愛齊科技 (ALGN) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Align Technologies Fourth-Quarter 2004 Financial Results Conference Call.

(OPERATOR INSTRUCTIONS.)

It is now my pleasure to introduce Miss Barbara Domingo, Director of Investor Relations.

Miss Domingo, you may begin

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

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

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

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

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

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

As a result, actual results my differ materially and adversely to those expressed in any forward-looking statement.

Factors that might cause such a 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 end report on Form 10-K for the fiscal year ended December 31, 2003, which was filed with the FCC on March 9, 2004, as clearly 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 reconciliations to the comparable GAAP financial measures, where practicable, are contained today's financial results press release, which we posted on our website at www.aligntech.com under Corporate Information, Investor Relations, Earnings Press Releases and have furnished to the SEC on Form 10-K.

We encourage listeners to review these items.

Additionally, we posted a 12-quarter GAAP and non-GAAP revenue model on our website at www.aligntech.com under Corporate Information, Investor Relations and Financial History.

Please refer to both of downloadable XL spreadsheets for more detailed line-item information.

With that said, I would like to introduce Align Technology President, CEO, Tom Prescott.

Tom.

Thanks, Barbara.

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

2004 was a great year for Align Technology.

We began our journey of building a great company where the people, the processes and the systems are in place to drive future growth.

It was a year when we focused on educating our customers and enlisting new ones, refining our product so that it's easier for our doctors to use, and understanding the patient-base and why they love our product.

We focused on internal operations, too.

We brought in three very experienced executives who will help scale the Company.

We installed systems that will support future growth.

We successfully defended our intellectual property, and along the way we won some very prestigious awards.

In a moment, I'll walk you through our achievements of 2004, and more importantly how we will continue this journey towards building a great company for our stakeholders.

Let me spend a moment summarizing our top- and bottom-line financials, as well as our key metrics.

I'll ask Eldon to provide a more detailed financial discussion shortly.

We reported 43.7 million of revenue in Q4 and 172.8 million for the full year.

While quarterly revenues were down slightly on a sequential basis, mostly due to the Case Refinement Policy change we announced in December, year-over-year revenues increased by 41 percent.

We are very pleased with this increase as it shows we are getting recognition and adoption in our doctor community.

We also reported our first profitable year on a GAAP basis at $0.14 and on a non-GAAP basis at $0.23 per share.

This is great.

We are very proud of this achievement in the fact that we are cash-flow positive throughout the year.

We expect to continue funding the business from operations.

Now, let me take you through a few key operating metrics.

Ortho and GP case shipments were down slightly in the fourth quarter compared to the third quarter.

We shipped 12,300 cases to orthodontists, and 11,400 cases to GP dentists.

This compares to 13,100 Ortho cases and 11,450 GP cases in Q3.

We do believe there was still some lingering effects from the third quarter that affected fourth-quarter volume, especially early in this quarter.

As we'll discuss in a moment, we are making steps towards growing our customer base and case volumes.

Compared to Q4 2003, Ortho cases were up 4.6 percent; and GP cases were up over 60 percent.

On international side, we continue to make progress at case shipments were up 37 percent sequentially to 2,700 cases and up 47 percent from a year ago.

Looking at the full year, we shipped over 100,000 cases in 2004; that's up 36 percent from 2003.

We continue to expand our customer base as we trained 4,200 GP dentists in 2004, 1,200 of them in the fourth quarter, bringing the total of trained GP dentists to 13,800.

Additionally, 3,600 new GP's began cases in 2004.

In 2005, we expect to train about 4,000 more GP's.

We're very pleased that adoption in this channel is increasing.

Worldwide, 82 percent of active doctors, both ortho and GP have started multiple cases.

The number of doctors sending us cases increased by 900 to 9,700 doctors worldwide during the fourth quarter, compared to 8,800 last year.

The number of US orthodontists generating cases went up slightly to approximately 2,970 -- 2,970, compared to 2,950 last quarter. 5,300 GP dentists generated cases, compared to 4,900 last quarter.

And the number of international docs generating cases was up by 400 to around 1,400 total.

As we expected and mentioned last quarter, greater brand awareness among consumers and increasing interest by dental professionals is leading to more doctors asking to be certified and initiating cases.

This increase in total docs combined with the slightly lower case numbers led to decreases in orthodontists and GP dentist utilization to 4.22 and 2.30 cases per doctor, respectively.

We have established a set initiatives to expand additional adoption, which we believe will increase utilization.

International utilization was up at 2.4 cases per doctor.

In total, over 250,000, a quarter of a million patients, have started and/or completed treatment with our product.

I'd like to spend just a moment or two on some key accomplishments during 2004.

Clinical education continued to be a major focus for us in 2004, and this effort will be sustained in the future.

We enhanced our clinical education programs to ensure a greater degree of education and hands-on training that doctors return to their practices, full of excitement and energy, for treating their patients with Invisalign.

Last November, we held our Annual Ortho Summit weekend.

This is a three-day event we host for our top orthodontist practices.

Nearly 1,000 doctors and staff members participated in this intensive training program.

