愛齊科技 (ALGN) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Align Technology's second quarter 2004 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, July 22, 2004. I would now like to turn the conference over to Ms. Barbara Domingo, Director of Investor Relations, Align Technology. Please go ahead.

Thanks, Frank 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'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 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 may cause such difference include, but are 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 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 reports 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. Most of these items, together with the corresponding GAAP numbers and a reconciliation to the comparable GAAP financial measures, where 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 have furnished to the Securities and Exchange Commission on Form 8-K. We encourage listeners to review these items.

Additionally, we have posted a 10 quarter GAAP and non GAAP revenue model on our web site at www.aligntech.com under Corporate Information, Investor Relations and Financial History. Please refer to both these downloadable excel spreadsheets for more detailed line item information. With that said, I'd like to introduce Align Technology's President and CEO, Tom Prescott. Tom?

Thank you, Barbara. And welcome to our shareholders and friends who are listening today on the phone and through our web site. For the last few quarters, we have discussed with you our longer range plans for expanding our customer base and enhancing our products, as well as the customer patient experience. Now, halfway through 2004 we are beginning to see how these efforts can positively impact the business. While many of our plans are long term in nature, we do expect to see some positive effect from our investments in the second half of 2004.

During this call, I'll share a view of Q2 results as well as point out progress in these longer range programs. So, let me start with some second quarter numbers. We are very pleased with our results for the second quarter. I'll give you a few highlights before Eldon dives more deeply into financials in just a few minutes. We reported 44.2 million in revenues for the second quarter of 2004. This is a sequential increase of 13% over the first quarter, and an increase of 51% over the same quarter last year. We also reported non GAAP EPS of 9 cents, exceeding the analysts’ expectations by around 3 cents. Net profit was $5.6 million on a non GAAP basis.

Let me first take you through some key operating metrics and follow up with some statements about our achievements in Q2, as well as our efforts going forward. On the revenue line, both the orthodontist and GP dentists channel revenues and cases continued to increase. We saw a sequential increase in the ortho channel of 5.1% to $22.6 million. GP revenue sequentially increased 19.2% to $15 million. Overall, 51% of total revenues came from US orthodontists.

We shipped 25,100 cases worldwide to customers this quarter, an increase of 13% over the previous quarter. Starting with this call, we will begin to provide a more complete view of revenue and our opportunity to build the business, by discussing utilization. By utilization, we mean the number of cases shipped per number of doctors we ship the cases to. For Q2, utilization for US orthodontists was 4.6 cases and for GP dentists was 2.3. In both channels, utilization trended upwards modestly. We have posted a historical utilization on our web site under the Financial History section of Investor Relations. In a few minutes, I'll speak to some of the efforts we are taking to create growth in adoption, which drives greater utilization.

Finally, I'd like to share some case volume and channel statistics with you. The number of doctors sending us cases increased nicely. Approximately 8,300 doctors worldwide submitted cases, during the second quarter, compared to 7,700 last quarter. The number of orthodontists submitting cases went up slightly to almost 3,900, compared to 3,800 last quarter. 4,450 GP dentists submitted cases, compared to 3,950 last quarter. Additionally, we trained and certified over 1,300 new GPs in the US during the second quarter, bringing our base of certified GPs in North America to 11,700 and we continue to do a solid job of having doctors initiating Invisalign into their practices and returning 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 describe some of the initiatives and key accomplishments in the second quarter. Clinical education is one of the most important initiatives for the company. As we've said earlier this year, we will increase spending for clinical education in 2004, as we believe that better trained doctors become more confident in achieving greater outcomes. As I mentioned earlier, we trained over 1,300 GP dentists during Q2, which is our best training quarter yet. Our hope is that these dentists will soon begin sending cases to us. As we analyze the behavior of two cohorts of trained GP dentists, those trained one year ago and those trained two years ago, we see that approximately 70% of both cohorts are sending cases to Align with a 2002 trained cohort having a higher utilization rate than the 2003 cohort logically.

We also have doctors from these cohorts who had not previously submitted cases, now beginning to train Invisalign and submit cases. While the length of time to complete a treatment with Invisalign tends to create a slow steady ramp in adoption, this clearly points to increasing use.

This morning, we announced that the Department of Orthodontics at the University of Illinois Chicago has incorporated the Invisalign system into the required undergraduate course work in Orthodontics. At U of I Chicago, while perhaps not the largest school, yet certainly considered one of the best dental schools in the nation, graduating around 2% of dentists, every undergraduate student will become certified in Invisalign, and can begin prescribing the product when they begin their practice. We have been working hard to enlist universities as partners because what students learn in dental school, they bring into practice. Working with dental schools also brings an increased legitimacy and credibility to our business, as academicians are some of the toughest critics.

In addition to delivering over 40 GP certification classes during the second quarter, we also held over 100 advanced training classes. Two different levels of Invisalign provider workshops, so called IPWs, a number of ask the expert conference calls and web casts, as well as a large number of study clubs. The specialized clinical instruction and support is instrumental in helping doctors and staff understand more about the product, the techniques required to ensure great results and the kinds of cases they can treat with Invisalign.

