愛齊科技 (ALGN) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Align Technology First Quarter 2008 Financial Results.

(OPERATOR INSTRUCTIONS) It is now my pleasure to introduce Miss Shirley Stacy of Align Technology.

Miss Stacy, you may begin.

Thank you and good afternoon, 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 two press releases today via PR Newswire and First Call.

One detailing Align's first quarter fiscal 2008 financial results and a second release announcing that the Board of Directors has authorized up to a $50 million stock repurchase program.

Both press releases are 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 12 months.

A telephone replay will be available today by approximately 5:30 PM Eastern Time through 5:30 PM Eastern Time on May 14, 2008.

To access the telephone replay, domestic callers should dial 877-660-6853 with account number 292, followed by # and conference number 280015, 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 second quarter and full year fiscal 2008, including future year's effective tax rate.

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, 2007.

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

We've also posted a nine-quarter GAAP revenue model and financial results webcast slides on our website at Investor.aligntech.com under "Quarterly Results".

Please refer to these files for more detailed information.

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

Tom?

Thanks, Shirley.

Good afternoon, everyone.

Thanks for joining us today to discuss our Q1 results.

I'm pleased to report another good quarter for Align and a solid start to fiscal 2008.

Let's begin with a few financial highlights.

For the quarter, results were better than our outlook across all our key metrics.

Net revenue was $74.8 million, case shipments were 51.8 thousand, ASPs were $1,380, gross margin was 73.8%, operating margin was 6.2% and EPS was $0.07.

These better-than-expected results were driven primarily by higher ASPs and expense management.

From a customer perspective, case volume mix was roughly the same as Q4, with a very slight shift from international to U.S.

Ortho.

Q1 revenue for U.S.

orthos and GPs increased in the mid-single-digits sequentially and international was relatively unchanged from Q4.

On a year-over-year basis, international led our overall growth, with an increase of 54.7%, reflecting the continued accelerated pace of growth outside the U.S.

and a positive effect from foreign exchange rates.

All in all, it was a good quarter.

As we move forward, we remain focused on the three critical levers that are driving our business -- product innovation, adoption growth and consumer demand.

Let me talk about each of those levers for a moment, starting with product innovation.

Product innovation is the most critical of our three levers for achieving growth.

On the product development front we are now through our first quarter of general availability of Vivera Retainers.

We believe we've made good progress to date and have seen greater whole practice conversion than anticipated.

In fact, the adoption rate is very encouraging, with more than 50% of our origin Q1 being reorders rather than new trials.

We'll continue to focus on expanding trial of Vivera across our customer base and driving whole practice conversion, such that Vivera becomes a meaningful portion of our customers' retainer business over time.

Another new product that we are excited about and believe will increase our share on orthodontic practice is Invisalign Teen, which is currently in pilot.

We launched the pilot to several hundred orthodontists in February and are gaining tremendous insights from their use of the Teen product.

Based on initial feedback, we are planning to add new clinical protocols and software to the pilot version to broaden the clinical applicability, including new software and setup tools for our treat operations in Costa Rica.

In Q2 we expect to expand the pilot to include a larger group of our most experienced Invisalign orthodontists in anticipation of a staged release later this year.

We're also pilot-testing Invisalign ClinAssist, which is designed primarily to help newly certified and low volume Invisalign GP dentists increase utilization and become frequent users more quickly.

The pilot consists of two groups of GPs -- newly certified, along with more experienced Invisalign doctors.

Insight gained from the pilot indicates that ClinAssist is working well for its primary target of newly certified GPs.

Doctors in the second group, experienced Invisalign GPs, have told us that given their greater experience and confidence with Invisalign they are less likely to use ClinAssist for simple cases.

In fact, they want to be able to apply a ClinAssist streamlined approach to more difficult cases to improve efficiencies within their busy practices.

The clinical protocols in the pilot were limited to simple crowding and spacing cases and this focus is resonating very well with newly certified GPs.

However, these protocols and accompanying software are not yet broad enough for the range of cases that more experienced GPs currently treat with Invisalign.

Our original concept testing confirms that both target groups are appropriate for ClinAssist and we will evaluate moving ahead with a wider range of ClinAssist applicability in the context of other product roadmap priorities.

Bottom line, we're pleased with the initial feedback on ClinAssist, which is on track for a late 2008, early 2009 launch and we are excited about the potential for ClinAssist to help newly certified GPs through the adoption cycle more quickly.

The second lever that's key to our growth is increased adoption through training and certifying new practices, as well as increasing utilization of our products within these same practices.

In Q1, the year-over-year utilization was unchanged for U.S.

Orthos, increased 14% for international and decreased 8.0% for U.S.

GPs.

The decrease for U.S.

GPs reflects the large increase in the number of newly certified, low volume doctors over the past 12 months.

We believe this also reflects some softness in the economy.

To better support doctors through their initial and extended learning curve, we have implemented a number of go-to-market initiatives, including expansion of our sales force and significant investments in clinical education.

In Q1, we successfully launched Aligntechinstitute.com, an interactive website rich in content and tools to improve treatment success for our doctors and enhance their bottom line.

