愛齊科技 (ALGN) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Align Technology's second-quarter 2005 financial results conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is now my pleasure to introduce Barbara Domingo, Director of Investor Relations. Ms. Domingo, you may begin.

Thanks, and welcome to everybody on the line. If you have not received a copy of our press release, please go to the Investor Relations page on our website at investors on AlignTech.com. Before we start the call today I would like to make some comments about forward-looking statements. During this conference call we make forward-looking statements relating to Align's expectations about future events, products and its future results including statements regarding expected financial results for fiscal 2005. Any forward-looking statements we make during this call are based upon information available to Align as of the date hereof. Listeners are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. As a result, actual results may differ materially and adversely from those expressed in any forward-looking statements.

Factors that might cause such differences include, but are not limited to, risks that are detailed from time to time in Align's periodic reports filed with the Securities and Exchange Commission including, but not limited to its annual report on form 10-K for the fiscal year ended December 31, 2004 which was filed with the SEC on March 3, 2005. And its quarterly reports on form 10-Q. Align undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

Please also note that on this conference call we will provide listeners with several financial metrics determined on a non-GAAP basis for comparisons to previous quarters. Most of these items together with the corresponding GAAP numbers and a reconciliation to the comparable GAAP financial measures where practicable are contained in today's financial results press release, which we have posted on our website at investors on AlgnTech.com under financial releases, and have furnished to the SEC on form 8-K.

We encourage listeners to review these items. Additionally, we posted a 10-quarter GAAP and non-GAAP revenue model on our website at investor at AlignTech.com under historical financial data. Please refer to these downloadable Excel spreadsheets for more detailed line items information.

Today's agenda will include Tom discussing operating metrics, how the business is going, our strategy and vision and our plans to operate in a competitive environment. Roger will give you an update on the legal front, both on the developments of OrthoClear and the latest on our patent litigation with Sybron's Ormco division. Lastly, Eldon will speak to the financials guidance and all will be available for Q&A. With that said I would like to introduce Align Technology's President and CEO, Tom Prescott.

Thank you, Barbara. And welcome to everyone on the phone today and on the Web. Let me dive right in. As you have seen in our results, Q2 revenues came in at $53.9 million, the midpoint of our guidance range. We believe that revenues were impacted by the launch of competition in the marketplace and the disruption this has caused. We will discuss this impact shortly.

For the past six years Align has earned the position of market leader in invisible orthodontics and removable appliances, and has had the luxury of no real direct competitors. We've always considered our biggest competition to be brackets and wires and have focused on taking share away from those products. We always knew that we might one day have a real head-to-head competitor, but expected that event to include the benefit of overall market expansion. Now we finally have a competitor, but they don't seem as interested in expanding the market with us. We believe that OrthoClear was formed for the sole purpose of creating disruption for Align.

In late 2003 we developed a comprehensive multiyear strategy to make Invisalign the best product possible and to increase Align selling to shareholders. We have known all along that 2005 and 2006 would be critical and challenging years in executing our strategy and in preparing Align's infrastructure, technology base and core processes to support our long-term goals. During previous calls last year we shared our key priorities and described the milestones that investors would be able to use to assess our performance in building the new Align technology, including full integration of physical manufacturing, an expanded and enhanced sales force, new technology to support what we call Invisalign 2.0, and a launch of a new consumer strategy.

I am really pleased to tell you that with the exception of the scaling and enhancement of the North American sales force, we are right on track with progress with all our key priorities. I know many of you are very interested in hearing how new competition has impacted our business this quarter, so I will address that first and then come back to the meaningful progress we've made in the other areas. So three primary issues were factors in Q2, and are likely to impact the top line for Q3 and Q4.

Disruption in sales coverage in customer relationships due to the raid on our organization by OrthoClear, disruption in customer focus on building their Invisalign practice, and while we do not believe this is translated directly into OrthoClear case starts, we do believe that it has stalled or sidetracked the focus some practices have had on building their Invisalign patient base.

And finally, pressure on current Invisalign pricing relative to OrthoClear. Let's get started with the disruption of our sales coverage. In the second half of 2004 we were working hard to hire additional reps in a number of territories where we felt that growth in the number of certified doctors and a result in customer base was too great for our existing sales coverage. The OrthoClear raid on our sales force exacerbated our existing coverage gap and created a great deal of upheaval both internally and for our customers.

With all that said, we ended Q1 this year with 80 quota carrying reps. We ended Q2 with 97. We expect to hire another 10 or so in Q3 and intend to end the year with 115 to 120. Now I spend time with each group of new sales reps during their training, and I am very impressed with the talent, energy and commitment these new employees bring to Align. Even with those qualities it will still take 6 to 12 months to get them up to speed and in some time longer to fully rebuild those important customer relationships.

We are also piloting a program where the same rep is responsible for both orthodontics and GP dentists within a geographic territory. We believe this structure may increase efficiency and synergy with each territory and enhance the cooperative model that helps improve collaboration between doctors.

I am very pleased that our new VP of North American sales, Dan Ellis, started in June. Dan's strong, experienced leadership presence is already visible and is being felt throughout the organization. His charge is not just to rebuild and retain our sales team, his commitment is to take this team to the next level to make the top sales organization in the industry.

Let's turn now to our customer relationships. Since they couldn't accept or ship cases early on, the new OrthoClear sales force apparently focused on disrupting the relationships between Align and our doctors. What do I mean by that? In the past few months OrthoClear has specifically targeted Align's top customers and has deliberately deceived and misrepresented customers and prospective patients regarding their product, certification, cases treated and more. In fact, they created some real confusion in the marketplace. Far beyond what you would expect from a typical new entrant.

I believe that in the near term the larger part of the revenue challenge from this disruption is not share loss, the lack of momentum in the practices that were previously enthusiastic supporters of Invisalign. We will regain the momentum through a combination of re-establishing the right sales coverage, rebuilding these relationships and initiating a set of programs that I will touch on in a moment.

Finally, we are facing greater pricing pressure for our full case price of 1895. We have known for a long time that despite the great treatment results, practice development opportunities and patient satisfaction doctors feel the lab fee is high. Given the opportunity most docs would love to add 900 to $1000 to their profit. We knew we had to be responsive to this issue and we're already working on multiple programs to address this opportunity or maybe differently stated need, even prior to learning about OrthoClear.

We are well along with our pilot Invisalign 7, a lower-cost offering for minor tooth movement that is met with very positive response in our trial regions. We expect to launch this product later this year and will combat OrthoClear's price game, not just with a low-priced solution, but with one that offers better value, superior customer support, faster cycle time, marketing collaboration and practice development.

In addition to broadening our product offerings, we recently introduced a very focused volume rebate, our volume purchase program besides discounts in a form of rebates to specific quarterly volumes. Approximately 140 high-volume doctors have enrolled in this program already, and the feedback from the field is even more doctors asking how they too can qualify for the program. This volume rebate program is a strong complement to the new, extremely well-accepted premier provider. Customers are not only excited about these new programs, they value the total solution of lead generation, practice marketing resources and rewards and incentives that Align provides.

These types of programs form some of the basis for Align's response to OrthoClear's predatory pricing tactics. We believe that their pricing including a new summer special, is either reared in lack of demand or is just another attempt to make price rather than efficacy and value the sole decision point for customers. When they are apparently capacity constrained, what is the logic in offering six free cases for purchasing six cases?

OrthoClear does not (indiscernible) in building a sustainable company or expanding the market. Does not offer any programs or resources that enhance the treatment experience or help grow practices. Their entire sales strategy is centered around a lower price, which is possible because they are leveraging our confidential information and trade secrets and because they don't have the cost of training or supporting docs or advertising to expand the market.

