愛齊科技 (ALGN) 2004 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to Align’s technology third quarter 2004 financial result conference call.

At this time all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

If you would like to ask a question please press star one on your telephone key pad.

If any one should require an operator’s assistance during the conference please press star zero on your telephone keypad and as a reminder this conference is being recorded .It is now on my pleasure to introduce Barbara Domingo Director of Investor Relations, Ms. Domingo you may begin

Thanks Darcy and welcome to everyone on the line.

If you have not received a copy of our press release, please go to the investor relation page on our website at www.aligntec.com.

Before we start the call today, I would like to make a comment on forward looking statements.

During the conference call we make forward looking statements relating to Align’s expectations about future events or our future results.

Any forward looking statement you during the 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 be lead to such differences include but are not limited to risks that detailed from time to time in the Align’s periodic report filed with the Securities and Exchange Commission.

Including but not limited to an annual report on form 10-K for the fiscal year ended December31, 2003 which was filed the SEC on March 9, 2004 and its quarterly report on form 10-Q.Align undertakes no obligations to revise or update publicly any forward-looking statement for any reasons.

Please also note that on this conference call we will provide listeners with several financial measures determined on a non- GAAP basis.

Most of these items together with the core fund GAAP member and a reconciliation to the comparable GAAP financial measures, where practicable, are contained in (inaudible) financial results press release, which we have posted on our website at www.aligntec.com under corporate information investor relations earnings press releases and was furnished to the Securities and Exchange commission on form 8-K.

We encourage our listeners to review these items.

Additionally we posted an eleven quarter GAAP and non- GAAP revenue model on our website at www.aligntec.com under Corporate Information Investor Relations and Financial History.

Please refer to both of these downloadable excel spread sheets from work detailed line itemed information.

With that said I would like to introduce Align’s Technology’s CEO Tom Prescott, Tom?

Thank you Barbara, and welcome to our shareholders and friends who are listening today on the phone and through our website.

As you saw in the announcement this morning Align recorded $45.8 m on revenues for the 3rd quarter 2004.

A healthy increase of 34% over the 3rd quarter last year, but slightly below our former guidance range of $46.7 – 47.7m.

Let me start by saying that there is nothing fundamentally changed to our business model, our strategy, the market or our enormous long term opportunity.

We are building this business, investing and creating a growth in a great company and demonstrating that even in the face of short term growth challenges we can deliver earnings growth.

Now before I go over highlights from the quarter let me take a moment to out these numbers as well as the revenue guidance Eldon will provide in perspective for you.

At the beginning of the year we gave a revenue range of $164-175m for fiscal 2004.

Throughout the second quarter of the year and through the first two weeks of July we experienced unusually high run rates stronger than we anticipated in our original guidance we felt compelled to call as we saw it and raised our guidance substantially, however, August was soft and while September improved somewhat we felt cases received would rebound later in August.

That in fact did not occur, most of August continued to be very soft, and while September was improved much of the volume received in September turned in to October fourth quarter revenue.

However, we are still not factoring the very strong run rates we saw in early to mid July and this impacts our view of Q4 as well.

It is very important for us and for all of you to understand the reasons behind these results.

While I am not happy about the top line growth in Q3, our company is making incredible progress.

We expect to deliver year-over year growth of 42-43%.

We expect to report our full first profitable year and despite and despite lower than expected volume in the 3rd quarter, we over-preformed in the bottom line and in cash generation.

That said there are a number of factors that we believe that contribute to this short term slow in the top line even though there is no single issue that created the short term growth rates.

Rather there is a set of internal and external reasons a few of these start with sub-par execution in areas of our business.

Specifically we planned on launching some significant improvements to our customer facing software applications like ClinCheck and VIP starting in Q2.

We believe that by improving the clinician experience by decreasing the time and effort to use Invisilign we can spur utilization and adoption especially by orthodontists.

In fact we release very little of this planned improved in functionality, because we experienced delays in completing, testing and launching the applications.

This clearly has an affect.

So why are we late?

Well several factors contribute here.

First, on a few of these programs we underestimate the overall effort required.

On top of that we did not manage several of these programs as effectively as we could have.

Second, we just completed a major over haul and upgrade of our enterprise resource planning systems or ERP and implemented a completely new manufacturing execution system of what we call MES.

This huge effort went live in early October and was launched with no significant glitches or other issues, a major accomplishment.

Historically, Align has built a series of applications to support the business running on multiple systems environments.

Prior to this massive upgrade, making changes on a key application like ClinCheck required modifying many other applications and system.

Now, we can make changes and upgrades in a modular way to accelerate our business systems and manufacturing capabilities and to drive improvements in customer facing processes and systems.

In the latter stages of implementing this major upgrade, the scope expanded substantially during the complexity of our existing IT infrastructure and applications environment.

We made the decision to put our key people in critical resources from other ongoing projects, which further contributed to the delays.

This was the right thing to do.

We now have a robust new IT systems environment and ERP systems that will effectively support alliance growth for years to come.

