愛齊科技 (ALGN) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Align Technology's Fourth Quarter and 2007 Fiscal Year-end Financial Results 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 Shirley Stacy from Align Technology.

Ms.

Stacy, you may begin.

Thank you; good afternoon and thank you for joining us everyone.

I'm Shirley Stacy, Senior Director of Investor Relations.

Joining me today is Tom Prescott, President and CEO and Ken Arola, Vice President and CFO.

Before we begin, let me cover some housekeeping items.

We issued a press release today via PR Newswire and First Call detailing our fourth quarter and fiscal 2007 financial results.

This press release is available on our website at investor.aligntech.com.

Today's conference call is being audio webcast and will be archived on our website for approximately twelve months.

A telephone replay will be available today by approximately 5:30 PM Eastern time through 8:30 PM Pacific time on February 12, 2008.

To access the telephone replay, domestic callers should dial 877-660-6853 with account number 292, followed by # and conference number 268148, followed by #.

International callers should dial 201-612-7415 with the same account number and conference number.

As a reminder, the information that the presenters discuss today will include forward-looking statements, including without limitation statements about Align's future events, product outlook, and expected financial results for the first quarter and full fiscal year 2008.

These forward-looking statements are only predictions and involve risks and uncertainties such that actual results may vary significantly.

These and other risks are set forth in more detail in our Form 10-K for the fiscal year ended December 31, 2006 and our Form 10-Q for the quarter ended September 30, 2007.

These forward-looking statements reflect beliefs, estimates, and predictions as of today, and Align expressly assumes no obligation to update any such forward-looking statements.

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 of the comparable GAAP financial measures, where practical, are contained in today's financial results press release, which we have posted on our website under "Financial Releases" and have furnished to the SEC on Form 8-K.

In addition, we have posted a corresponding slide presentation on our website.

We encourage listeners to review these items carefully.

Additionally, we have posted a 12-quarter GAAP and non-GAAP revenue model and supplemental slide on our website at investor.aligntech.com under "Historical Financial Data".

Please refer to these files in more detail.

Finally, I'd like to address a temporary halt in after-hours trading in Align stock that occurred in conjunction with the release of our fourth quarter results at 1:00 PM Pacific Time today.

As part of our disclosure process, we provided NASDAQ Market Watch an advanced copy of our release, which includes our fiscal 2008 outlook.

In comparing our fiscal 2008 outlook with the wide range of analysts' expectations for 2008, NASDAQ decided it would temporarily halt trading for 20 minutes and allow the Q4 press release to be fully disseminated.

There is no other reason for the temporary halt in trading.

Prior to the start of this call, NASDAQ confirmed that Align stock has fully resumed trading in the after hours.

With that, I'd like to turn the call over to Align Technology President and CEO, Tom Prescott.

Good afternoon, everyone; thanks for joining us today to discuss our Q4 results and our outlook for 2008.

Let's begin with the highlights from Q4; Q4 was another good quarter for Align, led by strong growth internationally.

Net revenues of $72.5 million and GAAP EPS of $0.08 were at the higher end of our outlook.

Higher average selling prices, or ASPs resulted in better than expected gross margin of 73.6%.

GAAP operating income of $5.7 million, or 7.9% represents the fourth consecutive quarter of profitability, a significant improvement from the prior year.

From a customer perspective, Q4 revenue mix consisted of 29.5% U.S.

Orthos, 46.2% U.S.

GPs, and 19.6% International.

Q4 revenues for U.S.

Orthos and GPs decreased about 4% from Q3, but grew substantially from the same quarter a year ago, up 23% and 37% respectively.

International performance continues to be outstanding, particularly in Europe, as demonstrated by International revenue growth of 22% sequentially, and 48% year-over-year.

Fourth quarter case shipments of 50.8 thousand decreased slightly from Q3 and were in line with our outlook.

The sequential decrease in case shipment is related to a shortfall in new case receipts during the last several weeks of September, described in detail during our Q3 earnings call.

Utilization rates continue to be an important metric in assessing adoption growth for Invisalign.

In Q4, year-over-year utilization grew 14% for U.S.

Orthos, 4% for U.S.

GPs, and 10% for International.

We are pleased with our progress.

As we look at the enormous opportunity in front of us, there are 3 critical levers that will help drive our business and long-term growth.

The first and most important lever is product innovation; the second is how to grow adoption; the third lever is implementing cost-effective consumer demand creation to deliver the right patients properly motivated to start treatment into our doctors' practices.

Let me first talk about innovation, and our recent new product announcements.

On January 9, we previewed 3 new Invisalign products that we believe will increase utilization and overcome barriers to greater adoption; the Vivera Retainers, Invisalign Teen, and Invisalign ClinAssist.

Let's recap the 3 products we previewed.

First, Vivera Retainers, designed for both Invisalign and non-Invisalign is our subscription-based program prescribed by Invisalign doctors, and shipped directly to the trading doctor or directly to patient 4 times a year.

Vivera provides us with an opportunity to offer product expansion to our doctors, as well as that incremental revenue streams.

It also gives us the very unique opportunity to build a relationship with the patient and the doctor that can persist well after the normal length of treatment.

While it's too early to count on Vivera uptake given its recent full launch, but feedback from doctors has been positive, and we will provide an update on its performance in the coming quarters.

Moving on now to Invisalign Teen and the potential to access the mainstream volume at our Orthos' offices.

Teen patients are a very big part of our Orthodontists' practices, and make up the majority of their case starts.

In fact, based on a recent survey by the AAO, 78% of new case starts in 2006 were patients under 19 years of age.

To date, Invisalign has only been used with teens that have their permanent teeth and mature dentition in place, which translates to roughly 15% of our current patient base.

Given that we have less that 7% total penetration, among the 2.3 million Orthodontic case starts per year, Invisalign Teen has the potential to ultimately increase the size of our served market.

Teen will do this by delivering a set of technologies which will make Invisalign much more applicable for teen treatment.

The product is currently entering pilot testing, and we will update you as we get closer to launch.

And our third product, Invisalign ClinAssist is essentially the first phase of our GP-specific product platform, and is designed as a turnkey consultative approach to Invisalign treatment for doctors who want a highly-efficient treatment process with built-in monitoring tools and progress checks.