To date, this website has had over 43,000 visitors, of which half were first-time visitors who had never been on our educational website before or registered for an online educational event with us.

We also introduced a new certification course called, Clear Essentials I.

Preliminary data from recent certifications show that doctors who complete this new course are coming up to speed and submitting cases faster than doctors who completed earlier versions of our certification training.

This suggests that we're improving the efficiency of our processes and accelerating the initial adoption cycle of Invisalign into practice, which should help increase utilization rates over time as well.

By combining our new certification course, Clear Essentials, along with the use of online precertification classes and the initiation of GP training in Europe, we anticipate training roughly 6,600 doctors in 2008 on a worldwide basis.

The third key lever for driving long-term growth is consumer demand creation.

We create awareness and motivation among millions of potential patients through a mix of media, including television, radio, print and increasingly, web-based approaches.

While completing production of our new ad campaign, which we call, "A Smile Changes Everything", we were off the air for 13 weeks, from late November until late February, our longest off-air stretch in a number of years.

Not surprisingly, qualified leads specifically from TV declined during that time period.

However, only four weeks after launching the new campaign, our qualified responses were up nearly 140% over the same period prior to launch and our doc locator feature on Aligntech.com is being heavily utilized.

As we progress through the year, we will continue to increase the reach and frequency of our demand creation approaches.

Early in the year, the mix is more heavily weighted towards TV.

Later in the year, as the cost of advertising rises, we'll shift the mix towards greater use of new web-based advertising approaches that we've successfully pilot-tested.

Together, product innovation, adoption growth and consumer demand creation are helping drive long-term growth for Align.

We're making progress on all fronts and believe that our continued focus on these critical levers, along with investments in other strategic initiatives, will help us capture a greater share of the market.

Q1 represented a solid start to the year, but we have a tremendous amount of work to do still to fully execute our plans for the year.

I look forward to sharing further updates with you next quarter.

And with that, I will turn the call over to Ken.

Ken?

Thanks, Tom.

Now let's review the first quarter financial results in more detail, beginning with the income statement.

Q1 revenues of $74.8 million increased 3.1% sequentially and 17.3% year-over-year and were above the high end of our outlook.

The sequential revenue growth reflects higher ASPs during the quarter, combined with a slight increase in case shipments.

For Q1, blended ASPs were $1,380 compared to $1,360 in Q4.

Q1 ASPs reflect the impact from fewer volume rebates, the benefit of exchange rates associated with international shipments and the mix of cases between full Invisalign and Express.

Q1 gross margin was 73.8%, compared to 73.6% in Q4 and 72.5% in the same quarter last year and higher than our outlook.

The higher-than-expected gross margin benefited primarily from favorable ASPs.

Q1 gross margin also included $400,000 in stock-based compensation expense, compared to $300,000 in Q4 and $200,000 in same quarter last year.

Q1 operating expense was $50.5 million, as compared to $48.4 million in Q4 and $39.2 million in the same quarter of last year and at the low end of our outlook.

As a reminder, Q1'07 operating expense included a credit of $1.8 million for the reversal of Patients First Program costs.

The sequential increase in Q1 operating expense reflects a full quarter of expense associated with the expansion of our sales force in Q4, go-to-market programs in North America and Europe, and media costs associated with our new TV advertising campaign.

In addition, we continued our investment in product development, systems and infrastructure projects and marketing programs.

Q1 '08 operating expense also included $3.6 million of stock-based compensation, compared to $3.1 million in Q4 '07 and $2.3 million in the same quarter last year.

Q1 EPS of $0.07 compares to $0.08 per share in Q4 and $0.10 per share in the same quarter of last year.

EPS was well above our outlook of $0.01 to $0.03 per share, as a result of higher-than-expected revenue and expense management.

Now, taking a look at the balance sheet, cash, cash equivalents, marketable securities and the restricted cash were $132.4 million, compared to $127.9 million at the end of 2007.

Cash from operations in Q1 was approximately $3.0 million, compared to $17 million in Q4 and just under $1.0 million in the same quarter last year.

Q1 is historically a low cash flow quarter, due primarily to the timing of annual incentive compensation programs.

Q1 DSOs were 57 days, compared to 56 days in Q4 and 54 days in the same quarter last year.

At this point, I'd like to take a minute to talk about a press release we issued today announcing that our Board of Directors has authorized a stock repurchase program of up to $50 million.

The timing and actual number of shares repurchased will depend on a variety of factors, including share price, corporate needs, regulatory requirements and other market conditions.

We are confident in our ability to generate cash in excess of our needs to grow the business.

Returning this excess cash to our shareholders through a repurchase program will contribute to our goal of enhancing shareholder value.

It will also have the effect of offsetting dilution from our employee equity plans.

Now let me turn to our outlook.

This is also in our press release, so I will only touch on a few highlights.

Before I do so, I'd like to provide a few general comments about the major factors that inform our thinking regarding the outlook.

First, we continue to be cautious regarding the economy and the potential effect it may have on our business.