We conducted 12 sessions highlighting different techniques, ranging from extraction cases and attachments to showing a side-by-side case of twins.

One in Invisalign and the other in fixed appliances.

For the first time, we had specific educational tracks for the staff members, teaching them how to sell Invisalign as well as how to monitor treatment.

As always, the summit was well received by our docs and really helped them see how much more they could do with the product.

Many of our customers came to me afterwards and expressed that while they already had generated many Invisalign cases, hearing from their peers about innovations in their practices left them thinking they could do so much more.

In 2005, we plan to host our first GP dentist summit for our top GP practices.

We expect that these top GP customers will emerge with a better understanding of the product and its applicability with a greater awareness for starting and finishing Invisalign cases.

These are important opportunities for us to provide extremely focused clinical education and practice development training for our top customers.

In Q4, we also participated in the annual American Dental Association or ADA conference.

This is a great conference for us where we can showcase the benefits of integrating Invisalign into the GP practice.

We also created a hygiene kit and are working with the American Dental Hygienist Association to help dental hygienists explain the benefits of straightening their patients teeth.

In 2004, we participated in over 30 GP and dental trade shows, along with orthodontist trade shows, and over 20 ortho-specific focused trade shows.

These trade shows help us gain exposure to existing and prospective customers.

Because of our efforts in educating our customers, in December we received DentalTown's County Choice 2004 award for the best post-graduate Orthodontic Institute program for our certification level one course.

This is a great honor for many reasons.

DentalTown is an online and magazine community of practicing dentists, and the award was given to us by their thousands of members, our customers.

This award affirms the quality of our certification program, and it gives doctors visibility into what we can offer to them.

Beyond clinical education.

Our team also made great strides towards making Invisalign easier for our customers to market to patients and created tools to help drive improvement in their practices.

We created multiple new pieces of collateral, ranging from a profitability study, which helps doctors understand how Invisalign can be more profitable versus fixed appliances, to launching the ClinCheck User's Guide, which helps doctors more fully understand how to review, adjust and approve their ClinChecks enabling a better end result for their patients.

We continue to make the online clinical education center a more robust resource for doctors.

We now have over 20 cases doctors can review and learn from.

We added new tips and techniques, as well as videos, on taking impressions and performing interproximal reduction or IPR.

And we entered a community forum which gives doctors a forum for brainstorming on cases with other doctors.

We also extended our teen program with several new kits and mailers that our sales force can use to show doctors that teens love the product as much as adult do and are even more compliant.

We believe that over 20 percent of current cases are now with teens, and we expect that number to continue to grow.

On the consumer side, we have invested the effort to define and understand what patients want and need, and how to better target them.

We embarked on several major consumer surveys in the second half of 2004.

We wanted to understand what would drive patients to doctors' offices, what motivates them, and how many have a desire to improve their smile.

What we found out in the surveys was astounding.

Ninety percent of people surveyed are not satisfied with their smiles.

We also wanted to better understand how patient felt about their treatment, both during and after completion.

The data confirmed a high rate of patient satisfaction.

In fact, among people who are in treatment or have completed treatment, 87 percent of those surveyed are either very or extremely satisfied with their treatment in Invisalign; and 90 percent of those people would recommend Invisalign to their friends.

This survey also revealed that there's already a huge awareness of the product in the general population.

Based on this data, we believe there are approximately 12 million people in the U.S. have already looked into Invisalign as a treatment option for correcting their malocclusion.

These results helped us form a comprehensive strategy at targeting the patient base and how we drive them to doctors.

I'll be talking more about that in just a minute.

We had a full year of training doctors and educating them on the applicability, profitability, and proper usage of Invisalign.

Knowledgeable doctors are a key to our success.

And with continued education, we believe we can drive deeper into doctors' practices and become a more important part of their practice.

Let me now turn to manufacturing and R & D. 2004 was a very significant year for progress in manufacturing.

We started the year by installing flex-like [ph] material handling systems in our Juarez production facility.

This automated production logistics system streamlines product flow and helps minimize errors associated with manual processes.

We also upgraded the software in our CT scanning process.

This enables quicker turnaround on the scanning of impressions.

And most recently, we completed the buildout of additional space in our treat-operations facility in Costa Rica.

As we generate more cases, even with productivity improvements, we are bringing on more treatment technicians responsible for the treatment planning and design of cases.

Most importantly is the fact that in the fourth quarter, we produced our 10 millionth Aligner.

Please remember, each Aligner is one of a kind.

As a medical device, they have to fit perfectly, almost, and this speaks volume to our production capabilities and facilities.

We have previously described the evolution of the Invisalign product, the Aligners, systems and processes that create it, and a support that surrounds it in terms of its current effectiveness, are what we call today as Invisalign 1.0.

The drive to create Invisalign 2.0 is well underway.

We've begun research into the next generation Align of materials.

We believe a better material than we currently use can greatly enhance tooth movement.

We are in the process of evaluating different polymers, the underlining characteristics of these specialized polymers, and the effects of these polymers would have on straightening teeth with our product.

We've also made progress in the development of a compliance indicator.