ClinAssist, which is in pilot testing now, is intended to make the process of starting and managing Invisalign cases more streamlined and less labor-intensive for doctors.

These new upcoming product offerings will all leverage the best aspects of the Invisalign system.

Our expectations for incremental growth from new products is minimal in 2008, but the addition of these and other new products in the pipeline enables us to go after a larger share of the market, and build on our foundation for long-term growth.

Ken will go through this in more detail as he describes our assumptions for new product revenue contribution and increased deferred revenue that comes along with that in a moment.

The second lever to driving our long-term growth, both domestically and around the world, is increased adoption, which includes basic expansion and utilization growth.

The way we grow our base is by training new doctors, and the way to increase utilization, in addition to leverage from new products, is having the right sales coverage and clinical education programs.

In 2007, we significantly expanded our customer base and increased our salesforce in North America and Europe.

Additionally, we continued to evolve our clinical education programs to help Invisalign providers ensure treatment success and improve their practices, clinically and financially.

Just last week, we launched aligntechinstitute.com, an interactive website with a suite of scaleable, on-demand educational resources for a range of prospective, newly-certified, and advanced Invisalign providers.

If you haven't checked it out yet, you really should.

Finally, given the enormous untapped market potential for Invisalign, marketing to the consumer and creating demand is the third lever for driving our long-term success.

During Q4, which is typically a tougher quarter for effective media impact, we implemented a planned shift in media mix and approach.

We increased our focus on online regeneration activity, and reduced the level of TV ad spending, which is typically less effective during the holidays, given all the other advertising noise.

Despite our reduction in traditional media and advertising in Q4, qualified leads were up over 15% sequentially, and up over 200% year-over-year.

Using Q4 as a model, we also tested other new demand creation approaches, anticipating a more expensive and crowded advertising environment, created by both the upcoming Olympics and the Presidential Election campaigns in 2008.

We evaluated alternative media and programming options that will help us maintain high awareness and demand for Invisalign.

This includes more digital media and a launch of a new consumer website in Q1.

Our new ad campaign, what we call, "A Smile Changes Everything", also kicks off later this quarter, and builds on the success of the previous [balloon] campaign.

Now, while you won't see us on the Super Bowl next weekend, you should see new TV ads beginning February 25.

While we are pleased to see a continued high level of interest in Invisalign from consumers, we are also mindful of increased economic uncertainty.

We know that doctors in some economically-sensitive regions of the country are seeing fewer new patients coming in the door, even as their Invisalign business remains steady.

Given this greater uncertainty and the potential for a broad recession, we have taken additional steps to get a more detailed understanding of our doctors' purchase intent, as well as likely consumer behavior in the current environment.

Our goal is to build our current insight into doctor and consumer behavior and get further upstream from our customers to develop stronger leading indicators that could signal trends in our business.

To that end, we recently retained a well-respected marketing research firm that focuses on consumers and physicians.

We asked them to conduct a large-scale, broad-based survey of our target consumers and Invisalign providers to assess their outlook on the U.S.

economy, and the potential effect on use or their purchase intent for Invisalign.

The survey was based on a random sample of 800 consumers in our target demographic, and 400 Invisalign-certified GPs and Orthos that have active Invisalign practices.

The large size and scope of the survey was critical to ensure confidence in extending the results across our large target market and growing base of certified doctors.

The survey process was designed late last year, and was conducted in January.

The dimensions of the survey instrument included steps in economic indicators, and terms and language similar to those used for the conference board, consumer conference index.

The results of the survey are extensive, so I'll just highlight some of the key findings.

Number 1, our target consumers and Invisalign providers are mixed, roughly 50/50 positive versus negative on their outlook for the U.S.

economy over the next 6 months.

Two, regardless of their outlook on the U.S.

economy, our target consumers' intentions of obtaining Invisalign are strong.

This is true, both in the near-term and the long-term.

Three, when our target consumers ranked the relative importance on appearance improvement procedures, Invisalign ranked high and above many other, such as laser eye surgery, Botox, and breast implants.

Four, Invisalign providers are project Invisalign case growth in 2008, regardless of their outlook on the U.S.

economy.

When we net this out, the survey confirms anecdotal and qualitative information we have been gathering ourselves.

It's also inline with smaller scale channel surveys many analysts have conducted and published recently.

When you put it all together, it suggests Invisalign is well positioned in the market, that our penetration is still very small relative to large market opportunity, and we should have confidence in our outlook for long-term growth.

I'd like to touch on a few strategic goals, and our performance this year.

First, our goals; one, continue driving strong top-line growth and extending profitability; two, developing and deploying GP-specific and Ortho-specific product platforms to drive adoption; three, continue to expand our customer base while fine tuning our demand creation and brand-building efforts; and four, evolving our manufacturing platform, enterprise systems, and core processes to improve efficiencies.

So how have we done?

Well, in the past 12 months, we delivered strong top-line growth and expanded our profitability.

We accelerated International revenue growth primarily through our focus strategy that has led to greater adoption in Europe.

We've expanded our global reach and coverage through additions and enhancements in our sales forces, while increasing productivity.

We began delivering on our product roadmap with the launch of Vivera, as well as getting multiple new pilots underway.

We significantly improved treatment quality, which has led to best practice protocols and Treat Soft revolution, and we continue our focus in scaling our manufacturing platform, which provides support for our long-term growth model.

In addition to these strategic accomplishments, we successfully finished the Patients First program, and complete 7 out of 8 re-examination proceedings with the U.S.

Patent and Trademark Office, which has yielded an overwhelming positive reaffirmation of our intellectual property.

So, overall we made tremendous progress in 2007, both strategically and financially.

As we look to 2008, despite positive indicators from our recent survey and other data that suggests a more bullish attitude among our customers and prospective patients, we are mindful of the broader economic environment and the potential for a consumer spending slowdown.

Given this environment, we are adopting a more conservative view, even as we continue to execute towards achieving our strategic initiatives, and optimizing our financial results for long-term shareholder value.

And with that, I'll turn the call over to Ken; Ken?

Thanks Tom.

Now let's move through our fourth quarter financial results in more detail, beginning with the income statement.

Q4 revenues of $72.5 million were slightly above the high end of our outlook of $69.5 million to $72.2 million, and an increase of 31% year-over-year.