To strengthen the leadership team in last quarter, we’ve brought in a world class talent in Cecilia Claudio, Align’s new CIO, Chief Information Officer and V.P of Engineering to drive improvement in our ability to develop, implement and operate the complex systems, applications and networks that enable Invisalign.

We are committed to expanding and enhancing our capability in this area.

The second internal area which we believe contributed to the slow down is the expansion of our sales force.

Specifically, on the GP side.

As we have continued to certify a new GP’s, we have not fully kept pace with deploying additional sales resources.

This has really stretched our field team as they work to support existing customers and our patients in progress while coping with newly certified GP’s.

To remedy the situation, we are stepping up our edition of new territory mangers and the expansion of the field management structure.

In Q4, we are bringing 12 new reps on and looking forward into early 2005, we are planning to add another 20, mostly in the GP area.

We will continue to evaluate our progress and adjust our deployment accordingly.

Over the past quarter, we also announced Bob Mitchell as our new V.P of worldwide sales.

Bob has a great track record of building and leading teams that have delivered enormous growth In Scale (ph).

We will look to his leadership to make this happen in Align.

Internal areas that we believe have contributed to some of the short term slowing of our growth rate are in the process of being addressed.

We look forward to updating you on the next call.

Looking at several external factors, there is strong evidence that consumer spending and confidence has eroded.

The University of Michigan’s consumer spending index fell from 94.2 to 87.5 in mid October.

This index reflects consumer’s outlook on the economy and their own personal finances.

While this is not necessarily a proxy for Invisalign prospects of buying behavior, it does line up with anecdotal input from doctors in many parts of the country.

It appears that concerns about the economy, Iraq and national security foster in the heat of the Presidential election campaigns maybe affecting consumer behavior and the willingness to start Invisalign treatment.

Our penetration is still very small so we do not believe we attract the broader economy in absolute terms.

However, we do believe consumer confidence plays a role in any elected procedure or discretionary expenditure.

A second factor involves seasonality.

In most prior years there has been a clear shift in the summer months.

There has typically been a slow down for Invisalign case starts in July and early August as families and doctors take vacations and as doctors’ waiting rooms are filled with children initiating conventional treatment with braces.

This effect tends to push adult starts with Invisalign into the latter part of August.

In late June and July this year, we saw case received at record levels.

At the end of July however, in persisting through most of August, case starts slowed, creating a very different case received and revenue profile for Q3.

Anecdotal total input from many offices confirms very quiet offices in the latter part of July and early August with the crowd of new braces starts for children hitting many of them in August rather than July.

Finally, a likely contributor involves our direct to consumer or DTC effectiveness.

As planned in early 2004, we began incrementally ramping up our spending on our DTC programs.

Just to remind you, we run a cost effective program that utilizes cable remnant slots to generate leads.

The broad advertising market heated up in late Q1 and early Q2 to absorb prolific advertising and the rapidly rising increases in advertising from the Presidential campaigns.

We have consistently been able to generate increased leads from increments of spending.

In late Q1 and Q2, we actually saw efficiency fall.

That is, an increase in spending lead to fewer leads.

Why?

Because there were fewer cable remnants available at a higher cost.

We plan for the affects to the Olympics, however, we cannot even imagine the dramatic expansion we have seen in political advertising in media.

This effect continues today and will not likely reverse until after the election.

These leads are an important source of new patient starts especially for orthodontists and we’ll be working very hard to address this issue.

We have recently described an evolution in our advertising approach which help makes us less exposed to short term swings and availability in cost of cable remnant space.

Within the next quarter or two, we will be ready to discuss these new programs and I hope they will help us reach ever increasing numbers of consumers or rather perspective patients and connect them with doctors that can give them great results.

I have gone into significant detail here but I wanted to have a candid discussion about the factors most likely involved in the short term issue.

I have consistently said that Align wouldn’t exhibit perfectly linear growth and we wouldn’t be perfect.

Given our current situation, as Eldon will describe later, 2005 growth will be slightly less, around 25%.

We strongly believe, however, that long term growth prospects beyond 2005 represent an opportunity to generate year over year growth between 30% and 50%.

On the earnings side of things however, we continue to be very pleased with our performance.

For third quarter we reported non-GAAP net profit of $4.7 million or 7 cents per share.

These results are at the high end of guidance and continue to reflect our ability to sustain growth while at the same time producing solid bottom line results.

I am particularly pleased that we may have been able to continue with such strong performance at a time when we are making significant investments in the company’s infrastructure.

As I mentioned in our last call we have moved passed the turn around phase of Align and are now in a position to make the investments and focus the resources necessary to build this company for the long term.

Now let me take you through some key operating metrics and our achievements in Q3.

On a revenue line, both the orthodontist and GP dentist channel revenues and cases continue to increase over 2003.

We saw year-over-year increase in the ortho-channel of 14% to $22.2m.

GP revenues increased 85% to $17.4 million from last year.

While U.S orthodontist revenues continue to lead with 49% of total revenue, revenue growth from the GP side clearly enabled us to sustain increasing revenues.