Second, as you may recall, we added new sales reps in the fourth quarter of 2007 and it typically takes approximately six months for those new reps to become fully effective in their new territory.

Therefore, we expect them to have a greater impact on our revenues over the second half of the year.

Third, when you take into account the seasonality in our doctors' practices, particularly in the summer months with vacations and holidays in both North America and Europe, you can typically expect slower case receipts and relatively flat revenue trending from Q2 to Q3.

And last, the effects of any stock repurchases are not reflected in this outlook.

With that said, our outlook is as follows.

For Q2 we expect revenues to be in a range of $78.5 to $81.5 million.

We expect case shipment to be in a range of 54,000 to 56,000 cases.

We expect worldwide ASPs to decrease slightly sequentially, due primarily to increased volume rebate discounts associated with the anticipated higher case volumes from doctors qualifying for the Advantage Rebate Program and case refinement deferrals related to the expected sequential increase in full Invisalign case volumes.

We expect Q2 gross margin to be in the range of 73% to 73.7% and is expected to include approximately $400,000 in stock-based compensation expense.

In Q2 we expect operating expense to be in a range of $55.8 to $57 million.

This reflects a full quarter of TV media spending related to our new advertising campaign launched on February 25th, costs associated with our go-to-market initiatives and marketing programs in both North America and Europe, and our continued investment in product development, systems and infrastructure projects.

Also, two of our three annual Invisalign customer summits are occuring in Q2, the U.S.

GP Summit and the European Summit.

Q2 operating expense also is expected to include approximately $4.5 million in stock-based compensation expense.

For Q2, we expect EPS to be in a range of $0.04 to $0.06.

We expect diluted shares outstanding in Q2 to be approximately 71.4 million shares.

For fiscal 2008, we remain comfortable with our prior outlook with one exception, deferred revenue.

We expect the increase in deferred revenue for fiscal 2008 to be in the range of $6.0 to $9.0 million as a result of the introduction of new products, including Vivera, Teen and ClinAssist.

This compares to our prior range of $9.0 to $18 million provided on our last quarter's earnings call.

This change reflects the feedback we have received for the ClinAssist pilot.

As Tom discussed earlier, more experienced and Invisalign GPs want to be able to use ClinAssist to address more difficult cases to improve efficiencies in their busy practices.

Based on this feedback, we have modified our assumptions for the initial release to reflect our focus will be on newly certified and low volume doctors.

Finally, I want to review the comments I made last quarter about the tax-planning strategy and future year's effective tax rate.

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.

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

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

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Taylor Harris with J.P.

Morgan Chase.

Please proceed with your question.

Thanks a lot.

Tom and Ken, just wondering if you could talk to us a bit about what you saw as you progressed through the quarter?

You've obviously had a tough consumer backdrop that a lot of people are worried about, maybe just update us on your thinking there.

And specifically, with your case volume guidance, your guiding to the second quarter being a higher case volume number than the first quarter.

So what are you seeing in the months of March and April that help you get there?

And then, as you progress through the year, the second half of the year certainly needs a pick up, so just help us with that pick up.

Is that primarily -- what are we count -- what needs to happen there?

Does the economy need to improve or do you think you can get there just with your plans around sales force expansion and new marketing programs?

I know that's a lot of questions, so I'll cut it off there.

I think you just answered the question with your last kind of rejoinder there.

I'll start there, Taylor.

We think there -- as Ken outlined the areas that inform our view of our outlook, we are being thoughtful and cautious about the economy and we think it has two effects, one dampening effect on consumer behavior.

We think that's probably a lesser effect in our business, given the huge number of patients.

There's a lot of people still that are not enormously impacted by this difficult economy.

We think the greater effect is actually in channel with doctors that are perhaps less likely, especially low volume doctors, less likely to offer up a high value procedure like Invisalign or full and cosmetic and restorative procedures and the sort.

But going back to the beginning, we're working really hard.

The business is responding.

The salespeople are starting to come online.

We think we've got another quarter or two to really get them fully operational and with all the disruptions that we created for customer relationships and all that, again, with dropping in 25 to 30 people, we really interrupted more like 60-plus territories, so half, roughly, of our customer base.

That's coming along.

The team is really focused.

They're working their tails off and again, we see some good things going on.

As we continue to evolve our clinical education and we get better initial results, it makes us more comfortable that we're on the right track with new products like ClinAssist, which while we don't look to really impact this year so much, we know we're on the right track.

On top of that, the new advertising campaign has created excitement and energy out in the offices and among patients coming in that have seen ads.

So, collectively, with these improvements in hand, we don't think it's going to be an easy year, but we're comfortable that we're going to see reasonable expansion as the year evolves.

Okay and --.

Taylor, I would add a couple things to that, first of all is on the international front.

We continue to see volumes growing on international, especially Q2 and Q4 are typically the bigger quarters for the international guys.

And then in addition to that, the training that Tom mentioned and doctors coming up to speed quicker after coming out of certifications and submitting cases.

Okay.

So, as we -- so, Tom, I guess maybe just to make clear, let's assume the economy stays status quo.