For quarter 4, blended ASPs were $1,360, reflecting the mix of cases between Full Invisalign and Express, (inaudible) rebates, case refinements, and the benefit of exchange rates associated with the higher mix of International cases.

Our quarter 4 GAAP gross margin of 73.6% decreased one percentage point from Q3, primarily due to lower volumes across a relatively fixed cost structure, and a greater number of new certification events during the quarter, compared to quarter 3.

During the year, gross margin increased 4.8 percentage points due primarily to the effective improved operating efficiencies.

On a GAAP basis, Q4 operating expense was $48.4 million.

This compares to operating expense of $44.9 million in the prior quarter, and $56.1 million in the same quarter a year ago.

Note that in Q4 2006, GAAP operating expense included $14.3 million for the Patients First program and settlement costs.

The sequential increase in Q4 2007 operating expense was primarily due to an increase in field sales headcount, sales compensation, and marketing program costs.

On a non-GAAP basis, which excludes stock-based compensation of $3.2 million, Q4 operating expense was $45.2 million.

Q4 GAAP EPS of $0.08 was in line with our outlook of $0.06 to $0.09 per share.

This compares to a $0.13 per share in quarter 3 and a net loss of $0.27 per share in the same quarter last year.

Q4 non-GAAP EPS of $0.13 was at the high end of our outlook of $0.11 to $0.13 per share.

This compares to $0.17 per share in quarter 3, and a loss of a penny in the same quarter last year.

Taking a look at the balance sheet, cash, cash equivalents, marketable securities, and restricted cash were $127.9 million compared to $64.1 million at the end of 2006, demonstrating continued positive cash flows.

In fiscal 2007, we generated approximately $52 million cash from operations, of which $16 million was generated in quarter 4.

Q4 DSOs were 56 days, reflecting continued healthy Invisalign practices.

This compares to 58 days in quarter 3, and 55 days in the same quarter last year.

DSO is one of the leading indicators of how the economy may be affecting our customer base, and we will continue to watch this metric carefully.

Now let me turn to the outlook for the first quarter in fiscal 2008.

This was also in our press release, so I'll only touch on a few highlights.

Before I get into the detail, I'd like to provide a few general comments about our new products in a broader economic environment.

As Tom mentioned, we are very excited about new product pipeline and prospects for expanding our share of the market over the long term.

Given the relative timing for general availability, we expect minimal revenue contribution from the new product launches in 2008.

With these new products, we will be delivering features such as progress tracking and stage delivery with Invisalign ClinAssist and replacement aligners will be offered with Invisalign Teen.

This means that both of these new products will have a significantly higher amount of deferred revenue as a percentage of their average selling price compared to our existing Full Invisalign product.

As new products increase as a percent of our total net revenues in the latter part of 2008 and beyond, deferred revenue on the balance sheet will increase, and this revenue will be recognized in future periods.

The results from our new products will be seen on both our income statement and our balance sheet, which I will explain in more detail as I go through the assumptions for each of the 3 new products we previewed on January 9.

Vivera Retainers were launched to our North America sales team 2 weeks ago, along with full marketing support.

This means that Vivera is really just getting off the ground now, and we expect revenues to ramp, particularly in the second half of the year.

Remember, retainers are the last part of an orthodontic treatment, so doctors that sell new Invisalign cases now won't actually order Vivera until the end of treatment, which is typically about a year.

It's too early to tell how much traction the Vivera Retainers will have with previous Invisalign patients, or with those finishing treatment now, but we'll continue to update you on progress throughout the year.

If Vivera Retainer subscription improves 4 shipments per year, the full annual subscription cost will be invoiced upon shipment of the initial retainer and deferred to the balance sheet and recognized ratably over the 1-year subscription period.

This means that 25% of the full subscription price will be recognized as revenue with each of the 4 shipments per year.

Invisalign Teen will begin piloting in February and is expected to launch in late 2008.

With a teen-specific product, we have the opportunity to move from serving only the very mature teens and adults to addressing younger teens and gaining a greater share of the overall teen market.

Equally important, we believe that a teen-specific product will allow Invisalign to becoming a more mainstream part of an Ortho's practice.

We expect revenue from Invisalign Teen to ramp in late 2008, depending on former launch and general availability.

The Teen product will include 3 free replacement aligners.

Revenue for these replacement aligners will be deferred based on the fair market value of the 3 aligners until the case is completed, or the replacement aligners are used.

We are estimating that fair market value of the 3 replacement aligners to be approximately $300.

ClinAssist is currently in pilot testing, and is expected to launch in late 2008 or early 2009.

Since one of the primary targets of ClinAssist is newly-certified GPs, you can think about the growth opportunity relative to the number of new GPs that we certify after ClinAssist becomes generally available.

ClinAssist cases will be shipped in stages based on built-in monitoring tools and progress checks.

The full ClinAssist case will be invoiced upon the first shipment, and revenue will be deferred to the balance sheet and recognized upon shipment of the final stage of aligners.

I want to be clear, so I will say it another way; revenue for ClinAssist cases will not be recognized until we complete our obligation to the customer for progress t racking and stage delivery, which will be when the last stage of aligners is shipped.

This is expected to be approximately 4 to 9 months after treatment begins, depending on case complexity.

You can expect that given timing of the ClinAssist launch and the typical duration of treatment, it is unlikely that we will recognize the ClinAssist revenue in 2008.

Beginning in 2008, our reported revenues will no longer match our actual case shipments because of the timing associated with revenue recognition for each product, as I just described.

The rate at which this shift towards greater levels of deferred revenue will occur will be based largely on 4 factors; first, the timing of the launch for these new products; second, the uptake of these new products and the resulting shift in product mix; third, the dollar amount of deferred revenue associated with each new product; and fourth, the revenue displacement of our current existing Invisalign products.

In our guidance, we provided a range of new product revenue deferrals because each of these factors will have some impact on our revenue growth and deferred revenue on the balance sheet.

We believe that over time, as our deferred revenue balance continues to grow, a larger percentage of our revenue will become more predictable.

Finally, while the consumer and doctor interest in Invisalign remains high given the recent increase in broader economic uncertainties from the potential impact of consumer spending in 2008, we think it is prudent to be more conservative about our outlook for the year.