Since this time last year, we have increased case shipments by 34%.

We shipped 13,100 cases to U.S. orthodontists, 11,450 cases to U.S.

GP’s and 2000 cases to international docs, bringing total case shipments to 26,550.

Utilization rates were 4.5 for U.S orthodontists, 2.4 for U.S GP’s, and 2.2 for international.

Just to remind you, utilization is based on a number of cases shipped divided by the number of docs that the cases were shipped to.

And we now have almost 230,000 patients treated or in treatment.

We have posted this historical information along with historical ASP’s or average selling price on our website under financial history.

The number of doctors sending us cases stayed relatively flat increasing by approximately 500 doctors to 8,800 doctors worldwide submitting cases during the third quarter, which compares to 8,500 last quarter.

The number of U.S. orthodontists submitting cases went up slightly, to approximately 2,950 compared to 2,900 last quarter. 4,900 GP dentists submitted cases compared to 4,450 last quarter and the number of international docs submitting cases was almost 1,000.

Additionally, we trained and certified almost 1,000 new GP’s in the U.S during the third quarter, bringing our base of certified GP’s in North America to 12,700.

Approximately 81% of our certified docs worldwide have submitted more than one case.

We expect more new doctors to submit cases as the Invisalign brand becomes more well-known in the industry.

Word of mouth from both the patients and other doctors has helped us increase the number of docs who want to try the product.

Also as I described a few minutes ago as part of the efforts in our DTC program, we have increased our job as in advertising this quarter and we’ll continue to do so in the coming quarters with an expectation of improving effectiveness post election.

We believe that by enhancing brand awareness among patients and doctors, we will create increased demand for our product line.

Let me move on to some of the key accomplishments in the third quarter and to our initiatives going forward.

Clinical education continues to be one of our most important initiatives.

As we previously outlined, clinical education is the cornerstone to adoption and increasing utilization.

We see that once a doctor starts our initial cases, it could be several quarters before they start additional new cases while they watch the outcome of their first few.

Doctors and staff who attend clinical education events such as IPW’s or Invisalign provider workshops, web casts and seminars, have a tendency to initiate additional and more difficult cases with us at a greater frequency.

This ongoing training helps doctors understand the ethicacy (ph)and arrange of treatments they can do with Invisalign.

When we examine data comparing cohorts of docs trained, we see in this quarter 36% of docs in Q3 of 2002 and 41% of docs trained in Q3 of 2003 send cases into Invisalign.

In the third quarter, we conducted over 65 clinical education programs.

We expect to continue to provide in educating docs on using Invisalign.

We also entered into an agreement with a premier dental institution which will integrate Invisalign into their dental programs beginning in 2005.

In the future, we would like to integrate into the majority of dental schools in the country and we are working diligently towards that goal.

Graduates will have a head-start on understanding malocclusion and how to treat it with Invisalign.

A quick note on our efforts in Japan.

We are still working on developing the relationship necessary to start a joint venture in Japan.

We will make the announcement of about our plans as soon as it is prudent to do so.

We continue to believe that the Japanese market represent a wonderful long term opportunity and have prioritized near the top of our geographical expansion plans.

Let me now turn to manufacturing and R&D.

The beta testing of the new high-tech software we announced last May has been completed and moved into production.

This brings additional capacity to the front end of the scanning process.

While this enables us to generate the 3D model of the original teeth faster, we still on approximately 30 days of cycle time as docs taking increasingly more time to review their ClinChecks.

Additional elements of automation are being integrated with the systems in Juarez and we have begun the process of identifying the machinery required how to make the back end of the Aligner fabrication process.

We are still on track to automate the entire Aligner fabrication process by the end of 2005 or earlier 2006.

Last quarter we mentioned some major progress we started this year, data mining, compliance indicator, and combination treatment.

These projects are still underway and as of this moment, we have no new findings to report.

By early next year, we will have some early data on the compliance indicator and combination therapy and how these tools are making it easier for doctors to use our product.

The efforts in data mining will help to find optimal treatment approaches and improve predictability.

I will come back in a few minutes to discuss our strategy going forward and we believe we are building a company to last and a company that will bring value to shareholders.

At this point, I would like to turn the call over to Eldon.

Eldon?

Thanks Tom.

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

Both GAAP and non-GAAP financial tables and a reconciliation of GAAP and non-GAAP financials are included in our press release and historical tables have been provided on our investor relations website under financial history.

Let’s move on now to our financials.

First, Q3 revenues as Tom mentioned were $45.8m, up 34.4% from the same period a year ago and 3.5% from last quarter.

Third quarter revenues by segment were $22.2m for U.S.

Ortho, $17.4m for U.S.

GP, and $4.1m for international.

These channels represent 49%, 38%, 9% of revenues respectively.

World-wide training and other revenues were approximately $2m.

Let me begin to some ASP information for each channel this quarter.

Average selling prices for U.S.

Ortho, U.S GP, and International were approximately $1,650, $1,500, and $2,030 respectively.

While the list price of cases for U.S.