This indicator will help us and the doctor determine whether or not a patient has been complying in wearing their Aligners for the required time each day.

An indicator will have to have certain properties that will make it appropriate for Aligner wear, and it must be durable enough to withstand brushing and cleaning.

We are currently in the process of assessing potential approaches and will drive this program forward.

We believe this will be very well received by our customers.

We've recently initiated a beta clinical trial for a combination product, in the early stages, and we are still enrolling both doctors and patients.

Our combination product would enable doctors to treat more difficult cases with a combination of fixed appliances of their preference and Invisalign.

Rather than a doctor having to start and manage what are in effect two cases for the same patient, we can potentially offer them one solution, one single integrated plan for treatment.

We believe this will be -- this will also be important to the Japanese markets due to a large percentage of complex cases.

As the clinical trial and our research continues, we hope to update you on our progress.

On the other end of the spectrum, we are looking into an offering that could cost effectively treat very minor cases.

We've found that there is a market within both the doctor and patient communities for a lower cost alternative to our core product.

We conducted a survey of doctors both orthos and GP dentists and found that the majority of participants would use a product that is limited to anterior treatments and fewer than ten stages.

This the product could be priced competitively so that it would only make sense to use it for simple cases.

We will begin a pilot of this new product in mid-2005 in a few select markets and hope to come back later this year with a definitive plan for a broader rollout.

We also entered into a new clinical research with NYU's Bluestone Center for dental research.

This research will study the use of Invisalign for orthodontic alignment prior to the placement of ceramic veneers in restorative work.

Our clinical and research teams are heavily involved in researching ways to make Invisalign a better product for our customers and their patients.

On the systems side, we upgraded our enterprise resource planning system in the fourth quarter.

This major upgrade enables timelier reporting and processing of our cases.

We've tied all of our systems together, from the customer-facing systems to our manufacturing-execution systems and our ERP, our enterprise system.

This was a great effort that drew people from across our company.

It is the beginning of building the infrastructure necessary for us to support a larger business in the future.

Let me discuss our efforts going forward and how that will impact our financials in 2005.

As we discussed earlier, 2004 was the start of journey towards building a great company.

We're continuing this journey in 2005 to make the best product for our doctors to use and a product their patients will love.

Let's start with our initiatives directed at the patients or let's -- before the patient even the consumer.

In 2005, we will launch a new consumer marketing strategy.

The new strategy will focus on the people who want to make a difference in their appearance, those people who are motivated to change their smiles.

Based on the surveys I mentioned earlier, we found out that about 35 percent of patients became aware of Invisalign through our TV ads.

Those ads have been reworked a number of times, however, they were created many years ago so it is time for a fresh, creative approach with different objectives.

Later this year, you'll see new advertising on TV, in print, and you'll possibly hear our ads on the radio.

The ads will focus on educating people about the benefits of straighter teeth, and how Invisalign can help you, as well as how to take the steps to find a doctor that can treat you.

On TV, we will also purchase fewer cable remnants spaces and focus on scheduled network spots in cable that target specific audiences.

We also found that 95 percent of our patients use the web and our website as an important point of contact with the product.

The new TV ads will motivate prospective patients to visit the new consumer website, www.invisible.com.

This new website will be the primary source for information on the product: if the product will work for you and who you should see to become a patient.

It will be rich with informative content and an improved doc locator, which will help lead patients to doctors who can make Invisalign work for them.

Expect to see the new ads and new website sometime in the third quarter of this year.

We believe this will generate the demand for consumers to get treatment and for doctors to start more cases.

While this new consumer and directed consumer effort will require more spending, we are allocating the funds differently than we have in the past.

Previously, our DTC spending included significant costs for call centers and fulfillment.

We will decrease our reliance on those two branches and increase our focus on advertising, the cost for new creative and the cost for additional placements in networks and remnant space, and on new point-of-sale collateral and consumer promotions for in-office help for the doctor.

We expect to double of funds from media placements, which last year was about 4 to 5 million; and yet, overall, we expect to increase our consumer marketing spend by around 50 percent.

We have a true commitment to developing the consumer space, and this is reflected in our drive to increase our visibility among the general public.

We will enhance our sales force coverage.

We plan on expanding our sales team by around 20 new reps in the first half of this year.

They will be geographically dispersed but mostly in the major metro areas.

Our sales reps will focus on the existing doctor base and driving utilization in their practices.

As our business evolves, we are also considering better ways to drive successful initial use and consistent results in our newly certified doctor base.

While a growing number of GP's have generated cases post-certification, we need to make sure that we are supporting these doctors and making Invisalign easier for them to get started with.

We plan on segmenting the newly certified doctor population from the existing doctor base with focused resources for each group.

Our sales strategy is evolving to ensure that we can reach these new doctors and get them started, while at the same time increasing our focus on driving adoption among the experienced doctors and practices.

To that end, our sales team, our existing sales team, will concentrate on the existing doctor base; and we as a company will most likely partner with another firm to extend our reach and drive GP certification and successful initial doctor use.

These plans are underway, and we will discuss our approach as soon as practicable.

We are also evolving our clinical support role to one of treatment partners, rather than just product supplier.

