.

In the US alone, and I'll just start there, we believe there are 2m people who have orthodontic treatment every year, and this is a conservative number.

We've seen estimates as high as 2.5m to 3m.

Subtracting that 2m the children with immature dentition along with highly complex cases and we're looking at a market opportunity of about 800,000 new case starts.

Last year, we sold 44,400 cases in the orthodontic offices and now with children where there is an opportunity today to treat 800,000 patients.

That's barely 6% of our existing conservative market opportunity.

That's just a start.

Looking on at existing opportunities, the GP dentist market and the 100m plus people that see their dentist regularly.

I won't go into this market size discussion in any more detail, however, it's well addressed in all of our presentations on the web and is also explained in our annual report.

The point is there is still

big market out there that we have barely tapped.

It's up to us to find a way to best increase our market penetration.

Before Eldon dives into the financials, I'd like to make some comments of other financial presentation of results.

We have a clear path in order to achieving a true GAAP profit.

We believe we're operating in a prudent manner so that we can deliver the greatest value to our shareholder.

In the past, we've always presented non-GAAP results, which excludes stock-based compensation and restructuring.

We'll start to move away from that presentation as stock-based compensation diminishes to the anniversary of our IPO in 2005.

Remember, many public companies must reconcile the difference between the fair market value of options granted, before the IPO, and the grand price, and amortize that over the vesting period of options.

For a line, the amortization period concludes on the four-year anniversary of the IPO, which will be in January 2005.

I expect that during future earnings calls, we will provide more emphasis on GAAP financials along with the non-GAAP bottom line.

in order to get you rates and structure your models accordingly.

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

As Eldon goes through our financials, and our guidance for the second quarter of 2004, along with the full-year 2004 we will take some questions.

Eldon?

Thanks Tom, and good morning to everyone on the call.

As a quick reminder our first quarter of press release, and 8-K filing of the same document are available on our Web site.

As Tom mentioned, we look to start placing more emphasis on our GAAP financial presentation on future calls.

For now, I'll give you the GAAP numbers, stock-based compensation, and then the map required to arrive at the non-GAAP financials.

We also want to make sure that you understand that the comparisons to previous guidance we've given, as much of that has been guidance on a non-GAAP basis.

Our non-GAAP financial table, and reconciliation of GAAP to non-GAAP financials is still included in our press release.

Additionally, we will continue to provide historical GAAP, and non-GAAP financial tables on our Investor Relation's Web site under financial history.

Let me move on now to our financials.

First, Q1 revenues as Tom mentioned were $39.2m, up

from last quarter, and 70.8% from the same period a year-ago.

First quarter revenues by segment were $21.5m for US Ortho, $12.6m for US GP, and $3.5m for International.

These channels represent 55%, 32%, and 9% of revenues respectively.

Worldwide trading, and other revenues were $1.5m.

GAAP gross profit for the first quarter of 2004 was $25.8m, or 65.8% of revenue compared to $23.6m, or 64.6% of revenues last quarter.

This also compares to a gross profit of $11m, or 48.1% of revenues for the first quarter of 2003.

Included in cost of revenues for Q1 was approximately $400,000 of stock-based compensation.

To arrive at non-GAAP gross profit margins we add back the $400,000 of stock-based comp.

Non-GAAP gross profit for the first quarter was $26.2m, or 66.9% of revenue.

The increase in gross margin which was higher than our expectations is primarily attributable to slightly higher ASPs, or Average Selling Prices, and continued manufacturing process efficiencies in both our treatment operations facility in Costa Rica, and the align of fabrication process.

As Tom mentioned, we introduced additional automation enabling more efficient handling of our liners through the fabrication stages of our manufacturing process.

Operating expenses on a GAAP basis were $24.9m for the first quarter of fiscal 2004, this compares to $23.1m for the fourth quarter of 2003, and $21.5m for the same quarter one year ago.

