愛齊科技 (ALGN) 2006 Q3 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by and welcome to the Align Technologies Third Quarter 2006 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 Ms. Barbara Domingo, Director of Investor Relations. Ms. Domingo, you may begin.

Thanks Dan and welcome to everyone on the line. If you haven't received a copy of our press release, please go to the Investor Relations page on our website at investor.aligntech.com.

Before we start the call today, I'd like to make some comments on forward-looking statements. During this conference call, we may make forward-looking statements relating to Align's expectations about future events, products, and its future results including statements regarding expected financial results for Q4 2006 and fiscal 2006 and our expectations regarding volume growth as a result of OC ceasing operations. Any forward-looking statements we make during this conference call are based upon information available to Align as of the date hereof. Listeners are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. As a result, actual results may differ materially and adversely from those expressed in any forward-looking statement.

Factors that might cause such difference include but are not limited to risks that are detailed from time to time in Align's periodic reports filed with the Securities and Exchange Commission including but not limited to its annual report on Form 10-K for the fiscal year ended December 31, 2005, which was filed with the Securities and Exchange Commission on March 1, 2006, 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've posted on our website at investor.aligntech.com under financial releases and have furnished to the SEC on Form 8-K. We encourage the listeners to review these items.

Additionally, we have posted an 11 quarter GAAP and non-GAAP revenue model on our website at investor.aligntech.com under Historical Financial Data. Please refer to both these downloadable Excel spreadsheets for more detailed line item information.

With that said, I'd like to introduce Align Technologies' President and CEO Tom Prescott, Tom.

Thanks Barbara and thank you all for joining us this morning to discuss our Q3 results, to discuss how we move beyond the OrthoClear litigation, and to provide a special focus on our most important strategic initiative that being new product development.

The third quarter was a very busy one for Align as we increased our base of Invisalign-certified doctors and also increased those using Invisalign for the first time. We expected our volumes to be impacted as OrthoClear worked its way through our GP dentists and some lower volume orthodontists. Even with this disruption, we still felt comfortable that doctors who had tried OrthoClear earlier were returning to Invisalign in increasing numbers.

At the end of the quarter, we announced our intent to sign a definitive agreement to settle all pending litigation with OrthoClear. Many of you were on that conference call and we appreciate all your words of encouragement. And most importantly, we appreciate all of our shareholders who stuck with us through the past 20 months. Definitive agreement was finally signed on October 13th. Since then, we have been busier still working through the transition in ensuring the affected patients will get the smile they wanted.

We'll talk about the Patients First Program shortly. Let me first start with a very brief review of the metrics we typically provide each quarter.

In the third quarter, case shipments decreased 7% sequentially and increased 22% year over year to 35,700. The sequential decrease was mostly due to the disruption caused by OC with GPs and lower volume orthos as we had projected from last quarter. Ortho cases were down 9% to 13,000. 26% of Ortho cases were Invisalign Express. We shipped 18,300 cases to GPs, down 6% from Q2. 32% of those cases were from Invisalign Express. And international was down due to annual summer holidays and ended with 4,500, a decrease of 11% from Q2, but up 39% from the same quarter last year. Overall cases were up 22% over last year.

During Q3 we trained 800 GP doctors, bringing our base of total trained GPs to 20,700. 16,100 of them or 78% have tried the product. We are on track with our plans to train and certify around 3,000 GPs or more this year. We also trained 200 international doctors in the third quarter.

During Q3, 12,100 doctors worldwide sent in cases. 1,100 of these doctors were first-time submitters. The number of U.S. orthodontists submitting cases was 2,700, down slightly from last quarter and 7,700 U.S. GP dentist submitted cases also down slightly from last quarter. Out of the 39,000 doctors trained worldwide, 27,100 have treated with Invisalign and 84% or 22,900 of those have generated multiple cases.

Utilization is down slightly from the third quarter as we had expected. During Q3, the average utilization per U.S. Ortho was 4.7 cases. U.S. GP was 2.5 and international was 2.7.

In July we shared with you how our thoughts-- we share with you our thoughts on how OrthoClear would affect the third quarter. As you can see from these metrics, their tactics in the marketplace definitely affected our volume and utilization. Now that they have shut down operations, we expect to return to meaningful growth. And it is important for us to tell you how we'll do that.

Eldon will take you through a summary and some ranges on costs associated with this settlement in a few minutes. Let me share with you how we are thinking about this transition and a timeframe necessary to re-stage real growth.

Separate and aside from any disruption caused by OC ceasing operations and our efforts to minimize the impact on doctors and patients, we expect it will take several quarters to capture the OC volume, new cases that might have otherwise gone to OC.

We don't expect all the OC volume to come to us immediately. Rather we expect it to come slowly through 2007 as doctors migrate back to pure Invisalign use. By sometime in the second quarter of 2007, we believe we will have added this volume to our organic growth and will be moving back towards the kind of volume growth we demonstrated before.

As far as how much volume to add back in, well we've done some preliminary work and made a number of assumptions based on the information we've received. Let me share with you what we are looking at internally.

We have taken OrthoClear's average over the first three quarters of the year, which was almost 8,000 cases per quarter. We've discounted this by 50% to cover the effects of case mix and the prevalence of heavily discounted or free cases. By mid-2007, we should be able to capture these 4,000 incremental cases. And by the end of 2007, we should be able to further expand on that volume.

We do not expect that all OC doctors will elect to bring Invisalign into their practices. And we recognize there's a very price sensitive segment of doctors that OC's pricing appealed to. We will refine this view when we hold our year end call in late January as well as providing 2007 guidance.

Now let's talk briefly about the 33,000 cases that OrthoClear started. When we decided to offer the Patients First Program, we knew it was the right thing to do for the business and for the industry. We wanted to make sure that patients and doctors still thought highly of clear aligner therapy. As part of the definitive agreement, we obtained a list of cases submitted to OrthoClear prior to September 28th, 2006. This list included just over 33,000 patient cases. Almost 5,400 doctors were treating with OrthoClear. Of these, 1,000 doctors are not Invisalign certified and they were treating approximately 3,200 patients.

As part of the Patients First Program, all of these cases are eligible for Invisalign treatment. Let me address Invisalign-certified doctors first. Doctors will first register their patients with us in VIP and they must do so by December 15th, 2006. They will submit all patient records and treatment plans online then send in the impressions.