Ortho and U.S.

GP is the same, International rates vary by country.

Additionally, International SP’s reflect currency fluctuation effects.

In general though, ASP’s reflect case mix and all product discounts and coupons but do not include the effects of the case refinement restatement that we announced in July of 2003 and I will cover in a moment.

GAAP gross profit for the third quarter of 2004 was $30.8m, or 67.4% of revenues compared to $20.6m, or 60.5% of revenues for the third quarter of 2003.

This also compares to a gross profit of $30m, or 67.8% of revenues last quarter.

Included in cost of revenues for Q3 was $140,000of stock-based compensation.

Non-GAAP gross profit for the third quarter was $31m, or 67.7% of revenue.

Gross margin was lower than expected due to the impacts of fixed manufacturing costs on lower than expected case shipments.

Operating expenses on a GAAP basis were $27m for the third quarter of fiscal 2004 resulting in operating margins of 8.4%.

This compares to $22.3m for the same quarter one year ago and $25.6m for the second quarter of 2004.

Operating expenses were less than we guided as we postponed certain programs and hiring decisions until the fourth quarter.

Excluding approximately $1.3m of stock-based compensation incurred in Q3, non-GAAP operating expense was $25.7m where an operating margin of 11.5%.

The net profit for the third quarter was $3.3m for $0.06 per basic and $0.05 per diluted share, compared to a net loss of $2.1m, or $0.04 per share in the same period one year ago and a profit last quarter of $3.7m, or $0.06 per basic and diluted share.

Total stock-based compensation for the third quarter was $1.4m.

Excluding this, non-GAAP net profit was $4.7m, or $0.08 per basic and $0.07 per diluted share.

This compares to non-GAAP net profit of $1.2m, or $0.02 per basic and diluted share for the third quarter of 2003 and $5.6m, or $0.09 per basic and diluted last quarter.

As we guided last quarter, net profit includes charges of approximately $1.1m or $0.02 per share for the departure of an executive.

Without this charge, non-GAAP net profit would affect $5.8m or $0.09 per fully diluted share.

A quick note on the bottom and top line performance as it relates to the case refinement restatement we announced back in July 2003.

The restatement contributed $800,000 revenue and associated income in the third quarter of 2004.

As this number has steadily been decreasing over time, we do not expect a meaningful contribution going forward and will not continue to report this number separately in the future.

Again, a full non-GAAP income statement in the reconciliation of GAAP to non-GAAP financials are available in our press release.

Now a moment on the balance sheet.

Cash, cash equivalents, and marketable securities at the end of Q3 of 2004 was $64m compared to $47.7m at the end of 2003, yielding positive cash contribution of approximately $16.3m on a year-to-date basis.

Additionally our DSO’s are at about 54 days.

Now I will spend a few minutes on the fourth 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.

Q4 revenues are projected to be in the range of $45-$47m.

Ortho channel, GP channel, and International are expected to compromise approximately 46%, 41%, and 9% of Q4 revenues respectively.

The remaining 4% approximates and ancillary product revenues.

Case shipment volumes are projected to be in the range of $26,000 to $27,200 cases.

Q4 gross margins on a GAAP and non-GAAP basis are projected to be in 67-68% range.

The impact of stock-based compensation expense reported in COGS will be negligible in the forth quarter.

Operating expenses on a GAAP basis are projected to be in the $28.6-$29.6m range for Q4.

Operating expenses will include approximately $600,000in stock-based compensation.

Excluding this, we would arrive at non-GAAP operating expenses of $28-$29m.

As Tom mentioned we do expect to make investments in R&D and in sales and marketing in the fourth quarter and beyond, resulting in higher operating expenses beginning with fourth quarter.

This higher operating expense guidance is consistent with the discussion of the third Q3 expenses that I mentioned previously.

GAAP net profit is projected to be in range of $1-2 million or an earnings per share of 2-3 cents.

Taking into account the stock based compensation amounts I just discussed, non GAAP bottom-line performances expected to be in then range of $1.6 million to $2.6 million, or an earnings per share of 3-4 cents.

Based on the numbers I just outlined full year revenue guidance is now expected in the range of $174 and $176 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 990,800- 100,001 cases.

The full year 2004 revenue projection includes approximately $4.4 million of the impact from the case reclinement revenue restatement we announced in July of 2003.

Full year GAAP gross margin is projected to be between 67 & 67 ½ % for the year.

Cost of revenues will include approximately 900,000 in stock based compensation, therefore non GAAP gross margin guidance is 67 ½- 68 %.

Full year operating expense guidance on GAAP basis is expected in the range of $106-107 million, stock based compensation including in OpEx is projected to be approx $5.1 million.

Again excluding stock based compensation, we arrived at non GAAP whole year operating expenses guidance of $101-102 million.

Full year GAAP net profit guidance is expected to be in the range of $8.6 -9.6 million, full year non GAAP net profit is projected in the range of 14 ½ to 15 ½ million.

Non GAAP net margin for fiscal year 2004, therefore is expected in the range of 8.3-8.8%.

