愛齊科技 (ALGN) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Align Technology fourth quarter and 2008 fiscal year-end financial results call.

At this time, all participants are in a listen-only mode.

(Operator Instructions).

As a reminder this conference is being recorded.

It is now my pleasure to introduce Shirley Stacy of Align Technology.

Ms.

Stacy, you may begin.

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 a press release today via PR Newswire and First Call detailing Align's fourth-quarter and fiscal 2008 financial results.

The 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 12 months.

A telephone replay will be available today by approximately 5:30 PM Eastern time through 5:30 PM Eastern time on February 11, 2009.

To access the replay, domestic callers should dial 877-660-6853, with account number 292 followed by pound, and conference number 309050 followed by pound.

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 of fiscal 2009.

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-Q for the quarter ended September 30, 2008, and 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 obligation to update any such forward-looking statement.

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 corresponding GAAP numbers and a reconciliation to the comparable GAAP financial measures where practical, are contained in today's financial results press release, which we have posted on our website at investor.aligntech.com under financial releases, and have furnished to the SEC on Form 8-K.

We encourage listeners to review these items.

We have also posted a GAAP and non-GAAP historical financial statement, including a corresponding reconciliation, as well as our fourth-quarter conference call 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?

Good afternoon, everyone.

I've got a little bit of a bug going around.

I actually feel better than I sound.

On the call today, I would like to cover some highlights from our fourth quarter and fiscal year.

Ken will follow-up with more detail on our financial results and our outlook for the first quarter.

Q4 net revenue of $74.1 million and case shipments of 52,600 declined slightly from Q3 2008, and both were up year-over-year.

International revenue increased to 22% of Q4 revenues compared to 20% in Q3 '08 and Q4 '07.

Q4 gross margin was 72.7%.

Non-GAAP operating expense which excludes a $4 million restructuring charge was $48.5 million.

Non-GAAP net income, which excludes the restructuring and the tax valuation allowance, was 4.9 million or $0.07 per diluted share, in line with our guidance of $0.06 to $0.09.

For the year, revenues increased to $304 million on 212,000 cases shipped.

This was a real achievement given the economic environment and consumer spending slowdown.

International revenues increased to 20% of our fiscal 2008 revenues compared to 16% a year ago, reflecting growth of 33%.

Internationally, we're beginning to feel the ripple effects from the economy, particularly in Europe.

But given lower market penetration in the US and new product introductions this year, we still expect to grow international revenues, albeit at a slower rate.

Fiscal 2008 gross margin of 74.1% increased from 73.6% in 2007.

Non-GAAP net profit margin of 7.1% for 2008 decreased from 11.9% in 2007, primarily reflecting increased investments in the launch of three new products as well as continued research and development.

At our analyst meeting in November we provided an in-depth view of our vision and strategy for driving adoption of Invisalign, both here in North America as well as around the world.

I'm not going to cover the entire set of presentations today.

But if you haven't seen them yet, I recommend that you spend time reviewing them on our website.

Instead, I would like to extract a few key elements from our discussion on our strategy and provide an update on our performance this quarter.

The four key elements that form our strategy to drive adoption of Invisalign include product innovation, customer experience, consumer demand creation, and international expansion.

For the call today, I'd like to focus primarily on product innovation, which is focused on removing any technical or clinical barriers -- for example, why any doctor would not want to use Invisalign versus traditional means of treatment.

Our objective is to make Invisalign easier to use, better to have, and ultimately a better treatment approach for the doctor and the patient.

To that end, about two weeks ago, we announced that the FDA had cleared expanded labeling for Invisalign and removed the permit dentition requirement.

In addition, a series of contraindications that restricted how complex the cases could be have been moved to precautions.

This enables us to widen clinical applicability to include more complex cases and expands the age range for treatment.

This is an important step for us, and will foster product innovation targeted at additional populations of patients.

Now let me turn to our most recently launched products.

Invisalign Teen has been in the market for roughly five months now, and while it is still early in its commercialization, the initial results are good.

As of Q4, we had a total of 2,700 North American doctors trained on Invisalign Teen.