I recently heard of a doctor's office where the OrthoClear rep had suggested that the doctor's staff place the OrthoClear trifold brochures in the Invisalign presentation case so no potential patients would know the difference. They even provided stickers to cover up the Invisalign logo on the display case. This isn't clever marketing; it is cheating and a clear indication of bait and switch tactics.

So despite some challenges in our revenue outlook as a result of OrthoClear's activities, we are continuing to work towards our long-term goals and are executing on our original plans. Eldon will take you through our guidance. However, you should know that reclaiming our revenue momentum is our top near-term priority.

And before I finish discussing revenue, I would like to lay out some important statistics for cases and volume in the second quarter. Revenues in the orthodontics channel were essentially flat over last quarter at 23.2 million. GP dentists general revenues were 22.4 million, an increase of nearly 8% over last quarter. Overall, 43 percent of total revenues came from U.S. orthodontists. We shipped 30,400 cases worldwide to customers this quarter, an increase of 3 percent over the previous quarter. Q1 utilization for U.S. orthodontists was 4.43, for GP dentists was 2.38 and for international was 2.32, all essentially flat over the previous quarter. Again, we posted these numbers along with average selling price or ASP's on the Investor Relations site under historical financial data.

We believe the slowing in case growth will be resolved by getting back-to-plan sales staff headcounts and further up the experience curve for our sales team most likely as we exit the year. As I stated earlier, regaining our momentum on the revenue line is a top priority for our field team and for the Company.

Let's move on to volume and channel statistics. An increasing number of doctors have submitted cases to us and in the last quarter. In the last quarter 10,400 doctors worldwide sent in cases. 1200 doctors were first-time submitters last quarter. The number of U.S. orthodontists submitting cases was 3000; and 6000 GP dentists sent in cases. Additionally, we trained almost 1100 new GP's in the U.S. during the first quarter, bringing our base of trained GP's in North America to 15,800. Out of the 32,500 doctors trained worldwide, 20,500 doctors have started a case and 16,900 or 83% of those have generated multiple cases.

I've taken quite a bit of time in discussing our Q2 revenue profile, and the issues driving our Q3 and Q4 revenue outlook, and I have also spent a fair amount of time providing some context for the disruption caused by OrthoClear because I believe it is important, and we are not where we want to be. However, there are many other areas of Align where we continue to make significant progress towards our critical strategic priorities.

And a great starting point for discussing progress in other areas is with our outstanding manufacturing capabilities. Align is consistently demonstrated the competencies necessary to develop and scale world-class technology and processes. In the past two, three years Align has more than tripled quarterly volume with a third-best drug manufacturing headcount. Along the way we delivered dramatic gross margin expansion, primarily through improved product cost and substantial improvements in quality and customer support.

Just this past quarter we deployed a set of enhancements to our lighter fabrication process including software, firmware and equipment that will decrease fab times, improve product tracking and control and facilitate the implementation of a fully automated packaging system. During the technology and product development, over the past few quarters we have made substantial progress in moving our new product platform while we call Invisalign 2.0 forward.

At the AAO in May we showcased ClinCheck 2.0, which integrates embedded IPR in comments fields, a review wizard for ClinCheck, auto updates and several other improvements. We continue to move forward with development of a product for highly complex cases, what we call the bracket positioning template and have expanded our Beta study to include additional doctors. We have many cases in treatment now and are studying the efficacy of the template. This capability when fully integrated with Invisalign will open up opportunities for participating the large type of complex cases, especially outside the U.S. where the incidence of complex cases is a much higher percentage of total cases.

Initial feedback from doctors participating in the pilot has been very positive and indicate that the product will not only expand opportunities for complex treatment with Invisalign, can also increase efficiency and reduce chair time. There is a lot more work going on for a range of product features, new enabling technologies, new aligner materials and protouch for a compliance indicator as all system enhancements that will take us to Invisalign 2.0. Such as new products like the lower-priced solutions for simple cases and beyond. We look forward to sharing this with you as we continue to make progress.

Turning to our new consumer marketing strategy, we were very pleased with the launch of our broad new advertising campaign right around Memorial Day weekend, several months ahead of schedule. This brand building initiative is a key element in our broader corporate strategy and integrates an entirely new approach to reaching consumers with high-touch messaging while inviting them to our newly designed website to learn about Invisalign and to find a certified doctor. So how have we done?

Well, in just one month post launch our Web traffic and unique visitors are up over 180%. And most important, over 40 percent of those visitors are going to our "find a doctor" section and selecting one or more doctors for follow-up. Through this intuitive approach designed around consumer needs, we have presented in effect prospective patients with more than 200,000 doctor referrals in just one month.

The overall feedback from doctors, staff and consumers has been outstanding. Totally fresh, new, point-of-purchase and patient information collaterals are in our offices now, and I'm getting frequent comments from orthodontists and GP dentists that say their patients and prospects have seen the ads and are excited about treatment with Invisalign. The balloon campaign, as we call it really resonates with consumers. Once again, we are only a month and a half post launch, however we are very pleased with our progress to date and intend to build momentum with this effort.

We've had some other major activities during Q2, including our first-ever selling for GP's and our first-ever selling for European doctors. The annual Invisalign Ortho Summit typically held in November has become known as one of the most professional, high-impact, high-energy events in the dental industry. Our goal was to create the same excitement and impact for our first event targeted GP which we held in early May and our first-ever European summit held in April. The feedback is consistently been that we did a great job here. For both events we delivered a high energy program with extensive clinical content, while hosting some of our top customers for a celebration of their success. We had over 1000 GP's and staff representing around 350 practices attend the GP summit.

When we evaluated their case submittal rates for the two months pre and post summit, on average we have seen around 14% growth in those practices compared to 3% growth from non-attendees. We expect this investment to lead to expansion of their businesses. Hopefully it is clear to you the scope, scale and intensity of effort underway at your Company. We've got a lot going on. We have a vision and a plan for the future of Align, and we are moving forward and staying focused on that broader strategy that we developed nearly two years ago.

Our game plan is the same as it has been. Develop Invisalign into a world-class product with the infrastructure to support future growth. Create additional products that will broaden our reach into both value and the performance segments of this evolving market. Deliver software systems and technology to help customers spend less time in front of their computers and more time with their patients. Brand Invisalign as a product that patients ask for and demand.

Improve our automated manufacturing to consistently provide a high-quality product with ever decreasing cycle times. And once we have achieved these goals, consider really leveraging our value proposition and igniting market expansion. We are well on our way to achieving these goals. While the emergence of competition has spurred us to compress our timelines for some of these programs, we believe we can continue to be a market leader and a market developer in an industry that has enormous potential. In the end we believe our customers will appreciate the work we have done to create a product that is proven, that helps keep their patients happy and their practices growing. We will act like the leader we are and be a very tough competitor in the marketplace and in the course.

And now I would like to ask Roger George, our VP and general counsel to provide an update of legal issues and related matters. After that, Roger will turn it over to Eldon Bullington, and then we will take some questions.

Thank you Tom and good morning everyone. We are in the midst of a few events on the legal front, one of which is OrthoClear, of course, and I'll address that last. The others are litigation with Ormco, as well as the re-examination of certain of our patents. As a reminder, there may be confidential or privileged information that I cannot disclose about any of these lawsuits. However, I will attempt to give you as much clarity as possible about where we are with each case.

Let me start with the Ormco litigation. As you know, we have been in litigation initiated by Ormco for several years; within the last year we have won five summary judgments against them. One part of that litigation involves our patent infringement claim against the product, Red, White & Blue, sold by Ormco's subsidiary, AOA. Recently, the district court ruled in our favor that Ormco and AOA infringed valid claims of Align's patents. We were thrilled that the District Court agreed with our positions on infringement and validity.

And following those rulings, the District Court issued a permanent injunction that prevents Ormco and AOA from selling the infringing Red, White & Blue appliances. The District Court temporarily stayed enforcement of that permanent injunction for 45 days to allow Ormco and AOA to notice an appeal to the Federal Circuit Court of Appeals and to request the Federal Circuit to stay the permanent injunction during the appeal. The stay expired on July 10.