We firmly believe that the doctors who enhance their skills, by attending continuing education classes, are more confident to recommend Invisalign to patients, and more willing and able to try advanced techniques. These classes pave the road for doctors submitting more cases and thus increasing utilization.

Let me talk for just a moment about the AAO conference in May. As many of you know, the annual American Association of Orthodontics conference is the premier event for orthodontists. This year we announced the results of a study at AAO, conducted on Invisalign profitability. The study was conducted with 14 experienced practices and over 500 finished cases. Typically, doctors charge a premium on Invisalign cases and believe they generate -- or, traditionally they have charged a premium on Invisalign cases and believed they generated less revenue per hour than with fixed appliance cases.

In the study, we found that doctors charged a small premium for the Invisalign cases, charging only an average of 3% higher than fixed appliance case fee. Even when they reduced their fees, doctors earned a net fee per hour of 10% more than with a fixed appliance fee. One example is Dr. Bob Fry in Kansas. He started more Invisalign cases, at pricing near parity with fixed appliances, and still generated higher revenue per hour than traditional wires and brackets. He was able to generate significantly more revenue and profit from the Invisalign cases than from traditional methods. This same model is being used by many orthodontists around the country with great success. For Align, this means continued growth in adoption, as Invisalign earns a greater share of doctors’ practices.

We found also, that there are many orthodontists who were trained in the early days but never submitted a case, and now are beginning to do so. Some doctors have even audited a certification class more recently, to re-familiarize themselves with the process. Many of these orthodontists lead high quality larger practices, and we look forward to becoming a part of their clinical treatment options.

We also launched the hygiene kit during the second quarter. This kit is geared towards dental hygienists. It describes not only the benefits of Invisalign but also the benefits of straighter teeth and better occlusion. This has been very well received and accepted by the hygienist community, and we look forward to them and the GP dentists to continue educating the general public about Invisalign and the value of a better smile.

Let me turn now to manufacturing and R&D. On the manufacturing side, the amazing news is that, in the second quarter, we manufactured more than 1 million aligners. It took us years to get to the 1 million mark and, now we are fabricating over 1 million in a single quarter. As every aligner is like a unique fingerprint, this is a huge accomplishment and I commend our manufacturing team in making this happen. We continue to make strides in automating the aligner fabrication process in Juarez, Mexico. We have added more machines to the flex rate (ph) system and are handling greater volume each day, demonstrating our ability to scale the business. We are also on track to automate the entire aligner fabrication process and bring it back to Silicon Valley by the end of 2005 or early 2006.

On the R&D side, we have a lot of exciting things happening. We've discussed the data mining projects before and since this is a long term effort to enhance clinical understanding from our thousands of completed cases, we are not ready to share concrete findings yet; however, we are already using the rich data in our records to drive improvement in our clinical education programs. We also have 9 clinical studies in progress, 4 with universities and, five studies in clinical practice. These studies help us drive the improved understanding of how to achieve difficult movements, explore new applications and more effectively use our auxiliary products. While they will take several years to complete, we are excited at the potential for great progress, and look forward to sharing these findings in due course.

We also have a rich pipeline of other projects underway. For example, a program has been lunched to create a compliance indicator. This will confirm for the doctor if a patient has worn the aligner for the required 20 plus hours or so per day. We are also looking at ways to systematically plan and implement combination treatment using Invisalign, in combination with fixed appliances, to help the orthodontist complete difficult treatments. Once an orthodontist is accustomed to the ability to plan, visualize and manage Invisalign cases, with accurate 3D data and modeling, they want to use it on highly complex cases, and integrate a treatment plan, to also reflect the portion of the case being treated with fixed appliances. We are working to try and make this far easier for them; as we do that, it opens up an opportunity for us to participate in those difficult cases. R&D projects take time so, once they have evolved from the research phase to programs with very clear timelines, we'll be able to talk about key projects in more detail.

Let me take a few moments to talk about the Ormco litigation, before I discuss where Align is heading. We made two announcements, since our last call, about the patent litigation suits at Ormco. The first was in a patent litigation suit that Ormco against Align. Ormco asserted that we infringed on four of their patents and the judge found that we did not infringe on their patents. In the second announcement, the judge found that Ormco infringes on three of Align's patents. Both pieces of news were great for us, and we were very pleased with the outcomes. Ormco has the right to appeal both cases. We believe, however, that our patents are highly defensible, and it will be very difficult for any company to attempt to produce a similar product, with the precision and volume that we have created.

I also want to spend just a couple of minutes talking about where Align is going and, how we try to create a great future.

I have been here a little over two years. In the first year, to year and a half, the focus was on stabilizing the company, making sure we had enough money to survive, had the right people in the right places, had the right direction and ensuring good execution in these critical plans.

And we really did a good job in that turnaround. Our stock was one of the best performers in 2003, and I'm grateful for the support many of Align’s shareholders gave us then and continue to give us now. That said, our singular focus on fixing the company and achieving profitability meant that we deferred a number of attractive investment opportunities.