And although Q4 is seasonally a soft quarter for teen orthodontic case starts, we saw a 20% sequential increase in Invisalign Teen cases, representing approximately 6.7% of case volume, up from 5.6% in Q3.

In Q1, we will ramp up teen consumer marketing, starting with this month's launch of InvisalignTeen.com and a new PR campaign that relies heavily on Web-based editorial, blogs and social networking sites to educate teens and appearance about Invisalign Teen as well as build grass-roots awareness and excitement among teen patients.

Invisalign Assist is primarily targeted at newly trained and low-volume GPs.

Feedback from those using Assist has been good.

Assist was launched in mid-October, so we don't yet have a full quarter's worth of data.

Also, keep in mind that a large percentage of the GPs were trained in December, and they typically don't submit their first cases immediately.

So we won't see the impact from Assist for at least another 60 to 90 days after those GPs were trained.

With that in mind, about 1,000 GPs submitted Assist cases in Q4, of which 147 were newly trained GPs.

Again, it's still too early to know whether Assist is changing the rate of adoption for newly trained and low-volume GPs, but we'll continue to monitor and update you as the year unfolds.

Let me update you on the key adoption metrics in terms of trained new doctors and utilization, or what we call same-practice sales of our product.

During Q4, we trained 1,940 new doctors, of which approximately 1,420 were new North American doctors, and 520 were new international doctors.

For the year overall, we trained 7,370 doctors, of which over 5,500 were new North American doctors and over 1,800 were new international doctors.

We now have over 55,000 Invisalign trained doctors worldwide.

In Q4, total utilization was down compared to Q3 2008, and Q4 of last year 2007.

Utilization for North American orthos and GPs decreased sequentially and year-over-year, while international increased both sequentially and year-over-year.

The economic crisis has continued to negatively affect our North American customers.

We previously saw this effect only on our low-volume GPs, but in Q4, utilization rates dropped across the board for our high-volume practices as well, both GPs and orthos.

We believe that this broad drop in utilization may imply that the economy is now also affecting the overall number of orthodontic case starts.

Even some of our high-volume doctors with very successful Invisalign practices are struggling to grow their business.

The one exception in the rate of utilization for North American doctors was for those prescribing Invisalign Teen.

Utilization for North American orthos that submitted teen cases in Q4 declined slightly from Q3, but significantly less than their counterparts not using Teen.

I'll now turn the call over to Ken for more detail on our fourth quarter financials and our outlook for Q1.

Then I'll come back for a few closing remarks.

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

Q4 revenues of $74.1 million decreased 1.4% sequentially and increased 2.2% on a year-over-year basis.

As expected, the sequential decrease reflects slightly lower volumes in North America base business, as well as the impact of a stronger dollar on European revenues.

Also, as Tom mentioned, we are pleased to see Teen volumes grow sequentially.

Q4 gross margin was 72.7% compared to 75% in quarter 3, and 73.6% in the same quarter last year.

The exchange rate impact on international revenues reduced gross margin by 1% sequentially.

Also we incurred increased freight charges in the quarter and transition costs associated with completing our move of the order acquisition group to Juarez, Mexico.

Q4 gross margin included $455,000 in stock-based compensation expense compared to $437,000 in Q3 and $291,000 in the same quarter last year.

Q4 GAAP operating expense was $52.6 million compared to $50.7 million in quarter three and $48.4 million in the same quarter last year, and included stock-based compensation expense of $3.4 million, $4 million and $3.1 million respectively.

Q4 GAAP operating expense also included a $4 million restructuring charge, primarily related to the cost savings actions we announced in October.

In addition, as we begin to implement these measures, we also elected not to move forward with an enterprise-based project to internally develop a software tool for business process management.

As a result, we incurred an asset impairment charge of $1.7 million.

Q4 non-GAAP operating expense was $48.5 million, excluding the $4 million restructuring charge.

Q4 GAAP diluted EPS was $0.98 compared to $0.08 in both last quarter and quarter 4, 2007.

This included a onetime benefit from the release of a tax valuation allowance of $64.6 million, or $0.97 per diluted share.