Ormco filed an appeal requesting that the Federal Circuit review the permanent injunction and rulings of infringement and validity. They have also filed a motion to stay the injunction pending this appeal. The Federal Circuit has not yet ruled on Ormco's motions. In the meantime, the District Court's 45-day-stay has expired, and the permanent injunction is in full force. The permanent injunction requires Ormco to advise certain people, including dentists and orthodontists who order Red, White & Blue about the injunction. It also requires Ormco to cease manufacturing and selling the infringing red white and blue appliances.

I realize this is dry. Bear with me please. If the Federal Circuit denies Ormco's motion to stay the injunction, Ormco and AOA will continue to be enjoined for manufacturing and selling the infringing Red, White & Blue appliances or they will risk being found in contempt of the permanent injunction. If the Federal Court grants Ormco's motion to stay the injunction, then Ormco will not be prevented from continuing to sell Red, White & Blue during the appeal, but they will remain liable to us for damages if the Federal Circuit ultimately affirms the District Court's order.

Now that the District Court's stay is expired and the permanent injunction is in full force and effect, AOA and Ormco have been forced to redesign Red, White & Blue in an attempt to avoid infringement. We understand that doctors will now receive the first two aligners and then approximately four weeks or so later they will receive the one remaining aligner. The new packaging is such that there is an instruction sheet attached which must be followed precisely to ensure that aligners are worn in the proper order. This is because the aligners no longer have markings to show their order of wear, which was one of the things that infringed upon our patents. It is not clear, however, that the redesign product avoids infringement, and we will continue to monitor AOA and Ormco's actions as well as their products, and we will not hesitate to take swift action in the courts to ensure compliance with the permanent injunction.

So where does this leave us with Red, White & Blue? We now have two concurrent proceedings against Ormco and AOA, the first at the District Court level. That action is not yet complete, although Ormco has been found liable for infringement. Currently only the amount of damage that Ormco and AOA's infringement caused remains to be determined at a trial. The damages trial has been delayed somewhat as the judge on the case, Judge Taylor, has retired and a new judge, Judge Snyder has been assigned. Judge Snyder has set a conference with the parties in August to discuss a schedule and the issues remaining in the case. At the same time, there is a second pending case which is Ormco's and AOA's appeal.

Briefing will occur in that appeal over the next few months, and then we will wait for the Federal Circuit to schedule an oral hearing; following the hearing we will await the Federal Circuit's ruling. The bottom line is that we are in wait-and-see mode on the Ormco and AOA litigation as it concerns Red, White & Blue. And as more information becomes available, we will do our best to inform you.

The second legal matter I am going to discuss is the re-examination of certain patents. Several months ago an anonymous party requested re-examination of one of our patents. Re-exams are fairly common in nature and are typically requested by anonymous parties. While we can certainly speculate who may have requested this re-examination, we will never know who actually made the request. Three additional re-examinations were requested in the ensuing months. It is certainly possible that the anonymous party who requested the re-examination did so purely to divert attention from the more important litigation issues we have at hand.

To give you some context and to address timing, the patent office has three months to determine if they will grant one of the anonymous requests for re-examination. So far they've granted two of the four requests. Once granted, the patent owner and that's us, has two months to file a response. However, customarily patent owners rarely respond. At the conclusion of the two months the patent office will discuss the claims, and this process could take two to six months. Then they publish an office action once they've made a decision. So right now we are waiting to see whether the patent office -- waiting for the patent office to discuss two of the requests and have yet to grant re-examinations on the other two. In the end many times a re-examination of patents causes the patents in question to become better and more concise. And when we hear any actions on this we will let you know.

So now I'm going to move on to OrthoClear. Quite a lot has happened since our last call, and let me first give you a chronological rundown of the events in the litigation arena. Then I will give you a breakdown of the things we do and do not know about OrthoClear. We put out an announcement in June regarding the first amended complaint we filed. I won't rehash it here, but the bottom line is that the court ruled on demurrs filed by both Align and OrthoClear. The court did not dismiss any of our substantive claims and denied OrthoClear's challenges to the core of our complaint. In addition, the court allowed Align to consolidate several causes of action and to update the original complaint. We were asked to include additional specific evidence previously introduced in support of the Temporary Restraining Order, which was granted in our favor in February. There will be another round of demurrs by both parties with hearings scheduled in August. In the meantime we continue with the discovery process. We have negotiated a protective order that when approved by the court will govern the production and protection of confidential documents and information produced during discovery.

The discovery process will likely continue throughout the remainder of 2005 and for some time beyond. Additionally, just last night we filed a multi-claim federal lawsuit in the United States District Court against OrthoClear. This complaint is different from the original complaint and alleges numerous violations of the federal Lanham Act. The violations include reverse palming off, trademark infringement and false advertising. The complaint also alleges violations by OrthoClear of California's Unfair Trade Practices Act and includes allegations and evidence that OrthoClear has deceived customers, and unfairly competed with Align in violation of California and federal law. By claiming and advertising that they, OrthoClear, trained and certified doctors to use their products. In fact they don't. They rely completely on Align's training program. They have claimed that the OrthoClear technology has a proven track record for successfully treating patients. In fact they have not successfully treated a single patient. And they are unlawfully using and infringing upon Align's registered trademarks.

The complaint seeks monetary damages and an injunction preventing OrthoClear from further false advertising and unfair competition. That is the litigation update. Now let's discuss briefly what we know about OrthoClear and their product. We still have not seen a product. We have confirmed that doctors are sending in cases. But we have yet to verify that actual aligners are in patient's mouths. And we do not know of any patients who have completed treatment using OrthoClear's product.

We are hearing a lot of complaints regarding OrthoClear problems with case turnaround time. OrthoClear claims that the delays are due to overwhelming demand, but we've seen nothing to support that claim. Although we are curious as to how adding GP's to the mix is going to impact an already backlogged system.

According to third-party interviews with OrthoClear customers, OrthoClear sent a letter to customers in which they claim to have cut their turnaround time almost in half for new cases. But with no mention of all the existing backlogged cases. According to interviews some doctors submitted cases weeks ago and waited, are still waiting 30 or more days just to see OrthoView, which is OrthoClear's version of ClinCheck. With no mention of how long it will take those doctors to get the actual appliances. This report supports other stories we are hearing every day in the field. Serious and increasing shipping delays, reps canceling appointments because they've got nothing to show. We have heard of at least one customer who was promised initial case delivery in June, then was told July and has now been told September.

OrthoClear has given the false impression through press releases that several people have left Align to work for OrthoClear. This is in fact not true. As Tom mentioned earlier, 17 salespeople left Align to work for OrthoClear. However, OrthoClear press releases saying that Dr. Craig Crawford and Ross Miller joined their Company in these releases, the wording is very vague and gives the impression that both doctors left Align and went straight to OrthoClear. In fact, Ross Miller left Align as an employee in 2003, and Craig Crawford left as an employee in 2004, both returning to their private practices. Whether or not they were already speaking with OrthoClear when they were still at Align remains to be seen and to be proven in the courts.

Because of these press releases many have assumed that the Temporary Restraining Order and subsequent preliminary injunction are no longer in effect. This is not true. The injunction states that OrthoClear cannot recruit or even encourage directly or indirectly employees to leave Align. We are researching whether or not this happened in both the cases of Drs. Crawford and Miller and whether or not OrthoClear continues to recruit Align employees. We are very frustrated that OrthoClear does not seem to be taking the judge's ruling on the injunction seriously. We find it hard to believe anyone could join OrthoClear without being encouraged directly or indirectly to do so.