So when we take these factors into consideration, our outlook for Q1 in fiscal 2008 is as follows; for Q1, we expect revenues to be in the range of $70.4 million to $73 million.

We expect worldwide ASPs to be consistent with prior quarters at approximately $1,350.

We expect case shipments to be in the range of 50 to 51.5 thousand cases; we expect Q1 GAAP gross margin to be 72.2% to 73.2%.

In Q1, we expect GAAP operating expenses in a range of $50.4 million to $51.9 million.

This reflects our investment in continued growth in sales coverage and go-to-market programs in both North America and Europe.

As mentioned on our last earnings call, we accelerated the hiring of sales staff into Q4, which means we are entering 2008 with a full complement of our sales force.

In the U.S., we added 21 people, for a total of 152 sales staff, and in Europe, we added 2 people, for a total of 29 sales staff.

In addition to headcount-related expenses, we expect continued investment in product development, systems, and infrastructure projects and marketing programs.

Q1 operating expense reflects the evolution of our customer programs, as well as heavier advertising and media spending in the first half of 2008, as described in Tom's comments earlier.

For Q1, we expect GAAP EPS to be between $0.01 and $0.03.

For fiscal year 2008, we expect revenues to be in the range of approximately $320 million to $330 million.

We expect deferred revenue to increase in the range of $9 million to $18 million as a result of the introduction of new products.

This revenue deferral will be reflected on the balance sheet, and will be recognized in future periods beyond 2008.

As a result, total deferred revenue on the balance sheet is expected to be in a range of approximately $20 million to $30 million by the end of 2008.

We expect case shipments for fiscal 2008 to be in a range of approximately 227,000 to 237,000 cases.

We expect GAAP gross margin for fiscal 2008 to be in a range of 74.2% to 75.1%.

We expect fiscal 2008 GAAP operating expense to be in a range of approximately $211 million to $219 million.

This reflects our investment in product development, go-to-market initiatives, such as our new advertising campaign, increased sales coverage, and continued buildup of our infrastructure.

We expect fiscal 2008 GAAP EPS to be between $0.40 and $0.45.

We expect stock-based compensation expense in quarter 1 to be approximately $3.7 million, and full-year stock-based compensation expense to be approximately $18 million, compared to $12.2 million for the full year 2007.

We expect diluted shares outstanding in quarter 1 to be approximately 71.2 million shares, and for the full year 2008 to be approximately 73.2 million shares.

From the balance sheet standpoint, we expect to continue to generate positive cash flows and expect to end 2008 with $160 million to $170 million in the bank.

Lastly, I want to update you on our tax planning strategy and future effective tax rate.

Our current tax rate is approximately 3%.

As stated previously, we are currently evolving a worldwide tax strategy taking into account the potential benefit from our International operations to allow us to minimize our overall effective tax rate.

We expect this strategy will be in place by 2009.

Additionally, during 2008, we will continue to evaluate our tax position and may determine that we will be able to utilize the future tax benefits from our deferred tax assets.

At that time, we would release the valuation allowance.

Once both the worldwide tax strategy is in place, and the valuation allowance has been released, we expect to have a GAAP-effective tax rate of 32% to 37%.

Total U.S.

net operating losses are approximately $218 million and will be used to offset U.S.

net profit.

As a result, our tax payments will be minimized to statutory taxes over the next coup0le of years.

Now, let's go back to the Operator for Q&A.

Thank you sir.

(OPERATOR INSTRUCTIONS).

Tao Levy, Deutsche Bank.

Good afternoon.

Good afternoon Tao, how are you?

I'm okay, I'm okay, so a few questions.

First Tom, maybe you can give us a sense of what you're seeing, what you're hearing from the doctors, the sales reps in the, out in the field, impact from the economy.

Obviously, Q4 was a little bit challenging, and during the last call, you mentioned that saying you were improving, and now given your guidance about Q1, it seems like maybe things kind of slowed down again.

So any insight there would be helpful; thanks.

Sure Tao, the first is I think as both Ken and I just described, we are being a bit more thoughtful and conservative in general, and that informs our overall view, and we're taking that posture, even when some are at odds with some of the anecdotal and quantitative data we've gotten.

I just think it's prudent for us to think about this in a complete way, given the amount of news out there, given the likely stress in the economy, and we just don't want to find ourselves in a situation where we get ahead of ourselves.

The second part of your question is what are we hearing; we had a kickoff in Europe two-and-a-half weeks ago; about a week or so ago in the U.S., and across the board, the team is confident that they're going to go grow their business substantially this year.

They're excited that we've got some new products coming out and an opportunity to pull those into some of these practices, along with evolution of some of the clinical training capabilities.

So then when we compare that with both the qualitative and quantitative research we've done, we see doctors, even in some of the areas that are more impacted saying that where their practices may broadly be down, their Invisalign business is up, it tells us they're actually using Invisalign to be a differentiator.

And so all that said, our goal is no matter what the economy throws at us, and kind of what the broader boundary conditions are, we're going to seek to optimize business results, and we feel reasonable comfortable we can drive meaningful growth this year.

Got you, and what's your I guess general thought process on, with the slowing economy, obviously you're going to invest on new products, where eventually if the economy doesn't slow down, you're in a good position.

But does it make a lot of sense to really start, continue to maybe increase advertising, adding sales reps, again given this backdrop rather than focusing a little bit more on improving profitability?

That's a great question; in a complete way, I think if you look at the potential range of outcomes for the year with what Ken framed with the range of deferred revenue scenarios based on product timing and the mix, we actually, you could work your way to a scenario that says we did demonstrate counting all that in, we did demonstrate meaningful improvement in profitability this year.

That may not show up in GAAP numbers, given the nature of deferred revenue.

The second part of that is I think it's a really fair question to ask whether in a time of broader economic stress is the right time to push forward on strategic initiatives.

We do believe we understand what our payback is specifically for key strategic programs, like consumer demand.

And we have made investments over the last couple of years to be more and more productive with that, so we believe we do know what returns we get, and when we look at the mix of program spending, that continues to rank up near the top of our choices.

So until that calculus changes, we're going to continue to make thoughtful investments in broad consumer demand.