Now, we believe that we have earned the opportunity to build the great company that our investors were interested in, in the first place. As we’ve described, we are increasing our investment in a range of high leverage areas, in the people, processes and technology that will help us drive revenue and business growth in the future. We continue to attract outstanding people as we build the Align team. A great example is Bob Mitchell, our new Vice President of Worldwide Sales. This is a newly created position that will oversee our sales efforts worldwide. We will continue to focus on US orthodontists and GPs even while significantly placing greater effort on growing international business. Bob is responsible for building our sales team around the world, as well as delivering on the top line.

A sign of progress to build global scale is our efforts in Japan. We are fairly close to announcing a joint venture, with a leader in the Japanese dental market. We would expect to roll out Invisalign as a new concept to orthodontists, in October, during the Japanese Orthodontist Society or JOS meeting. This is part of a long term global strategy, and while I don't believe Japan will contribute materially in the near term, the overall market is very attractive and could be a key driver of growth in 3 plus years.

In other key areas like R&D and manufacturing automation, are really just getting started and the possibilities are endless. We are looking at exciting opportunities right now, potential programs that we're not ready to talk about yet.

We're looking at making the entire customer experience easier, from the way a doctor starts a case, to how we design the treatment, to all of our interactions with the doctor in their practice. We will make a product that is even easier to use and that achieves even better results. This will increase the doctor's level of confidence, and enable them to treat more cases and more difficult cases, increasing our share of the customer's practices. In the not so distant future, we'll provide some tangible examples of these new products, tools, customer facing software applications and the like. I think you'll be very pleased when we start to show the potential yield from this fairly new development pipeline.

Eldon's going to talk about financials in just a minute and update our guidance on 2004 and 2005. Let me talk a little about where our future growth is coming from and how we reach and support the customers. As you know, the bulk of our revenues come from two primary customer groups or channels, US orthodontists and US GP dentists.

Our goal on the orthodontist side is to increase utilization. When you look at our historical utilization, you will see that while growth has been steady, there won't be a huge spike in any area. On the sales and clinical support side, we have spent most of our time focused on the orthodontists that do most of the cases, and much less effort on those that only do a few cases per quarter. The doctors doing most of the cases are already comfortable with the product. We'll continue to support them efficiently from a field and corporate standpoint, with direct marketing programs such as co-op marketing and DTC advertising.

For those orthos that got to a good start but are content with submitting just a few cases each quarter, we will invest more hands on effort helping them grow their Invisalign practice. For these doctors, we have found that they are very comfortable doing easy cases but don't want to step up to the next level, cases that may require more time and more effort. We want to expand their level of comfort, increase their confidence and improve their motivation. We intend to do this by increasing sales coverage and providing continuing education, more intense marketing programs and more leads via DTC. Bob Mitchell will work with the sales team in moving these docs to the next level and helping us become a much more important part of their practice.

On the GP side, the overall approach is different. There are still a very large number of GPs that we can train, and with the sheer number of GPs we believe that eventually, total GP revenues may surpass ortho revenues. While they will not utilize Invisalign as intensively as orthodontists, they will provide a broad awareness of the value of a better smile and improved occlusion. They are also identifying and treating simple cases that would likely would not have gone to an orthodontist. In this way, they are significantly expanding the market.

The key to our success will come from focusing on the customer. Through education we will make sure that the doctors understand the power of Invisalign and what type of cases they can treat. Through our symptoms and processes, we will make it easier for the customer to start a case and work with us to finish that case, and through the great value proposition that the Invisalign product represents, we will expand the market and keep doctors and their patients very happy. I will now turn the call over to Eldon Bullington, our CFO, to discuss our financials. Eldon.

Thank you, Tom. As a quick reminder, the second quarter press release and 8-K filing of the same document are available on our web site. Last quarter, we mentioned we would begin placing more emphasis on our GAAP financials, as we near the end of the amortization of stock based compensation. We will continue to provide both GAAP and non-GAAP financials, as we have in the past, but we would like you to be aware that we anticipate moving to GAAP only reporting at some point next year. Both GAAP and non-GAAP financial tables and a reconciliation of GAAP to non-GAAP financials are included in our press release and historical tables that are provided on our investor relations web site, under financial history. Let me move on now to our financials.

First, Q2 revenues, as Tom mentioned, were 44.2 million, up 13% from last quarter and 51% from the same period a year ago. Second quarter revenues, by segment were 22.6 million for US orthodontists, 15 million for US GP and 4.1 million for international. These channels represent 51%, 34% and 9.3% of revenues respectively. Worldwide training and other revenues were 2.4 million.

GAAP gross profit, for the second quarter of 2004, was $30 million or 67.8% of revenue, compared to 25.8 million or 65.8% of revenues last quarter. This also compares to a gross profit of 16 million or 54.6% of revenues for the second quarter of 2003. Included in cost of revenues for Q2 was 300,000 of stock based compensation. To arrive at non-GAAP gross profit and margins, we add back the 300,000 of stock based compensation. Non-GAAP gross profit for the second quarter was 30.3 million or 68.5% of revenues. Gross margin was slightly higher than our expectations, and it’s primarily attributable to operating efficiencies in our aligner fabrication process.