Q1 operating expense includes approximately $1.8m of stock-based compensation.

Excluding the $1.8m of stock-based comp, we arrive at non-GAAP operating expenses of $23.1m.

Operating expense in the first quarter included a $400,000 one-time charge for termination of regional distribution agreement in Europe.

GAAP net profit for the first quarter was $557,000, or $0.01 per basic and diluted share compared to a net profit of $452,000, or $0.01 per basic and dilute share of last quarter, and a loss of $10.7m, or $0.19 per basic and diluted share in the same period one year ago.

Total stock-based compensation for the first quarter was $2.2m, excluding this we arrive at first quarter non-GAAP net profit of $2.8m, or $0.05 per basic, and $0.04 per diluted share.

This compares to non-GAAP net profit of $3.5m or $0.06 per basic, and $0.05 per diluted share for Q4 2003, and a loss of $5.9m or $0.10 per basic and diluted share in Q1 of 2003.

A quick note on the top and bottom line performances related to the case refinement restatement we announced in July of 2003 last year.

Restatement contributed $1.9m of revenue and associated income in the first quarter of 2004.

Again, a full non-GAAP income statement and a reconciliation of GAAP to non-GAAP financials is available on our press release.

Now, on to the balance sheet.

Cash, cash equivalents, and marketable securities at the end of Q1 of 2004 was $48.2m, compared to $47.7m at the end of 2003 yielding a positive cash contribution of approximately $0.5m.

Typically, the first quarter of our fiscal year includes a number of annual cash expenditures despite the seasonable pressure.

On first quarter cash flow, we are pleased with our cash position and asset management, including DSOs or day sales outstanding and receivables of approximately 57 days.

Now, let's spend just a few minutes on the second quarter and review our guidance for full year 2004 and 2005.

Again, I'll first provide GAAP guidance and a reconciliation to non-GAAP guidance for your comparison purposes.

Q2 revenues are projected to be in the range of $41.5m to $43.5m.

Ortho channel, GP channel, and international are expected to comprise approximately 51%, 34%, and 10% of Q2 revenues respectively.

The remaining 5 % approximates training and ancillary product revenues.

Case shipment volumes are projected to be in the range of 23,700 cases to 24,900 cases.

Our Q2 revenue projection includes approximately $1.2m of the impact from the case refinement restatement we announced last July, and also reflects ASPs of just over $1600.

Q2 gross margins on a GAAP basis are projected to be in the 66% to 67% range.

We project that gross margins will include approximately $400,000, a stock based compensation charge to cost of revenues.

Taking this into consideration, non-GAAP gross margins are projected to be in the range of 67% to 68%.

Operating expenses on a GAAP basis are projected to be in the $25.5m to $26.5m range for Q2.

Operating expense will include approximately $1.6m in stock based comp, excluding this we would arrive at non-GAAP operating expenses of $23.9m to $24.9m.

GAAP net profit is projected to be in the range of $1.5m to $3.5m.

Taking into account the stock based compensation amounts I just discussed, non-GAAP bottom line performance is expected to be a profit in the range of $3.5m to 5.5m.

Let me turn to guidance for full year 2004 for a couple of minutes.

We expect revenues in the range of $165m to $175m.

This is an increase of $5m from the guidance we provided on our January call.

The Orthodontist channel, GP channel, and International channel are expected to comprise 49%, 36%, and 10% of 2004 revenues respectively with the remaining 5% approximating training and ancillary revenues.

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

Full year revenue projection also includes approximately a $5m impact for the case refinement restatement we announced last July.

Full year GAAP gross margin is projected to be between 66% and 68%, again an increase from previous guidance.

Cost of revenues will include approximately $1m in stock based compensation; adding this back we arrive at non-GAAP gross margin guidance of 66.6% to 68.6%.

Again that's 66.6% to 68.6%.

Full-year operating expense guidance on a GAAP basis remains constant at a range of $104.1m to $107.6m.