For doctors who are not Invisalign-certified, they must first become certified. We are creating a web-based provisional certification for these doctors who do not want to become full Invisalign-certified docs. This will provide enough training and understanding so that they can start their OrthoClear patients in Invisalign treatment. Doctors who take advantage of the web-based certification will only be able to treat their OrthoClear cases with Invisalign. In order to start other new Invisalign cases, they must attend one of our regularly scheduled certification programs. The web-based certification will be available in mid-November.

Once doctors are signed up for certification program, they will register their intent to treat their OrthoClear cases either through VIP or through a fax back form. This must also be done by December 15th. All registered cases must be submitted to us by March 30, 2007 in order to qualify for the Patients First Program. We will treat these cases with as much expediency as possible but we must balance these with our revenue-generating cases from existing doctors. As such, it may take longer for doctors to receive aligners and they must consider alternate ways to retain a patient's dentition in the meantime.

We expect that 30,000 cases will be registered for the Patients First Program. We expect to complete manufacturing these cases by the second quarter of 2007.

In addition, there were many doctors who became part of our exclusivity program and did not use OrthoClear in their practice. We have decided to demonstrate our appreciation for these doctors by offering them a free case during the fourth quarter. This will be handled in a form of a rebate to the doctor at the end of the quarter.

It is essential that we execute our Patients First Program very well and help former OC doctors and their patients minimize the disruption associated with OC's decision to settle this matter and shut down their business. I say minimize because no matter how well we do with this immense effort, these doctors and their patients will face at best some inconvenience and at worst some delays and disruptions in rescuing their OC case.

As we work towards integrating these OC cases into our production system, we will also continue our focus on new product development. Invisalign is an outstanding product. It addresses huge market opportunities that we believe can translate into over $1 billion in annual revenue in around five years. That opportunity combined with our strategic vision for helping millions of people get a beautiful smile is what fuels our passion for this business.

Today our $200 million plus annual revenue base belies how very small our market penetration is. In the U.S. orthodontic market, we capture around 6% of the applicable orthodontic starts. On the GP side again, just in the U.S. alone, our approximate volume of 75,000 annual GP starts primarily represent incremental market growth since many of our GPs do not used fixed appliances. That market growth and those starts represent a total accumulative penetration of less than 0.2% into the huge latent population of the 72 million patients with Class I malocclusion that routinely see their dentist.

Simply stated, we have enormous opportunities for growth. The key lever to achieve that growth is by dramatically evolving the Invisalign product. We believe this will lead to significant increases in adoption among orthodontists and GP dentists.

During the past year, we have undertaken a complete redefinition of the Invisalign system through the eyes of specialists, the orthodontists, and generalists, the GP dentist. Today's Invisalign still falls short of meeting the needs of our unique customer base. Orthodontists want and need a suite of tools, giving them greater control, wider applicability requiring less labor or technique-sensitivity as well as more predictable treatment paths. GP dentists want a turnkey system that is more predictable, requires less labor and time as well as a manageable level of training and education to treat simple cases.

Today's Invisalign system will evolve into products targeted specifically at these GP dentists and orthodontists' clinical and practice needs. Much of today's technique and Invisalign-specific training requirements will recede as we evolve the technology inherent in the Invisalign system. We will use extensive clinical standards and understanding to guide case selection, treatment approach, and monitoring. And we will build these approaches into the system itself.

This past week at the American Dental Association meeting in Las Vegas, we launched the first step in that evolution. ClinAdvisor is a new software platform targeted primarily at GP dentists. ClinAdvisor is a major step towards the creation of very different Invisalign products and a system that is geared towards delivering on the very different needs of experienced doctors and those that are less experienced.

I can summarize ClinAdvisor's impact on our doctors with three words; confidence, simplicity, and efficiency. Using the experienced understanding gained from over 490,000 cases and thousands of Invisalign doctors, Align has addressed several key issues or questions. We hear from all doctors beginning to use Invisalign.

The first question we typically get is, "Is this case appropriate for me, for my skills and experience?" The second issue is the overall complexity and the mastery of technique required which currently impacts overall efficiency in practice. Now with ClinAdvisor doctors can confidently select the right cases appropriate for their skills and experience. With ClinAdvisor's goal-based treatment approach, selection, set-up and monitoring for successful outcomes has dramatically improved and will greatly simplify the doctor's experience for the entire process.

ClinAdvisor will also include a set of highly visual and intuitive chair-side software tools that will help prospective patients see how their own treatment is likely to progress. This is a great tool for doctors to use to help sell Invisalign as a treatment to patients.

ClinAdvisor was launched last week, has been rolled out to a pilot group of specifically targeted practices. We expect to learn a great deal from their broad use of this new system and will integrate that learning into the full commercial launch in early 2007. Based on the feedback from ADA last week, doctors really get it and they seem to be very excited about this simple approach, which is going to make them more confident about utilizing Invisalign in their practice and gain efficiency as a result.

This is the beginning of our efforts to reach the mainstream of dental care. The path to reach that mainstream is through continued evolution of our software and products. There are millions of patients that want a better smile that can afford that new smile and most importantly visit their dentists for routine care.

Invisalign can help dentists and orthodontists get their patients the great smile they always wanted. There's a great deal more good work going on in your company. I have tried to focus on the key issues most directly tied to our strategic vision and will update you as we move forward.

I'd now like to turn it over to Eldon for a summary of the financials and a discussion of the OC-related financial issues. Eldon?

Thanks Tom. As a quick reminder, our third quarter press release and 8-K filing of the same document are available on our website. Both historical GAAP and non-GAAP financial tables and a reconciliation of historical GAAP to non-GAAP financials are included in our press release and historical tables and have been provided on our investor relations website under Financial History.

In our discussion of Q3 results and the 2006 outlook, differences between GAAP and non-GAAP financial data result from the expensing of stock options under FAS 123(R) beginning in January of this year.

First, Q3 revenues as Tom mentioned were $49 million, down 3.6% from the same period a year ago. Third quarter revenues by channel were $16.2 million for U.S. Ortho, $22.7 million for U.S. GP and $7.3 million for international. These channels represent 33%, 46% and 15% of revenues respectively.

Invisalign Express revenues included in these numbers were $2.6 million for U.S. Ortho and $4.3 million for U.S. GP. Worldwide training and other models-- worldwide training and other revenues were $2.8 million. Blended ASPs were approximately $1,485 for full Invisalign cases and $1,295 for all cases. ASPs were slightly higher than our July outlook as a result of lower than anticipated volume discounts. Full case ASPs for U.S. Ortho, U.S. GP and international were $1,430, $1,465, and $1,670 respectively. ASP data both including and excluding Invisalign Express is posted on our website under Additional Information for your reference.