Operating expenses on a GAAP basis were 25.6 million for the second quarter of fiscal 2004. This compares to 24.9 million for the first quarter of 2004 and 24.1 million for the same quarter one year ago. Excluding approximately 1.5 million of stock based compensation incurred in Q2, we arrived at non-GAAP operating expense of 24.2 million. GAAP net profit for the second quarter was 3.8 million or 6 cents per basic and diluted share, compared to a net profit of 557,000 or 1 cents per basic and diluted share last quarter and a loss of 7.8 million or 13 cents per basic and diluted share in the same period one year ago.

Total stock based compensation for the second quarter was $1.8 million. Excluding this, we arrived at second quarter non-GAAP net profit of 5.6 million or 9 cents per basic and diluted share, which compares to a non-GAAP net profit of 2.8 million or 5 cents per basic and 4 cents per diluted share for Q1 of 2004, and a loss of 3.4 million or 6 cents per basic and diluted share in Q2 of 2003. A quick note on the top and bottom line performances related to the case refinement restatement we announced in July of 2003, one year ago. The restatement contributed 1.2 million of revenue and associated income in the second quarter of 2004. Again, a full non-GAAP income statement and a reconciliation of GAAP to non-GAAP financials is available in our press release.

Now, on to the balance sheet. Cash, cash equivalents and marketable securities at the end of Q2 was 56.4 million, compared to 47.7 million at the end of 2003, yielding positive cash contribution of approximately 8.7 million dollars, on a year to date basis. Additionally, our days sales outstanding for Q2 were 52 days. Now, I'll spend a few minutes on the third quarter and update our guidance for full year 2004 and 2005.

Again, I will first provide GAAP guidance and reconciliation to non-GAAP guidance, for your comparison purposes. Q3 revenues are projected to be in the range of 46.7 to 47.7 million. Ortho channel, GP channel and international are expected to comprise approximately 51%, 34% and 10% of Q3 revenues respectively. The remaining 5% approximates training and ancillary product revenues. Case shipment volumes are projected to be in the range of 26,800 to 27,400 cases. Our Q3 revenue projection includes approximately $800,000 of impact from the case refinement restatement we announced in July of 2003, and also reflect ASPs of just over $1600. Q3 gross margins on a GAAP basis are projected to be in the 68.5% to 69.5% range. We project that gross margins will include approximately $200,000 of stock based compensation charged to cost of revenues. Taking this into consideration non-GAAP gross margins, for the third quarter, are projected to be in the range of 69 to 70%.

Operating expenses, on a GAAP basis, are projected to be in the 28.8 to 29.8 million range for Q3. Operating expense will include approximately 1.2 million in stock based compensation. Excluding this, we would arrive at non-GAAP operating expenses of 27.6 to 28.6 million. Let me take a couple of minutes to discuss the sequential evolution of our operating expenses, between the second and third quarters. Consistent with our discussions over the past several quarters, the company is investing in sales and field support infrastructure, marketing, customer education programs, international and R&D projects. As planned, we are increasing spending in the third quarter, in the range of 2 to $3 million related to these programs.

Additionally, operating expenses for the third quarter will include approximately 1.2 million of nonrecurring charges related to the departure of Align’s VP of Engineering. Approximately 400,000 of the severance will be for cash compensation, to be paid in increments over the next year, while approximately 800,000 will be for accelerated vesting of stock options, a non-cash event. This unexpected charge will impact Q3 earnings per share by approximately 2 cents.

GAAP net profit is projected to be in the range of 2.1 to 3.1 million or earnings per share of 3 to 5 cents. Taking into account the stock based compensation amounts I just discussed, non-GAAP bottom line performance is expected to be in the range of 3.5 to 4.5 million, or earnings per share of 5 to 7 cents.

Let me turn to guidance for full year 2004. We believe the second half of 2004 will be better than we expected earlier this year, and are therefore increasing our full year revenue guidance, to a range of $180 million to $183 million. The orthodontist channel, GP channel and international channel are expected to comprise 50%, 36% and 9%, 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 103,000 to 105,000 cases. The full year 2004 revenue projection includes approximately $4.4 million of impact from the case refinement restatement we announced last July.

Full year GAAP gross margin is projected to be between 68% and 69%, again an increase from previous guidance. Cost of revenues will include approximately $1 million in stock based compensation. Adding this back, we arrived at non-GAAP gross margin guidance of 68.5% to 69.5%. Full year operating expense guidance, on a GAAP basis, is expected in the range of $108 million to 110 million. Stock based compensation included in operating expense is projected to be 4.9 million. Again, excluding stock based compensation, we arrived at non-GAAP full year operating expense guidance of 103 million to 105 million, higher than previous guidance, due to increased spending in sales and marketing, as discussed earlier, and expenses related to the VP of Engineering's departure.