Though revenues are increasing, OPEX guidance remains constant due to the decrease in stock- based compensation projections.

Stock-based compensation included in operating expenses for 2004 is projected to be approximately $4.9m.

Again excluding stock-based compensation we arrive at non-GAAP full-year operating expense guidance of $99.2m to $102.7m.

We project full-year GAAP net profit in the range of $4m to $10m.

Full-year non-GAAP net profit is projected to be in the range of $10m to $16m.

Additionally GAAP EPS for 2004 is expected to be in the range of $0.06 to $0.15, while non-GAAP earnings per share is expected to be in the range of $0.15 to $0.24.

Let me move on to the balance sheet projections for 2004.

As we've said last quarter we believe there may be quarter-to-quarter cash utilization fluctuations.

At the end of the year however, we expect that our total cash contribution to the business will be neutral, but slightly positive.

With that said, cash balances at year-end 2004 are estimated to be in the range in $47m to $50m.

Day sales outstanding are expected to average in the range of 56 days to 58 days.

We project capital expenditures in the range of $10m to $12m for the year.

Depreciation and amortization is expected to be in $10m to $11m range for full-year 2004.

For 2005, revenues are estimated to be in the range of $220m to $240m.

GAAP gross margin are estimated to be up 270%.

GAAP net income for 2005 is estimated to be up 216% of sales.

GAAP net income includes approximately $1m non-cash stock-based compensation, basically that charge will be complete in the first quarter of 2005.

Now, we'll take some questions.

Operator.

Thank you.

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

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

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

If you're using a speakerphone, please lift your handset before entering your request.

One moment please for the first question.

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

Our first question comes from the line of Ed Shenkan, Wells Fargo Securities.

Hi, good morning gentlemen.

I want to ask a question broadly about the industry and what you're seeing, would you see any either braces manufactures or new competitors that you expect and to introduce similar products to Invisalign in the upcoming years or three years?

And similarly could it make strategic sense for Invisalign to merge with any braces manufactures and increased distribution?

Thanks for the soft

question Ed.

I guess the first statement I will make is to your second question is this wouldn't be the time or place for us talk about broader strategic initiatives anything on the M&A side.

But let me say in general we believe we got competition all over the place.

We try to act it like everyday, and we've got a large fire under us in terms of creating a sense of urgency.

There are a range of choices for clinicians today to straighten teeth, and there are very good products out there in the marketplace for them to use and, so we have to work very hard to make sure that our value proposition for the doc and the patient are superior

can bring the market.

Beyond competing for those case starts, we are competing for the attention of non-consumers in the marketplace for whom conventional braces and brackets don't meet their needs or potential may not meet their needs, and so we are trying to get to -- we're trying to get to the point where we can attract people that would even think about getting braces to get their teeth straightening in this line way.

All that said, we've got -- we believe are very strong fresh intellectual property, as well as tremendous manufacturing and technology competencies to make it difficult to follow the records, or in the real world.

And, anybody who should say what we are doing today is, going to probably be late by the time they get there anyway.

Yeah we winning a lot competition Ed.

Yes, it's the nature of the competitive marketplace, but we believe we are prepared for.

And again, I'm not going to comment the second issue at this point.

Thank you.

As a follow-up.

Physicians more eager to try in this line doctors who haven't tried it previously, now in a year ago.

Is the introduction from the second or third patient to the 50th patient, is it accelerating, can you talk a little about that?

Thank you.

Maybe there is two dimension to that, I think as Eldon talked about a little bit, we are not going to provide any granularity here.

But we did see utilization same practice case starts go up in the ortho channel at a significant level.

And that's actually a good sign to say that the people are starting to accelerate their practice there.

Anecdotally or quantitatively, and we actually provide detail there, but anecdotally, we do feel that there are some patients who perhaps didn't have the best experience with the products early on, that have come back, and have had some good results.