And revenues included a $1.8 million benefit associated with our case refinement policy change in June of 2005, consistent as we reported for the last several quarters.

GAAP gross profit for the third quarter of 2006 was $32.2 million or 65.8% of revenue compared to $35.9 million or 70.6% of revenues for the third quarter of 2005.

Non-GAAP gross profit for the third quarter was $32.4 million or 66.1% of revenue compared to $35.9 million or 70.6% of revenues for the third quarter of 2005.

Gross margins are down year over year due primarily to price reductions and volume discounting.

Operating expenses on a GAAP basis were $43.2 million for the third quarter of fiscal 2006. This compares to $37.4 million for the same quarter a year ago. Operating expenses in the third quarter were higher than expected due to OrthoClear-related legal expenses. As you can imagine, the cost of negotiating the settlement was both large and unforeseen. OrthoClear-related expenses in the quarter were approximately $8 million, $3 million higher than projected and over $6 million higher than the third quarter last year.

Q3 non-GAAP operating expenses were $41.1 million compared to $37.4 million for the same quarter a year ago.

GAAP net loss for the third quarter was $10.3 million or $0.16 per share compared to a net loss of $1.5 million or $0.02 per share in the same period last year.

Q3 non-GAAP net loss was $8 million or $0.13 per share. This compares to non-GAAP net loss of $1.5 million or $0.02 per share a year ago.

Now taking a quick look at the balance sheet, cash, cash equivalents and marketable securities and restricted cash at the end of Q3 for this year was $86.1 million compared to $74.4 million at the end of 2005.

Align borrowed $15 million from our credit facility at the end of the quarter to facilitate the payment to OrthoClear. And that payment was made on October the 16th.

Our DSOs are tracking at about 60 days for the current quarter.

Before I move on to our outlook I'd like to discuss an issue that has been in the news a lot lately, especially with Silicon Valley companies. As a company, we decided to be proactive and voluntarily review our stock option grants. We had not been contacted by the SEC or any other governmental agency regarding our stock option practices. But it felt it was the right thing to do.

The review covered the period 2001 to our adoption of FAS 123(R) and was completed by our internal audit group. No instances of backdating or other improprieties were found.

Now let me move on to our business outlook. Spending a few minutes on the fourth quarter and we'll also update our outlook for the full year of 2006. Again, I'll provide a GAAP business outlook and a non-GAAP outlook for your comparison purposes.

The financials I will take you through will reflect our base business and will not include the impact of the $20 million agreement with OrthoClear or the cost of the Patients First Program that Tom discussed. Before I take you through the numbers, let me discuss the status of those events.

As I mentioned the $20 million payment has been made to OrthoClear to settle pending litigation, transfer intellectual property rights to Align, and secure non-compete agreements from certain OrthoClear officers and employees among other things. Under GAAP, we are obligated to undertake an independent evaluation of the intellectual property and non-competes to determine the value if any assignable to the balance sheet. This process is underway and we're targeting completion by year end. Once completed, we will be able to determine what portion of the $20 million is recorded as an asset on the balance sheet and amortized against future periods and what portion will be charged as an expense to the fourth quarter P&L.

In a separate action as Tom discussed, Align is launching the Patients First Program which is designed to provide current OrthoClear patients and their treating clinicians the option of starting Invisalign treatment at no cost to them. We are in process rolling out that program, targeting clinician registration as Tom mentioned for the fourth quarter and delivery of cases from now through the second quarter of next year. I hope you can appreciate that a lot of communication, analysis, and preparation is happening in a very short period of time to execute this program.

What we do know at this time is that the program will involve up to 30,000 cases with an initial cost estimate of approximately $10 to $13 million. This estimate is based on what we know today and is subject to refinement as the process moves further along. Also we are assessing the impact on the financials and what portion of these costs can be reserved in Q4 versus charged to future periods.

With that said, let me move on to the base business. Case shipment volumes are projected to be in the range of 36,000 to 39,000 cases for Q4. We expect that Express cases will comprise approximately 25 to 28% of our overall case volume. We expect Q4 revenues to be in the range of $48 to $52 million. Our revenue outlook reflects a one-time charge of $1.3 million covering rebates for our exclusive customers in appreciation for their continued support throughout the OrthoClear matter, as Tom mentioned earlier.

Ortho channel, GP channel and international cases including Invisalign Full and Express are expected to comprise 31%, 47%, and 16% of Q3 revenues-- Q4 revenues respectively. The remaining 6% approximates training and ancillary revenues. Approximately 15% of the total revenues are projected to come from Invisalign Express cases of which two-thirds are expected to be derived from the GP channel.

Blended ASPs for Full Invisalign cases are expected to be approximately $1,470 and $1,285 for all cases for Q4. The ASP projections excludes the impact of the one-time rebate I mentioned a moment ago. The rebate affects Full Invisalign case ASPs by $45 and all case ASPs by $35. Revenues also include case refinement impact of approximately $1.6 million.

Q4 GAAP gross margins are projected to be in the range of 63.8 to 66.3%. Gross margin includes $200,000 of stock option expense charged to cost of revenue. With this added back, non-GAAP gross margins are in the range of 64.2 to 66.6%. Margins reflect the impact of the loyalty rebate program. Also we are initiating a policy change during the fourth quarter to discontinue cancellation fees prior to ClinCheck acceptance. This will result in a one-time $400,000 charge to cost of sales.

Q4 GAAP operating expenses are projected to be in the range of $42.2 to $43.7 million. Sales and marketing, R&D, and G&A represent approximately 46%, 12%, and 42% of operating expenses respectively. Operating expenses for the third quarter include $2.1 million of stock option expense. Excluding this, non-GAAP operating expense is projected to be $40 to 41.5 million.

Sequentially we expect to see some increase in R&D supporting our development initiatives, some increased focus on marketing programs in Europe and G&A supporting our business process reengineering efforts, partially offset by reduced spending in legal. However, OrthoClear legal expenses are expected to remain at approximately the $5 to $5.5 million level as we close out the OrthoClear agreements during the fourth quarter.

GAAP net loss is projected to be in the $9 to $11.5 million range or a loss of $0.14 to $0.18 per share. Bottom line impact of stock option expenses is estimated at $2.3 million, resulting in a non-GAAP loss of $6.6 to $9.2 million or $0.10 to $0.14 per share.