I think your underlying question is how are you running the business; based on what evolves during the year, we have a mix of headcount and program spending that we can evolve during the year to fit within a framework of a reasonable P&L, and we're going to be good stewards of that, and be watchful and mindful about what the economy brings.

But that's a fair question.

Okay, and just a couple of clarification points; on the revenue guidance that you're providing for the full year, the number that are going to show up on the P&L when you get to Q3, Q4, we should be looking at your guidance numbers excluding the deferred; is that the right way Ken?

The numbers that I referred to for guidance, the $320 million to $330 million?

Exactly.

That's netting out the deferred revenue.

(Inaudible) will be GAAP revenue, which will also net out deferred, correct?

Correct.

Okay, so the number, the business that you actually expect to bring in is that plus the deferred.

That's exactly correct.

That makes me feel a little bit better.

And then just on, as I look at your Q1 EPS guidance, your GAAP guidance, and then your full year, it looks like you're looking for a big step-up, not only on the top line, but also the bottom line as well.

Aside from new products, anything else Tom that is driving I guess the back-end loaded part of the year?

So there's a couple of things; there's some seasonal spending for us that come in with trade shows and kickoff meetings with sales forces and big insurance; there are some things that structurally occur for us in the first quarter.

Other than that, the only other significant departure for us is given the frame this year of consumer demand, and the fact that we pulled in the development of our new consumer campaign, which really wasn't going to originally be ready until mid-year, we pulled it in earlier into Q1 so we could get impact before advertising rates got up there and the noise from the Olympics and the Election got great, so we could create the impact we wanted.

That's more front-loaded in the first half of the year, and that is a higher run rate.

But we should be able to get impact out of that later in the year and into early '09.

Okay great, thanks.

Sure Tao.

Matt Dolan, Roth Capital.

Hi guys good afternoon.

Good afternoon Matt, how are you?

Just a follow-on or 2 on the prior question relating to case demand as you see it today, Tom.

Given that we're into Q1 and you have the most visibility to date into this current quarter, have you seen any impact of the consumer question today?

And the second part of that question is considering that Q4 was a little softer than you originally expected as the summer started, is there anything here that you could help us clarify in terms of the seasonality with Q4 being flat into Q1?

Thanks.

Sure Matt; the first thing is maybe going back to our discussion at the end of Q3; the Q4 impact, we had a solid ramp through Q4.

The timing of Christmas and New Year's was a little different this year, but there's always some impact there.

It was, the Q4 issues were really caused by the latter part of September, and the kind of failure to have a normal ramp coming out post-Labor Day.

And we've talked about that a lot; I won't go back there.

Other than that, we had a solid ramp through Q4.

I want to maybe come back to typical Q1; International has been growing at, their growth has been outpacing the U.S., and Q1 is not the strongest growth quarter for International, specifically Europe.

They take, there's much more holiday for the in the first quarter; with a shorter month in February it's a shorter number of days worked in office in general.

And so the way we look at European run rates takes that into account.

So typically, Q1 is not the biggest lift we get from International.

That's maybe a secondary, more subtle factor in there, but we're just trying to be thoughtful about the beginning of the year, and lay out a framework that allows us to continue on from Q4 and have reasonable expectations about how the year is going to evolve.

Okay fair enough; and then in terms of the guidance for '08, as I look at the numbers, I think it looks like a high single digit operating margin.

I think in the past we've talked about getting into the low double digits is more of a normalized rate today, can you help us understand how that kind of tracks throughout the year, and should we still expect that, are there one-time events this year, etc.?

Well, kind of the big one-time event from a broader perspective is the implication of increases of deferred revenue starting to wash through our P&L, which will become visible on the balance sheet.

Certainly, that's over the longer term with these new products and the mix they kind of earned in our, in the share of our mix that they get, that buildup of deferred revenue probably will serve to make our business more predictable and more linear over time, and you'll see that before it's ultimately recognized in subsequent quarters.

But that's the biggest single change that we have, that we are investing a lot of strategic initiatives, continuing on those, all 3 of the levers that I talked about, product innovation, base expansion, and as well as consumer demand.

And we don't necessarily, we aren't getting the impact to drop down the operating margin of that revenue that we would get as it's going into deferred revenue.

The second thing is there are some timings; we are front loading in the first half of the year some of the investments for demand creation to get the greatest impact given the Olympics and the Election, just as a practical matter.

And we're choosing to make those strategic investments because we believe it's the right thing to do over the longer term.

But that said, we continue to be very, very certain that over the longer term, we will continue to evolve the model and create leverage, and we believe our long-term objectives of being a high-growth business, and having the kind of operating margins we've discussed are still very much there to be had.

Okay, and just to clarify, so it's more of an operating issue at this point as opposed to just simply relating to your conservatism on the guidance with respect to discretionary spending and so forth.

I would step back and say we have been more conservative in a complete way about our framework to the business this year, but the second part is we are pushing ahead on strategic initiatives, even though there's some near-term apparent P&L impact on a GAAP basis while there's deferred revenue buildup in our balance sheet that's not washing through our GAAP P&L.

Very good, okay thanks guys.

Thanks Matt.

Taylor Harris, JP Morgan.

Thank you, so I want to rehash some of the deferred revenue issues first, and then move on.

So just to be clear; the deferred revenue is increasing on the order of $9 million to $18 million, or is it increasing from $9 million to $18 million?

It's increasing on order of magnitude from $9 million to $18 million Taylor; our current balance is that we have a deferred revenue around $10 million, $11 million on the balance sheet, and this would be incremental to that.

Okay, so can we really translate that as if you weren't launching these new products, your revenue guidance would be close to $10 million to $20 million higher than it is, or is some of that truly incremental product revenue that's just going to get pushed out?

So I would describe it like this; if we did not have deferred revenue associated with these products, and we had a revenue recognition model comparable to our Invisalign Full, you could look at that as incremental revenue above our guidance.

Okay; the case growth number, or the case guidance that you gave represents a case growth of 11% to 17% or so; are there deferred cases at all, or is it really just revenue associated with cases?

No Taylor, those are all cases that we will be shipping including deferred cases, and that goes to my comment about the fact that tracking the revenue to the actual case shipment is going to be a little trickier this year, and we'll be giving you information on deferred revenue, as well as shipment volumes.

Okay, and shifting to the earnings impact of the deferred revenue, can you give us an estimate of that?