Q4 non-GAAP diluted EPS was exclusive to restructuring charge, and the release of the valuation allowance just mentioned was $0.07 compared to $0.11 in quarter 3 and $0.08 in quarter 4 2007.

Taking a look at the balance sheet, cash, cash equivalents and short-term marketable securities were $110.2 million, compared to $127.9 million at the end of 2007.

In quarter 4, we generated $9.2 million in cash from operations, compared to $17.4 million in quarter 3 and $17 million in the same quarter last year.

For fiscal 2008, we generated approximately $40.2 million in cash from operations compared to $52.8 million in fiscal 2007.

During quarter 4, we repurchased 1.5 million shares of our common stock at an average price of $6.92 per share for a total of $10.7 million, which completed our $50 million stock repurchase authorization.

Cumulatively, we purchased a total of 4.7 million shares at an average price of $10.73 per share.

Q4 DSO's were 64 days compared to 59 days in quarter three and 56 days in the same quarter last year.

The increase in DSO was primarily due to the effect the economy is having on both consumer spending and on our customers.

Our payment terms for North American customers are net 60 days.

And until very recently, our DSO's had consistently been below that level.

During the last two months of quarter 4, our North America accounts receivable aged as some customers were slower to pay.

Most of these are very good customers, with solid practices, and we will continue to work with them.

It just may take a little longer to collect.

Now let me turn our outlook.

We all know that as fiscal 2008 came to an end, economic and market conditions continued to worsen.

The result of this deteriorating environment and the impact it is having on consumer spending has created greater uncertainties for our business beyond our normal 30- to 45-day window of visibility.

As a result, we're providing -- we are only providing guidance for quarter 1, and we will make a few directional comments on how to think about 2009.

With that said, our outlook for the first quarter of fiscal 2009 is as follows.

For quarter 1, we expect revenues to be in a range of $65 million to $69 million on case volume of 44,500 to 47,000 cases, reflecting sequentially lower volumes in our North America-based business.

International volumes are also expected to be slightly down sequentially, as we are beginning to see some ripple effects of the economy and our European business.

We expect Q1 gross margin to be in the range of 72% to 72.5%, and is expected to include $400,000 in stock-based compensation expense.

In Q1, we expect GAAP operating expense to be in a range of $49.5 million to $50.5 million, which includes approximately $3.8 million in stock-based compensation expense and approximately $1 million in restructuring charges related to the October cost reduction actions.

This range reflects the continued investment in our strategic growth initiatives, such as international expansion, Teen commercialization, and product development.

Also, over the first half of 2009 we will incur transition costs related to moving our shared service organizations to Costa Rica.

Excluding the restructuring charges, we expect Q1 non-GAAP operating expense to be in the range of $48.5 million to $49.5 million.

In Q1 we expect GAAP operating margin to be in the range of approximately minus 4% to 0%.

We expect non-GAAP operating margin, which excludes restructuring charges, to be in a range of approximately minus 2% to a positive 1%.

For Q1, we expect GAAP EPS to be in a range from a loss of $0.04 to breakeven.

We expect diluted shares outstanding for quarter 1 to be approximately [69] million shares.

And we expect cash on hand at end of quarter 1 to be approximately $108 million to $113 million.

We're working diligently with our customers to collect on receivables.

However, in this environment, it may takes time before we see an improvement.

For quarter 1, we expect DSOs to be 65 days.

Now let me turn to the full-year fiscal 2009.

There are some elements we will provide directional comments and perspective on, particularly those we can manage, such as operating expense.

As we have mentioned, the greatest uncertainties beyond quarter one involve case volume and revenues.

It will be very difficult to grow in this environment, and we are expecting 2009 revenues to decline from 2008.

We believe we can maintain our gross margin at levels comparable to Q4 2008, although with our relatively fixed manufacturing cost structure, [volumes] can move gross margin up or down in any particular quarter.

Also, movement in exchange rates can impact gross margin as we saw in this past quarter.

Let's move to operating expenses.

We've been clear about our key strategic initiatives, and will continue to invest in these areas to drive long-term growth and profitability, with a focus on managing our overall expenses.