Do you feel comfortable with the guidance and what should we be looking for with respect to utilization rates as we go through the year?

Does guidance assume that those tick up?

So those are maybe two really different questions.

I'll answer them in pieces, Taylor.

We don't think the economy is going to get better anytime soon.

We think there will be -- we think we can definitely see a bottoming out in some areas and maybe I'll use an example of what we call ground zero.

We're pretty close to it out here in the Central Valley and there's communities like Stockton and areas like that where we are watching very closely what's going on with consumers and doctors.

I think Stockton has the unfavorable opportunity to have the highest foreclosure rate in the country, roughly six times the national average.

And yet we still have doctors being successful there, although in general, through the Central Valley, we believe we've seen compression of around 25 to 30% and I think we're steering through that with our team and learning a lot from it.

So we think that represents ground zero and virtually everywhere we look in the country, other than the State of Michigan, which has been under some distress for quite a while, everywhere else in the country has some pockets of distress.

But in general, we have this huge population of potential patients and a pretty sizable base of doctors that are still very motivated with Invisalign.

So, all that said, we don't expect or are not counting on a bounce in the economy.

We think we're going to have to drive the business through it, but again the good news is we have a ton of patients that are still financially more or less unaffected by the economy.

The second question on utilization, the big -- we think there is some softness in the economy in that number.

We're having a hard time quantifying it, so I'm going to call that a qualitative factor.

The quantitative effect is due to the large surge in GP certifications we did, especially in the second half of 2007.

Growing the denominator that rapidly and dropping that many relatively low-producing, low volume GPs into the base goofs up the math, from a comparative level.

So there was some compression and we saw that most specifically in the Central Valley, but we still have practices that are growing.

The bigger part of it just the denominator grew very rapidly and comparison's driving that down.

Okay.

So, if you strip out the increase in the denominator with the low volume docs, would utilization be increasing in the rest of the base?

Well, the problem is you can take a group of cohorts and start looking at when they were trained, and we still have solid adoption going on all through the base, the problem is the base is growing very fast.

So kind of large numbers are against us on utilization rate.

The best way to think about utilization rate is probably on an annual basis.

In the near-term, given the large number of docs we're training, what I would say is, in general, GP broadly is flattish-to-down if you look at same-practice equivalent.

We think that's the reflection of the economy.

When you add in a huge number of new lower producing doctors it really pulls it way down.

Okay, great and then last question, just to push back on March and April.

Did things move in the right direction for you in these last couple months?

Is that part of what's giving you confidence on the remainder of the year?

You know, Taylor, when we went through the last quarter here, things were on track as we were anticipating, going into the quarter, for March timeframe, and our guidance for this quarter that we've given takes into account what we're seeing going into the quarter.

Thanks, Taylor.

Next question, please and please do try and limit your questions to one so we can get everybody through.

Mark Mullikin, Piper Jaffray & Co.

Good afternoon.

Hey Mark.

I guess can we start off -- I'm going to ask one question in two parts, but I swear it's pretty much the same question.

Go ahead.

The expense management in the quarter, part A, what -- where were the positive variances as far as expense management in the first quarter?

And then B, as I look to your second quarter guidance I really need to load up the expenses to get to $0.04 to $0.06 of EPS based on your revenue guidance.

So are you expecting to spend more money in the second quarter across the board?

What's in the plan?

Mark, it's a great question.

Let me start with a really, maybe a -- our business, from a spending and activity perspective, is not linear in any way.

We have quarters like Q2 every year, which are loaded up with trade shows, which are loaded up with summits, in this case two.

In this year we have increased spending in expanded pilots, in commercialization activities for some new products, etc.

On top of that, we're really pushing very hard to get a lot of reach and frequency with this new ad campaign before ad rates start to tick up as you approach the elections and the Olympics in the middle of the year.

So we planned on a significant expansion of spending versus kind of the natural organic growth through headcount expansion and program spending.

I want to kind of remind you about that first and then I'd ask Ken to -- most people model us linearly, because, frankly, we don't give you better information than that, but maybe that's a starting point for Ken to dive in and provide some more detail.

Yes, Mark, let me just give you a little more detail here, first of all, with the question on Q1, our expense management for the quarter.

That was generally across the board, across all areas as we were looking at how we can keep expenses on the low end of our range here and manage it as we go into Q2.

What Tom said is the business is not exactly linear as you model expenses, given our significant customer events that we have in Q2 with our summits.

We also have AAO trade shows and other things we go to.

The other thing to make note of is, if you recall we had mentioned that we're going to do an increased amount of TV media advertising for increasing reach and frequency, and you see we just started that ad campaign on February 25th, as I had mentioned.

So you get a full quarter of TV media spend, but you also get an increased amount of media spend because of the focus this year being earlier in the year versus stretched over the entire year.

The addition to that we have the product launches that Tom was talking about, so product development and launch costs, which we do not have in previous years as we transition from Q1 to Q2.

Then the last thing I would mention, if you were to go back and look at last year, you may ask the question why didn't you see expenses increase as much last year and in fact, they did have a pretty significant increase last year.