We believe this is the right course to take so that we can help our doctors treat their patients with confidence.

We have brought experienced doctors into our organization, taken steps to develop clinical standards, and encouraged newly certified doctors to seek assistance from experienced clinicians.

We believe that providing the tools and framework, along with this support, will help doctors become more successful.

Once we've generated the interest, we have to make sure the product works for both the doctor and patient.

As I said, developing the next generation of Invisalign is already underway.

In 2005, we will continue our research and develop enhanced materials for Aligners, as well as creating that simple case offering, along with a combination system that will address more difficult cases.

We expect to see more of that this year and to showcase these products in 2006.

On the manufacturing side of the business, we are also making great strides towards complete automation of our production facilities.

On the front end, we have been testing an automated system that will reduce the manual labor associated with separating the molds from the SLA platforms.

On the back end, in Aligner fabrication, we will continue developing the processes and identifying the technology to fully automate the end of the process, which means the separation of Aligners from molds, the polishing and sterilization of Aligners, and the packaging and shipping.

We are working with different vendors to adapt existing technology to our purposes.

Full automation is expected from somewhere by the end of 2005 to the beginning of 2006.

These improvements will reduce volatility in the process and reduce variability, improving quality and gross margins.

We've decided to keep our Aligner fabrication processes in Juarez.

We have a lot of programs in store for 2005, including our focus on driving improvement in clinical education, sales support, consumer outreach, and customer-facing systems.

We have a great relationship with our partners in Juarez and are confident that we can continue automating the production line and implementing margin improvement initiatives.

Therefore, we believe that a movement from Aligner fabrication processes from Juarez to Silicon Valley is unnecessary at this time.

On a systems side, we will continue enhancing our customer-facing applications in 2005.

Both V.I.P., our doctors' portal to their cases, and ClinCheck, our treatment planning software, are undergoing significant improvement that will launch into 2006.

We expect to make V.I.P. more robust with information that doctors can use to manage their cases and improvements that will make -- improvements that will make working with Align easier for the doctors.

With ClinCheck, we plan to provide tools that will make it easier for doctors to review and update their treatment plan, such as a health feature and an embedded expert that will give them tips on treatments they may not have thought about, as well at clinical education that is embedded in the software.

We expect that improvements of both systems will foster better communications with doctors and give them a product that is more helpful and easier to use.

We have a lot of plans going forward, but the most important thing for you to know is that the management of Align is committed to developing a product that works in a large number of cases, that is easy to use, while we're educating doctors to recommend Invisalign with confidence and creating a product that patients will continue to love.

We believe that 2005 will be another great year for us.

We remain focused on our objectives while continuing to driving results with our product and with our financials.

I'm excited about our plans for the year, and we are committed to do the right thing for our shareholders, customers and employees.

Before I turn the call over to Eldon, let me spend just a moment on our plans for the international side.

As you know, most of our international revenues come from Europe; and in the fourth quarter, they did a great job.

In 2005, we will refine our focus in Europe and concentrate on three major countries -- the UK, Germany, and Italy.

Italy is currently our fastest growing market;

Germany has the greatest number of cases; and in the UK, we believe an opportunity exists that we have not yet fully tapped.

In Japan, we are laying the groundwork to build a business and continue to work in the formation of a joint venture in order to begin offering Invisalign there.

We will update you on our progress as soon as possible.

I'll turn the call over to Eldon now, who will report on our financial performance for last quarter and last year, and who will give you a better indication of where we will perform financially in 2005.

Eldon.

Thanks, Tom.

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

Both GAAP and non-GAAP financial tables and reconciliation of GAAP to non-GAAP financials are including in our press release and historical tables have been provided on our Investor Relations website under Financial History.

We have also provided a reconciliation of our full-year guidance on our Investor Relations website under Financial History.

Let me first review the quarter, and then I'll move on into the full year.

First, for reported numbers, then for guidance.

First, Q4 revenues, as Tom mentioned, were 43.7 million.

As we noted in the press release we issued on December 9th, we announced the change to our Case Refinement Policy.

The outcome of this was a one-time downward effect on fourth quarter 2004 revenues and net profit in the same amount of 1.9 million.

Fourth-quarter revenues by segment were 19.7 million for U.S. ortho; 16.9 million for U.S. GP; and 4.7 million for international.

These channels represent 45 percent, 39 percent, and 11 percent of revenues respectively.

Worldwide training and other revenues were 2.3 million.

Average selling prices for U.S. ortho, U.S.

GP, and international were approximately 1,600, 1,485, and 1,745 respectively.

ASPs were negatively impacted by the Case Refinement Policy change.

Taking this into consideration, U.S. ortho and U.S.

GP ASPs would have been slightly higher than they were in the third quarter.

International ASP is down slightly due to case mix and additional promotions.

GAAP gross profit for the fourth quarter of 2004 was 29.1 million or 66.6 percent of revenue, compared to 23.6 million or 64.6 percent of revenues for the fourth quarter of 2003, one year ago.

This also compares to a gross profit of 30.8 million or 67.4 percent of revenues last quarter.