Now let's talk about software. As you know, we have many patents covering our Treat software and ClinCheck. We have seen the OrthoClear software. As a matter fact, many of our analysts and investors also saw the software during the AAO meeting in San Francisco in May. The OrthoClear software incorporates artificial limitations as a result of Align's strong patent position. For example, customers cannot view the incremental stages of teeth movement. These stages are crucial for doctors to see so that they can understand if they must use additional methods, such as attachments, pontics or buttons. We've heard from doctors that they would not use the OrthoClear product for this reason alone.

Lastly, let me share information about manufacturing. On the aligner fabrication side they are using a process called CNC for mold creation. While CNC is considered highly accurate, it is a very slow process, especially since OrthoClear is believed to be using older, slower, CNC mills. Align evaluated this technology early on. When those same people were at Align and determined that CNC was too slow to be scalable. They could get much smaller and faster equipment, but that would cost quite a bit of money. Once molds are created using CNC technology they then use BioStar machines to hand punch the aligners. Remember that we used BioStar machines when we first started the Company.

Then OrthoClear has to hand cut each aligner and hand polish each aligner. This process also takes time, reduces accuracy and creates a greater possibility of mistakes. That is why we automated the process. We believe OrthoClear attempted to bring someone aboard who could have helped streamline the process, assess efficiencies and scale the processes to support increased volumes. However, they were not successful in doing so. So where do we go from here? We will continue with the discovery phase and gathering evidence and support to fight this lawsuit against OrthoClear.

Let me now turn the call over to Eldon for the financials.

Thanks, Roger. As a quick reminder our second quarter press release and 8-K filing of the same document are available on our website. Q2 revenues, as Tom mentioned, were 53.9 million, or up 5.4% from last quarter and 22% from the same period a year ago. Second quarter revenues by channel were 23.2 million for U.S. ortho, 22.4 million for U.S. GP and 5.7 million for international. These channels represent 43%, 41% and 11% of revenues, respectively.

Worldwide training and other revenues were 2.7 million. Gross profit for the second quarter of 2005 was 37.3 million, 69.2% compared to 35.7 million or 69.7% last quarter. This also compares to a gross profit of 30 million or 67.8% for the second quarter of 2004. Gross margin was down slightly over last quarter due to higher than expected costs for clinical education events. There was no stock based compensation included in Q2 2005 cost of revenues.

For comparison purposes non-GAAP gross margin, which excludes stock based compensation was 68.5% last year. Operating expenses were 36.1 million for the second quarter of fiscal 2005. This compares to 33.5 million last quarter and 25.6 million for the same quarter one year ago. For comparison purposes, non-GAAP operating expense, which excludes stock based compensation last year, was 24.2 million. There was no stock based compensation recorded in Q2 of 2005 in operating expense.

Operating expenses for the second quarter reflect an increase in expenses related to the initiatives Tom discussed, such as strengthening the sales force, marketing initiatives including the launch of the new advertising campaign and the R&D initiatives we have in place to build a great product and Company.

Additionally, OpEx includes 2.1 million for OrthoClear related matters during the second quarter. Year-to-date expenses for OrthoClear related matters total $4.5 million. Net profit for the second quarter was $538,000 or $0.01 per share compared to a net profit of 1.9 million or $0.03 per share last quarter, and 3.8 million or $0.06 per share in the same period one year ago. For comparison purposes non-GAAP net profit last year was 5.6 million or $0.09 per share. Again, the full GAAP and non-GAAP income statement and a reconciliation of GAAP to non-GAAP financials is available in our press release and on our website.

Now on to the balance sheet. Cash and cash equivalents at the end of Q2 2005 was 73.4 million compared to 70 million at the end of 2004. Additionally, DSO's were 59 days, still below our terms of net 60 days. Cash was higher than we anticipated due primarily to the timing of capital expenditures moving into the third quarter. I will spend just a few minutes on the third quarter and speak about our full year 2005 guidance. As you have heard from Tom and Roger, rebuilding our sales force and the competitive landscape with OrthoClear has created a degree of volatility and uncertainty in our business. We are providing guidance for the remainder of 2005 based on the knowledge we have in our business today. Should we see changes in our business due to market conditions and competition, we may revisit guidance at that time.

We expect Q3 revenues to be in the range of $46 to $50 million. Sequentially projected volumes are down, reflecting the sales force and competitive impacts Tom discussed, as well as the typical summer period sluggishness we see in Q3. Ortho channel, GP channel and international are expected to comprise approximately 42%, 44% and 10% of Q3 revenues respectively. The remaining 4% approximates training and ancillary product revenues. Case shipment volumes are projected to be in the range of 26 to 28,000 cases. Our Q3 revenues reflect blended ASPs of approximately $1660 to $1670, which includes a $1.7 million benefit associated with our case refinement policy change announced in early June.

As you may recall in June, we amended our case refinement policy to include up to three refinements. In addition to including more case refinements in the price of each case, we also changed our method of deferring case refinement revenue. Between May 1 of 2003 and June 30th of 2005 we deferred to fair value of case refinement on 100% of aligner cases shipped. Now that we understand the historical usage rate or breakage factor, we will defer the $125 fair value of case refinement on approximately 45% of aligner cases rather than all cases shipped.

Blended ASPs excluding this benefit would be in the 1600 to $1610 range, reflecting a sequential decrease associated with the volume based price discount program Tom described earlier. We believe that beyond 2003 or excuse me -- we up believe beyond Q3 we will continue to review price discounting and rebates to provide incentives for our customers.

Q3 gross margins are projected to be in the 65 to 68 percent range, reflecting our case volume expectations for the quarter and the aforementioned volume discounts. Operating expenses are projected to be in the 38.5 to 39.5 million range for Q3. Sales and marketing, R&D and G&A represent approximately 55%, 15% and 30% of operating expenses respectively. As Tom mentioned, we expect to continue with our plans to develop the Invisalign system and make Invisalign the best product for our doctors. This guidance also reflects OrthoClear related expenses estimated to be 3 to $4 million for the quarter.

GAAP net loss is projected to be in the range of 6 to $9 million or a per-share loss of $0.10 to $0.15. Let me turn to guidance for full year 2005. Again, let me mention that this guidance is based on what we believe today. While it is difficult to fully predict the effect of competition based on what we know, we have attempted to incorporate this knowledge into our full year guidance.

We are reducing our revenue guidance for the year to $194 to $204 million, an increase of 12% to 18% over 2004. Channel breakdown is estimated for the full year to be 42%, 43% and 10% of 2005 revenues for U.S. ortho, U.S. GP and international, respectively, with 5% approximating training and ancillary revenues. The July case refinement policy change I alluded to a moment ago benefits the full year by $3.5 million. Case volume for the year is projected to be in the range of 112 to 118,000 cases. Full year GAAP gross margin is projected to be between 67% and 68%. Full year operating expense guidance is expected to be in the range of 144 to $147 million. Sales and marketing R&D and G&A are projected to represent approximately 55%, 15% and 30% of operating expenses, respectively.

Full year 2005 OpEx guidance is down slightly from previous guidance given in April of 2005 and includes the incremental 10 to $12 million for OrthoClear related expenses that we previously discussed. The reduction from previous guidance is due to lower than anticipated personnel costs, R&D program costs and non OrthoClear related legal costs.

Net loss for the year, therefore is expected in the range of 10 to $16 million. Additionally, loss per share for full year 2005 is expected to be in the range of $0.16 to $0.27. Note also that our guidance is provided on a GAAP basis.

Let me move on to the balance sheet projections for 2005. We estimate our cash balances at year end to be in the range of 58 to 62 million. DSO's are expected to average in the mid to upper 50s. We project capital expenditures consistent with our prior guidance in the range of 19 to 21 million for the year. Depreciation and amortization is expected to be $11 to $12 million for full year 2005. We will go now to the operator for questions and answers.

Tao Levy, Deutsche Bank.