Let me turn to our base business for full year 2006. Again this does not reflect the impact of the OrthoClear agreement or transitioning OrthoClear cases through the Patients First Program. 2006 revenue is projected to be in the range of $199 to $203 million. OrthoClear-- Ortho channel, GP channel, and international Invisalign cases including Invisalign Full and Express are expected to comprise 33%, 46%, and 15% of full year revenue with the remaining 6% approximating training and ancillary products. Approximately 15% of total revenues are projected to come from Invisalign Express cases at which two-thirds are expected to come from the GP channel.

Case shipment volumes are projected to be in the range of 147,000 to 150,000 cases. We expect that Express cases will make up approximately 25 to 26% of full year cases. Full year blended ASPs for Full Invisalign cases expected to close out at approximately $1,478 and $1,287 for all cases. Including the impact of the exclusivity program rebate, full Invisalign case ASP expected to be approximately $1,466 with all case ASPs at approximately $1,279. The full year includes case refinement impact of approximately $6.8 million.

Full year GAAP gross margins are expected to be in the range of 67.4 to 67.9%. Non-GAAP gross margins are projected to be in the range of 67.7 to 68.3%. Gross margin includes $600,000 of stock option expense charged to cost of revenue. Added back, non-GAAP gross margins are projected to be in the range of 67.9 to 68.3%.

Full year GAAP operating expenses are projected to be in the range of $165.2 to $166.7 million. Op Ex is consistent with our previous outlook except for increased OrthoClear legal expenses. Sales and marketing, R&D, and G&A represent 48%, 11%, and 41% of operating expenses respectively. 2006 is expected to include OrthoClear-related expenses of $23.3 to $23.8 million, reflecting the increases related to the OrthoClear settlement.

Operating expenses for the full year include $8.5 million of stock option expense. Excluding this, non-GAAP operating expenses would be in the range of $156.8 to $158.3 million.

GAAP net loss for the full year is $26.6 to $29.2 million or a loss per share of $0.42 to $0.46 per share. Bottom line impact of the stock option expense for the year is estimated to be $9.1 million resulting in a non-GAAP bottom line loss in the range of $17.6 to $20.1 million or a loss per share of $0.28 to $0.32 per share.

Taking a quick look at the balance sheet, our cash outlook has-- reflects the $20 million payment to OrthoClear. We estimate our cash balance at year end to be in the $56 to $58 million range with DSOs averaging in the mid-50's. We project full year capital expenditures in the range of $11 to $12 million with depreciation and amortization to be approximately $9 million for the full year.

We'll now go to the operator for questions and answers. Operator?

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Tao Levy of Deutsche Bank. Please proceed with your questions.

Hi, good morning. It's Tao Levy at Deutsche Bank.

Good morning Tao.

Good morning. I just have a couple clarifications. One Tom you mentioned the cases that you expect to recoup from OrthoClear in the middle of next year. Was that number for quarter or for the full year? I think it was over 4,000 cases or 8,000 per quarter or for the full year.

Let me run back through that Tao. I think I covered that pretty quickly. We took the average of their first three-- we took their quarterly run rate for each of the first three quarters this year. We averaged that out. That's about a little under 8,000 cases a quarter they were doing on average. We discount that by about 50% to cover the effects of mix as well as the prevalence of discounting and heavily discounted cases and free cases. And we get to about 4,000 cases a quarter which we expect to capture on a quarterly basis by around the end of Q2, about mid year. And then I think I also said is by the end of the year '07, we think we should be able to build on that incremental volume.

Great.

On a quarterly basis.

Okay and have you guys had a chance now in terms of market research to sort of look through the customers that are-- were ordering OrthoClear product? So what I'm trying to get at, I know with Align's business the majority, for example the orthodontists' volume is conducted by about 30% of the folks who submit cases. Is it the same with OrthoClear's business?

We, well in general, first of all it's too early to do what I'd call real research. There definitely are insights and we've been able to look at the practices that were using OrthoClear and Invisalign. And in some cases it was the pricing they had and in those cases where we have the right product, we think they'll come back quickly. In others may have been their anterior product, which we currently aren't offering. But I think it's too early for market research per say, but I do think there are-- there were some doctors that liked some of the features that OrthoClear had, to be perfectly honest. And as we seek evolution in the product line and seek to give orthodontists for example greater control, we're going to try to learn from that experience. But it's too early to call that real research. I'd say maybe call them insights.

Okay and then just lastly, you mentioned the midyear next year sort of being a pivotal point in improving your growth profile. Anything beyond the fourth quarter Eldon you can maybe provide some commentary, obviously the fourth quarter guidance implies roughly, it's still a decline year over year I believe in total cases. And I was just wondering when we start to see growth in your base business now that OrthoClear is not around?

Well Tao as Tom mentioned, we're digesting a lot of information there and we're also looking at 2007. Really to give you a more granular look at that we'll be targeting to get back to you on our January call and get into 2007 in more detail.

But Tao I think we are year-over-year decline on revenue on top line because of pricing effects. But we're up over 20% even through this churn on volume. And that's cases. So cases are still up strongly. They haven't been up strongly enough to generate year-over-year top line to cover that pricing implication. But we're still up on volume over 20% even with the projections Eldon provided.

Okay, great. Thanks.

Our next question is coming from Mark Richter of Jefferies & Company. Please proceed with your question.

Good morning guys. How are you?

Great Mark. How are you?

Good thanks. Just a few questions. First on revenues are you talking about $48 to $52 million for the fourth quarter? You know clearly that would be down sequentially. With OrthoClear out of the market, can you just better help us understand how you could, how you could be down sequentially?

Well we did $49 million in the third so that's fairly consistent to potentially a little bit up. And we're also looking at slightly higher volumes. I said Mark I think one thing you have to take into consideration that OrthoClear exiting the market happened right at the end of the third quarter with a lot of transition going on. The docs working through and understanding what's going to happen with their OrthoClear in-process cases that that's an evolutionary event. We're not going to see or nor do we expect in the fourth quarter to see an immediate step function in the OrthoClear transition. Although we're certainly encouraged with how our quarter is getting off out of the blocks and how it's starting.

Mark maybe if I can add to that. The other-- there's a specific effect. We're handing a gift of sorts, over $1 million of revenue, in a one-time effect to those doctors who committed to us on an exclusive basis they would not do OrthoClear. They were the only other product. With this settlement in hand, with handing free cases out to patients and doctors, even those of who that were using OrthoClear, we felt it was important to demonstrate our appreciation to them.

That takes, I think the Eldon, the number Eldon used was $1.3 million right off the top line. That won't be a recurring implication, but that's revenue we normally would have reported. So that also factors into that effect. But we do expect to be up a bit on volume. I think Eldon gave you a range for good reasons. There is uncertainty as we go through the churn of these changes about how quickly that volume change generates real top line growth. And we're trying to-- we're trying to give you enough room through this because there's some uncertainty for us.