And been able to create some very good clinical results for patients.

So, I think it's a hard one to answer.

We are going to get lots of feedback in the next week or so.

We are about to go up to the American Association of Orthodontics, AAO, the annual meeting.

And its always an intense week, and we get lot of feedback, and lots of good ideas about from our doc.

So, I'll be ready to answer this more concretely when we go into the next call.

Thank you.

Sure, thanks Ed.

Our next question comes from the line of

.

Please proceed with your question.

Hi guys, this is Dale.

Hi Dale.

Just can you speak of a quick numbers for which I missed -- orders received in the quarter?

New cases received were -- we had 23,700 net new cases received in Q1.

And the average cases per business?

376.

Great thanks.

In terms of the '04 guidance, you bumped that up by $5m?

Yes.

Yet your shipment volume didn't change, are you looking for higher ASPs, or is there anything going on there?

I'll let Eldon comment there.

Dale its probably a couple of things.

One, I think is doing some true ups in our guidance, for one thing.

And two is -- as I mentioned, we are seeing a little bit higher ASPs, and part of that is driven by -- we are seeing a little bit of an evolution of our mix relative to full large, do a large treatments than what we expected.

And also, kind of the evolution of our case refinement revenue flow through the business is picking up a little bit quicker than what we had anticipated.

So, that is having some uptick on our overall average ASP.

Okay.

And if I look at where you guys came out on a channel basis, you are little lower than you are looking for on the orthodontics side, and a little higher on your GP side.

Do you think there is any cannibalization possibly going on from the GPs at this point?

Again, maybe we were off in what model you had told, but from our perspective, we were right about where we are expected to be from a channel perspective which actually is really good news for us.

We think we have pretty good handle on where the levels are in the business.

The other question around that whole issue is our cannibalization, not only is there not cannibalization, we then tried the acceleration in ortho practices is because of working to build this cooperative market model where Ortho's work with GPs in areas that are already referral partners.

And as they help them be comfortable doing straightforward simple cases, many people who had not even a soft orthodontic treatment, they might be in a dentist office to get your teeth widened to do some basic restorative.

And if the ortho works with LGP in a cooperative way, the GPs offices increasing their awareness and knowledge understanding of malocclusion, they gerside support, hygienist, they are all better able to spot malocclusion and talk to patients and educate them about it.

Increasingly, those people are wearing liners as part of our professional discount program.

I have the front line of education, and those anything not straightforward and simple are not going to

in any way and we are seeing that happen.

So, I think it is just the opposite, many other people, the GPs are doing, we are not seeking orthodontic treatment to begin with.

Okay and then if I could add a couple more and I'll get back in the queue.

Your sales and marketing expense went up significantly as you guys had mentioned in prior conference calls.

What type of payback, when do we see the payback on the significant investment that you are currently making?

So really sales and marketing is really two fold.

One component is slight uptick in advertising, and we are -- and so when we increase consumer marketing, several things come along with that.

One, we increase direct-to-consumer program both direct mail and MTV spots and fulfillment and along with that comes kind of linear increase in call center costs.

So, as we step up or increment up direct-to-consumer promotion, there is a couple of piece that come along with it.

The second part of that is program spending, we have substantially stepped up our clinical education efforts.

We are expanding number the of types and we believe substantially the quality of the workshops, study clubs, professional training environments the clear feedback from all our clinicians is this brings tremendous value to them.

So, we see pay back from direct-to-consumer programs within a quarter or two as leads turn in to cases.

We generally see a pay back range from a quarter to three quarters in education initiatives, and we track and measure those very carefully at a single practice level for the people who have participated.

The third piece of this is some expansion of sales force which we forecasted and talked about, and the money we are spending on the increases in marketing and sales in Q1, and the direction we given for OPEX in general for the year are very much consistent with what we talked about in Q4 when we did the year-end release.

So, we are right on where we said we are going to be in terms of incrementing up spending in two key areas.