Another tough one here. Just a few questions. First, the way I see things and we want to talk to doctors and our friends over at OrthoClear, I mean it seems like they probably have a case volume of anywhere from 1000 to 2000 cases. And based on what you're saying on the manufacturing front it doesn't seem like that necessarily is going to improve too much. Yet it seems to appears to be having a greater impact on your business then just that. And I wonder if you can talk a little more about that, talk about whether the sales force is properly understands what's going on and can compete, and is looking to expand the market rather than just argue against OrthoClear?

What is disappointing -- we've made so much progress, and this is absolutely going to be a great company. We have made huge -- think of where we've come from the last few years. This whole thing with OrthoClear is about disruption, and so our goal is going to be to manage down that disruption by getting a sales force totally tuned in and focused on our customers. And then going from there. But, I mean, so the real game at the end of the day is not letting that disruption turn into share loss. And that is what we believe we can prevent.

Their whole goal, the whole process they have taken has been to get between us and our customers, and that was very effective. They had reps with good existing relationships and we were uncovered in many of those territories. You may remember we are already chasing the coverage curve in 2004, which put us into a little bit of a trough in the second half of last year. We made real strong commitment to building the sales force, and of course we entered the year and got raided. So this sales team knows exactly what they've got to do. I said earlier that I am really excited by the talent I am seeing. Now even if we bring in someone terrific and they are getting to know their customers, its going to take them a while to build that kind of strong, credible relationship, which is why we are trying to be conservative and thoughtful about the rebound.

But the simple fact is we sure did not ask for this, and we certainly wouldn't have expected a normal competitive entrant to do the kinds of things that OrthoClear has done. But that said I think that actually spurs our team to take the high road, to be incredibly professional, to work with our customers and do great things. And Dan Ellis, our new VP of sales has been out in the field almost the entire time since he got here seeing customers and reps and working with the team. And I am absolutely certain we are doing the right things and it is going to come around.

Okay.

It is not fun because we are accomplishing all these really great things and these guys have caused some disruption in our world, but we are dealing with it, and we are going to get past it.

Turning over to marketing and efficiency of that, obviously a lot of money is being spent on TV campaigns and so forth. Yet we haven't seen thus far any material benefit on the numbers. I was wondering if you could address that because obviously historically there was a big spend by Align on this big marketing push, and essentially it didn't work out. And I just want to make sure that doesn't happen again with this marketing effort.

And also, is there a way that you can quantify the hit rates of the referrals? I have to assume that a lot of those hits on the website are investors trying to call up some of the doctors. But any way to gauge from your customers how many of their patients are coming directly from the website links?

Yes, the short answer is yes, we have lots of ways we can do that; I don't want to go into detail but there are a lot of techniques we are using, to track unique visitors, to do some research with those consumers going to our website, and to start understanding the conversion rate in a fundamentally new approach. Again, if you compare what we are doing today, it is very, very different from what the Company did in terms of process in 2001, 2000 early 2002 and there are a couple of fundamentally different things in the marketplace. And so your question is a good one, which is we have just changed guidance, revenue is flattening out maybe even going down a little bit. We've got losses mounting and we are spending a lot of money on marketing so it is a fair question.

To put this in perspective, we are increasing consumer, total consumer spending by 50% year-over-year, which is a big jump, but that almost translates to a 100% increase in advertising. Again because the old program, using call centers and direct to consumer what I will call kind of the high-end "Bo flex" approach was those costs for the call center and all those related things scaled for $1 of media spend, we had roughly $1 of related call center costs. This is very, very different for $1 of media spend we have a fraction of those expenses related in terms of other materials, fulfillment, etc.

The second thing is if you go back to when the Company first did its first big push, the company was frustrated with the slow pace of adoption by doctors and the channel wasn't ready to accept demand by consumers. When consumers went in, doctors actually were putting them into braces and brackets. So we believe this channel of orthodontists and dentists is very much ready for us to raise the water level, and our job now is and we are just getting started with this -- again we are a month, month and a half in, our job now is that over the coming quarter and quarters turn that increased interest into conversion rates in the doctor's offices. And I will tell you anecdotally what we hope to have happen is when patients got into a chair for their consultation they were already very much aware of the value proposition, the idea and had the strong motivation to do something to improve their smile, which is a different place than we were with DTC approach. That is exactly what we wanted to accomplish.

And then we have chairside selling tools for the staff and the doctor to effectively present Invisalign to their patients. So this is part of the practice development program, and all that stuff, and we have ways of managing the quality along the way by crazy things like mystery shoppers, and spy calls and all kinds of things that we use to assess how the doctors are effectively using those tools and if in fact, someone is out there baiting and switching. And we have all sorts of things we can do about that. So we are -- this is a key part of our strategy. We are committed to moving forward, but we are absolutely intensely focused on making sure we derive great value from this.

And since we have Roger on the phone, if just so that we are clear if I go to an orthodontist today and for whatever reason want the Red, White & Blue product, can I get it? Or am I getting into that sort of two-stage process that you're talking about without instructions or what not?

Your getting it in that verkochte process that I described.

Okay, so whatever they are selling now is different than what it was a month ago or whatever?

Yes, you're getting red and white and then if you wait a while you will get blue, and you better hope you put the white and the red in the right order. And I won't bore you with a dissertation on the doctrine of equivalents and why even that crazy system probably doesn't pass muster.

And the two patents that are being re-examined, are they the ones that were found to be infringed by Ormco?

No.

Okay, and just lastly, and it is probably a tough question for management, but what is -- Tom, how are you, Eldon and I guess the rest of the executive team going to be compensated going forward? What is the metric that you get paid on? Is it hitting numbers, is it growth in sales?

How many analysts question's we answer? (multiple speakers) We did a good enough job of answering your questions obviously, Tao. It is a fair question, and I think it is fair to say that if we look at last year as an example, while we absolutely accomplished our business plan for the year, the second half of the year was disappointing compared to the first half. Now in retrospect, we think the seeds were being sown for some of the things we saw happen with OrthoClear, and it does make you wonder if there weren't some of those things contributing to last year's second half performance. But for what I will just talk about good governance here for the bonuses and the other actions that we are taking for management and people in the Company, those were indexed down based strictly from the numerical results that were in place with the comp committee. They were indexed down because of the second half and the decline in operating profile.

So I right now I am not at all thinking about bonuses and the team. We have been in a very unprecedented time with a competitor that disappointingly hasn't created value and brought value to the marketplace other than kind of disrupting it and disrupting us and offering this low price that is kind of not fairly gleaned. So we are working through that. I am as excited as I ever have been about this company. Our team is intensely committed and focused. You asked the question its really the first time we thought about it. It is not an issue on the table for us. Comp committee is going to do what is right for the enterprise and the Company, and whatever it is, it is.

Okay, perfect. Thanks.

Ryan Rauch with Jefferies & Co.

Just a couple quick questions. Can you just walk through the sales force ramp? How many GP reps do you have? How many ortho reps? I know you gave general figures, and then at year end what do you expect in each of those channels from a headcount perspective?

Let me maybe set some context for just a second. There is a couple things going on. We are going to probably start to talk about sales force numbers a little differently for a couple reasons. One, as we ended the year we were in the middle of starting a reorganization. We had two separate sales forces, Ortho and GP, different management structures, reporting into the VP of North American sales, regional managers for Ortho, reps for Ortho; regional managers for GP, etc. And so to answer your question directly in a moment but we moved in January to create a single management structure but preserved a region management structure that was going to have Ortho and GP both.