We are increasing full year GAAP net profit guidance to the range of $11.5 million to $14 million, from previous guidance of 4 million to 10 million. Full year non-GAAP net profit is projected in the range of $17.5 million to $20 million. This is an increase in the previous guidance of 10 million to 16 million. Non-GAAP net margin, for fiscal year 2004 therefore, is expected to be in the range of 9.7% to 10.9%. Our effective tax rate for 2004 is approximately 10%. Additionally, GAAP EPS for 2004 is expected to be in the range of 17 to 21 cents, while non-GAAP EPS is expected to be in the range of 27 cents to 31 cents, both a sizeable increase from our previous guidance.

Let me move on to balance sheet projections for 2004. We are pleased with our balance sheet management thus far in 2004. We are increasing our estimate of cash balances at year end, to a range of $57 million to $60 million, a cash contribution for the year of over $10 million. Days sales outstanding are expected to average in the mid-50s. We project capital expenditures in the range of $11 million to $13 million for the year. Depreciation and amortization is expected to be in the $10 million to $11 million range for full year 2004. For 2005, revenues are estimated to be in the range of $240 million to $260 million. GAAP gross margins are estimated in the range of 69% to 72%. Operating margins are anticipated to be in the range of 17% to 22%, and as you know, we have been providing some 2005 guidance since early 2003.

At that time, we had not fully anticipated the tax ramifications, and based on additional forecasting we have done and our increased revenue and gross margin guidance, that margin is estimated to be in the 10% to 14% range, and reflects a 35% tax rate for the full year 2005. GAAP net income also includes approximately $1 million of non-cash stock based compensation. As most of you were aware, the county regulations are presently being debated, requiring the expensing of stock options beginning in 2005. Our current guidance does not reflect the expensing of stock options, and we will not provide that guidance until a decision and a final definition of methodology has been made. We believe that beyond 2005, we are looking at a business that will grow at a rate of 30% to 50% of year on the top line, a very respectable number for a growth company, in that we can continue to increase gross operating and net profit margins. We expect, over time, to operate as a more established medical device company, with a gross margin beyond 72% and operating margins in the high 20% range.

Let me now turn the call back over to Tom.

Tom?

Thanks, Eldon. Before we turn it over to Q&A, I'd like to address a question that we get a few calls on, and that is regarding sales or purchases of Align stock by insiders. The company has a insider trading policy that officers, directors and all employees are subject to. Our board members and board observers are also subject to this policy. The policies stipulate the trading window that opens a few days after our financials are reported and closes the last day of the second month of the quarter. This is when we are allowed to trade. We generally do not discuss insider sales or purchases among officers or directors. That said, I want to take a moment to speak for the company and myself about some recent sales.

Among the officers and, in fact, among most employees, equity in the form of stock and stock options has been a key element in recruitment, retention and total remuneration. Many employees worked for years in a high-risk startup at below market salary levels to give birth to this young now thriving company. Other key executives and employees joined at a time when Align was in deep distress. Each of these employees has an opportunity to realize a return on their tremendous investment of time, effort and personal sacrifice to build Align. We do not have a culture where we either encourage or discourage employees to hold their stock or options.

As for myself, like most personal investors, I have been given professional financial planning advice that strongly suggests reasonable diversification among my assets. As a result, I entered into a 10B5 plan that automatically trades stock on my behalf. In total, this will be a very small percentage of my Align Holdings. I fully believe in the value of this company and where we are headed. My trading plan is based on asset diversification. As money managers, many of you would not want to have the majority of your assets tied up in one stock. That is my situation and these small stock sales are a way for me to diversify my assets, and then invest the money in funds that are run by many of you on the call today. Understand me clearly, I fully believe in this company as do the other officers, directors and employees. We are totally committed to the vision of building Align into a leader among all medical device firms. With that said, let me turn the microphone to the operator for some questions.

Thank you. Ladies and gentlemen, if you'd 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 would 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

Our first question comes from the line of Tao Levy, Deutsche Bank. Please proceed.

Hi, guys. It's Tao Levy from Deutsche Bank.

Tao, good morning.

Good morning. Really good quarter.

Thanks very much.

I guess the whole business really isn't going down the drain, is it?

No, it's certainly not.

Just a couple quick questions, congratulations on the new dental university signing. That's good news. What's the -- when you talk to those people, especially on the Chairman, the Chairwoman of orthodontics, what's her impression in terms of having GPs trained to straighten teeth. I know we heard a lot out in some of the medical journals about that. Can you just provide some color there?

Well, first of all, I'm not a clinician, so I'm going to be thoughtful about what I say here. What we hear in general in leading dental schools and orthodontic schools is, there is -- strategically there is an increasing role for the GP dentists in their practice to play a part in the general healthcare, certainly the oral healthcare of – just to use the US as a focal point -- the American family.

Dentists are trained as part of their education to understand occlusion. They are not trained to correct it per se, that isn’t what orthodontic education is about, but they are trained to do that.