One sales and marketing that build the business grow the topline get better results, and two the R&D and technology development side where we are substantially increasing the leverage on automation systems other sort of things.

So, we are actually right about where -- Eldon talked about a one-time cost we had, but we are right about where we expected to be in terms of controllable OPEX or operating expense.

Okay great.

Thanks a lot, and just one final one.

In terms of your guidance for '04 on EPS front Eldon, what is the tax rate that you are using if any in the $0.15 to $0.24?

Dale consistent with what we talked about in the past.

The taxes that are falling through our income statements this year are pretty much disresiduals for some foreign tax and some local tax.

We have not recorded the roll over to a reserve on the books type of accounting model.

So, it was a $133,000 of tax discharged to the P&L for Q1, and that's not going to be dramatically on the line with the relative dollars charge through time.

It is not as much as a percent of operating income it is just where we have to pay residual foreign taxes this year.

We are not providing at this point in time for Sate or federal against our NOLs.

Okay.

That is an event we will address in the future, but is not coming near term.

Thanks a lot.

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

Our next question comes from the line of Brian

of

.

Good gentlemen and congratulations on the quarter.

Thank you.

I am sorry.

Hello.

Operator.

Do have one or two question in, please?

I am very sorry.

My microphone was still open, terribly sorry.

Thank you.

Please continue Brian.

I am sorry.

In terms of the training of the GP the 700 GP that you trained in the quarter, how does that compare to kind of what your internal forecast were, and is that still then on track for the 5000 plus for this year?

We have typically -- well let me answer the broader question first Brian.

We have typically have said we will do 4000 to 5000 in the things little closer to four just in doability.

We traditionally have a slower start in certifications in Q1 just because you enroll them typically the quarter before and that's the holidays and we did our first certification of the year until very late January, early February.

The rate of certifications is right where we are to be, and we are forecasting a little about 700, but not by a lot.

We didn't expect huge number in Q1.

We were very comfortable that we will do 4000 and they will bounce for the year and that is kind of our game plan.

So forth to -- okay.

So, if I look at kind of last couple of years it was running 5000, how should I think about why -- it is just a capacity issue in terms of not being able to do more than 4000 and going back to the kind of historical levels of GPs trend?

So, we've always talked about kind of up to 5000 as an upper bound and there is a reason it's an upper bound -- I mean we could put an awful lot more bodies in hotel rooms on Friday and Saturdays all over the country, but there is a practical learning here that has occurred it says there is a whole system approach.

It starts with pre-work before the certification where the field team actually contacts us, sets the right expectations, does some front-end learning.

They bring their pre-work to the certifications; there is an intensive session at certification.

There is a fast start program that occurs after the certification and so capacity kind of with large is company capability to properly train them, support them, get them started to make sure they get great results.

At some level if we had, you know, two times the number of people in the field that we had more clinical support resources broader on line -- I mean if the whole thing was scaled up, we might dial that up more.

But we're very comfortable where we are.

Our principal goal is to get the right docs in the chairs, have them trained in a professional manner, so that they're very pumped up when they go back and then have them most importantly getting great results for patients.

And I think, the numbers 4000 and above, we've have been around that number and in the last couple of years, I think the number approximately was around 4100 for all of '03.

So, again, we've said around 5000 or up to about 5000, but that depends what you said about four.

Okay.

I mean my concern was that it's not just a lack of demand, as you know, the demand still out there for the number of GP that you haven't trained.

So, the trend on seeing is a function of what you're talking about?

I mean that's what I was trying to focus on?

Yes.

We've got about 7% of the GP population out there, to do the business certification.

Thanks and then just a clarification on the case refinement.

You said that the contribution was $5m and associated income, so in your EPS guidance, is there $5m -- I should assume it's a 100% margin this restatement will draw us up the bottom line?

For the most part.