Our effective tax rate for 2004 remains at approximately 10%, additionally GAAP EPS for 2004 is expected to be in the range of 13-15 cents, while non gap EPS is expected in the range of 22-24 cents.

Let me move on to balance sheet projections for 2004.

We are again pleased with are again 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 $60-63 million.

DSO’s are expected to average in the mid fifties.

We project capital expenditures in the range of $11-13 million for the year, depreciation and amortization is expected to be in the $10-11 million range, for full year 2004.

We are currently in a process of completing the operating plan for 2005, at this time we are only able to provide guidance for the top line of $220-240 million consistent with the guidance we provided before our July 2004 call.

We would like to have our operating plan for 2005 further developed before we provide additional guidance on the rest of the P&L and balance sheet.

Let me turn the call back over to Tom…

Thanks Eldon.

We have recently unveiled our product roadmap, while many people see the aligners and believe they make up the entire product, the reality is the aligners are just a center piece of a solution that includes customers facing soft replication and clinical education and support, integrated treatment planning, and automated manufacturing.

All of these extended credit capabilities are integrated to create a product patients love but still too few doctors recommend with confidence to their patients.

We call Invisalign 1.0 this is where we are today, to get doctors to the next level of utilization we must deliver expanded capabilities to what we’ll call Invisalign 2.0.

That offering will further improve clinical outcomes, enhance doctors’ use of use, and enhance the doctors’ value proposition.

We will do this by introducing new features such as the compliance indicator and systems that differentiate between complex and simple cases.

We will offer enhanced educational tools and even better customer facing software application and will involve our sales force and customer care models to better leverage our strengths for our different customers.

In addition we will also look for ways to increase the reach of our sales team so we can offer better total customer service to these doctors.

By launching Invisalign 2.0 we expect to increase adoption and use of the product, expand the customer and patient base and improve the ease of use in profitability for our customers.

By doing this in the next 18-24 months, we expect to have a product that patients and doctors love, with treatments that are even more predictable.

We won’t stop there, in the next 3 or 4 years we expect to have a holy grail in design or what we’ll call version 3.0.

What we would hope for is the product that all doctors use for applicable cases, this will be possible when we can deliver a product that’s easy to use and is highly predictable with integrated and diagnostic and treatment tools, new materials to aid in compliance and conformance with treatment and last, best practices for treatment full integrated into the software.

We believe that by delivering on this product’s road map, (inaudible) systems applications that you find in the Invisalign system and expanding our product line, we will drive substantial growth and utilization and adoption.

And as we reach an ever increasing number of doctors and they in turn create highly satisfied patients, we will have the opportunity to build a truly great company

Ultimately, it may be the highly satisfied patients that create the positive tipping point for Invisalign.

It a consumer research completed late this summer, we found that 87% of Invisalign patients completed or in treatment, were either very or extremely satisfied.

Those results are simply astounding and we are just beginning to see how there excitement over this treatment can be better leveraged.

And finally, although it is bit ironic to receive this news, after a quarter of slower growth, we were just notified that align technology is ranked number 8th, and that Deloitte and Touche, and Deloitte Technology fast five hundred, of fastest growing companies, based on revenues.

Additionally we have been ranked as number five in the Silicone Valley, Deloitte Technology fast fifty list.

We have only accomplished this great growth in progress as a company because of the commitment of our outstanding employees and a partnership we have formed with our Invisalign customers.

I am confident that we will achieve our objectives and create substantial shareholder value in the process.

Let’s now move to Q&A, Operator.

Ladies and Gentlemen we will now conducting a question and answer session, if you would like to pose a question, please press * 1 on your telephone keypad.

You may press *2 if you’d like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your phone set before pressing the * key.

Thank you, our first question, will be coming from Tao Levy of Deutsche Bank.

Hi, how are you doing?

Hi Tao, good morning.

You did provide some colors as to what happened, I mean specifically, can you address what happened in the second part of the quarter, why were Leads down, when I look at my sales and marketing expense that I worked out for you guys, you guys came in a little bit lower, you guys did not spend that money, was it spent inappropriately?

Well, I guess… let me make sure I get your question Tao.

We did turn back a little bit of spending in a couple of areas, specifically in our R& D and development, because we had a finite capability to work on some of products we intended to get going because the large upgrade absorbed a lot of those resources, and it wasn’t likely throwing bodies at the problem would actually help.

In sales and marketing area, we spent reasonably close to what we anticipated, but it was below the track because sales, hiring lagged and a few other things were behind the curb and again as I described, that was a factor.

We actually spent very close to what we expected on the advertising on the director consumer side, but as I described the bigger effect there was more of less effectiveness that we wanted to have in director consumer.

We simply didn’t anticipate the tremendous amount of media, that’s going on in the current presidential campaigns, and again it’s crowded out some the available cable spots we could have used.

So we do expect we to continue investing in the things we need to in fact as we described selling in Q3 last year, we were going to move forward and rebuild the infrastructure for the building right in the middle of that and we continue to build on sales leadership infrastructure to support this expansion in sales.