So, there is a lot of work been done with some very aggressive removal of enamel, meaning removing teeth down to very small points to put on full mouth veneers. There are some that view a different approach, potentially a more responsible approach to preserve enamel for the long term, is to first do alignment of teeth and then do some restoration on top of that. That's a pretty interesting, very contemporary topic in dental schools and among dental circles.

Given what's going on in the marketplace both aesthetically with whitening of teeth and the like, there is great interest in helping dentists grow their practice, in creating responsible clinical expansion of practice and creating value for their patients. Again, the goal is not to try and have dentists become orthodontists; that's a very significant commitment of additional education. This is about -- from our perspective and what the perspective of the dental industry is, is to give dentists an opportunity to do most primarily anterior cases of front teeth, some people call the social 6 and to do some of those cases that never would have gone to an orthodontist.

In the meantime, they are educating patients in chairs and families about the value of a better smile and better occlusion. In doing so, they are increasing the profile and the desirability of getting a better smile, which includes getting a complete, better-improved occlusion. So, these are some of the topics being talked about. They want to make sure their students are coming out of university with very contemporary framework of education.

OK. And, if I look at the sequential growth that you just reported in the second quarter it's about 5 million, is there anything as to why we shouldn't expect that type of growth in the third quarter? I know your guidance for the third quarter is a little less sequentially than 5 million. Is there any seasonality or anything impacting that?

Well, Tao, we do see a little bit of seasonality in the second and third quarter -- or going into the third quarter. You know, it's the dynamics of our business change between ortho and GP, that's just something we're learning on and we have to watch. But, that's why we have looked at the business the way it is, the summer holiday period, the dynamics of ortho GP and also the European summer holiday season, where in most countries, culturally, they take close to a month off through the July, August time frame. So, we try to look at that carefully, and we try to take all that into consideration and that's a key element of the guidance I just provided.

OK. And, if I look at the sales and marketing this quarter, they came in a little lighter than I was looking for. And, then for the third quarter, they’re coming in concurrent (ph); you’re guiding to a little higher than I was looking for. Was there stuff that was shifted from this quarter that's now in the third quarter?

Let me maybe jump in there for a second. I'll let Eldon frame that in more financial terms. This is really how we laid out the plan for the year. We never provided very, very detailed guidance about -- we talked about the entire year at a general level. We never really provided detail about what each quarter would look like and, so, that was your model, not ours. We kind of planned here to step up in the third quarter and fourth and this was part of our business plan. So, it is right about on schedule, we are right about where we expected to be, we're again, very pleased that we're getting traction from these programs and we're going to keep pushing it forward. Maybe Eldon could provide a detail or two about the absolute numbers.

You know, Tao, I absolutely concur with what Tom said there, and I know we don't provide multiple quarter guidance going forward but this is absolutely in synch with what we anticipated to do. As we've talked about and I really go back to the anchor, when we started talking in some depth relative to 2004, on our October earnings call last year at the end of the third quarter, that what we're doing and everything that we're doing is tracking along those lines. I mean, we are continuing to bring additional folks into the sales force to support our growth, some on the ortho side, also on the GP side of the business. And, in particular, the third quarter is one of the focal point quarters, that even though it's a holiday period in Europe, it's also a period in which we're going to focus on doing some infrastructure things in Europe. And, it's also kind of the period that we're seeing one of our more significant step up in R&D resources. So, it may look a little bit lumpy, along those lines, but it's not off queue of what we anticipated to do. In terms of any push from Q2 to Q3, that would be extremely slight. You know and again...

Maybe a little (ph) on the capital side, if anything...

Yes, not really so much on the expense side. At the end of the day, you know, the one thing that we have talked about and I'll reemphasize here. We're building a business to go into the future and, as Tom mentioned, from a standpoint of the evolution of where we are at, and where we have come to that we have felt and we have talked for the last several quarters, that it's very important that we make those investments in the business now, to lay the framework for what we do over the course of the next two to three years.

OK. Great. Thanks. And, I really appreciate the utilization numbers that you provided, that will really help some of our models. And Tom, I really appreciate your comments on your stock sales. Thanks.

Thanks, Tao.

Our next question comes from the line of Mike Chiou (ph), SAC Capital. Please proceed.

Good morning. A couple questions. I apologize if I missed it but did you guys give '05 guidance?

Yes, we did.

Just really quickly the top line and bottom -- and non-GAAP EPS?

The top line that we talked about in 2005 was a revenue range of 240 to $260 million.

OK.

And the -- we gave a range on operating margin of 17 –

Did you give EPS?

Just EPS.

No we didn't give.(multiple speakers). We provided an operating margin of 17 to 22% and a bottom line net margin of 10 to 14%, reflecting a 35% effective tax rate.

OK. And, then you also said, top line growth from '05 and beyond should be 30 to 50%?

Yes, that's what I said, that we're looking -- that as a growth company, we feel we have the opportunity to grow the business in that range.

And, can you make any comments on where you think the -- your number of GPs trained in '06 might be as you exit '06? Do you have any idea how many you might train? Are you going to go with the run rate of about 4,000 to 5,000 a year?