Okay, So, can you help me then, if I were to move the benefit you have in your guidance this year for EPS and then bridge me kind of what the EPS guidance is for '05?

Except it's a huge ramp after I take out what was the case refinement benefit?

Brian, we view case refinement that's an ongoing part of our revenue and basically the way that process works, case refinement for one case has included in our pricing and we defer that and recognize it in one or two points either when the refinement is actually shift or if the case concludes and the refinement is never requested by the clinician, or if beyond the first refinement is included, clinicians can buy additional cases that.

We don't view that as an adjunct to our business is part of our business and part of our normal revenue flow.

So, we don't include it or exclude it or view it as an extraordinary item, so I don't view that business that way and I don't see the value in analyzing it that way.

Okay and I was just trying to say my impression was that this was a restatement that will impact '05 but then going forward it will no longer be a contributor.

So, I was just trying to bridge from where you are in terms of bound line guidance this year to next year, and I guess my assumption was that it was like a case refinement benefit we had this year wasn't going to repeat itself in '05?

And maybe I was wrong on my part.

Okay or maybe I didn't completely understand your question, if you're relating to the revenue restatement numbers that we talked about then that's an issue that is pretty much done in 2004 and you would not carry forward other than just a very small residual amount in 2005.

So, if I misunderstood your question, I apologize.

Case refinement and the restatement are two completely different things.

Okay and then I guess -- maybe I missed on something on the restatement portion -- how much was the contribution for the restatement in '04?

It's $5m.

Okay.

So, we're talking about the same thing.

Okay, thank you very much.

And to your point, that basically fall straight through.

Okay and it will not recover into '05?

That's correct.

Okay.

Alright.

Thank you very much and keep up the good work.

Brian, thank you.

Our next question comes from the line of Mary

of A.H.

Rosenti Capital Growth.

Thank you.

Good morning, I am wondering if you could talk a little bit about the marketing partnerships you negotiated with Care Credit and sort of, you know, how long you have had it, and what your doctors might be seeing in terms of is there increased interest or are they being more aggressive with the product now that they have the opportunity to get paid upfront on the product.

Well, you know, I guess, never want it.

It's very new.

We have been working for the last year to year and a half on a whole range of alternatives that, you know, we don't want to be the Bank and traditionally orthodontists were the Banks.

They basically set for a flat price, I will charge you X and I won't pay your interest -- I won't charge you interest and what they were basically doing was leveraging their, in a sense, financing their time because their running costs were not as high as they are under this line.

In this line it's little bit of reverse troop.

The doc has more costs upfront as they pay our fee roughly six months into the process, and so they have been more driven on a cash basis to

collect a little more upfront of $1000, $1500, or $2000.

For some patients, that's just too much money to put upfront and -- versus pay $250 to $500.

What this allows them to do and this is a change for orthodontists, not all orthodontists want to do this, some that have significant expansion going on in their practices, in effect it takes the pressure of working capital for them, and they are really jumping on this, because they find if they have gone from say 10 cases a year to 50 or 75 cases a year, they can easily get out of this step with the cash flow that are actually coming in from the patient over time.

So, this allows them especially during those periods of expansion, at a very low rate, where we effectively brokered interest rate, in effect helped the financing companies see the size and desirability opportunity and a very good credit list in all of these, you know, wealthy practitioners represented and we can't put buyer and seller together and help create a program.

And so, what I would say is it is very early for me talk about broad trends, but we think this can both be important at dentist's office, the GP as well as the orthodontist, and again it allows them to overcome one of the key questions setting at cheer side for the patient where, boy! that's a lot of money -- I don't know if I dropped with $1000 to start or $1500, they can basically say you can get $30 today with almost no down payment, you can basically pay in a year, and then take a year after that to pay over, you know, 12 payments.

As there are no financial implications for our line we are not guaranteeing anything, we have no reserves, there is no -- we are not backing it by the appearance, so you know, it's just us helping our docs broaden their practice, have better offerings, and hit a part of the market that they may have been missing.