Okay thanks. That's helpful. And then could you just give me a better sense of how you're going to be accounting for that $10 to $13 million for the Patient First Program?

Well between the settlement and the Patients First Program we're going through a process of assessing not only the costs of the program but for the intellectual property and the non-competes as to any value that we would have to capitalize and put on the balance sheet. Beyond that then we'll-- the next step is then what flows to the P&L is dependent on what we can record in the fourth quarter and anything we may have to take in future periods.

So as far as the $10 to $13, the first is to get our arms around the true cost of the cases. And right now that's a fairly wide range. But that's our initial estimate. And then we'll determine based on what we can charge and how much we can charge to each period. I mean obviously our desire will be to get as much of that done in the fourth quarter as possible.

But your sense is it clearly could and will trickle into next year as well?

There's a possibility. We'll know a whole lot more about that later in the quarter.

Okay, got you. Thanks. And then on the international front, anything to talk about there? New initiatives, potential partners, etc.?

I think the near term is it's stepping up our efforts for growth and especially in kind of core Western Europe, we're going to-- we're going to do a little demand creation there. Start with some marketing initiatives that we really haven't done much of. And the real lever Mark for partnerships outside the U.S. or inside the U.S. is evolution in product that makes-- that makes it easier to support the product without the big clinical support tail coming along with it. And so our biggest efforts that will ultimately open up bigger chunks of market domestically and outside the U.S. is about simplification of that product environment, which we're working really hard on.

Okay, last question guys. I mean I know you haven't given formal '07 guidance, but could you at least help me think directionally about '07 as we're all modeling that?

Well our goal is to restage very meaningful top line growth, manage spending down, and return to profitability. We hate having brackets on the business. And we're going to do that as quickly as is practicable. The issue is, is that we don't yet have a handle on how the accounting will be handled. That's going to have a lot to do with what the absolute P&L looks like.

But by the time we get through Q4, we should have that pretty well circled. There's a few wild cards right now and that is how quickly we work through these transition issues with Patient First, with recapturing OC volume and how that turns into top line expansion. But our goal is to generate meaningful growth in the top line next year and to return to profitability and then get on with it from there. That's our intention.

Okay, perfect. Thanks and have a great day.

Thanks Mark.

Our next question is coming from Taylor Harris of JPMorgan. Please proceed with your question.

Thanks a lot. My question is on pricing. And pricing it looks like was a bit more favorable in the quarter than you thought it was going to be. So can you just talk first of all about why that was? What's going on with the volume discounting programs? And then, and maybe just clarify for me, what is included? What are the assumptions included in the fourth quarter $1,470 pricing figure?

Taylor underlying the-- our ASPs is pricing that's stable. We're not changing our prices and that's not on-- that's not on the board at this time. For the third quarter, what I meant about the volume discounts is not a change in the program. It was the level of participation. We didn't have as many docs that earned their volume discounts at the level that we'd initially projected. So we did a little bit better.

I think as you stepped into the fourth, everything else held equal, our ASPs will be relatively consistent. Other than the impact of the loyalty rebate that we discussed projecting to be about $1.3 million impact for the quarter, which will take our effective ASPs down a bit. Other than that we don't expect to see any dramatic change nor do we have any underlying pricing changes baked in there.

Okay so the pricing assumption, I think it was $1,470 excluding Express in the fourth quarter. Does that include the exclusivity rebate or not? And just to be clear, I think that's down from $1,485 this quarter.

Excludes the rebate, yes. It will exclude the rebate.

Yes, that excludes the rebate.

Okay, so basically--

And to answer your question, $1,485 to $1,470 again is based on the assumptions and the estimates that we make at the level of participation in the existing discounting programs.

And maybe Taylor if I can add to that, as we look at especially orthodontists that could bring back significant volume pretty quickly that may have been using OrthoClear and Invisalign, as they move that volume back, they get the opportunity to participate at a higher level of discount pretty quickly. So if we just do the math with the insight against what they were doing, we knew what they did with us. When we add what they were doing with OrthoClear, that's how we created some of these projections. So we think there's a little downward drip, but it's only level of participation.

Okay. And it sounds as though at least throughout the balance of this year, you're going to keep these volume discounting programs in place. How do we think about pricing next year given the discounting programs? Given what you had been doing this year in terms of exclusivity etc.?

You know again we're not really so much talking about 2007. But I'll talk about direction. There's the fundamental piece which is we view pricing as stable. We've been asked if we're going to raise prices or jack up prices. No, I think we're at the right place and our customers are responding to those collective programs and our value.

We will likely not continue the exclusivity program. Another good reason to reward our really loyal customers with a free case if you will. But we will continue on with volume-based rebate programs that allow a doctor that's going to make Invisalign a very big part of their practice to earn a lower price. And again those practices are very, very self efficient and self reliant. We don't require a lot of effort and support to do them.

So the basic product, pricing and programs other than exclusivity will likely roll into '07 with no significant change. The only changes in the future would come likely from significant changes in the product platforms and the opportunities that provides both on a GP and Ortho side. But we've got a little more runway before we get there.

Okay and do you guys have a figure for us on how many cases you're going to do this year under the exclusivity programs?

We've not provided that Taylor. It's a good question, but we've not provided that.

Okay. And then-- yes go ahead.

Taylor let me, Taylor let me qualify or clarify one thing for you. The ASPs that we talked about at $1,470 for the full cases and $1,285 for blended, which is consistent with the-- on a basis consistent with the third quarter. Excluded those loyalty, the one-time loyalty rebate, the $1.3 million impact. If you look at the ASPs taking that into consideration for the full cases it would be $1,425. For the overall average ASPs it would be $1,250. So that's going to be about a $45 impact for Invisalign Full and overall cases including Express would be about $35.

Okay, but that's just a one-quarter dip down?

That's correct.

Okay and then turning to the OrthoClear spending front, if we-- Eldon can you revise the total fiscal year '06 OrthoClear spending that you're going to have running through the P&L? Is that now about $23 million?

Yes I called it out at like I think $23.3 to $23.8. So it's just, right now we're projecting just under $24 million for the full year.

Okay and you're-- and you're going to have about $5 million in the fourth quarter. How-- will all of that go away in 2007? How quickly does that ramp down?

With the work that's being done in the fourth quarter to effectively finish with the course and executing the various case elements that we would hope that that's going to be substantially finished during the fourth quarter.