You know what we -- we haven't really framed that, Mike. It's a great question. I would rather not speculate, but I think if you had to pick, it would be a reasonable thing for you to assume that the run rate that we have demonstrated is about what we will continue.

OK. And, did you talk about the cases ordered during the quarters?

We did not talk about new cases received during the quarter. We're trying to focus on the revenue event which is shipment and that's what ties out to utilization.

OK. So, I know in the past you have given cases ordered or cases received, so?

There's been -- part of the reason why we're trying to focus this is there has been some confusion, Mike, as people have tried to model the business between a received case and a shipped case, and trying to get proper kind of utilization numbers.

Yes.

We have tried to just tie this back to the revenue event, when we recognize it, which is a shipped case.

OK.

Mike, one thing that we've talked about in the past -- and the dynamic of our business hasn't really changed – is the cycle time for cases, typically, through our business, is about 30 days and we tend to run a fairly linear business. So it's not -- this is not something that's conducive to a hockey stick of a surge of activity in the last three to four weeks of the quarter. Our business runs reasonably linear and typically about a 30-day throughput cycle.

Got it. OK. And just last last...

Mike, really quickly to that point.

Yes.

What I would generally say, although we're not really reporting this, because it’s not been as meaningful -- we are very comfortable with the continuing growth in received cases. It's the front end of our process.

OK. And, then just a last question, is there any way you can help us quantify what the impact of your increased DTC spending might be, like are there any metrics as far as how many --for every dollar or every million dollars spent how many calls come into your call center? And, then how many cases actually get ordered as a result of that?

You know, for the first answer, I would love to answer your question. But, we haven't provided that kind of clarity for a range of reasons. When we say DTC, that is a collective effort, it does not just include media spent, it means the actual media spent, it means fulfillment, it means call center cost, it means direct mail, it means a set of things that are targeted at the consumer designed to create leads to give to our customers.

And, so as we toggle up, and maybe I'll ask Eldon just to comment on what we've for the year basis, at a year level, what we prior said for -- you know, we have said we would incrementally increase DTC during the year and that -- there's not been any significant swing.

So, a) we haven't responded at a specific level about tying out the relationship between a dollar spent in DTC and what happens at the received case line or the shipped case line. But b) I would say in general, we said earlier in the year or late last year we're going to toggle up, increment up the DTC programs in a complete way, as well as spending on field deployment and other related things. And, as I said those things are paying off for us, but we have not provided detail there.

Mike, we haven't gotten very specific about how much more we're spending. We did talk -- we have talked in the past, but last year was in the range of $5 to $6 million, and we are upticking that by a fairly reasonable number. And, we haven't talked about specific metrics, but we have learned in the business that there is a correlation between investment in DTC and in stimulating patient contacts with clinicians.

OK. Great. Congratulations on a great quarter.

Thank you very much, Mike.

Our next question comes from the line of Jerome Garcia, Beekman Capital. Please proceed.

Hi, Tom, how are you doing?

Very well, Jerome. Good morning.

Good. I had a couple questions. Could you give me an idea of what proportion of class 1 cases involved Invisalign for this quarter?

We really haven't provided -- what I would say, in general is the lion’s share, most of our business is class 1, and it's also where most of the market is. We -- the exception to that is where we get involved in cases where an individual, say, may have chosen not to pursue full treatment, meaning full correction of a class 2 or class 3 problem, but wanted some -- a more aesthetic anterior treatment or where they were using a -- what some doctors call combination treatment, integrating use of Invisalign and fixed appliances. But, we have not provided feedback on prior calls or in general about percentage. But I would, the -- what I would say is, most is class one.

All right. Can you put any numbers to it just so I get an idea of what kind of market share you all are gaining from braces and so forth? Is there any kind of number you can give me to work off of, where it's been and where it's come to?

What I would say is, really most means most. In general, we've, if you try to calculate it, we are taking cases away from -- a start going away from a fixed appliance start, there's probably some of that. But, I think there's some of that going on but we are also growing the market. In many cases, the people that we talked to, that we did some consumer research with, that our doctors’ offices talk to say, I was just not going to get treatment if it couldn't be with Invisalign. And, so, we believe we are effectively adding to the market, not just taking away from the braces practice companies. And, then I think, if you follow them you'll see some of them are showing decent growth. So, that seems to confirm it in my mind.

OK. Also, I think, as on your press release I noticed that ortho cases, the growth of that was flat from last quarter. Can you give me the reasons why?

We didn't say that was in our press release, and I think what we did say is there was growth in the channel. So, that was not in the press release. What I've said is, we've had a fairly stable number of orthodontists increasing modestly over time. And, again, when I say it’s orthodontists, in general its clinicians are somewhere between artists and engineers, they are very thoughtful and careful about integrating new technology into practice, because of the length of a procedure taking a year or more, they want to see, that actually they have had great success with the cases, before they maybe try a more difficult case or expand use beyond say a simple class 1 crowding. What we did say on the script, as we talked about our -- the verbal comments on the call was, that revenue from US orthodontists was up 5.1% quarter-over-quarter, which is solid growth and cases are also up sequentially. So, it's not flat. We actually grew it nicely.