Gross profits were negatively affected by the Case Refinement Policy change by 2.1 million or 1.8 percentage points.

Included in cost of revenues for Q4 was $39,000 of stock-based compensation, non-GAAP gross profit for the quarter was 29.1 million or 66.7 percent of revenue.

Operating expenses on a GAAP basis were 28 million for the fourth quarter of fiscal 2004, resulting in operating margins of 2.4 percent .

This compares to 23.1 million for the same quarter one year ago and 27 million for the third quarter of 2004.

Excluding approximately $175,000 of stock-based compensation incurred in Q4, non-GAAP operating expense was 27.9 million or an operating margin of 2.9 percent.

GAAP net profit for the fourth quarter was 1.5 million or $0.02 per basic and diluted share, compared to a net profit of 452,000 or $0.01 per share in the same period one year ago and a profit last quarter of 3.3 million or $0.06 per basic and $0.05 per diluted share.

Total stock-based compensation for the fourth quarter was 214,000.

Excluding this, non-GAAP net profit was 1.7 million or $0.03 per basic and diluted share.

This compares to non-GAAP net profit of 3.5 million or $0.06 per basic and $0.05 per diluted share for Q4 of 2003, and 4.7 million or $0.08 per basic and $0.07 per diluted share last quarter.

The Case Refinement Policy change reduced bottom-line performance by 1.9 million or $0.03 per share.

As we have said previously, we do not expect the change to have material impact on revenues or gross margins in future quarters.

Now, for the full year 2004. 2004 revenues totalled 172.8 million, an increase of 40.8 percent from last year.

Ortho revenues were 86.1 million;

GP revenues were 62 million; and international revenues were 16.5 million.

These figures represent 51percent, 36 percent, and 10 percent of revenues.

Training and ancillary revenues were 8.3 million.

Again, this revenue figure includes the one-time Case Refinement Policy change that had negatively affected revenue by 1.9 million.

GAAP gross profit for 2004 was 115.7 million or 66.9 percent of revenue, compared to 71.2 million or 58 percent of revenues for 2003.

The increase is mainly due to fixed-cost absorption and automation improvements throughout our case design and Aligner fabrication process.

Included in costs of revenues for 2004 was approximately 900,000 of stock-based compensation.

Non-GAAP gross profit for 2004, as a result, was 116.6 million or 67.5 percent of revenue.

Operating expenses on a GAAP basis were 105.5 million for 2004, resulting in operating margins of 5.9 percent .

This compares to 91.1 million for 2003.

Excluding approximately 4.7 million of stock-based compensation, non-GAAP operating expense was 100.8 million or an operating margin of 9.1percent.

GAAP net profit for 2004 was 9.2 million or $0.15 per basic and $0.14 per diluted share, compared to a 2003 net loss of 20.1 or $0.35 per share.

Total stock-based compensation for 2004 was $5.6 million.

Excluding this, non-GAAP net profit was 14.8 million or $0.25 per basic and $0.23 per diluted share.

This compares to non-GAAP net loss of 4.6 million or $0.08 per share the full year 2003.

The fourth quarter Case Refinement Policy change decreased net profit by 1.9 million or approximately $0.03 per share.

The effective tax rate for 2004 was approximately 10 percent.

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

Now, on to the balance sheet.

Cash and cash equivalents at the end of 2004 was $70 million, compared to 47.7 million at the end of 2003, yielding positive cash contribution of approximately $22.3 million for the year.

Additionally, day sales outstanding were approximately 59 days.

Before I review guidance for Q1 and full-year 2005, let me just go over some items that will affect our financials.

Additionally, we have provided a reconciliation of GAAP to non-GAAP guidance on our website under Financial History.

As Tom mentioned earlier, we will dial up our efforts in sales and marketing and R & D in Q1.

Additionally, in Q1, we typically have a number of annual business expenses and capital asset investments that take place this quarter, making this quarter a heavier cash quarter than the others throughout the year.

For the full year, while our stock-base compensation expense will no longer be a factor going forward, we will continue providing non-GAAP guidance for the full year.

We believe that when we are required to expense stock options later this year as a result of the Financial Accounting Standards Board's 123-R pronouncement, we will be able to break out this expense as a non-GAAP items.

We are in the process of evaluating the different methodologies for evaluating stock options expense.

For now, we will provide P&L guidance, estimating the effect of the pronouncement, using the Black-Scholes' method.

Onto guidance: Q1 revenues are projected to be in the range to 47 to 49 million.

Ortho channel, GP channel, and international are expected to comprise approximately 45 percent, 43 percent, and 9 percent of Q1 revenues respectively.

The remaining 3 percent approximates training and ancillary product revenues.

Case shipment volumes are projected to be in the range of 27 to 29,000 cases.

Q1 gross margins are projected to be in the 67 to 69 percent range.

Operating expenses are projected to be in the 33 to 34 million range for Q1, as Tom mentioned previously.

Q1 reflects an aggression start to our sales and marketing and R&D initiatives.

That said, we expect to break even or generate a loss of up to 1 million or a loss of $0.02 per share to break even.

On the balance sheet we expect to use some cash in the quarter to fund business expenditures and capital equipment requirements.