But - -

So, have you - - going forward, do you feel everything is in place?

I mean, what has changed in the direct consumer advertising?

I mean we still have the elections coming up, we still have Iraq on our minds, you know.

How can you generate federal lead?

Is it advertising in paper or radio?

I mean, I don’t know, I’m just flashing out there.

Alright.

So there’s really at least two answers to that question.

The first is what’s going on in the very near term?

And the second question is how can we improve on this model at the DTC or the consumer side over time?

I’ll take those in reverse order.

Over time, I think as we described in the last few months, we are going to evolve our consumer marketing programs and we believe through creating new brand building campaign.

We will get more impact out of the incremental spending we’ll get and that really wont kick in until - - let’s just say the middle of next year and of course then there is a bit of a tail behind an advertising events and demand creation.

But there is as much as a quarter or a little bit more.

So, the real question is what are we doing right now and over the next 2 to 3 quarters to ensure that we’re going to be more effective.

The only factor that really has impacted DTC effectiveness in terms of quantitative impact of lead generation and conversion has been the election process and the tremendous amount of advertising that’s been going on.

That is going to be gone from the senior with a week or two - - couple of weeks and it will dramatically die down.

Now, there is a seasonal shift as we get to the holidays but we will be able to get more spots cleared and placements of our ads than we’ve been seeing over the last quarter or so.

So, we do expect that to improve and certainly into early next year to have more impact which relates to more leads.

So that’s the short term.

But the longer term answer is to evolve our programs to better reach more customers, compel them to take action and then they’ll have us play a more active role in directly connecting them with a very qualified Invisalign doctor.

Great.

And is that why you’re sort of - - you know, in your fourth quarter guidance you’re normally - - or in this fourth quarter you’d expect a little bit of a pick-up versus the third quarter.

Is it because of this lag in advertising?

Well - - I wish there is one single issue tail that’s why we try to be very candid and open about the set of factors we believe contribute whether be internal executing issues or whether they be external factors in the broader economy.

And so - - if there were just one or two issues, we could get at it and deal with it but there are a set of things.

So, we are absolutely responding to the issues we believe are internal.

We are working with our customers to help them improve their demand and their conversion opportunity as patients come in.

But what really impacts our view of Q4 and then by that definition, rate in the early 2005, is really what we’re seeing at the moment and while the business has responded, we are not yet back to where we were literally before we made the decision to raise guidance at the end of Q2.

- -and just a little bit on your ’05 top line guidance.

What kind of forecasting tools do you use to make - - to give us some comfort that that’s a good number?

You know, the 25 to , I think roughly 40% year-over-year growth that you’re projecting on the top line?

Well Tao, this is Eldon.

I’ll address that.

Basically it’s a combination of things that we use.

One, over time based on the distributor business, we model our profile.

We model our profile over time.

We look at the number of clinicians we have participating, we look at our projections of number of new clinicians we intend to bring into the business, we take input from the field, we take input from the marketing organization and on that basis we make our projections.

So, we basically take information and model it from all points on the compass.

That’s what we have been doing in the business and that’s consistent with what we’re doing now.

Okay.

Thank you.

Thanks.

Thank you.

Our next question will be coming from Taylor Harris of JP Morgan.

Hi.

It’s actually Argen [ph] Christian from JP Morgan.

Hi Argen.

Hi.

Just you know, one question and then one follow-up.

Tom, maybe if you could just spend some time on what we’re seeing in the business now since the big chunk of your incremental penetration in growth is coming from the GP population, that’s the Orthodontists, who were the big drivers initially.

I mean, how comfortable are you with this shift especially in terms of sustaining top line growth in the out years? and then I have one follow-up, thanks.

Alright.

So, we - - again, we started the - - the company was formed and originally generated revenue solely around the Orthodontists.

Orthodontists continue to be and will, in my view, always be a very important strategic lynch in the business.

We have not substantially grown utilization and as we’ve described on multiple occasions a significant part of our strategy and our effort towards evolving the road map Invisalign 1.0 to 2.0 to 3.0 is targeted at increasing the utilization adoption.

So, while over time just a shared number of GP dentists trained will mean that the GP channel will generate more revenues.

We believe that the larger users and the more intense users are going to be the Orthodontists.

On top of that, they are the specialists.

They are the ones that are helping us push the envelope for treatment as modality and as an approach and we are very very committed to that goal.

So, to me this - -you know, initially Orthodontists thought that going to GPs was a very poor idea.

There are 20,000 plus GP’s that practice Orthodontics in one fashion or another just in the US.

And - -beyond that, GPs have the legal right under licensure to do any range of dental procedures including Orthodontics.

So, what we’re trying to do is help foster the traditional networks that exist between GP and their Ortho partners and in fact strengthen them.

And many Orthodontists that do Invisalign have actually developed closer relationships with GPs that have gone to Invisalign training and helped them better understand other select simple cases that they can handle given their training and experience and as a result, those orthodontists that are working with GPs in Invisalign have seen there are referrals from those GP practices go up very dramatically.