Okay, so maybe a little bit of residual in '07 but almost nothing?

Might be a little bit of residual but you should see a significant step down against that $24 million in '07.

Okay. Thank you guys very much.

Thanks Taylor.

Our next question is coming from Matt Dolan of Roth Capital Partners. Please proceed with your question.

Hey guys, good morning.

Good morning.

Just a couple of quick questions here. In terms of your feedback from the OrthoClear users and you gave us a 50% estimate in terms of volume that you expect to get in the second half of next year. Does that assume that maybe half of these guys are price sensitive or are there other things in place there? Can you just walk us through some of the assumptions in that 50% number?

Sure and I realize it's a pretty big discount. The biggest single factor is the mix they had for what they called their 4x4 or their anterior-only treatment which was priced very attractively. And given that doctors could try and make that work over whatever length of time for a pretty cheap price, a fair number of them did it. That was, I guess I can talk about the number, it was around 40%. So we don't have that offering. We don't see the real value in having that offering today. And if doctors really wanted to buy it that way, there is some impact that they may either be more resistant or won't want to go up to full case price.

So that's a pretty big chunk. On top of that, we know there was some-- there was a lot of discounting and free cases going on. We know this cause doctors have told us that. And but even with all that, a lot of these doctors are planning on coming back and they're pretty much, well I'm back. Let's get going. Let's just get back to building the clear aligner business.

But there is going to be a-- so there's-- the biggest issue is mix. The second biggest issue is probably prevalence of discounting. And against that discounting and free case approach, there are some doctors out there that were more motivated by the opportunity to really leverage free or nearly free to make this work. And we're not going to be doing that.

So our job is to go get those practices that really want to make clear aligner therapy a big part of what they're doing and make sure we deliver value. And so I think 50% of their volume is a pretty good number for us to plan on capturing by say end of Q2 '07. And I think we should be able to build on that some. Again we'll know more by January we think when we talk about this again. But we should be able to build on that some by the end of the year.

Okay, very good.

(multiple speakers) Organic growth, yes.

Right. And then in terms of manufacturing, you talked about maybe prioritizing certain cases over others. In general, where does that stand? And what's your capacity at this point? Is there any need for an investment there over the long term?

Well let me talk generally about the way we're going to manage Patients First. Again, we had to set this program up with the assumptions of everybody needs it tomorrow and they're all signing up tomorrow when we roll out the program. And there will-- there is likely to be some phasing in the timeframe doctors and patients sign up. And so likely versus planning, likely this queuing will occur naturally and we will work with doctors and their patients to help them retain patients and retain their dentition until they can get their aligners going again.

But in the meantime, we-- we're going to make a commitment to, for our ongoing business and the doctors giving us that business, that our existing delivery times are not going to be impacted. So the way we're going about that, there's not much real-- there's a few bucks here and there.

There's not a lot of incremental capital. It's mostly headcount in Costa Rica, some in Juarez. But, and I think we've spoken before about what our-- the ramp time is to really bring a new treatment tech out of Costa Rica. It's a bit more than a quarter for us to feel that they're really ready to fly on their own.

So we, as we got into this and it looked like there was in fact a likelihood of settlement, we actually got a core team internally working on how we would-- how we would gear up for this. And as soon as it looked like we were going to move forward, we pushed the green button there to go.

So they are in the middle of all that. They are hiring. They are expanding. We've got space and we've got the resources to do it. But it's just a matter of time.

So again our goal is going to be to not impact the existing base business, which is growing 20% a year in volume. And to deal with this, it's going to be to queue this in as logical and orderly way as we possibly can to help these people get treated. I hope that answers your question.

Definitely, yes. Thanks. And then one more and I'll hop off here but in terms of the sales forces, are you getting feedback from the reps either I know the settlement was relatively recent, but are you getting feedback that demand has either gone up considerably for them or they have more free time at this point because they're not defending OrthoClear as much. And what does that imply for your plans for the sales force as we go into '07?

I think in general, first of all they don't have any free time. It has been really busy and they have, they are working through a lot of practice specific issues, helping doctors understand the Patients First Program. The materials were just mailed out last weekend to doctors. The VIP website goes live I believe this weekend or early next week where they can actually sign up. They're getting materials in their hands. They're working through how they can do it. And I think it's actually October 30th. So it's Monday. And so they're running around helping doctors solve problems right now. There's a ton of energy out there.

In general, doctors are reconnecting with us, saying well let's figure out how we get going forward together. But it's a little different practice by practice. There's some doctors that aren't not quite ready to dive back in. There's other doctors that were saying, well what am I going to do about these six free cases that OrthoClear promised me. And we're saying that was something between you and OrthoClear.

But I'd say is that we will look at incremental additions in the sales force and any other part of the go-to-market approach. There's nothing more significant than that being anticipated at this point for '07.

Okay, very good. Thanks a lot guys.

All right.

Our next question is coming from Raj Denhoy of Piper Jaffray. Please proceed with your question.

Good morning.

Morning Raj.

You know most of this has been answered. But I was curious, you mentioned again getting back to this idea of capturing 4,000 cases and the average run rate for the last three quarters was 8,000. Is it possible I don't-- maybe you gave this I'm sorry I was kind of jumping between calls, but did you give the actual numbers for the last three quarters of what OrthoClear was doing?

Yes, there was some growth, not dramatic. But if we take those three and the facts are that the submitters were going up. Utilization was going down and cases were rising, but not dramatically. And so we took the average of those three quarters and to try and-- and then we looked at the mix. And I think one of the things I said Raj was the biggest factor for, in fact discounting that volume, capturing that volume was the mix. And they had a very large percentage of that being their anterior-only treatment, which was priced very attractively and kind of didn't have an endpoint. They could keep working that anterior product for a year or two to get it to work.

So we don't have that offering and so we thought gosh, that's problematic. The second thing is working through whatever disruption or churn we're going to have. We felt it was reasonable to say against our existing organic growth and some growth on top of that we thought we could capture about half of this or around 4,000 cases to add to our organic growth by about the end of Q2 '07 and then build on that. That was the logic if you didn't hear the whole thing.

Well I did hear that. I was just kind of-- I was hoping to get the underlying numbers though for the last three quarters and you said submitters was going up, utilization was going down and the actual number was increasing as far as the unit, the number of units. But can you actually give us those numbers for the last three quarters?

What I-- I don't know that it's enormously meaningful to do that. What I'll tell you is the mix was very stable, around 40% of the anterior-only product. And there was not-- there was not dramatic growth. The average was just under 8,000, 7,900 cases or something like that. So--

So it was about the same for every-- I guess what I'm just trying to get at is I'm trying to get a figure of what it was kind of-- what it was running at when they ceased in a sense. And if it was--

I'd say neighborhood of 8,500 cases.