We expect to end Q1 with a cash balance in the range of $60 to $63 million.

Let me move on to full-year 2005 guidance.

For full-year 2005, revenue guidance is expected to be in the range of 210 to 230 million.

This is an increase over 2004 of a range of 22 to 33 percent.

The orthodontist channel, GP channel, and international channel are expected to comprise 43 percent, 45 percent, and 8 percent of 2005 revenues respectively, with the remaining 4 percent approximating training and ancillary revenues.

Case volume for the year is projected to be in the range of 120 to 135,000 cases.

Full-year GAAP gross margin is expected to be between 69.5 and 71.5 percent.

As I mentioned earlier, we expect to expense stock options beginning in the third quarter.

This will affect cost of goods by approximately 1 million.

Non-GAAP gross margins, which will exclude the stock options expense, are expected to be in the range of 70 to 72 percent.

Full-year GAAP operating expense guidance is expected to be in the range of 140 to 146 million.

Stock options expense included in operating expense is expected to be $5 to $6 million, leading to non-GAAP operating expense guidance of $135 to $140 million.

Based on the plans we have in sales and marketing and R & D, we expect sales and marketing expense to be up 45 to 50 percent over 2004, and R & D expense to increase up to 45 percent over 2004.

Remaining G&A costs will reflect the support of a larger customer base.

Full-year GAAP net profit guidance is expected to be in the range of $4 to $15 million, or a net margin of 2 to 7 percent.

Full-year non-GAAP net profit, which will exclude $6 to $7 million of stock option expense, is projected to be in the range of 10 to 22 million.

Non-GAAP net margin for fiscal year 2005, therefore, is expected in the range of 5 to 10 percent.

Our effective tax rate for 2005 is expected to be approximately 10 percent.

We previously believed we would begin showing an effective tax rate between 30 and 40 percent beginning in 2005; however, upon further review of our tax profile and deferred tax loss carried forward position with our outside consultants, we estimate remaining at a 10 percent rate through 2005.

Additionally, GAAP EPS for 2005 is expected to be in the range of $0.06 to $0.23; while non-GAAP EPS is expected in the range of $0.15 to $0.33.

Let me move on to the balance sheet projections for 2005.

As Tom mentioned, we expect to continue funding the business through continuing operations.

Our cash balances at year-end are expected in the range of 70 to 75 million.

This reflects the increase spending we will have in the business in order to generate demand for the product and approve the product for our customers.

DSOs are expected to average in the 58 to 61 range.

As we automate our production facilities and expand capacity, we expect to incur capital expenditures in the range of $17 to $19 million for the year.

Depreciation and amortization is expected to be in the $10 to $12 million range for the full year of 2005.

I'll now turn the call back to the operator for some questions and answers.

(OPERATOR INSTRUCTIONS.)

Our first question comes from Tao Levy with Deutsche Bank.

Please state your question.

Just a few questions.

Obviously, the big part of this conference call is your outlook for 2005.

And you know, the range on the bottom line on the EPS is fairly large. same thing on the top end.

What are some of the important, sort of, levers that are going affect whether you hit 210 or 230 on the top line, and then same thing on the bottom line?

Tao, this is Eldon.

Let me address that question.

The -- really, the key lever goes right to top-line performance that, you know, as we've talked in the past -- and certainly our business model is no different -- that, you know, as we see any potential range of variability in volume, we have a limited amount of flexibility in terms of costs in our operations.

So when we talk about a range of performance on the top line, that definitely has a fall-through effect on the bottom line.

So really, when we talk about a range of revenue guidance relative to margin performance and relative to operating expense, that does create a range on the bottom line, but that's mainly because you don't have a lot of flexibility in the intermediate term in the operations world as our manufacturing process is set up.

Tao, underneath that question, perhaps, is really we -- as we talked about in the call, we see progress in terms of run rates and case submittals and the effectiveness starting to improve, but many of the changing and initiatives really won't kick in until later in this quarter, Q1, and get into Q2.

So a lot of this also goes to the kind of run rate we can establish as we exit Q1, get into Q2.

And we believe the second half of the year we'll get much more tailwind based on these initiatives in the first half.

So at the end of the day, it's really what kind of progress we can make in Q1 and Q2 to establish the top-line trajectory.

And then, looking at your first quarter guidance, you know, at the low end of 47 million, that clearly implies, you know, finally some sequential growth on the dollar basis.

Is that based on your visibility today given that, for all intents and purposes, we're half way through the quarter, given the lead times that you need?

Tao, the process by which we assess where we're at in the business and guidance takes in all factors, you know.

We look at the evolution of our business, you know, as you well know.

We do have an in-process queue that gives us some visibility to where we are in the business, where we hope to go, and we look at and assess where we're at literally on a daily basis.

So what we are saying in terms of guidance here for the first quarter takes into consideration where our evolution was exiting Q4 and literally where we are through today.

So you'd say the sense from the Company now is the difficulties that you encountered into the third quarter that flowed into the fourth quarter are -- you know, we're starting to finally see that ending as we transition through the first quarter?