There were two things that brought that expense down a little bit in Q2 in 2008.

First of all, we got an insurance reimbursement related to the OrthoClear settlement agreement that we had, which was a pretty significant amount and then we also had media spend go down pretty significantly from Q1 to Q2.

In prior years we had heavier media spend in Q1 and Q3 and a little bit lower in Q2 and Q4, so you take all that into account.

Q2 is typically a higher spending quarter for us, more so than most of the others during the year.

And I'll add one more thing, is we're flowing a bit more resource to our international team.

They are demonstrating continued solid, solid growth and we're giving them some more resources to build the business.

We want more of that.

Great, thank you.

Thanks, Mark.

Next question please.

Derek Leckow, Barrington Research Associates.

Thank you, good afternoon.

Thanks, Dereck, how are you doing?

Hi Dereck.

Hi.

Just looking at the doctor utilization rate, they look like they have stabilized here and as you mentioned, as you grow the denominator it's more difficult to get the numbers to go up.

What is sort of a same-store comp?

Is there a way to look at doctors who are certified over 12 months ago and compare those to -- what are you seeing out of that group compared to some of the newer ones?

Well, that's exactly how we look at it internally, Dereck, because the two things we consistently say is utilization, on a quarter-to-quarter basis, there's a lot of moving parts.

First you have to sort out what's meaningful.

So, internally, what we -- and so it's probably best to use annually.

Internally, we look at different cohorts of doctors trained at different times and then characterize what their adoption growth looks like, what the utilization growth looks like.

So if we could -- you asked a specific question about what about docs trained 12 months ago versus say, well, let's just go back one more quarter, say five quarters ago versus one quarter ago.

What we can say is from roughly a year ago, with the certification, the support model that was in place versus doctors training in the last quarter, we are seeing a faster ramp, less time from completion of the cert course to first case and a faster ramp to multiple cases that we've seen in the past.

We think that's a reflection of better coverage, of improving clinical education and improving clinical support and that is actually in advance of getting the product evolution in place, which is going to further accelerate that.

When we get the new ClinAssist product out, which is really targeted at that specific group, that newly certified doc or the real low volume doc that hasn't quite gone over the learning curve yet, we think that ClinAssist is going to really further lubricate that adoption cycle.

So we are seeing, again your words same-store growth, we call it same practice growth, a significant change year-over-year.

We think it's the product of coverage, clinical education effectiveness and we think in a year or so we'll see impact from product.

And how many of your doctors are now operating with the new ClinAssist software in their practice?

We haven't sized the pilot yet.

It's substantial.

But before we go to release, it will be large, large hundreds.

We're out in a significant way with multiple versions of the software and the tools.

Okay and if I can just ask one more quick one here on the tax rate?

You guys were talking about making that determination sometime in 2008.

So are you kind of telling us that we should be looking for a rate in the range you provided for starting in '09 or is that too early?

Should I move that out to 1020?

No, Derek, I think that's a fair assumption on your part.

Okay.

All right, thanks, so 2009 then you'd probably see that range, right?

Like I said, I think that'd be a fair assumption on your part.

We'll be evaluating as we go through this year, towards the end of the year.

Okay, thank you very much.

Good luck.

Thanks, Derek.

Next question.

Matt Dolan, Roth Capital Partners.

Hi, every, good afternoon.

Hey, Matt, how are you?

Good, a follow-on to your comments on the Q2 outlook, relative to the whole year, it looks like EPS will have to really kick in, in the back half of the year to maintain your guidance.

Can you give us a feel for -- another operating expense line that we haven't talked about yet is S&M relative to the sales force.

How many hit their quota in Q1 and did that play in and how should we look at that going forward for the year?

I guess I'd rather not get into detailed breakdown of the distribution of comp pay-out for the reps.

But what I would say in general is if you started with Ken's description a moment ago on Q2 spend, the increase, there's a pretty significant chunk of that that is non-recurring that was very event-based.

We expect to see some increasing spend into Q3 and Q4 based on a normal, planned headcount and program spending around key initiatives, some of that in marketing and dialing back a little bit on the marketing spend as the year progresses.

We don't see any big surge on the sales side.

We've made a big investment.

We'll incrementally add a few heads here and there, as we train doctors and evolve through the year.

But the biggest growth plan is to support product development, technology development and commercialization of those new products.

And that's a more linear effect and there are opportunities to accelerate or slow that spend based on our relative broader priorities, how the business is doing, how our products and pilots are doing in market and all those other things.

So I think we have a reasonably good handle on discretionary spend and again, this big chunk of spending in Q2 that doesn't have an impact of Q2 EPS is very event-driven by a large number of very market-focused activities.

Okay, that helps and then, secondly, on the revenue line, first can you give us a reminder of what happened in Q2 of '07 relative to the Patients First Program?

How should we be thinking of underlying growth relative to that?

And secondly, your deferred revenue guidance, just maybe a feel for why that came in relative to the initial uptake of your new products and I'll jump off, thanks.

Okay.

Hey, Matt, this is Ken.