Okay so we really-- they really weren't showing much growth then.

There was growth but it was all coming from additional doctors. And utilization was going down reasonably sharply.

Okay--

And that to us supports this lack of traction. It does reinforce the-- what we were seeing with doctors coming back and the real economic sensitivity to the offering. And it reinforces our rationale in being a little thoughtful here about capturing this volume immediately and in a complete way. And that's again, I'm trying to be very transparent here about what's behind this and how we can, how we-- what we think about in terms of getting at this volume. We're going to know a lot more and we'll give you much more concrete guidance by January when we do our year end call.

Okay fair enough. And then just one last one. You know most things have been answered, but-- have been asked but the 60 or so sales reps that OrthoClear had, maybe it was even more than that at the end, is there any idea of what's happened to those folks? I know you mentioned you're not planning on hiring any of them. Are they go-- I guess there's nothing really truly competitive with you, but is there any concern that they're going to wind up at places where they can compete against you, if even if it's wire or metal brackets or some place else?

Well look I-- everybody deserves a chance to go apply their trade in the business. And we don't have any enmity against those individuals. And this issue is behind us.

We hope they all find good jobs. And we still are a very small part of the total orthodontic marketplace in terms of share of starts. Our job is to continue to compete against that share of chair. And if those people are out there helping people sell brackets and whatnot, we'll be selling against them for that share of chair. But we think this is complementary not competitive purely.

So I-- again, I'm-- we don't have any broad plans to go hire a lot of these people. I'm sure this was a huge disruption in their lives as well. Most of these people got virtually no notice of this happening. And a lot of these people have acted with great class through the transition.

Great. Thanks a lot.

[OPERATOR INSTRUCTIONS] Our next question is coming from Anthony Ostrea of JMP Securities. Please proceed with your question.

Hi, good morning guys. Thanks for taking--

Morning Anthony.

A couple of questions here. On the-- I just wanted to get back to that 4,000 cases that you think you will not be getting from-- by OrthoClear customers. Is that really a function of just an analysis of OrthoClear's books and the mix or are you already taking into consideration essentially I guess you've only had a couple weeks of really talking to the docs, the OrthoClear docs out there?

All of the above Anthony. It was given that we originally started out internally saying we really can't provide any guidance framework for '07. And the internal discussion we had was, all of you on the sales side and the institutional investors really need to think about how this impacts our business going forward.

And so we decided to just share with you the facts as-- and how we're thinking about them so you could understand going forward. This is very new. We're still out talking to these doctors. We're still living through literally three weeks ago signing this or not even signing this, three weeks ago announcing this. And only on the 13th less than two weeks ago actually signing the definitive agreement.

So-- and we just got our hands on all the materials and the detail and the customer and patient lists and all that stuff that we needed to develop this understanding. So it's just too soon. They seem like very reasonable assumptions. And we felt it was important to share them with you so at least you knew directionally how we were thinking about capturing the volume going forward.

Great. Yes, the only reason I asked the question is I guess should we think about that 4,000 number as being the worst case scenario? And that there-- well we probably shouldn't model it but there could be upside to those numbers?

Well the worst case is zero. I hate to say it that way. I don't think that's likely. I also don't think the best case of little under 8,000 is likely.

So if we take off the 40% for the anterior-only product, which we're not offering. That seems very reasonable. If we take off another chunk, we could have easily talked ourselves into less but we wanted to be thoughtful with you about we think we can capture around 50% of that or about 4,000 cases a quarter by the end of Q2.

If we get it sooner, great. If it's a little more than that, great. If it's a little less than that, you're not going to throw any rocks at us. So we're trying to give you context for how we're thinking rather than a specific guidance framework for '07. And I realize you want that, we're not there that. We'll have that for you that we feel we can really commit to by January.

Great. Thanks. And then on capacity, I know Tom you mentioned that your goal is not to disrupt your current customers and them being able to have product. Can you just talk about just maybe in general what your, how much utilization or how much capacity you actually have on a unit basis?

Anthony let me take that one. The way we run the business is we carry capacity and we try to carry a buffer. So if there is a change in the cadence of volume in the business we're not caught short. But that's not a huge buffer. It certainly isn't geared to being able to immediately react to 30,000 cases.

So the basis is that we don't want to disrupt the flow of our existing business. We don't want to disenfranchise any of our customers. But at the same point in time we want to react as quickly and as responsibly as we can to the transitioning the OrthoClear cases.

But the reason why we're saying we expect that's going to take through the second quarter is we're not going to have to make any significant investment in capital. But what we will have to invest in is technicians in Costa Rica and also bring on some additional people capacity through our subcontractor in Juarez. That's about a 90+ day, 90 to up to a 120 day cycle.

So initially we'll max out that buffer capacity to the best of our ability. We'll bring on additional capacity, feather it in. And get these cases delivered through the first couple of quarters of next year. And then also try to have a smooth transition exiting that exercise.

So there's a little bit of artwork in there. There's responsibly bringing in the resources and balancing against where we have been is trying to be responsible and the level of capacity that we've been carrying in the business.

And maybe can you talk about the costs needed to actually get those new technicians on board?

Well the normal-- bringing on new technicians and training them is a normal part of our business down there. We're just going to be doing it at an increased pace and level. So we hire, we respond to normal attrition. We put increments in the business and we do training classes on an ongoing basis for our technicians. Obviously this is going to be a step up in that activity.

So the one-time costs of doing that is not going to be significant. It's just going to be an increase in pace. And as far as the costs of the program, it's-- of doing those incremental cases, that's what I mentioned as we went through the call.

Okay, but say we fast forward through Q2 of '07 when you're essentially ramping-- when hopefully you've already taken on the 30,000 cases and you're now including your base business but the 4,000 per quarter for OrthoClear. Is there a big step function in capacity or in manufacturing capacity that you need to do to get there?

Well I think Anthony what we're looking at there and it gets into the heart of how we're trying to responsibly manage this and the business, there's a little bit of artwork involved there. Because we're going to build capacity to deal with the 30,000 incremental cases. And then try to balance coming off of the backend of that exercise-- how that capacity will feather into our meeting our normal business demands without being way off base either over or under capacity. So we're going to step up in terms of capacity and then we're going to try to blend that into our normal business, stepping out of the first half of 2007 to the best of our ability.

And our expected growing volumes.