I think I would say that we feel some traction.

What we talked about in general on the last call, three months ago, was the fact that we weren't really going to get a better effectiveness lead flow out of advertising until the November time frame.

Those turn into kind of, you know, late January, February, two- and three-month lag and beyond, turn into case starts middle and latter part of Q1 and flowing into Q2.

We've had, you know, good success.

Our current DTC approach will continue on right up until we roll out our whole new consumer program.

And we believe we're going to have more effectiveness and have been seeing that as we roll into this year.

So that should get better, that will help.

As we continue to enhance the sales force, add coverage, you know, that won't be completely linear.

As we evolve the sales force and evolve our management structure and invest in resources, we're going to get better coverage.

But -- so those things are all kind of happening as we speak.

We believe we are getting our legs on this [ph].

We believe we understand what happened, both from a company-effectiveness perspective in terms of the customer-facing applications, making it harder [indiscernible] to do business with us, which we believe we've largely fixed, and the coverage and effectiveness of the consumer and the sales force coverage are getting better.

But, again, the reason to be a bit conservative in the first half of the year is that the real -- the real step function improvements don't come until later in the year.

And so I think we -- that's what is underlying this run rate in Q1 and Q2 of 2005.

And just to [indiscernible].

Any comments on ASP increases for this year?

And also, what do you expect your share count to be in the first quarter as well as for the full year 2005?

Tao, we don't expect a lot, you know, any significant volatility in our ASP's.

You know, we might see a slight uptick going into the year in U.S.

GP and ortho that I believe we will stay fairly consistent.

As I mentioned, we did do some promotional activity internationally, which is primarily Europe, and, you know, we're hoping to see some volume uptick as a result of that.

So you might see the international ASP's down a bit from what you've seen in the -- you know, back in the second and third quarter --

But nothing dramatic?

-- and what you are going to see into the fourth and consistent at that level.

Nothing significant, nothing dramatic.

As we go further through the year and into 2006, as we bring out additional new offerings, we will see mixed shift driven ASP changes.

But that shouldn't impact gross margin; it should generate incremental growth.

So -- and, again, as we do that, we'll certainly speak to those changes

And, Tao, to the second part of your question in terms of shares, you know, what you are seeing in the press release for the fully diluted weighted shares for Q4, you are going to see, maybe, just a very slight uptick in Q1.

It's going to be, give or take a little bit, around, we expect, 64 million shares.

And for the full year on average in a range of 65 66 million shares that you would use in your fully diluted calculation.

That's our best projection at this time.

Okay.

Thanks.

Our next question comes from Mike Weinstein with J. P. Morgan.

Please state your question.

Hi, there.

It's Taylor here, Estera, along with Mike as well.

First question is just on the guidance, the reduction of about $10 million.

Is that -- would you characterize that as just a slower recovery from some of the same issues you've discussed before in Q3-Q4, or is it different factors that we should be aware of?

The -- it's not so much recovery per se, it's just -- I think what I said a moment ago was that when we identified issues that were going on that had to do with our coverage, our effectiveness of our coverage, customer-facing applications, and the issues around that, and then the real gaps we had encountered in the effectiveness of our DTC -- directed consumer and lead generation, the -- they have a -- several of those have a fairly long fuse to create impact, even when you become aware and you fix them.

So in the case of adding sales reps, it probably takes a quarter for them, to two quarters, to become really effective, by the time we are finished with training, deploying them into their territories, and getting out there and really having an impact.

So, you know, as we look at that, as we started making impact in -- really in Q4 dealing with Q3 issues, we pretty quickly have resolved the customer-facing application issues, and have not perturbed creating any more [indiscernible] in terms of user environment; it's gotten better and stable as it should be.

So that is a stable factor.

We are adding sales reps.

We just finished a national sales meeting.

We had a number of new reps there, literally their first week on the job.

But we are going to continue to do that and believe we're going to add, you know, 20 or so in the first half of the year here.

Those will take some time to phase in.

And, again, the increases in leads we expect to see, we're feeling a little bit of that right now, that turned to case starts, but that will really be a late Q1 into Q2 effect, carrying into Q3 when we then roll out our new DTC and consumer programs.

So the reason to be a bit more conservative here is that we -- that we're getting traction, getting better, but those things aren't step-function changes.

They're all going to add together, and so Q1 and Q2 -- good reasons to be thoughtful about how quickly those things are going to bring impact.

And, maybe, Eldon, if you want to add anything to that in terms of numerics.

No, I think basically you're hitting the key point.

You know, as we evolve through the year and the programs take hold, you know, we're trying to give the community best judgment on what we think the full year will look like; and that, I think Tom stated it well.

On the sales and marketing side, when you transition some of the way you generate leads and drive people to the website, is that going to be a gradual process?

Is there any reason to fear that there may be some transitional effects there?

No, I think it will not be a gradual process when we're really ready to roll it out.

I mean, we have to -- you know, the process of creating a whole new, very systematic advertising campaign to go along with -- to go along with a very organized, coherent, PR campaign, a very organized, coherent point-of-sale with specific collaterals for the doc's office, print, media, the whole bit, is a lot of work.