Yes, going back to your first question for Q2 of '07, if you recall we had about 4,000 cases in backlog that we shipped in Q2 in relation to the Patients First backlog that was created and that generated about $5.0 million or so of additional revenue in Q2.

So, if you were to back off that and kind of normalize the quarter, the year-over-year growth for Q2, given the guidance we have out there, it would be in the 10 to 14% range year-over-year, excluding that impact from Patients First.

Okay?

Great.

And then your second again was?

Was, oh, the deferred revenue, the rationale behind that.

What have you seen initially or with Teen and ClinAssist to drop that a little bit?

Yes, I think when we framed that total annual guidance.

We had some -- it was a pretty wide range, because we had some uncertainty about whether or not we hit the mark with some of these new products that had been tested in concept and had a couple different targets there.

The biggest piece of the deferred revenue component was ClinAssist, as we described, I think, in our year-end call and giving the guidance in January the much smaller components of deferred revenue, respectively, in Teen and Vivera.

And so not much has changed, in our view, for those two.

And we have more market experience, certainly we're in-market with Vivera.

We're in substantial pilot with Teen.

We continue to tune our view of how those are doing or what's success or not success.

But as we really now have separated the two very different target groups of doctors and the usage environment for ClinAssist, we've tested it in concept more as one.

And what we found in pilot is it's too kind of pretty different products based on the same base.

We decided that the most important priority was our starting point, which was to make sure doctors worked through the adoption cycle, became confident and effective quickly with using complicated new product.

So we've put with the great learning -- and this is a very positive outcome from our perspective, because it's really confirmed the impact and the leverage.

Those practices that have done this in pilot have gotten off to a very fast start and have gotten a lot of cases going quickly, compared to the baseline and so that's our whole goal.

If we can move them through five or 10 or more cases quickly, simple easy cases with ClinAssist, shortly after certification they're pretty much ready to go with Invisalign full, with some normal support and clinical support and help from the rep.

The challenge is getting them over that hump and sometimes that takes literally years.

So we're focusing our efforts on getting that ClinAssist offering out first and our evaluated -- and because of that, we're going -- it'll be applied initially to a smaller group, those newly certified docs.

And then in a segmented away going back to those lower volume docs that haven't gotten over that hump.

Rather than rolling it out broadly to the whole base, we'll come back and we're evaluating now how much resource effort, etc, to put into that relative to our other roadmap priorities.

Whether we should bring out a full ClinAssist all the way through moderately difficult cases to the whole base and how that impact fits in, relative to some of our other important priorities like Teen and elsewhere.

So that's the issue.

Yes, it's a little bit down in deferred revenue, but we think it's a very good news story relative to our primary goal, which is getting at adoption growth.

Makes sense.

Okay, thanks guys, nice results.

Thanks, Matt.

Next question, please.

Spencer Nam, Summer Street Research Partners.

Hi, thanks for taking my questions, just a couple of good questions.

Invisalign Teen, when are you going to fully launch this in the U.S.?

We haven't put a date around it, Spencer.

We indicated that in Q2 we were substantially going to expand the pilot out to make sure we had a lot of our most experienced orthos using the product, making sure we had a very full and complete view of the product usage and environment.

Again, our goal is to become mainstream with this into the middle of an orthodontist's practice.

We want to make sure it maps well into that.

So we haven't really described the full launch yet.

We did define it as it would be a staged released following all the normal things we'd want to put in place with this expanded pilot in Q2 and it'll be later in the year.

Appreciate that and then deferred revenue, I think you've already commented a couple of times on this.

But should we expect some of that amount, some of that deferred revenue to transfer over to the full revenue line this year?

That might be something that you could think about.

But the way I think we need to think about it now is with the different way we're looking at ClinAssist and the fact that we're going out to newly certified doctors and low volume doctors and the product's not going to be rolled out to more experienced doctors.

Right now our anticipation is that the more experienced doctors' utilization rates will not uptick significantly from where they are today, until we have additional product features incorporated into ClinAssist in the future and they have availability for that product.

We're going to be a bit thoughtful and conservative and make the assumption that there won't be a base business uptick this year.

I see and then one final quick question, pricing increase.

Can you guys give some guidance on what the range we should be thinking about or the percentage growth from where it is today, for the rest of the year?

How should we think about that?

Well, let me answer a high level question and I'll Ken to come back, since he provided the outlook information.

We -- as far as price increase per se, we aren't planning any, in this concerning economic environment, we're trying to work with our doctors to make sure they can improve profitability using this product.

I'd ask Ken to speak on how we see ASP evolving specifically through the year.

Yes, as mentioned there's a number of things that impact our ASPs as we go quarter-over-quarter.

Certainly there's a volume impact related to full cases and Express case mixes that we ship every quarter.

There's also the volume rebate program where doctors have to qualify for certain levels of rebates and then there's typically impacts related to case refinements, in relation to full cases.

So, as we see increases in full case shipments that have case refinement associated with them, we defer more revenue in that subsequent quarter, where we see the increase in volumes.