We also decided in the process of doing that we're going to try because we were still at manpower gaps in some areas we were going to try some coverage experiments where we would create a single territory manager that would cover both Ortho and GP. And understand how well that worked before we thought about deploying it more broadly. Well in the middle of all that we got raided and lost a big chunk of our most experienced Ortho reps. And so what we had to do literally was flush whoever was available to cover two and three and sometimes four territories. It wasn't perfect. So we kind of in some ways purposely and other ways not purposely but to be pragmatic, had to move away from a pure channel approach. We are -- we have a number of regions around the country where we still have these experiments going. So even as we backfill we are in some cases hiring with mixed territories. So the numbers of Ortho and GP will become less meaningful. We are going to try probably next quarter to give some -- for lack of a better term translation view of how that is evolving -- maybe on an FTE basis about how we think they are deployed in terms of accounts. But we are still working through that.

The upshot is, if I just look at the number here, we started the year with in 2005 with -- bear with me for a second -- it says we are going to end the year -- let me get back to my numbers. Sorry, hang on, Ryan. I do not want to freelance here. We started the year with -- Barbara, hurry up and write here. She's writing upside down, guys. I can't quite read it. Go ahead. Just give the numbers, Barbara.

We started the year at 30 on the Ortho side and 52 on the GP side. At the end of Q1 we were at 19 Ortho, 61 GP. And again, at the end of Q2 we are at 36 Ortho, 61 GP.

And that is more on an FTE basis. We haven't necessarily added back that many pure Ortho reps. That also includes the view of combined territory which is why this translation thing is a problem.

We are including the combined territory reps in the Ortho (multiple speakers).

I do not want to confuse the issue. The simple fact is that our plans were to exit 2005 with somewhere around 115 to 120 reps. We are going to be there. The other thing that we plan on doing was doing this in a more linear way. We had really hoped by the end of Q1 to be very close to our kind of what we talked our optimal coverage profile. But we certainly didn't anticipate losing 17 very experienced reps. That really hurt, and we are still, as I said, trying to not only backfill some of those territories but then rebuild those relationships.

So again, we ended Q1 with 80 total reps, which is a combination; we ended Q2 with 97 total reps. We got 10 or more in the pipeline right now. We intend to end the year with 115 to 120 and we view that as a very full complement, trying to keep up with our coverage model which we were chasing through a good part of last year. So I hope I have not confused you, Ryan, with the translation process. Does that answer your question?

Yes, that was great. And then can you walk through again the difference between your manufacturing process and what you believe to be OrthoClear's and how you have this information? You seem to have some pretty salient details about how they have a sort of very archaic manufacturing process. Is it from someone who left to OrthoClear, came back or -- give us an anecdotal evidence there because no one has seen the product but you seem to have very intimate knowledge on how they are manufacturing it. And then can you walk us through that again and how it is different from yours and why you chose years ago not to use that method?

Let me start -- first of all I didn't use the term archaic. But I will talk about what we do and how we got there and in general where we are going. And I will let Roger George provide a little more color commentary if he chooses on what we know and all that. But assume it is a major urgent effort for us to understand exactly what they are doing given the nature of how they came to be, and there is lots of things we know that we won't discuss.

Our journey for manufacturing, it touches every part of the technology from materials to process to capital. We are on our I think 6th or 7th generation of scanning technology. We have gone through multiple cycles of aligner fabrication processes. We have over time attracted a group of very talented engineering and technology people centered around, centered on manufacturing, and we continue to work -- and it's very hard. And our dream is a fully -- what we call fully integrated lights out, automated facility where we stream material in one end and out comes highly accurate, high-quality aligners at the other. And in a very scalable, modular way.

We are right on track with making that reality occur. And we turn over our manufacturing technology every year at every stage. There is not a week or a month that goes by that we aren't piloting something new that we aren't releasing new software that we're not bringing on a new feature, that we aren't improving productivity, that we aren't generating cost savings. And so it has been a very big part of the Company. I guess I'd like to stop there. That is what my focus is. That's what our Company focus is. Roger gets to spend his time with the right resources in place to figure out what OrthoClear is doing. I am much more interested in leading the team to focus on how we are going to make Align a great Company. It is Roger's and the lawyer's job to hold OrthoClear responsible for what we feel they have done in the marketplace. Roger.

Thanks, Tom. Ryan, I'm not sure how satisfying an answer I can give to you on how and where I have gathered this information because, quite honestly, if I were to start explaining things like that it might very well cut off my access to such information. So I said what I said in the script about what we have come to understand about how they are creating molds and how they are pushing out aligners. And I could talk to you about alternative technologies for making molds and for punching out aligners, but it wouldn't take very long to reach the limits of my technical understanding, which is why I work in legal and not in manufacturing.

Finally, with the stock off significantly today and with as upbeat and enthusiastic Tom, as you are about the future of Align, is it fair to assume that we could see insider buying once the window opens? Thanks a lot.

You know, yeah, thanks a lot. I don't know what to say, Ryan about that because we have got strong-minded investors that are very supportive. And they could choose to do that. I certainly can't speak for the management, and I guess we just have to see what happens. But we're certainly disappointed to see with all the progress we are making what has gone on with the stock price. Our goal -- while we worry about the stock price and it's hard not to look at that -- what I try to tell employees is focus on taking care of customers, building the business, delivering results and the stock price will take care of itself. And that is what we try to spend most of our time on, but we will see what happens on the buying side. I don't imagine you will see much selling. That's for sure.

(OPERATOR INSTRUCTIONS) Michael Weinstein with J.P. Morgan.

Hi, it is actually Taylor Harris here for Mike.

First question is just looking at your guidance, as of the first quarter your guidance excluded the impact of OrthoClear. It now clearly includes the impact. Would you say that all the change is due to OrthoClear, or are their other market dynamics that we should be aware of?

You know, it's really a good question. And I think at one level if I step back from this whole thing, we think the market is evolving beautifully. We think the things we've done to gain that market are happening right on track. We think the thing that has really created some challenges for us in the near-term are tactical, in a way and have been largely created by OrthoClear with the disruption. Again, they have -- let's just say if a big competitor came in which would present different challenges -- let's say a big company that had spent years and gazillions of dollars and believe they had ways around our AP and they came blasting into the industry with a value proposition and a product concept, they would even though they would create challenges for us to compete, they would be enhancing the total market. We would have to respond. We have to believe customers would win. Market would expand. Product features would improve -- over time, even as the share leader we still win because the water level rises and perhaps even more quickly, even while we have to react to that competitive threat.

The difference with OrthoClear is they are acting more like a parasite using our stuff, living under our price umbrella, goofing up the market, creating far more disruption than -- Tao threw out his guesses about their actual case volumes a few minutes ago, the disruption they have caused is far in excess of that. And that would not be normal behavior by a credible new entrant. They would be much more interested in share gain, in scaling a business and not acting unprofessionally in the marketplace because they are going to live in that marketplace for a long time.

And so what I see is very largely these issues are both a legacy if we got behind a power curve on coverage and effectiveness for our sales force over a year ago, we were chasing that in trying to catch up with that and then we got raided and it put us pretty much deeper in a hole. We are pulling out of that, and we are going to be just fine. I think we are going to have to deal with OrthoClear for a while and I'm going to make the assumption they're going to find a way to scale their business a bit. But I am also going to make the assumption they're going to continue to use these very unprofessional tactics to disrupt us for a while until we can stop them in court and take the high road with our customers and create broader value in the marketplace.

So again, small share loss, larger scale disruption. We are coping with it. I think we are out of the response mode, back in to -- which we were for a while -- back into build our business and take care of business and get on with life and build a great company mode. Not fun, but it's where we have to be.

Great. And then just as a follow-up I want to focus in on the price discounting in the marketplace. And can you maybe first of all just describe your philosophical approach to that how reactive versus proactive do you think you're going to be? And if you could give us any way to quantify the percentage of cases in your base that the discounting would apply to? And where the ASP's may trend after the third quarter given the current discounting plans in place that would be great.