OK.

Again, you've got to remember that the number of doctors submitting cases is pretty much the same versus GPs, that number is growing every quarter.

Great. One last question. Longer-term, can you give me an idea, just a round estimate, of when Invisalign, when Align will become more than a one product company. You mentioned some new products coming out and so forth. Is it all still focused on Invisalign? It's understandable if it is, but is it going to be three years down the road, before there's more areas that it’s going to go into, that Align is going to start putting focus on and so forth?

That's a difficult question to answer without telling more than I'd like to. What I would say is my comments earlier were that we've earned the right to go and try to make this company what it can be, using our people, our talented folks, our processes, our technology and knowledge of this market.

I personally believe that the dental market is going to be one of the great markets over the next 10 years in the medical device arena. I think the intersection of increasing awareness of the GP and the orthodontists and the clinical specialists in the dental industry, and their role in potentially managing a broader set of healthcare problems for the public -- I think the intersection, the untapped nature of technology, getting into that market, there are a whole set of opportunities in the orthodontics space, for moving teeth, for getting a better smile aesthetically and deeply clinically intensive, there are many other related products and technologies, either directly related what we do today or at least aligned with what we do today, that are possible. And what I'd I say is, at the right time, we're going to come out with a framework that helps our investors understand how we're thinking about this path forward.

What I would say in the near term is, our complete focus, while we're building up a strategic view of what's possible in the future and starting to place a few small bets, that we won't be discussing for a while, we are putting the lion’s share of our effort into building a great company around the Invisalign product, and there are more variations of Invisalign that can come out in the future; there are lots more things we can do, even within this core organic growth opportunity. So, maybe that's a long way of answering what I could have said in a short answer, but there are a lot of strategic choices in the near term. We are going to be very focused around our core organic business, because there is so much growth opportunity there.

OK. That's all I have. Thank you, Tom. Great quarter.

You're welcome.

Ladies and gentlemen, as a reminder, to register for a question, press the "one" "four". Our next question comes from the line of David Volt (ph), Raymond Capital (ph). Please proceed.

Thanks, guys. Thanks for all the detail. It's very helpful. If we could just turn back to the 2005 guidance for a second. I just wanted to make sure I you heard correctly, it was non-GAAP guidance that you provided, is that correct?

It was GAAP guidance and then we gave you a footnote on kind of the last trailing piece of stock based compensation that will flow through in 2005 and that was $1million. And basically, the timeline on that is, the company's IPO was in January of 2001, so the amortization of the stock based comp will be completed in the first quarter of 2005.

OK. So, the revenue and the margins you gave were GAAP based numbers? Is it...

Correct.

And, do you have an indication of what you think the diluted share count will be in 2005?

What the diluted share count would be, do you have a projection?

We haven't provided one yet.

OK. And then is there a reason -- a structural reason why we can't get that information and kind of figure out what the diluted EPS could be for '05 on a GAAP basis and an adjusted basis? I'm just trying to figure out what the bottom line growth rate is going to be next year versus this year?

You're going to see an evolution in our overall diluted shares. I haven't got it here, I'll pledge to come back and provide that on a future call, but not today.

All right. So...

Let me, if I can say this, there's nothing we're contemplating, other than the normal course of business, that would have any significant effect on that share count, other than the normal things that change these things, the share count in a minor way.

Right.

I don't know if that helps you or not.

So - so more or less it will be going to be closely in line with where we are today?

You know, the base of outstanding shares and the evolution of conversion of stock options, using the fully diluted share calculation will evolve into the next year.

And then just -- I just want to make sure that I'm clear about this noncash stock compensation. You said it's $1 million next year roughly?

That's correct.

So, is it fair to say I just add 1 million back to kind of what the GAAP net income number is to come up with kind of a pro forma non-GAAP net income number?

That would be a fair assumption.

So, if I just kind of use your mid point, that's about $31 million of non-GAAP net income on 65 million shares, is that kind of a reasonable calculation?

What I gave you was a percentage range. You'll have to work with that.

Right, but just using the middle you get to about 31 million net income non-GAAP on 65 million shares or about 48 cents a share, is that in the ballpark within the range?

I'm not going to comment on that.

You've got to use your own math. Again, you’ve got to -- frame it how you want, David. But, we're trying to give you a range for a reason, not using the high-end, not using the low-end, not using the middle, for good reason, for our part given disclosure rules today. And, so you've got everything you need to construct the view you want to construct, high-end, low-end and middle. But, the math is pretty straightforward here.

OK. Great. Thanks, guys.

All right.

Ladies and gentlemen, as a reminder to register for a question, press the "one" followed by the "four."

Operator, if there's no more questions, I guess we're -- I'll make a few final comments. You can check if there's any more questions. All right. Perhaps I'll just make a few comments, operator. So what I'd like to do is thank you all for your time, your interest in Align and your support as we move to try and build a great company.

We will -- we look forward to sharing our view of the company going forward with you at investor conferences and in later calls, and you have a great day. Thank you very much.

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

Have a great day.