For the first half of the year, we expect non-GAAP operating expense to be relatively consistent with the Q1 run rate, and anticipate that spending in the second half of the year will trend lower as we begin to benefit from the transition of our shared service organizations to Costa Rica.

Stock-based compensation expense for fiscal 2009 is expected to be approximately $20 million.

Shares outstanding for fiscal 2009 is expected to be approximately $70 million.

Finally, I would like to comment on taxes.

As a result of releasing our tax valuation reserve in quarter 4, we now have more variability in our effective tax rate.

The most significant impact on this variability will be the amount of profit before taxes and the taxes related to stock-based compensation.

As we have mentioned, we expect 2009 revenues to be down year-over-year.

Accordingly, we have reduced expectations on profit before taxes.

As a result of lower expectations for profit before taxes, we now expect our full-year effective tax rate to be significantly higher than was previously indicated.

For Q1 2009, given our outlook, we would expect to have minimal tax expense.

From a cash position, we expect to pay minimal cash taxes for some time, as we will utilize the net operating losses on our tax returns.

As of quarter 4 2008, we had approximately $190 million in net operating losses.

Now I will turn the call back to Tom.

Despite the economic challenges of fiscal 2008, we had many significant accomplishments.

We successfully launched three new products, including Invisalign Teen, which as you've heard is off to a good start.

We grew annual revenues during the worst business environment in decades.

And we took action to reduce the Company's cost structure.

We're disappointed with our outlook for less profitability in Q1, given lower case volumes, but we'll continue to drive overall operating profitability for fiscal 2009.

As we embark on a new year, the economy remains very difficult, and our outlook is more uncertain.

However, the market opportunity and value proposition for Invisalign is strong, and we will continue to execute our strategy to drive adoption worldwide.

I look forward to updating you on our progress as the year unfolds.

Now let's go back to the operator for a few questions, which I'm sure you'll have.

(Operator Instructions).

Taylor Harris, JPMorgan.

Thanks a lot.

Business conditions for you guys I'm sure changed pretty rapidly through the fourth quarter.

So I would first of all just love to hear what you saw as you progressed month-to-month, and how that -- including into January.

It is a very dynamic environment.

We saw in December specifically -- maybe Ken, to add to this -- we saw in December receipts slow down, which certainly impacts Q1 revenue.

To this point, December was very soft.

And the trends show up in things like utilization.

January was better than December, and our outlook for Q1 is consistent with that case receipt.

So maybe, Ken, you can build on that?

I would just add to that, Taylor, that as Tom said, as we came through the quarter, in particular over the latter part of the quarter in December, we certainly saw a slowdown in the receipts, and in particular, more so in the second half than the first half.

And that continued through the early part of January with the holiday season.

As they've come back, as we're looking at case receipts now through the month of January, coming into today's call, our guidance -- [we pressed] what we've seen so far early in the quarter.

And you're guiding, I guess, on the case volume front for Q1 '09 to be down sequentially about 10 to 15%.

But revenues are not going to be down that much, which means you put in place a price increase.

Can you maybe just describe that price increase, and tell us where it applies?

The price increase, Taylor, is about a $50 price increase on pretty much most of the products here in North America.

That price increase was announced beginning of the quarter, so as case receipts come in over the quarter -- and they're applying the case receipts going forward after that announcement was made.

So as we go through the quarter, receipts that come in in the January/February timeframe, as we turn those around and ship them, there will be some impact in the first quarter.

But you'll see impact (inaudible) out into the year with the prices, as doctors start commuting cases, newer cases to us.

As far as the overall revenue, the [decline] -- in relation to the unit decline, it's really -- some of the new products that we're shipping also carry higher prices.

And at lower volumes, we're likely to see less volume discounts.

A couple of expense questions.

Did I hear you mention an asset impairment charge that you took in the fourth quarter?

I wanted to make sure we understood that.

Yes, we did.

So as we've gone through our restructuring in the month of October, and we looked up priorities that we need to focus on coming into 2009, and we looked at resources that we can apply to the various projects that we wanted to keep moving forward with, we were in the process of developing a management tool to manage the case -- case management from start of a case through the completion of a case; to track things like case refinements, when they started when they completed; warranty events, those types of things.