If doctors, as we saw in Q1, do not reach the tiers so they can qualify for more significant rebates in our rebate program, we actually, in the quarter, issued less rebates to fewer doctors in Q1.

Our anticipation, as we go into Q2, is we would issue actually more rebates, as we have increased volumes and the anticipation is that the doctors will be working to reach those higher tiers and get a larger volume rebate from us.

So those are fluctuations that you'll see quarter-over-quarter and we also potentially have, depending what's going on with international exchange rates, you have that flowing into the overall ASP.

I would look at it, at this point, going forward for Q2, as I'd indicated, slightly decreasing ASPs as we see or anticipating more doctors participating in the rebate program, plus shipping more full cases.

And we'll see how it goes during the year, but I'd say it'd be probably somewhat comparable.

Thanks very much.

Thank you.

Thanks, Spencer.

Next question.

Seth, Deutsche Bank Securities, Inc.

Hi guys, this is actually Seth for Tao.

Thanks for taking the question.

Hey Seth.

Hey Seth.

How's it going?

So just first a couple financial questions, I guess.

The DSO, it was up a little bit, I think you'd say to 57 days.

Could you help explain that?

And also, it looks like the international channel pricing was down sequentially and I know you said you had FX helping out there.

So just wanted to maybe get a little more color on what's causing the pressure on price there.

So let me take your second question first on international pricing.

What you saw from Q4 to Q1 in the trend there was in Q4 we actually do a lot of true-ups of our case packs that we have doctors sign up for in Europe.

So there's an impact to the overall ASP, when you look at it from a quarter-to-quarter basis there and you saw that trend downward because we had a favorable uptick in Q4 related to that true-up.

The overall ASPs in Europe in general, over the quarter have increased a little bit as we went into the quarter and then came out of the quarter.

So we had a little bit of uptick in revenue associated with that exchange rate.

As far as volume is concerned, over on the international front, volume in relation to Europe was relatively flat, actually slightly down a few hundred cases, maybe, quarter-over-quarter.

We saw an uptick in our distributors that we transitioned to, so for Asia Pac and Latin America, in 2007 we transitioned to a distributor model where we had internal managing directors take over those businesses as a third party.

They actually had an uptick in volumes, but we're selling to those customers now at a distributor price instead of a full list price, so you see a little impact there on ASPs.

Okay?

And finally, a little UK pricing challenge so not a big deal.

A little bit of UK pricing challenge (inaudible- multiple speakers), so.

Okay?

And then DSOs?

Yes, DSOs.

Really, that's an impact of more shipments coming in the latter two-thirds of the quarter than the first of the quarter.

Our aging is actually in excellent shape, so I'm not concerned about that.

I think we'll be bumping around in that 55 to 57 range here going forward.

Okay and then back to the Teen product.

I assume the rollout is into the -- well, when it happens it'll be into the ortho channel, not into the GPs.

Or do you plan on releasing it to the heavier volume GPs as well?

Seth, that's correct, the former.

This is an ortho product and that said, there are GPs that have an ortho practice.

This is a real orthodontic product at the mainstream of their practice, which is teens and kids, and so as we launch this, and you could see by our description in our call, we are going out to a large group of our most experienced orthodontist, orthodontic customers.

So our goal is to earn the opportunity to gain a much bigger share of their chair, their practice, and to increase our potential served market.

We're going to have an opportunity.

It's not -- like an issue that's not going to be a quick, overnight thing.

We're going to have to earn our way and these are practices that have well-established behaviors.

But with the feedback we've gotten so far, we think this product really appeals to the practices that are using Invisalign and it certainly appeals to the teens and so we're going to roll it out at orthodontic practices.

Great, one last housekeeping question on the Vivera product.

Is it recorded in Other and are you going to break that out eventually?

You know it is recorded in our Other category right now, Seth, and as we move forward and the volumes become more significant, that's something we'll consider doing.

I'd love to have that become big enough to have it stand out in sum.

I'm sure.

Thank you for taking the questions.

Thanks, Seth.

Thanks, Seth.

Next question, please.

Anthony Ostrea, JMP Securities.

A few questions, actually one question, multiple part though.

I just wanted to ask about your -- you commented on TV and web-based advertising.

I think you said more TV in the front half of the year versus the back half of the year.

Can you maybe just comment on the mix between that advertising mix this year versus last year and also maybe what the relative productivity of each of those media are in terms of case volumes?

Sure.

Let's start with leads, qualified leads, which flow into case volumes and we've had a number of year to be able to test and kind of verify our payback, our productivity yearward.

Starting with TV, because the Bloom Campaign was getting a bit faded, a bit tired, we were metering our investment in that campaign.

It was to two-and-a-half years old and we were using it and it was having impacts, but it was showing some signs of fatigue, so we were already metering down our relative spend last year on that and productivity was flattening.

The "Smile Makes a Difference" is showing wonderful productivity improvement over that, when we look at all the metrics we compared to test once we've tested then released it.

We're only a month or two into it now and we're already having a very significant impact.