So, there is lots of success stories around that all around the country.

So, this is very early but our goal is to help facilitate creation of , for lack of a better term, these networks - - these positive referral networks that result in getting more of the patients that are sitting routinely in dentists chairs for cleaning and hygiene and restorative work.

Also to get over - - to get treatment for Invisalign for simple cases there or to get over to an Orthodontist if they have more a complex problem.

So, to us that’s a very, very important part of strategy and we feel that we can please the Orthodontists who are the most discriminating users, then we can please everybody else.

So, I don’t know if that helps but you said you had a follow-up.

Yeah, actually the follow-up’s for Eldon.

I’m sorry, I got on the call a little late but what did you say in terms of revenue guidance for next year.

What did you say in terms of revenue guidance for next year?

Did you say 25% or was it a range from 25 to 40%?

And what have you said previously?

What I said was a range of $220m to $240m in 2005.

I think Tom had mentioned that was approximately 23%, if you do the math or 25%.

If you do the math it’s probably closer to 22 to 23%.

Okay.

What we had guided last quarter was $240m to $260m for 2005.

So, in a sense Argen, we’ve gone back to our guidance framework that was in place before we released in Q2 in the face of very, very strong run rates in the business.

Understood and do you expect to see acceleration in, come 2006 or what are we going to see in out years?

We are going to put a lot more color on that when we come out in the end of the year.

But what I have said consistently is that we believe the business framework we are putting in place, the tools we are laying out there for clinicians who use the product are going to give us the opportunity to grow 30-50% year over year for years to come.

What I would say by definition, is that we believe we are going to work through some of these cTaolenges in the later part of ’04 and getting into early 2005 then we believe we can reestablish the kind of growth rates that we have been seeing prior to this.

Great, well thanks so much for your time.

Thank Argen.

Thank you.

Our next question will come from Raj Demoy (ph) of Piper Jaffrey.

Hello good morning.

Thanks for taking the question.

Thanks Raj.

Just wondering if I could follow up a little bit on what Argen was asking on the orthodontic channel.

I just think it’s a necessity in keeping that particular segment of your business happy.

But if you look at your numbers in the quarter, if you look at the sort of utilization per practitioner as well as the revenue in that particular segment, they were down for the first time since, at least the last year and a Taof.

I am sure you are aware of some of the editorials that have been written and some of the herbage that’s coming out of that community as far as your marketing programs and the fact that you are spending a lot of your efforts in the general dentistry and I wonder if we are seeing some sort of a realization of that unhappiness in that channel in this quarter.

Are there any plans to maybe later what you are doing to get some of those people back in order.

I wonder if you could just comment on that?

Sure, I really spent a lot of time and the company, when I came in two and Taof years ago, Align had a very fractious relationship with the orthodontic industry for a whole range of reasons including the posture that a former distributor had taken and their approach to the GP market and including the way they kind of blasted into the industry.

We have worked very, very hard to become a partner, a member of the industry and a collaborative player and have made a ton of progress.

That’s not to say that there are – you know we’re only doing business with a little less than Taof of the orthodontists that are in the US and of course most of those have been certified.

And the other Taof some of those people have very strong views about what works, what doesn’t work, what’s appropriate or not appropriate whether they have experience with the technology or the technique it self.

It’s interesting that some of the people have the most strident views have zero experience, have never done a case and have never tried the product.

And so what we try to say is it’s an opportunity to bring patients into the practice.

It -- as a value proposition it’s wonderful for the patient, it’s wonderful for doctor.

But it’s more than just a product it’s technique and the technique has to be learned.

If clinicians and staff commit themselves to learn that technique, they can get incredible great results and thrill their patients as you can see from the consumer research we’ve done.

And there is a whole different dynamics in many of these orthodontic offices.

So I guess to put this in context there is some core of the orthodontic community that is resistant.

But there is generally a resistant reaction to technology of any sort compared to say some other specialties of medicine where there will either be more or less resistance to new technology.

I would say they are kind of in the middle to maybe more conservative and I guess I would say there are many doctors still arguing over whether straight wire appliances work, orthodontists arguing whether straight wire appliances work and they were brought out in the early 80s.

I appreciate that argument but if you just look at the utilization per practitioner you know it kind of a good benchmark.

It’s the first sort of sequential quarter where that number actually dropped you know since the beginning of 2003 when (indiscernible).

And I grant that’s a small decrease but you know it’s kind of a reverse of a nice trend.

And I guess what you know we’re worried about is if we bought stock if that’s you know something that we can see play out.

I mean does that plateau here at this point.

What are your expectations for that market?

Well I guess if you go back a little further what you would see is that in Q3 a year ago even in the face of substantial growth for the business we also saw a drop in utilization.

And there is two things going on here there is the external factor that Q3 is a weird quarter for orthodontists and for us as profile for Invisalign.

And if you go out and do channel checks and get off the phone and go into their office in July and August typically you’re going to see mayhem in their offices.