Let me do this in two ways. I will talk a little bit about our approach, and I will ask Eldon to maybe amplify on your question about ASPs and relative to the guidance and how much of it is price versus volume. He's shaking his head that he didn't provide that commentary, so I am going to wave him off on that. So philosophically one of the first things we could have done with OrthoClear was coming and rattling the price. We could have said okay we are going to run for the exits and cut our price and race to the bottom. And that is not the behavior of a market leader. So the second thing is such philosophically where we have been.

The second thing is we would prefer to create new offerings, not just cut our price on our core product. Create new offerings that provide the right value proposition at the price point at the value end for simple cases and at the high-performance end. In fact, we are extending that performance envelope by bringing out things like the bracket positioning template that will even do more complex cases, and I think you will see over time from us a much greater expansion in this offerings development mode.

So that said, we think -- we knew -- we've known for a long time based on our detailed research among our docs that they just thought our lab fee, five to six times what brackets and wires cost them per case, we've known there has been resistance for some time. Or long-term plans have been to build the right platform, to get Invisalign 2.0 in place, to move further down this manufacturing journey to have a totally integrated platform that is very scalable, and then at that time from position of total strength, again that assuming we'd have another competitive marketplace, to look at taking meaningful changes in our total value proposition with docs; meaning rethinking pricing, structure, everything else and use it as a chance to really ignite long-term market growth.

That has been our thinking for years, and that was our game plan. Of course, that is of course known to some of our former employees. So now what we are doing is to say, okay, we have a competitor out there. They're playing the price game. We are responding in a multitude of ways, one of which is to accelerate some of our development programs, one of which is to branch out our offerings more and to position those offerings around OrthoClear's price offering. Another way is on price itself, and what I would say is today we do discounting.

We don't really discount our product, but in effect we discount our value proposition because for those higher volume practices and doctors we do have a whole series of fairly expensive and extensive marketing programs, like co-op where for certain volumes they earn co-op dollars in the next quarter. They spend those co-op dollars, we match them dollar for dollar in marketing initiatives in their markets. Those in effect are kind of marketing driven rebate programs based on specific volumes, and at the highest levels doctors that have say chosen a path to do Invisalign only practices, those kinds of things, we've had very extensive co-op arrangements with them where we helped them develop their market.

These are large-scale commitments and some of these things have included radio and local TV and things like that. So we are moving after talking a lot with our doctors -- we are moving away from some of those co-op focused approaches, bringing more price based approaches but doing this in a targeted volume discounted way. So on total it costs us more money than we would be using for just if we were doing co-op. So we are losing some price, but we also are spending far less dollars and in fact probably moving away from the marketing co-op approach. So it is not all price. There is also going to be some OpEx offset there on the marketing side. But there is no question we've known for a long time -- not a surprise that doctors are restive about this price.

OrthoClear is trying to exploit this by saying we're going to bring you value. Part of the reason why they can have a low price is they don't have to train doctors, they don't have to buy clinical support, they are going out to our doctors we've already trained and they are kind of riding underneath that. They have taken our technology and trade secrets, and as I said, they are kind of starting at third base and pretending it is a home run. So we are responding on price, but we are at the same time we are trying to act as the market leader and going to not race these guys to the bottom. Does that answer your question, Taylor?

Yes, it does. And just Eldon are there any additional quantitative measures you can give us?

Taylor, as I mentioned when we went through our narrative, that if you look on an apples-to-apples basis we call that a range of blended ASP of like 1600 to $1610 in the third quarter, which is on a trend is a step-down from what you've seen in recent quarters. And that reflects what we expect that we might see during the third quarter in terms of impact on our ASP's related to the volume discount program that Tom talk about. And I didn't call out specifics that you will look at in the remainder of the year and when you count the quarters that would allude to into the fourth quarter of the year, that fundamentally that we are trying to provide provision for some additional or stepped up level of that activity. I didn't call out any specific ASP's, but we tried to take that into consideration when you roll out to our full year guidance.

Okay, great. Thank you.

Raj Denhoy with Piper Jaffray.

Thanks for taking my question. Just a quick follow-up I think to Taylor's question. You know when we spoke previously you were pretty adamant about not wanting to cut your price until you actually saw some product in the market in a sense until there was really a reason to. And although it is just at the higher end of your business, the high-volume users, it seems like you have started down that path a little bit. It also seems that from your explanation you're also I think cutting some of the marketing programs or some of the other incentives at the higher end, as well. And I guess it is just a bit worrisome that we might be on the slippery slope that if you start to cut costs and also programs around them, sorry, cut price and then also programs around them that maybe over the next couple of quarters into next year we might see you cut your price quite a bit. And I am just curious whether you have any reaction to that.

Death by 1000 cuts, kind of?

Exactly.

No I think that practical matters we are executing our strategy. We fully expected that at some point in time the marketing co-op program would evolve. It is hard to administer. It is expensive for us to do. It in effect imagine you have a customized marketing program with 500 doctors, 1000 doctors and every quarter you are evolving that, you're handling paperwork coming in with receipts for yellow page ads and we have a whole team that does that. And so it is not -- it has been hard to make that create optimal effect. It has been valuable to customers. As we went out and we've done focus groups with customers and we've talked to them about where they want to extract value, and where they have trade-offs, especially at the higher volume practices they've said give me a little more leverage. I will go ahead and invest this into my practice, do some other things.

And that is where we are coming from. So this is actually been under discussion for more than a year, well before we ever were aware of OrthoClear because if you really think about a marketing co-op program that is really very difficult to scale broadly. And really where we are trying to get at is the value proposition for the fundamental product. So as part of what we moved away -- again, with the old program being a direct-to-consumer lead generation focused program the way to help local doctors that were higher volume players game that the best was to help them customize a local program that kind of drafted in its wake the best.

Now we have gone to a broad, national branding kind of campaign. Our systems are much more effectively lined up to support them at almost no incremental cost. Again, these are web, this is a web process, and the web process was redesigned around the way consumers said they want to get information and to reach doctors. We are going to evolve that whole system in a way that is going to be allowed to scale that much more effectively. So we in conjunction with the new web approach with the branding approach we did expect to move away from this very tactile kind of co-op thing.

Now we are managing away from some marketing programs that have not been as effective. But we do that all the time. As you'll notice with our SG&A, we are still spending a heck of a lot of money. I am sure we are still wasting some of that. So I guarantee you there are opportunities to spend better and still provide the focus we need for programs. I am -- again, we are not trying to save our way to prosperity at this Company's life Raj. I have been very consistent -- I have talked with some value investors that say why aren't you driving it for EPS growth? I said we are right in the middle of rewiring the entire enterprise. We're going to finish that important work, and I guarantee we will create real financial leverage. But we are not trying to save our way to prosperity today, and I hope that answers your question.

It does. Just a follow-up would be I guess in the past you have said that you will be reactive to price if in a sense that if moving forward OrthoClear is able to scale and you start to become as much bigger of a problem. It sounds like price is something you're willing to at least explore down the road, is that (multiple speakers).

Absolutely. We are not going to sit here and let them take share. Again, if you think about the bigger fact here for us, especially at a net income level, at the levels we approach our operating plan view, it also in incremental dollar revenue it almost falls through the bottom line. Right? And so the disruption they've caused really has had far more effect than the share loss they have created.

The second thing is we planned for a long time to work with price as a strategic issue, not a tactical issue. And this is why we have done a lot of research and work to think about where the pricing resistance points were. And to think about our value proposition so beyond just price, Raj, we are very focused. We're going to move forward with Invisalign 7 and other offerings that will not just be price but will be value. And so rather than just say oh, we're going to reactively cut price on our full case price we are going to tweak that and move it. And we would rather if a doctor was going to deliver 30 cases in a quarter they are going to get at the end of that quarter a discount on those cases.

But rather than more broadly kind of tactically react to OrthoClear, we are going to work at creating the right set of price points and value propositions across the case flows the doctors have. So absolutely. But I think of price as a very strategic choice, not as a tactical kind of reactive issue.