It was a tool to help management internally from a process efficiency point of view.

That was one of the things that we actually took off the table given all the priorities and the spending that we have so we can keep focused on product initiatives and other things that we will push on for the revenue.

We tried to preserve all of our investments we could to drive revenue over the long-term, including -- (multiple speakers)

And we didn't (multiple speakers) impact we were looking for from that program.

Okay, but was that included in restructuring charge or not?

That was not included in the restructuring charge.

Okay, so if we strip that out, and operating expenses in the quarter were about $50 million, I guess, and you're guiding to slightly lower than that in the first quarter,$48.5 million to $49.5 million -- is that right?

My math is a little different, Taylor.

What I was looking at was about $48 million after I pull out the restructuring -- $48.5 million, so after restructuring, we're relatively flat on a quarter-over-quarter basis.

(multiple speakers)

Right, so I guess that's my -- exactly, I think I did the math in reverse.

I guess that's my question -- it looks like operating expenses are actually going up in the first quarter, if we sort of compare apples-to-apples.

Yes, so from quarter 4 to quarter 1, there is about a few million dollars of an uptick in spending over the quarters.

Most of that is related to the strategic investments we have come in particular our international investment that we started to make, as well as additional commercialization of teen products and the other new products in the marketplace.

With that said, I will say that what we're doing with commercialization of Teen is with more digital media and social networking.

And media costs in general have come down a little bit for us here with the economy.

But that's where we're putting our money (technical difficulty) in quarter 4.

Bigger steps were investment in Europe, feet on the street, and programs, and starting to step up investment in China to get ready to do business there.

Tom, last question.

You guys talk about in your broad four-year guidance being profitable, having operating profitability in 2009.

Let's assume the business doesn't pick up, and that otherwise, you would have -- potentially negative profitability like you're having the first quarter.

Does that mean you have to put further expense reduction plans into place?

What I would say is that to the board and the management team, it's important to find balance between investing in the long-term drivers to accelerate shareholder value, but still being good stewards and running the Company very responsibly through a difficult time.

So we believe we still have flexibility in the business to manage spending over the annual basis to find our way through that balance.

And we intend to do that.

Matt Dolan, Roth Capital.

Good afternoon.

Follow-up on the sequential month-to-month topic in terms of what you've seen out there.

Maybe -- considering we don't have official guidance now for '09, can you provide us maybe your thoughts on the dental market itself, what are you hearing in terms of overall volumes, and then maybe anecdotally, how does Invisalign play into that so we can get a better feel of how things may turn out here?

I guess you may have better data then I do broadly here.

What we see anecdotally is overall dental visits are down.

Haven't seen good data on it yet.

The big dental distributors haven't all announced.

I think the mainstream companies will give us a bit more insight.

Danaher recently announced, talked about softnesses in their specialty areas in dentistry.

We're hearing from even our best customers that while they're getting patient starts, they're working harder to do them.

And the way that shows up is taking longer to get that case closed to a sale, and that patients are often shopping two or three or orthodontists or dentists.

We do hear that on the high-end restorative side that full mouth restorations -- those are really off.

And so I think we're somewhere between core dentistry and the real high-end restorative work.

I believe we have offset some of that softness in orthodontics with new products like Teen, and we're probably picking up share, although this will be a trailing measure.

It will take some time before we see how it sorts out.

So in general I think when data comes out, we're going to look back and say the second half of 2008 was probably flat to down in orthodontic starts.

That would be our guess at this point.

Our view is there's not going to be a lot of upward pressure to grow that in 2009.

And until the consumers get back in the game, we think it's going to be pushing and shoving as we're doing now.

But we think we do have opportunities to steal some share from the bigger players with products like Teen.

Okay, and then just a follow-up, so as you've seen the market here, and you obviously have receipts that push you into February in terms of revenue, has this been -- it looks like the December quarter wrapped up at least in line with what you're expecting, maybe slightly better.

So things didn't completely fall off a cliff.

Are you seeing a steady deterioration here, and therefore you have come up with maybe a more conservative scenario in terms of your guidance style than we've seen in the past?

Just maybe some final commentary there would be helpful.

I'm not going to comment on conservative or not.