There are kids piled up to the ceiling and the initial starts for braces for juvenile take several hours to do.

So it’s not -- when they have a chance to do that they typically do that during the summer months versus pulling the kid out of school for a 3-hour appointment.

In the afternoons during the school year the orthodontists’ office are very full with patients, young patients just getting their routine treatments and tweaking of their care.

So typically there is a big bolus of new patients’ starts for juveniles in the summer months.

That fact plus vacations all that typically crowd Invisalign or the more adult starts out later summer.

So we also saw utilization dip the same quarter a year ago.

I don’t thing there is any pattern here.

The fact is we don’t have enough orthodontists even with the great growth we’ve had making Invisalign the most important part of their practice.

We’re committed to doing that.

And that’s the whole rational for evolving the product platform or we’ve done extensive focused groups, we’ve talked to customers and we talked to patients and we know exactly what are the features, and what’s important they are waiting for those features.

And we’re working very hard to bring those to them.

And now the second part is -- that’s things we can impact directly.

The second part is orthodontists rely heavily on the leads we send them.

Doctors and dentist can start patients out of their own office.

They have this captive population of perspective patients flowing through chairs every day.

Orthodontists rely on referrals either from their own marketing efforts from their referral partners to dentists or from us.

And when our leads went down in the latter part of Q2 and into Q3 because of the effectiveness of our G2C programs in this saturated advertising space that directly affects the orthodontist.

So we already have seasonal direction going the wrong way and we already had a different profile later in the quarter this year than normal, which pushed some of the rebound into Q4 into October revenue, September cases.

And on top of that we have less effectiveness delivering them fewer leads.

So I think all those things play a factor but you know the biggest issue for us is to deliver them the full functionality they want.

And as we do that as we make improvements in the products these guys pick it up and take it to the next level.

Okay I appreciate that, just one other question on the tax rate for the quarter.

I think it’s the end of the second quarter you guys were guiding to a 10% tax rate for the full year, in this quarter you’ve show something more on, you known all-round I think it was 8% on GAAP and I think it was 6% on the non-GAAP.

A question of why you didn’t put more on something that would get you to 10% for the full year, because sounds like you have to catch them even further down the fourth quarter?

Raj basically what we talked about is an over all 10% tax rate.

As far as what we bought off of the income that we needed to book on we were booking as a 10% rate relative to the number.

Okay thanks again (indiscernible).

You know the issue is just on a very over all basis if it missed by a percentage point you know we’re booking at the rate that we need to provide tax for.

You know that’s plus/ minus the percentage point we’re not going to be off of that.

Ok that makes sense.

Thank you.

Thank you.

Ladies and gentlemen as reminder if you’d like to pose a question please press star one on your telephone keypad at this time.

Our next question will come from Kevin Tyler of Gallian Group.

Hi good morning.

Hi Kevin.

I was just curious – I was of the assumption that your pipeline, you have like a 30 day visibility for the pipeline and I guess the quarter was an inline quarter and I guess this a more a discussion about the trends for the future.

But could you just review kind of how you feel about your visibility going forward?

And what you’ve just given that won’t come up at the end of next quarter with a change in guidance.

Well there is a couple of questions bearing on that, you know, I guess I’m going to answer the second part of your question first is that what ever we can do in the business to work as hard as we can to get the results.

That would be what will affect our guidance and you know we can wish for something different.

And frankly when we made the guidance call as part of our Q2 results we pulled up to a revenue frame work over $180m where we had plan for the whole year prior 165 to 175.

That was directly because our pipeline was very, very full and we were getting case receipts at absolutely record levels.

And again there are couple of factors that impacted us the profile of the Q2 transition to Q3 was different this year.

And so we –even with that visibility and with visibility today to our quarter that we’re in now as we exited Q3 is what sets the frame work for us to be a bit more conservative about ending this year and going into next year.

So nothing has changed in our business, our business model, our processes, our approach, we I guess Kevin we try to talk very candidly about some areas where we believe our own executional gaps that we’re fixing aggressively contributed to part of the problem.

And not considering facing the economy or hurricane in Florida or whatever, we contributed to this problem our selves we’re a young company and we’re growing and we believe we know what we have to do to fix some of those things.

But the collective set of factors that we believe are at work creating a case receipts volumes that we see today and the trajectory we’re on as we go into 2005 are things we believe we can address.

So we got to call it as we see it if that makes sense.

Is there anything you could do on a partnership side that would kind of ensure kind of the growth prospect?

We have lots of strategic choices in the future.

We’re kind of you know – we’re not going to talk about dinner until we finish cooking it here.

So we got a lot things going on but our focus is head down execution.

We know what we have to go do to build this business.

And as opportunities presents themselves for a longer time we’ll be happy to report them to you.

Okay thanks.

That’s all we have time for now so if you have additional questions that you need to get answer from please give us a call here at the office at 408-470-1000.

Thanks so much.

Ladies and gentlemen thank you very much for your participation in today’s Align Technologies Teleconference.

You may disconnect your line at this time, thank you for your participation.