Well, that's a little trickier; we obviously are reporting GAAP guidance here, Taylor.

It depends greatly on the mix, different new products that are assumed into this have different elements of deferred revenue, and so there's 2 different pieces moving; there's the range we've provided for the full business, and there's the range we've provided for the new product implications in $9 million to $18 million that have a number of moving parts, 3 new products that have different kinds of deferral screens with them.

So I think to just give you -- I wish it were that simple -- but to give you a pat answer, we've tried to provide those as 2 separate ranges.

Now maybe I'll have Ken build on that.

Yes, one of the things you can think about Taylor, is with these new products, as Tom mentioned earlier, we looked at a product portfolio and the return on the products, and with any product, it has to make a, meet a certain threshold from a gross margin perspective on a contribution basis.

So these new products fit into our 75% gross margin model, so if you wanted to apply something like 75% margin against a $9 million to $18 million increase in deferred revenue, I think you can get to a reasonable answer.

His answer is better than mine.

I was trying to get you back to our GAAP guidelines, outlook.

Okay, I got it; so I'm just trying to add up the different factors for why earnings are, you're actually expecting earnings to be flat to down versus '07, and looks like you've got, you're missing out on earnings from deferred revenue as one; you're investing salesforce product development, even in the fact of poor economic backdrop; and then -- and help me if there's anything I'm leaving off this list -- stock-based comp is going up from $12 million to $18 million or so?

That is correct.

Why is, with your share price where it is, why would stock-based comp go up by 50%?

So what you're seeing at this point, Taylor is the stacking effect.

If you think back a couple of years when we implemented FAS123R, it was the initial year of stock-based comp, and since every year you add another layer to that, so now we're into the third year of layering, and that's why you're seeing the interest to $18 million.

Okay, how -- is that expense, how dependent is it on the stock price?

It's only dependent to the extent that you value the options when they are issued, and that value remains.

Okay.

It's based on the issue of the grant.

It's based on when that grant was issued.

Right.

Okay, got it.

And then back to the first quarter; so help us out with the U.S.

versus International business.

You mentioned that International business probably wouldn't be as strong in the first quarter.

What are you looking for in terms of growth rates in the U.S.

business?

Without getting into specifics, Taylor we have, International we grow less quickly; put it that way.

And if we look historically, International typically Q4 to Q1 is less growth almost every year going back quite a ways International.

So it's not so much bad news or downside; it's just literally less step-up because fewer days worked.

If you take a look at the U.S., with this view, we're trying to be thoughtful about what's going on in the U.S.

economy, and again, we say this even while we have gotten some very bullish sentiments from our field organization, from our customers, and more recently, this consumer and doctor research we did.

All that said, we're trying to be thoughtful about the year in total, and the start of the year in particular.

Okay, I guess, just as I add up your, the different factors contributing to case growth, and you're predicting 11% to 17% case growth.

Maybe, I would think that the International business is going to grow faster than that on a full-year basis, but in the U.S.

business, you're going to be adding new dentists into the fold, and then there's the utilization effect.

Can you help us out with what are you assuming in terms of percentage increase and dentists, Orthodontists, and what are you assuming in terms of percentage increase in utilization?

What we haven't typically provided, Taylor is -- it's a great modeling question -- we haven't typically provided guidance about utilization, while we look at it very importantly both as an annual number and inside cohorts of doctors, we typically don't provide that as a guidance, a framework.

The backdrop is this; in the U.S.

specifically, we do have assumptions about numbers of doctors we're going to train.

We're going to go do that; we hope we can get better at getting them started up, getting them to start their first cases more quickly, and get them to ramp faster.

That's part of new product leverage; a significant amount of that new product leverage doesn't come until later in the year, to make it easier, faster, more efficient for them.

The second part is salesforce is still pretty new; we're going to come up with a learning curve for some of them.

The third part is products like Teen, which are really targeted at Ortho really don't come out until a little later in the year, and then there's going to be some trial and use to get going.

So if we sort it all out, I think at a high level first of all, again I said to begin with, we're being a little bit more conservative; the second thing is we're expecting less growth overall in the core Ortho space.

I won't put an exact number on it; third we were expecting a little less growth that we've seen on GP; and then fourth, we're expecting a little less growth than we've seen for International.

And that's how we get to that range.

Okay, I guess just maybe final question would be utilization; it seems as though you have seen positive trends in utilization, and yet we've had a few quarters in a row of sequentially flat case performance.

Is there some dynamic that I'm missing there, and do you think it's fair to assume that economic conditions aside you should have utilization increases next year?

And it's a great question, and average numbers don't always tell the story.

We publish average utilization per Ortho, GP, and International.

When we look, what's more telling is looking at cohorts of doctors, when they were trained and where they are in their experience curve in their adoption cycle.

When we look at experienced doctors in different categories, we see meaningful adoption growth, utilization growth within those.

The broad tale of less active doctors continues to skew the average number, that denominator, and if you look at Q4 as an example, with the slower case receipts in the latter part of Q3, in September, which impacted who was getting cases shipped to them, that skewed utilization, both for Orthos and GPs.

So we had a large, wide base of GPs doing a little bit less each.

That pulled down the number.

We had our high-volume Orthos almost uniformly doing less cases each because it was quiet in their offices.

Some of them, as I think we said before, said the quietest September they've seen in years.

And those short-term effects skew our quarterly number.

So within that, even within the quarter, the (inaudible) reported, there is meaningful adoption growth in the segments of doctors we really track closely to show there's still fundamental traction.

But again, in a given quarter, which is why we think annually, it's a more useful number on average to look at annually.

Okay, I'll hop back in the queue; thank you.

Thanks Taylor.

Spencer Nam, Spencer Street Research.

Good afternoon; thanks for taking my questions.

Thanks Spencer:

I just have a few questions, quick clarifications I guess.

I was looking at your presentation packet, and when I look at page 39, it shows you the number of doctors receiving cases quarter-by-quarter.

And what I've noticed is that there was actually quite a big jump from Q1 to Q2, and then since Q2 of 2007, it's been somewhere in the neighborhood of 16,200 doctors doing cases, the number seems to be fairly stable.

How should I think about that number growing in 2008?