We're calling it as we see it.

But what I tried to say in my comments that may not have come through clearly, was December was softer.

And we have some ideas, but we really don't know what's driving that completely.

The issue is -- we believe that things at least are stabilizing for us.

Ken mentioned that January receipts were stronger than December.

We can't obviously control if that will continue forever, but it's at least going the right direction.

So it is actually not a further deterioration.

December was soft.

Q4 didn't end the way we would have liked.

And therefore, we're going into 2009 probably with greater uncertainty.

But that said, we're calling Q1 as we see it.

But again, December receipts are January shipments, and therefore you see that softness in the revenue in Q1.

But again, receipts are headed in the right direction.

And then last kind of touchup question is on pricing, with the increase, what are you hearing initially here on the feedback from that in this environment, is that something that your customers are receptive to at this point?

And second question on the spend side of things -- I know you're ramping up Teen, but given a weakened consumer, are you thinking of maybe cutting back on your traditional consumer expenditures?

So there's two parts right there.

I'll take the second first.

The incremental spending on Teen is more redirection of existing spending on consumer.

And you'll start to notice in our regular advertising, we're putting a tag at the end that says Invisalign Teen now available.

That doesn't take much effort.

Media rates have come down some.

We typically buy a quarter or a bit more ahead.

And we're going to continue to manage through this as best we can, spending what we think is appropriate for the impact we want to get.

The expense is up a little bit in Q1, because of Teen, broadly.

That has to do with other efforts -- broader commercialization of the sales force, point-of-sale materials, some new programs for doctors.

But a lot of the other efforts that's going on for Teen is not so much media; it's a broader marketing program with PR, editorial efforts, a lot of digital and online approaches.

We've got a whole bunch of new tools through InvisalignTeen.com that take us through and plug us into social networking sites, make it easy for teens to share stories etc.

And the second part of that, we decided to make an investment along with additional feet on the street in Europe and a more significant consumer program.

We've tested and found what worked in Europe, and we're doing that in a very targeted way.

And that was another part of the incremental spend for Q1.

So we're actually flattening our overall spend in consumer in North America, redirecting it to Teen [into] new tools.

And we've layered on some incremental spend in Europe, which is showing good returns at this point.

I would just add one more point to that, which is typically in quarter 4, we tend to go off the air with our media advertising on television, and back on in quarter 1.

So you'll see a little of that as well.

And I'm sorry -- the first part of your question I dropped again.

What was that first part?

(multiple speakers)

Receptivity to pricing in this environment.

What do you think?

Nobody was thrilled.

It was a small change.

And high-volume doctors can largely offset this through the advantage program.

The net change to a high-volume doctor is actually pretty small.

So what we have seen is -- and we have not raised prices in the time I've been here.

And so we certainly -- on a net basis in the last seven years, prices have come down 25 to 30% to the doctor.

So that's through absorbing fuel surcharges and freight increases and all (inaudible) stuff.

So it was a small price increase.

We put it through with minimal complaint, we thought about it carefully, and decided it was the right thing to do.

Thanks for the detail.

(Operator Instructions).

Tao Levy, Deutsche Bank.

So a quick question on the usage of Teen.

Have you guys been able to dissect and sort of some of the practices that have adopted the product early on -- what percentage of the opportunity is going to teen?

The answer is yes.

We look at it very carefully.

We've got several thousand doctors well along in the process again two quarters in.

I would say it ranges from a very conservative doctor who has started three to six cases, and is tracking them through to make sure the case completes the way they would expect.

And at the other end of the extreme is as a doctor who has over 1,000 starts a year, that has pretty quickly switched us on as a primary choice for teens.

And we have been able to generate with this doctor -- I think by the end of 2008 somewhere close to 200 teen cases starting from May.

So tapping into a chunk of those 1,000 starts a year -- that's at the high-end.

(multiple speakers)

So at the high-end, 20% is what you're seeing now, Tom?

Sorry to cut you off.

I would say on that 1,000 starts a year, if you take away the adult population in that practice and just are left with teens, which are probably 80-plus percent, we're actually getting a bit more than 20% of that teen population.