How long is the agreement?

Is there an initial term for the agreement or is it just sort of indefinitely or does the financing company have the ability to re-examine it at some point?

Yes, there is no actually no agreement between Care Credit and Align, there is no financial relationship, there is no contract with us.

What we did, we did program development, we haven't found best in class companies that could do -- there is -- we've been working like this for about a year, a year and a half.

And what we really thought was we considered should Align do this, should Align create an offering here?

And we get back and say, we are not a financing company, we don't have a cost of capital and our balance sheet structure and everything else that would make sense for that.

So -- but we are now looking for people that understood Healthcare and loaning -- working with doctors for patient based financing, that will use their professional practice environment, single office environment.

So, we act as a facilitator, developed a program of care credits, tuned it up for orthodontists and GPs and roll it out to our customers and it's doing pretty well for just being a starter, so maybe I wasn't very clear, there is no agreement to stay with us and it's a business development for them and facilitation for us.

Okay, and you started this during this quarter?

Yes, we launched it this quarter and there will be more discussion about it at

next week.

Okay, thank you.

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

Our next question comes from the line of Tao Levy with Deutsche Bank.

Please proceed with your question.

Hi guys.

Just a couple of clarifications.

Eldon, what was the net profit non-GAAP that you are guiding for the full year '04?

Okay Tao, for the full year GAAP -- for full year 2004, our GAAP net profit was about $10m and our full year non-GAAP net profit for 2004 projected in the range of $10m to $16m.

Okay and that compares to the last quarter, do you remember what your guidance was last quarter, just five and a half to 12.

Correct?

That's correct.

So yes, that's correct I guess.

So you see there is a $4m to $5m uptick there from our -- our guidance last quarter.

Okay and what is it for -- for '05, the net profit non-GAAP?

And I apologize I can't write as quick as I publish it.

Not a problem.

Glad to help.

For 2005, basically what we talked about and what I said and I gave it in percentages.

So, I will give you the pieces again.

For 2005, what I quoted a few moments ago was a revenue range of $220m to $240m and a GAAP gross margin of up to 70% and a GAAP net income of up to 16%, and included in that the stock drops to a small number of $1m.

So in terms of converting that to a non-GAAP bottom line, now let's do the math.

Perfect and I guess as was the thing with last quarter, you didn't change your '05 revenue guidance, and I assume that you are just waiting for some more visibility.

I don't know how this year goes.

On our call last quarter, the revenue guidance is the same.

What our bottom line guidance was, we gave a range of 10% to 16%.

Right you write it up to 16%.

Right I am saying up to 16.

Great.

On the revenue line, when do you feel comfortable in '04 to possibly start adjust or maybe -- maybe move up the '05 revenue guidance.

It is still early in the year.

As we said a year ago on the -- I can't answer that question absolutely.

But as we see the year go on and we understand the run rate and the dynamics of the business will -- you know we will -- if there is any difference in the view we have got out there, we are obligated to talk about it.

It is early for me to say when and I don't know if it will be this time next quarter, perhaps third quarter.

Certainly by the fourth quarter we will be able to -- you know if there is a change.

But you know we are -- we are going to talk about it as soon as we can.

Great.

Thank you very much.

Ladies and gentlemen.

As a reminder if you wish to register a question please press the one followed by the four on your telephone.

Operator, maybe we will take one more question if there is one out there.

Otherwise we can bring this to a close.

At this time there are actually no questions.

I will turn the call back to you.

Thanks.

Thanks very much.

Well -- let me just say that the entire Align team is energized by the opportunity of taking this great new product in Align and building a great company.

The field is set up for us here.

We look forward to sharing our progress with you in upcoming calls and so thanks for being on the call today.

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

Thank very much, operator.

Ladies and gentlemen.

That thus conclude the conference the call for today.

We thank you very much for joining and ask that you please disconnect your line.