And then, related to that, how many more of the general dentists as well as Orthodontists do you guys plan to train in 2008?

Let me maybe answer the second question if I may first.

We don't see significant training of Orthos in the U.S., other than coming out of the University programs.

It's not a big number, so that's pretty well fixed.

We do expect to get utilization growth out of 3,500 or 3,000 Orthos in a given year that really do business with us with any level of activity.

On the GP side, it's a very different bag, and we I think through the end of the year, we had trained a total of -- I'll give you the number here -- roughly it was 26,000 at the end of Q3; it was roughly 27,000, 28,000 total, to date that we've trained for GPs.

There's still a very large umber out of the 130,000 in the U.S.

that have practices that are interested that would be a fit.

And so we have a lot of headroom to go before we've reached where we think a marginal GP provider would be marginal in terms of interest and fit for Invisalign in their practice.

And if we step outside the U.S., we have even less penetration in total, and we've only trained a fraction of the potential doctors, if you look at the major markets in Europe and Asia and elsewhere.

So we will continue, and we have stepped up more recently in Europe to get training again on new doctors, and more in Asia as we progress in Japan.

We will continue this year training more GPs.

Stepping back to the first part of your question, which was what's going on with the, is it a flat number with total participating; that's the mix of changing of doctors.

To make up that 16,000, the Orthos that play are pretty steady; the International doctors that play are pretty steady; there's not a lot of turnover in who is getting cases shipped.

On the GP side, you've got a large number, let's call it half roughly, of the 10,000 or so that are getting cases shipped in a given quarter that are small enough volume doctors early enough in their process that they might be in for 2 or 3 cases in a given quarter, and go into the quarter without starting a couple of cases.

And some other low-volume GP still learning is in for a few more.

So that 10,000 GP doctors is moving around a bit about exactly whom is submitting cases.

Our goal it to get all of those GPs more routine submitters of case, and our long-term goals, we've described in general, which we think is a reasonable, but long-term goal, is a case a week per doc.

Now whether we can do that for 10,000 or a sub-set at 10,000, that's our long-term goal.

And we do believe that one case start at week for a GP means it becomes an important part of their practice.

So hopefully, Spencer that helps answer both parts of your question.

Yes, I guess one quick follow-up question is that if I look at from 2005, it would show we appreciate you providing us with fairly extensive historical data; it seems like every 12 months or so, there is a meaningful step up from where the number was orbiting in the prior year to kind of another level, another maybe 1,000 or 2,000 additional doctors sending in cases.

I was just curious, given that trend, could we expect another step-up in 2008?

And if so why, if not, why not?

The answer is we should, and I'll say it somewhat guardedly because we continue to train new doctors, and we have a pretty good handle on the cycle of getting a doctor qualified then trained, and then becoming a submitter.

And there's a fairly predictable process to get them to get their first cases started and to work through that, that learning cycle.

As they become somewhat more routine submitters, and show up in this number, which now is 10,040 for GPs in last quarter, over time, the layering of new cohorts of doctors start to show up, and because we train -- there is some seasonality, when we train the largest number of doctors, they tend to show up in chunks rather than in a really smooth fashion, and you have seen that.

Now also obscuring what I call linearity here is the effect of a competitor over the last couple of years where we lost some main doctors and gained them back for factors other than just kind of normal linear training and adoption growth.

So I think you have to, you know you have to remember that when you think about this.

I would expect solid, steady growth both in number of submitting doctors, and utilization rates over time; I wouldn't look for any big step functions, and that's probably the best way to model it.

Great, I appreciate the detail.

Tom, related to that, on pricing I noticed that the average price actually has gone up sequentially, blended ASP has gone up from Q3, and I was wondering what the prospect is on that in 2008.

Should I expect in the neighborhood of 1,360; are you guys seeing higher number?

I mean, or is it going to be slightly down based on just the pricing origin over time?

What do I worry about?

I would say that -- this is Ken by the way -- I would say that the pricing, overall ASP pricing that we've seen in the recent past is what you can expect going forward for the first half of the year.

And then as we introduce new products that will have an impact on that potential pricing as we determine the pricing of the products in the latter half of the year as we get ready to launch those, you may expect to see some of the pricing move a little bit at that point in time.

But for the first half of the year, I'd look at it to be pretty stable to what we've been doing.

And Spencer, to build on that a little bit, the reason why there's been some upward lift a little bit in that ASP is based on a number of factors; one of those is that as volumes were a little softer, the rebate programs, and the volume rebate programs, the Advantage Plan, doctors got less back; as they delivered less volume, they got, they collectively paid a little higher price incrementally.

That's supported in ASP; also currency plays into that as well.

Thanks Spencer; we're going to go to the next question, and if I can just remind folks to limit your questions please so we can get through everyone.

Anthony Ostrea, JMP Securities.

Hi guys, can you hear me?

Yes we can Anthony.

Just a few questions here; first on the new products, Tom could you maybe just walk us again through the timelines on when they kick in.

I though I heard you say second half for Vivera, but then late '08 for the Teen and the new GP product.

Let me back up and make sure I heard that right; what I believe we said is that Vivera is out, fully launched now.

We actually released it late in 2007, but we actually formally launched it to our U.S.

organization just several weeks ago, and we actually got it finished earlier than planned, and thought rather than waiting for the full U.S.

launch at the national sales meeting, we'd get it out there and do some learning.

So Vivera is out there now; it was fully launched in January, and I think we've talked about what that is.

Teen is later in the year; we haven't put a finer date around that, as well as ClinAssist.

Both of those are out there in different stages of pilots.

We continue to gather data, learn from that, test different pricing scenarios and offerings around that, as well as making sure that the whole system is working and with scale.

And what we've said for both ClinAssist and Teen, and ClinAssist primarily being targeted in the GP community, Teen being targeted at Ortho, those were later this year.

And I think as Ken described, the deferred revenue, for example on ClinAssist, we are unlikely to get any deferred revenue impact this year, which would almost by definition say it's later in the year.

Okay, and maybe just to follow up on that question; so are we to assume that the increase in deferred revenues is to be mostly Vivera in '08?

No, what we've said is it's going to be all of the above, and the reason for the range, $9 million to $18 million, is depending on the ultimate timing, the ultimate offerings and pricing, and the mix that each of those new products gains in our total flow of business, that's what will determine both our total net revenue as we end, as well as our amount of deferred revenue that's on the balance sheet.