And this practice expects to continue to grow that.

So again, those are the two extremes.

There's a lot of people in the middle, and I think orthodontists are going to take some time to make sure the product works for them.

What we're hearing is it's easier to sell -- versus early-stage, first-stage treatments, early to sell -- it's easy to sell a 13- or 14-year-old Invisalign versus fixed appliances.

And in this day and age, when it's harder to get those case starts, I think that is resonating with the practices.

Looking at the other opportunity -- maybe Japan, any updates there or any geographic sort of expansion opportunity you talked about during the analyst meeting that could maybe start to drag things sometime later on this year?

We do expect continued growth in Europe.

We have a more conservative consumer that wasn't quite as leveraged in the US.

Every case we get over there virtually speaking is private pay anyways.

So we expect slower growth, but we still expect significant growth out of Europe this year and that's an increasingly important contributor.

To that end, we're investing more feet on the street.

They put together plans, they execute them well, and we're returning on that with increased investment.

Part of that is supporting programs for consumer that helps further accelerate doctors' growth.

So we do expect Europe to continue to be an important contributor.

Meanwhile, North America works through a more difficult time.

We don't expect Japan to grow significantly in the year, although around the rest of the world and other geographies, volumes are growing, volumes are growing much faster.

Again, distribution pricing means we don't get the same impact on revenue.

And then coming to China -- coming to Japan, we think that's a longer-term growth opportunity, we've done all the right things to give us the runway for growth.

But we've got to create some market change there.

And so we're being mindful about our investment given the couple years it will probably take to make some of that happen.

And then finally, we haven't put a date around commercialization in China yet, but part of this increased spending is towards those commercialization efforts, regulatory, legal, business entity -- all that developing relationships so that we are in position as soon as practicable to turn on the spigot in China.

But again, that's one of those strategic investments we felt was absolutely important to deliver longer-term shareholder value and why we worked so hard to create some structural cost room that we could fund those things even through difficult times.

Okay, and just two quick financial questions.

On the G&A side, how come that increased in the quarter?

And also, how should we think about that going forward, because it's a fairly big delta between where you are Q4 '08 versus where you were Q4 '07 -- and also kind of what can happen next year?

The latter part of your question here, as we go forward with G&A, some of the things that we're doing with some of our customer-facing activities here at the Company moving down to Costa Rica, you'll see some of that impact G&A through the credit and AR activities that we do, as well as some of the organization as we move through the first part of the year transitioning to Juarez as well.

That will save us additional costs in the G&A line as we transition those people out of the business -- positions out of the business as we move forward.

And as far as a quarter-over-quarter increase in G&A, it just has to do with the timing of compensation expenses and other things as we move from quarter to quarter, and you see some of that showing up in the G&A line.

We -- actually, at a cash basis and at a non-GAAP view of G&A, we're actually holding flat to down most every G&A department.

Okay, that's helpful (multiple speakers)

On a year-over-year basis.

On a year-over-year basis, yes.

And then just lastly, the DSOs -- do we get to a point where maybe you start to cut off some customers?

Have you reached that level yet?

I'll stop there.

I guess our standard process is we try to work with the customers as long as we can through our credit group or through our sales organizations as well.

And we do put doctors on hold if they're not paying the bills, or we do also send them off to credit agencies, or if we just can't work with them or they're not willing to talk to us.

What we have really seen here more recently is doctors -- in this environment, they're really running into a situation where they're trying to get their office staff paid, they're trying to get their rent paid, keeping their lights on, as well as paying Align Technology.

And those other things right now are taking a little more priority as they're looking at their cash and how they're going to spend it.

We're hoping that we can get that back in line.

No one is saying they're not going to pay us, they're just saying it's going to take a little bit longer.

(multiple speakers) mindful here that we have been getting paid before our terms date.

And as they talked to their accountants, their accountants look at all their bills and go -- you don't pay any of your bills exactly on time.

Why should you pay these guys early?

We typically have DSO's under our terms date.

So this is probably a more normal view of the dental industry.

But we would like to get back to 60 days for sure.

Absolutely.

Taylor Harris, JPMorgan.

Just a few follow-ups.