We've been working on it for, you know, three to six months already.

It starts with having the right data and insights into the consumers and the doctors that are going to help treat them; and it results in new creative, new ads and everything else.

So when when we're ready to throw the switch, it'll be -- it'll have been well tested, [indiscernible], run, retested, and we believe it'll have a big impact.

But we should have a chance to see that in Q3.

So you've piloted that program on select markets or --

So the whole process is well understood with -- in terms of working with major ad agencies and working through creative is a very organized way you develop, you know, key themes; you understand which consumers you are going after, which segments of population, what things are important to motivate them and speak to their needs and how to satisfy those.

We know that.

That's why we did the groundwork and the baseline work with detailed consumer strategy work last year with data and surveys and the like, focus groups.

Once you develop those themes, you tease them out into a whole set of potential approaches for creative.

As you then go test those qualitatively, with focus groups and the like around the country in appropriate markets, you then refine that, turn that into advertising and create a framework for print and media you test that again, and by the time you actually go run your program you have a very well-tested, well-designed set of programs, ads, print, messages, point-of-sales collaterals for docs, training, new website, everything that all works together to create the effect.

So we will have had a whole series of at-bats with these materials, with this set of creative messages and with the media before we ever go live.

Okay.

Great.

Then just one final question.

Can -- you talked a little bit about the segmentation of your sales force and the use of a partner.

Can you just expand on that a little bit and maybe help us understand in general terms what the partnership agreement might look like?

Well, I guess, I want to be very thoughtful about -- about how much I say in this area.

What I -- we've had a number of questions over time that have asked, you know, how -- are you going to have 500 sales reps some day?

Simply with the size of the GP dentist market.

And what we've talked about is we would continue to think about our long-term strategy of coverage and how we can have a close clinical consulting relationship with them to help the get great results, at the same -- you know, to allow us to go deep in those practices that want to adopt, and yet at the same time reach the broad number of GPs that will do very important work, maybe be small adopters, but yet do the important work of educating patients at chair-side.

These are the hundreds of millions of patients that are sitting in their dentist chairs throughout the year.

And we've said before, we would evaluate the use of working with firms in this space that had those relationships, that had that breadth of coverage.

And that's about as much as I want to say right now.

We will, at the right time, talk about how we're going to go do that.

But we have had a series of questions and in this open forum to all our investors, I wanted to make sure we could answer it -- we could at least lay it out there and provide a chance to come back behind it with more detail in a coming call.

Our next question comes from Matt Stratton [ph] with Think [ph] Equity Capital.

Please state your question.

Yes.

Question for you: Have you guys begin to see competition coming on the low end from Dents Fly [ph]?

Evidently, checks indicate they have come out with kind of quasi-imitation Aligners.

So I'm curious if you've seen that type of competition yet.

Well, you know, I guess there's two levels of -- what we would say is, we're pretty familiar with all of the commercial businesses out there that are trying to do something like Invisalign.

And the most obvious one is Sideburns' [ph] Armco division that had red, white and blue.

And we've responded very aggressively in the marketplace over the last couple of years, and have prevailed in a series of intellectual property actions and received three summary judgments.

We're going to continue to be very, very aggressive in the marketplace to defend our intellectual property and commercial rights, which were hard one [ph] through the innovation of Invisalign.

What we see is there are people out there that are trying to create tools for the doctor to do kind of a custom in-office Aligners; and we think that's actually a good thing.

I mean, there are companies that make special pliers and kits to use, materials; and we think the more that orthodontists and dentists become comfortable, moving, even tweaking a tooth or two with one aligner or two aligners they make, even if they are a little more crude in the office and they have to form it and cut it themselves, we think if they become more comfortable using clear plastic to move teeth, it's just going to help us.

Actually I had a discussion recently with a person I met that said, yeah, I've been Invisaligned.

And it was one -- one single office-made aligner.

And so we -- I don't have a problem with that.

If anybody tries to sit on top of our intellectual property, they can certainly assume we're going to respond very, very aggressively.

But, you know, Align was developed as an innovative young company.

We work really hard to scan the waterfront and to keep -- we take seriously to keep track of everybody out there.

But one of my favorite books was written by Andy Grove called "Only the Paranoid Survive."

So we've created a great new space.

It saw a lot of interest.

We have to assume we're going to -- somebody's going to try and come after us.

So we take is seriously

There are no further questions at this time.

Well, I guess we either did a really good job or not, with answering questions perspectively on the call.

But I'll bring it to a close, and I'll thank you for being on the call today.

So maybe just to summarize.

We've described for you over the past year and continuing today a multi-year strategy to try and build a great company.

With the plans we have in place now to reach consumers through new -- the new consumer program and our directed consumer process, reach those patients through the consumer programs, through sales-force expansion, through evolving the Invisalign product offerings and the underlying technologies that support them, and continuing the process of a manufacturing automation, as well as a rational plan for internation expansion, we believe we can grow the top line and work to build a great company.

If you have any questions, we can be reached at (408)470-1000, and we thank you for being on the call today.

Operator?

(OPERATOR INSTRUCTIONS.)