Fair enough and just two quick follow-ups. You mentioned Invisalign 7 product. I think you mentioned now you are planning on ruling that out later this year and from what I understood before you were talking early '06. Is that in fact a change in the timing of that?

Yes, that is a change I think we're looking at the fall timeframe, and the reaction is very positive and the sales force is excited about that. And customers didn't know that we've done it in regions that neighbor some of those regions where they've had it. And say, when is it coming here. Surprisingly it is all NPG's fault. They have some simple cases they would like to do.

And then the guidance you've given for the year, I imagine it has a combination of an additional potential benefit from the Invisalign 7 and then also the potential impact of OrthoClear. Is that in fact true or is Invisalign 7 at this point largely upside?

The way I think about it is it is probably upsides, Raj. What we saw in the pilot is when we bring this into doc's offices, it takes them a while to get up and in the motive presenting this to patients and implementing it into practice. And so I think there is some number of months after we even roll this out where it is just in process and getting into practices before we really start to see caseload. So I would say even if we are able to pull this into the fall for Invisalign 7 type product, I think it is mostly an '06 kind of opportunity for us.

I think what Tom said there is spot on. The introduction will be evolutionary, and as far as the factors behind our guidance as we've said -- we have in a volatile environment we try to call it and we best see it and know it today. And we will change it accordingly.

And then just lastly on the litigation front, you have yet to add patent infringement to your complaints against OrthoClear. And I am curious why that is if you're still waiting to actually see a product or if that is in fact what it is or if there is something else broader than that?

And also, I'll ask one last question and I'll jump off. Also if you have any update on the overall timing of any of the loss as you're moving forward? Thanks for answering the questions.

Sure. I'll provide update on the timing as we know it. I don't have anything additional to add right now on the timing issues. As far as patent infringement goes, we simply have not seen the product or the process up close enough yet to know whether there are patent infringement issues. And we won't know until we get deeper into the discovery process.

But those would come about as a matter of that understanding.

Yes. Absolutely.

Does that help, Raj?

Thomas Spoondock (ph) with Ram (ph) Partners.

Thank you for taking my question. I have some questions regarding the litigation itself with OrthoClear. And the first would be do you have any tangible evidence be it documentation or records of some sort that would show when OrthoClear was actually formed or conceived?

I'm pretty limited in how I can answer this, but let me try. First of all, there is a difference between --.

One moment, please. We have a little bit of an echo occurring on our line. Can you check that like quickly? I do not want the other listeners to have to deal with that.

There is no echo on our side sir.

We will just deal with it on our end. Go ahead, Roger.

So the question of when they were conceived versus formed, you know there is a legal distinction of when OrthoClear Holdings and OrthoClear Inc. were formed in the British Virgin Islands and Delaware, which happened in December of '04, January of '05. We have evidence, however, that what turned into OrthoClear was conceived and acted upon as early as 2002.

2002 and so that would be written documentation or phone logs, something of that sort?

Evidence.

I just have another question concerning the termination of the consultation agreement with Zia Chishti. Was Align represented by (indiscernible) in that --

No Bau (ph) is a patent lawyer and did not do contract work.

Okay, so he did not prepare the release, the general release?

Correct.

And at the time the general release was signed, was anyone at Align aware of the existence of OrthoClear?

No.

Okay, so that is essentially what I want to know. Thank you very much.

Ariel Worzowski (ph) with Elmridge (ph) Capital Management.

Thanks for taking the question. I just wanted to come back to the pricing issue a little bit. The 140 -- you said 140 doctors had already signed up for your promotion for your rebate.

Yes.

Is there a way for you to help us understand what percentage of quarterly cases those doctors represent?

I am not going to give voice to that right now. We absolutely know what they represent, and the implications of that are certainly netted into our discussion about ASP and guidance. What we actually hope to have happen over time is that the value proposition improves, doctors actually grow their practices. But I think we are-- I am going to decline at this point in time to talk about a lot of detail there. Maybe I'll ask Eldon if he wants to amplify. I'm sorry I have to be totally responsive to your question, but I'll ask Eldon.

Ariel, just to give you a point of reference and it is a statistic that we talked about quite a bit around the business. And it is based on the historical participation in the business. And that is in the orthodontic channel approximately 25% of our doctors do approximately 70% of our cases. So that is just to give you some color that when you start looking at our higher volume participating doctors, it is not the classic 80/20 rule, but it is about the 25 to 70/75 rule. So that's what we've seen historically in the business.

And that 25% is probably about 1000 to 1200 doctors.

To make sure I understand the 25% of the doctors, which you say is how many 1000?

Yes, round numbers on roughly 3000 Ortho's, if you look at the group that generally does cases on a continuing basis, if you take Eldon, 75/25, then you are dealing with roughly 1000 doctors in round numbers as delivering roughly three-quarters, two-thirds to three-quarters of our revenue base. So if you build it is reasonably linear along that line.

And that is in our traditional orthodontic channel for the highest concentration over the highest volume doctors.

So it sounds like you did like 13,200 or something in the ortho channel this quarter. So if I take 75% of that that it is 10,000? And 1000 doctors did those 10,000, so those doctors do about 1000 cases per? Is that fair?

That's not necessarily (multiple speakers). That is a very rough comparison but there is a stratification within that group.

So it looks like the doctors that signed up probably then will tend to be skewed towards those higher guides, right?

In general, yes. This is not a broad program. In other words, we just go out and say anybody want to do this -- we went out to by definition those higher volume doctors and proved their value proposition at the same time moving away from things like co-op, and get them to go for specific volumes. So it was by definition with the higher volume doctors.

I apologize. This is just basic math. I think your highest rebate level is 35% at 50 plus cases.

We haven't discussed that.

I saw that and somebody put out a note on it, I forgot who it was, it might have been Jeffries, and it appears to be something that came from the company. Maybe they made it up; I apologize for bringing it up --.

I doubt Jeffries would make it up.

Assuming their document is right and that 50 plus cases per quarter gives you 140 doctors, times 50 cases is 7000 cases. So that is like half of your ortho cases would be eligible for 35% refund? Is that --.

That's not how the math works, but my -- here is my suggestion. We've got a lot of data that we have shared, posted on the Web and everything else. Maybe what we can do is, Barbara Domingo can get off line with you and walk you through our view of the model and so you can prepare your model the way you see and what the implications are. But it would probably be better to have Barbara in a very detailed way take you through the data we've disclosed, the model we've disclosed and the way we have consistently discussed how the profile of our customers stratify. I don't want you assuming something that is -- but that is not how we would describe it.

I appreciate that. Let me just ask you a quick follow-up, and this is Eldon, I think we spoke in the quarter and during the second quarter at some point, just about you guys had aggressive measures in place. I'm assuming that this price promotion is one of the things you're referring to. Is that fair?

Actually not necessarily fair. This is the program that Tom alluded to here on the call is one that we have recently implemented.

So maybe the way to think about this is there is a broad set of programs that some of which we are accelerating, some of which we have not discussed. And I'm not going to lay out our whole game plan here with an unscrupulous competitor kind of listening in as well. But please rest assured that we are busting our tails to ensure that the Company is competitive, successful and has the appropriate offerings, pricing, strategy to win the marketplace. And some of those things are becoming visible. Some we are still working on, and as soon as we can talk about them in more detail, we will.

That said, I am afraid we are going to have to go ahead and cut off the conference call right now. I know you might have some additional questions Ariel, and I will call you back later. For everybody else, we are available to take calls and questions. The number is 408-470-1000, and our next scheduled call is on October 26th.

Thank you very much for your attention and time today. We look forward to catching up with you.

Ladies and gentlemen, this concludes Align Technology's teleconference. You may disconnect your lines at this time. Thank you all for your participation.