Yes. And basically then to try to be positioned to meet the business without having a bolus of under capacity or over capacity.

Great and then just my final question here is on your operating costs, can you speak a little bit about what kinds of additions you'd need essentially to be able to-- I mean now essentially you're their base business plus OrthoClear's business. Can you speak to how much additional operating expenses you'll be incurring in '07 and beyond to meet the-- your new demand essentially?

Let me, I'm not going to let Eldon jump in that cause we're not really ready Anthony to talk guidance in general. We-- I think the business in a broad sense, we've managed expense reasonably well other than the costs if you will of legal. G&A in total is down year over year nicely. We would have gotten much more productivity out of sales and marketing spend if we hadn't lost the volume and pricing due to OrthoClear. We were on a track to do that. We expect to go back as we restage growth. As we get the top line going again, as we bring down G&A specifically legal, significantly we're going to get some operating leverage out of this growth.

I think the way to think about the business is we're going to continue to invest in those things that return, whether they be product development, whether they be investments in manufacturing, in automation, in our go-to-market approach. We're going to talk about this in more detail in January when we provide our view of '07 and talk about the priorities of the business. But I think you should think about us being very interested in getting this business back to a profitable strong growth with a profitable bottom line. And that constraint we're placing on ourselves means we got to make choices about lots of things.

If I can just follow-up on that one, but you're not expecting essentially to ramp or having to hire call it 50 new sales people to meet the new demand. And concurrent with that, is there anything else besides your legal expenses that you were incurring when OrthoClear was around that will go away now that they're out of the market?

Legal's the biggest piece Anthony and we've-- and Eldon's already provided some view of what happens there. There, as I said I think once before, when we had a question, there is no, there are no plans other than incremental additions that would be in the normal course of business against a trajectory of growth to make any big changes in our go-to-market approach, structure, cost base, etc. Now we want to go run the business better, get top line growth reestablished, and start having that be profitable growth.

So again, we're going to talk in much finer detail in January. We look forward to sharing with you the view of how the business evolved through the year. And drives towards the kind of business we've said we want to build.

Perfect. Thank you for taking the question.

Sure Anthony.

Jan, I think we've got time for just one more question please.

Our last question today will be coming from Kevin Kotler of [Broadfin] Advisors. Please proceed with your question.

Hi guys.

Hey good morning.

Morning Kevin.

I just wanted to I guess-- I don't know if anyone hit on new products and this, how the timetables are playing out for that? And maybe also I guess the, if there's an update on the manufacturing side, I guess the automation of the packaging part?

Okay, so why don't I talk about new products. I'll let Eldon talk about the operating platform. We, as I think I said in the call, we expect a full commercial launch of ClinAdvisor, which is the first real step towards separating today's single Invisalign product and tuning it for the specific needs, the very unique needs of a GP dentist office versus an ortho. As '07 plays out and into '08, we expect to do the same on the ortho side with today's Invisalign product kind of disappearing in the background and a very unique user experience created for a set of tools, a suite of tools for the ortho.

We believe those things will get at those changes and they're big changes for the company, will get at the fundamental issues of adoption, which is really what drives this business for the long term. So that's what-- that's what we've rewritten the entire code base for ClinCheck. We've done a lot of stuff in the background to get the business ready to go do this. We've gone through huge amounts of research and conjoint analyses and looking at user needs and literally spent days and weeks in customers' offices looking at how they do their work and what we can do to help. And this informs-- this informs our product strategy which ultimately becomes company strategy. As the product evolves, our enterprise systems and all the surrounding technology evolves with it.

So this is our-- I don't speak lightly about this when I say this is our number one priority for the company. We are evolving a line of technology along with evolving the product. And I think ClinAdvisor if you get a chance to see that at ADA or once it gets out there, fully commercially in January, in early '07, it's a really big deal and it's a really big change. And the feedback so far from GPs including some orthos is that it's a very big deal and it makes a big difference.

So there's a lot going on, on the new product side. We got the organization really jazzed up about it. This is just the beginning, but we got a lot more to do and we look forward to sharing that with you.

So I'd like maybe Eldon to touch on the specific question you had about some additional automation down in Juarez.

I'm sorry. Tom, do you-- I thought you were giving timelines for like improvements on your aligners. Before there was a couple things that you were going to come out with later this year, early next year that the company was working on. Do you just have like the dates of how those things are, the timetables and check and what those were and when you expected, the best guess?

Yes, I mean sort of the one of the reasons we were showing some of those placeholders from our perspective, some of those are-- some of those are reasonably small changes. And we were in a competitive world so we really frankly weren't willing to talk about the big changes we were making to the platform. It's not that they were not important but they weren't pivotal as a new, a whole new platform for Invisalign as for GP and new platform for ortho. We didn't want to telegraph that to the market cause we didn't want telegraph it to our competitor.

The new material is on track for early part of '07. The branding on the alliance was rolled out in early Q3 ahead of schedule. Compliance indicators are going through some additional testing. We may cluster those with some additional features. But there's a whole set of big things and small things that are cranking along at what I'd say the bigger more pivotal events. And I'm not prepared to give detailed timelines at this point are around the big platform changes for Invisalign that will really go to the core of adoption. ClinAdvisor was the first step of that that we just announced and launched last week.

All right. And just on the material side, is there anything going on there that changes like the cost structure of these things?

Not in the near term. Better conformability means we deliver-- and better lower stress relaxation and better conformability means it better fits and it delivers force or torque to the right teeth at the right time which means movements express on time. The second part of that is it has the potential over time for us to make a thinner aligner. That has to be fully vetted internally, which means not only would be a little less cost but we would also have a little lower profile for the patient. So again we're not really there but this was incrementally lower cost but substantially better product performance, which was the new material driver.

Great.

And do you have a second-- we're about out of time. But--

Kevin just brief-- Kevin briefly you asked about the packaging automation. We're bringing that online as we speak.

And just curious I know '07 you're not giving guidance, but if you're exiting fourth quarter '06 at what, I don't know, margins were going to be what? 67 to 69%. What does that incrementally what does that add for margins or can you give us some cost saving assumption?

Kevin my suggestion is we're-- there's a lot of moving parts right now in the P&L that have to do with all these impacts we've talked about. I'd rather come back to that in the context of the year end and a clean view of how '07 looks. There's just an awful lot of moving parts and I'm also getting the message from the operator, we're going to have pull the hook.

Okay.

All right, so we look forward to following up with you but I'd also like to thank all of you on the call for joining us this morning and we really do look forward to providing a further update on our progress in our year end call in January. Please have a great day.

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