All the normal measures we look in terms of doctor searches, qualified lead responses and initially case starts from some of those already are showing to be better than even back when we first rolled out Bloom.

Now comparisons are difficult, because we're in a competitive situation and we certainly didn't capture all that demand.

But so, as we look forward -- and we certainly have described things like internal things we track, like conversion rates, but we are very pleased with what we see so far from this new campaign and Q2 and into some part of Q3 we're investing pretty significantly to get the right kind of mass, what we call reach and frequency, out there.

We believe we know the math very well about what that turns into, what qualified leads turn into with case starts, but we're going to continue to track that to make sure we are getting that productivity or better.

When we start looking at the other things that go along with that, between point of sale materials, print, in magazines, some media, radio media, they are effective but in a different way.

Collectively, we've targeted this mix and we test this mix for a certain impact and then we look to see how many leads, how many responses, how many qualified leads and then what the case flow is out of that.

We actually go back and test this with the people that they started or did not start a case.

So our processes haven't changed.

Our mix of tools have changed and we are using some more cost-effective approaches in some new forms of print and especially in digital approaches with some very new ways, which I'm not really going to get into yet in detail.

We're still testing the total productivity of those.

But they are dramatically less expensive to use and so our goal is to create the demand and awareness and then be able to really harvest some of that with more digital techniques later in the year.

In the heat of the election campaign and all that, so we can more cost-effectively stay in front of our customers and our patients.

But again, we're going to continue to track productivity.

So far it looks really, really good in the new campaign.

Great.

Thanks a lot.

Thanks, Anthony.

Operator, we'll take one last question, please.

Isaac Ro, Leerink Swann & Company.

Hey guys, thanks for squeezing me in.

Of course.

Yes, hi Isaac.

Hi.

So I'll ask a two-part question.

First would be just trying to get comfortable with your guidance as it relates to the back half of the year and just back of the envelope, when I look at the past few years.

A typical kind of jump-up in the back half has been maybe, like, 50 to 100 BPs in your total revenue, kind of weighted to the back half.

Given the reiteration of guidance, it looks like you're kind of looking for more like a 200-BP swing in the back half, so call it 52% and change.

Is there a new element to your seasonality that you're seeing that gives you confidence that those volumes can kind of ramp accordingly in the back half?

So I wouldn't necessarily say new thinking.

What I would say is that, as we think about, like I said, going through the summer months you'll typically, you'll see slower case receipts come in Q3 over Q2.

We had some learning experiences last year that I would point to also.

In the summer months, where our doctors were out of the office or patients were out of the office and we had the case receipts did not pick up after the Labor Day weekend, as we originally anticipated.

We're going to be more mindful of that this year as we go through the summer months.

And we're looking at making sure our sales folks are coordinating with their doctors on their travel plans or vacations and when their going to have their offices open and closed in relation to the summer.

We'll see how that goes.

This will be a first time that we're really taking a more serious look at that.

The other things that we're looking to getting a lot of benefit from in the second half of the year are the 20-some-odd headcount we added at the end of fiscal 2007.

We disrupted a number of territories there, Isaac, as we talked about.

And with those reps now coming up to speed as we move through the first half of the year.

We should see a lot more productivity out of those guys as we move into Q4 and a lot of the go-to-market initiatives that we have going on in the sales organization, with business reviews with the doctors that we think can drive the most volumes.

And how sales force effectiveness -- making sure the sales guys are tapping into the doctors coming out of training classes, that they think that can be the most productive and targeting them and going after to them to help them increase their volumes in their practices sooner than later.

So those some of the key initiatives and also the TV media advertising that Tom was talking about a little while ago.

That's picked up pretty significantly here and we should start seeing some impact to that over the second half of the year as well.

And if we add to that, typically Q4 for the increasingly significant international business is there, typically their strongest quarter of the year.

Okay and so just as a follow-up on the TV media ad spend, just given the Olympics and the fact that it's an election year, how does this affect the rates that you guys are paying for that ad space?

And to what extent have you guys locked up that ad inventory over the balance of the year?

We've already done that, bought that space, as dedicated space and aren't trying to buy remnants.

We are -- and we've already planned our mix to evolve away from being on as much TV as we approach the election and working a bit around the Olympics.

Again, buying significant enough blocks that matter and doing it in a way that organizes that through the year is more efficient in terms of media buy.

That said, we're not a big media buyer like a Proctor & Gamble at billions of dollars a year.

But it's meaningful enough that we can lock in reasonable rates for the things we want to do.

Again, I already said we're migrating away, relying less on TV as the year evolves, relying more on print, some radio and certainly some new web-based approaches that appear to be paying off.

But we have a little more work to do before we're ready to say they're as productive as traditional media.

Great.

Thank you very much.

Take care.

All right.

Thanks, Isaac, and thank you, everyone, for joining us today.

This concludes our conference call.

We look forward to speaking to you again at upcoming events, including the Deutsche Bank Healthcare Conference on May 6th.

As always, our conference presentation and breakouts are available on our webcast at www.investoraligntech.com.

If you have any further questions, please contact Investor Relations.

Have a great day.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.

16