Okay, maybe I can ask you a question on Teen and ClinAssist offline, but maybe can you just comment on your operating expenses; quite a big jump, I realize $6 million of that is options expense.

Maybe can you walk us through maybe the various line items and maybe give us a little more color on where and by what magnitude you are seeing the increases in those various line items?

Anthony, what I would say is, as we mentioned, we'd have a more significant increase in spending or heavier spending in the first half of the year, and that really revolves around the fact that we've expanded our sales coverage, and particularly in North America, and we've also, we also have a lot of go-to-market initiatives kicking into the first half of the year, including accelerating consumer demand, media, etc.

The other things that are impacting spending for the year are the continued efforts in product development from an engineering perspective, and then we're also working on building out our infrastructure at the Company.

So all of those, I'm sorry, are all of those essentially non-discretionary, i.e.

those will be recurring revenues in '09 and beyond?

Anthony I'll see if I can answer that, and then we're probably going to have to move to the next question.

We, the way we're approaching the business from our perspective, we have some what appear to be fixed costs, headcount, etc., but we're going to run the business in a way that allows us to increase or decrease spending while still delivering on strategic initiatives, depending on what the marketplace and the year evolve like.

So I don't what you to think of this all as fixed costs; some of this is program spending; some of it is headcount in place; and some of it is spending as projecting with headcount to be hired.

All that said, I think I said in my comments we're going to run the business in a way to get a lot of these key strategic initiatives punched out.

The impact in the market this year, set ourselves for significant future growth while being mindful about our economy and managing appropriately.

But I think, maybe we could have a follow-up discussion with Shirley and the gang, and tease out a little more information there.

Okay, thank you.

Next question please.

Isaac Ro, Leerink Swann.

Hi guys; thanks for taking the question.

Just following up again on this operating margin and guidance for operating expenses in '08, growing a little faster than revenues in this year, can we assume that this investment is going to drive dividends in the business in '09 maybe, and you know, concurrent with that, do you think it will get, is it conceivable, are you willing say that you think that 20% operating margins are achievable at some point in the future?

We absolutely believe that; I say that -- I believe I tried to say that a minute ago, maybe not clearly enough.

But we believe the right thing to do is to push through on these key strategic initiatives.

We understand, we believe we understand what it takes to accelerate adoption growth; we believe we understand what specific unmet needs for the product exist in a dentist and in an Orthodontist's office, and these very big steps are targeted at closing some of those gaps, which our doctors, as we've tested them, say will increase their utilization , which is the key to the castle here.

The second thing is we believe it's the right thing to do, and as we push through, even in the pressure with the competitive marketplace, with a lot of legal spending, we dialed back from strategic spending, but we still pushed through some of that.

So we felt the right thing to do was to do the right, make the right strategic investment in the future because we believe this is a very big rich market, and we believe the right thing to do for shareholders is to build the kind of company that will access that market.

So yes, we believe those kind of 20% operating margins are there to be had, and we will create leverage in our model; yes, we still believe very comfortably that the long-term growth prospects are

Okay, and then just a follow-up on the deferred revenues, one more item here; could you maybe quantify what you think the EPS drag is for the deferred revs in '08?

Yes, what I said earlier -- I think someone else might have asked this question -- is the deferred revenue of $9 million to $18 million for the year typically, our products carry a gross margin of around 75%, so if you apply something along that line to the revenue deferrals, and then determine what the EPS impact is, you can get to something.

Okay, and then just last question; on G&A, you mentioned Tom in the past kind of legal expenses having G&A be a little higher than you would think over a normalized basis long term.

Do you think $15 million or thereabouts per quarter is the right level for the long run in this business, and does that factor in?

Briefly, what I'm getting at is does that factor in a few million per quarter and potentially sort of setting aside some money for potential legal action that you might have to take to protect your franchise?

We certainly don't project any kind of other legal activity at this point.

There's the normal set of things that occur.

We certainly are in the finishing stages of the re-examination process, which has not been, which has not been easy or inexpensive.

But I guess maybe there are some good follow-up discussions we have, because we have modeling about '08 and beyond with Shirley and Ken, the team.

But in the practical matters, we believe over the longer term, as we evolve the Company, as we re-think process in the Company, we think SG&A spending in total is going to start, we're going to start to create real leverage against, you know?

We've shown we can do that; this year there's a little more drag on that given deferred revenue, but that's exactly the right thing to do for our customers and for the long-term growth.

So our job is to explain how that washes through our P&L, how you can see progress in the balance sheet with the build-up of that deferred revenue, and how you can think about the business creating, starting to create some financial leverage with growth in the future.

But in our view, we ought to be able to do a lot better at all these areas over the longer term.

Okay, thanks very much.

Thanks; Operator we're going to take one more question please.

Operator?

Or not.

Operator?

Josh Jennings, Jefferies & Company.

Good afternoon; thanks for taking my call.

So the International growth obviously was strong in the fourth quarter.

Just wondering though if you've noticed any trend; it may be a little bit too early but with some of the sort of recessionary trends now entering International markets, have you seen changes in case starts over there in Europe or in other areas Internationally?

So I'll give you anecdotally data; the feedback we gave about slightly slower growth in Europe, specifically in Q1, is a very typical scenario we've seen in virtually every year, and in fact, we forecast for this.

It had to do with their, the number of days worked, it has to do with their holiday schedules and the like.

I traded emails earlier today, just anecdotally, with one of our higher volume docs in Europe, and he's just opened a second practice, and very excited about Invisalign.

When I asked him about the economy, he said, I think his words were, "We're still skimming cream off the cup".

And this is core Western Europe, so what I'd say is our penetration in Europe is even less than our small penetration is in the U.S., and our, the Orthodontic in most of these places, there's really no dental insurance.

They really are marketing to wealthier people in general.

The short answer is they have not seen it yet, and we haven't seen concerns expressed yet.

All that being said, we're being thoughtful about our complete forecast for North America as well as the rest of the world, and I think we've reflected that in our outlook for guidance.

Okay, thanks for taking the question.

Sure Josh.

Thanks Operator.

Thank you.

Sorry; thank you everyone for joining us this afternoon.

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