So like Tao was asking on the G&A, did the asset impairment charge show up in G&A this quarter?

The asset impairment does show up in G&A.

So if we strip that out, then G&A was flat sequentially from the third quarter.

And can we expect G&A to stay at that level or decrease (multiple speakers) 2009?

Yes, as we move through 2009, you'll see some decrease.

As Tom mentioned, we tapered back in all the G&A areas, trying to run it as tightly as we can, and a lot of the transition activity that we have going down to Costa Rica -- some of that is associated with G&A as well.

So you'll see that trend downward.

So it's probably more useful to think about this year-over-year than quarter-over-quarter, because other things happen to move that around a little bit within a quarter or two period.

Right.

So really all of -- as we talked about the spending -- the operating expense increases in the first quarter sequentially are going to be in sales and marketing, I assume --?

Predominantly.

A couple of cash -- balance sheet, cash flow questions.

You talked about cash on the balance sheet ending first quarter -- I think you said somewhere around $110 million.

(multiple speakers) is that -- that's a pretty big increase versus the end of the year.

Are you including marketable securities?

At the end of the year we ended at $110 million or so, so we think we'll stay relatively flat and the end of quarter 1, Taylor.

Q1 is a more -- bigger cash use quarter.

A lot of annual payments, things like that come in, so it's more of a timing issue.

It's especially pretty flat Q4 end to Q1 end.

Historically, yes.

But cash flow, I guess -- operating cash flow, you have historically generated more operating cash flow than net income.

I assume that will continue.

So is that right or not?

And for 2009, are you pretty confident of being able to have positive free cash flow?

Yes, I don't think any of that changes, Taylor.

If you think about the non-cash charges that I quoted again the P&L, that doesn't change significantly as we move through 2009.

So we should be generating consistently positive cash flow to the business.

Great.

And just the last question on the international business.

So you actually grew faster this quarter internationally than you did in the third quarter.

Was there any particular reason for that, and then is there any -- do Japan, China, any of your new initiatives really start to contribute this year or not?

I'll make a comment on Europe, and then I'll ask Tom to add onto Japan.

Typically, in Europe, it goes back to the seasonality issues we see, where during the summer months, doctors are out of the office and for a good part of the summer, so case volume is down during the summer months, and then comes back stronger in December.

And that's pretty typical on a year-over-year basis, we see that pretty much every year, and we saw it again this year.

So that's why you see Europe going sequentially up pretty nicely quarter-over-quarter.

I'll let Tom add onto the Japan.

Yes, in terms of the rest of revenue picture, very strategically important -- not significant in the near-term.

And so the volume is increasingly important coming out of the broad group of individual country markets.

In large Asia, we don't get the same revenue impact because these are through distribution partners.

But those are building the basis for future streams of business.

China, as I think I said a moment ago, we haven't provided dates yet for when we expect to first commercialize, but we're well into our activity for setting up business entities and doing the regulatory and legal processes to get all that in place.

And so that's a set -- that's a stream of revenues in China that will be out in the future.

Japan is small but important.

And before we're going to put more significant resources into Japan, there needs to be a clearer path to turn that into revenue increases.

And we're still working on that.

And again, part of the issue is the overall penetration of orthodontics in Japan is still small relative to the large size of the population, order of magnitude less than the US.

And so we don't want to how have to carry the full weight of market change on our backs for now.

So I think there are really good opportunities in Japan to accelerate that.

But again, especially in the timeframe we're in, where resources are scarce and we need to direct those most critical priorities, it's a good time to take a more thoughtful approach in Japan.

So primary growth is going to be core Europe, [enabling that to] continue to grow, albeit not quite the same rate we saw in '07 and '08.

And then we'll scratch and claw here in North America to make the best of a difficult situation that we can.

Great, thanks a lot.

At this time, there are no further questions.

I would like to turn the floor back over to management for closing comments.

Thank you, everyone, for joining us this afternoon.

This concludes our conference call.

If you have any further questions, please contact Align investor relations.

Ladies and gentlemen, this does conclude Align Technology's teleconference.

You may disconnect your lines at this time.

Thank you very much for your participation.

Have a wonderful day.