愛齊科技 (ALGN) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Align Technology first-quarter fiscal 2009 financial results teleconference.

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 and thank you for joining us.

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 first-quarter fiscal 2009 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 twelve months.

A telephone replay will be available today by approximately 5;30 PM Eastern time through 5;30 PM Eastern time on May 6.

To access the telephone replay, domestic callers should dial 877-660-6853, with account number 292 followed by #, and conference number 318996 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 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-K for the fiscal year ended December 31, 2008.

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

Please also note that on this conference call, we will provide listeners with several financial metrics determined on a non-GAAP basis for comparisons to previous quarters.

Most of these items, together with the corresponding GAAP numbers and a reconciliation 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 set of GAAP and non-GAAP historical financial statements, including a corresponding reconciliation, as well as our first-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?

Thanks, Shirley.

I'll begin today by focusing on the highlights from our Q1 performance and then discuss the progress we've made towards achieving our strategic initiatives.

Ken will follow with additional detail on our Q1 financials and outlook for the second quarter.

Overall, our first quarter was solid, a real positive in these challenging times, and I'm pleased with our results.

Our performance this quarter reflects higher-than-expected revenue, case volume and gross margin, as well as the benefit of a lower operating expense base.

This, combined with a $1.5 million credit for insurance reimbursement, resulted in earnings that exceeded our guidance.

We've all seen what's happened to the global economy and its impact on consumer sentiment.

Our customers are continuing to adjust to a more challenging economic environment, and most believe Invisalign can and is making a difference in their practices.

In fact, in Q1 we had a record number of doctors, both orthos and GPs, submit cases, which suggests broader usage even in this difficult economic environment.

We've spoken consistently about the key elements that form our strategy to drive adoption of Invisalign, which includes product innovation, customer experience, consumer demand creation and international expansion.

During the quarter, we made good progress on each, which I'll discuss briefly in a minute.

But first let me update you on some of the adoption metrics we track in terms of training new doctors and utilization, or what we call same-practice sales of our product.

During Q1, we trained 1,220 new doctors.

The number of doctors trained in North America was lower than we had expected and resulted in lower training revenue for Q1.

We trained 890 doctors in North America in Q1 compared to 1,420 in Q4 and 330 new international doctors in Q1 compared to 515 in Q4.

Based on our current training run rate, we have lowered our expectations and now plan to train approximately 3,500 new North American doctors this year.

We believe this shortfall in North America training is related to a couple of factors.

Across the dental industry, dentists have become more conservative in this environment and less interested in learning about new, higher-value procedures such as Invisalign.

In addition, following the October restructuring, we made changes to the new dentist recruiting team, along with some adjustments in our recruiting program, which resulted in a more selective and narrow approach this quarter.

We'll continue to evolve our approach to new doctor training with increased focused on ensuring that the doctors we do train are more likely to integrate Invisalign into practice.

As expected with these lower volumes, total utilization in Q1 was down compared to Q4 '08 and Q1 '08.

North American orthos were unchanged from Q4 and down just slightly from Q1 '08.

North American GPs were down both sequentially and year over year.

International decreased sequentially as Q1 is seasonally a weaker quarter for Europe and was unchanged from Q1 '08.

We had a record number of GP submitters in Q1, but utilization declined.

GPs that are in the game are doing well, but fewer GPs are actively marketing Invisalign.

We believe that's the case across the board in the dental industry as GPs retrench and focus on more traditional treatment.

For North American orthos, we saw increased traction during the quarter, driven by Invisalign Full, Teen and Express.

Invisalign Teen has provided an opportunity for our sales force to reach out to orthos with a product offering that is more relevant to their practices and increases our "share of chair." Invisalign Express is helping orthos as well as many GPs close sales with more value-conscious patients who are increasingly shopping around for the best price.

For international doctors, increased utilization amongst our lower-volume doctors was a key factor in driving Q1 case shipments up 18% year over year.

We've also seen a higher use of Invisalign Express and Anterior for what they call the "social six" smile as consumers in the UK and elsewhere in Europe shop for better value and elect sometimes to have partial versus comprehensive treatment.

I'll now move to an update on our products, and let's start that with Teen.

Invisalign Teen continues to grow nicely, increasing nearly 10% sequentially to 7.8% of volume from 6.7% in Q4.

Utilization, or same-practice sales, is also increasing with 34% of orthos submitting four or more cases in Q1 as compared to Q4, and twice as many orthos submitting 12 or more cases.

There was tremendous interest in Invisalign Teen from both doctors and potential patients.

In fact, Teen has become a great tool for re-engaging North American orthos as they look for ways to differentiate and grow their practices in a tough market.

On March 2, Invisalign Teen was made available internationally, and we've had good initial response from orthodontists in Europe.

This is particularly noteworthy given that European doctors are a bit more conservative than their North American counterparts.

Within the first 30 days of availability, 753 doctors completed the online Teen training, over 150 cases were submitted and 22 cases were shipped.

We're pleased with Teen's progress to date but understand that it will take time for orthos to see the results of their initial Teen cases and fully embrace the product.

Over the long term, we believe adoption will accelerate, and we expect Invisalign to become a substantial part of the Teen market.

Invisalign Assist cases increased 28% sequentially to nearly 2% of Q1 volume and is being used 2 to 1 over the Invisalign Full product by new GPs.

With fewer than expected trained doctors in Q1, Assist volumes were a bit less than expected.

Having launched late last year, Assist is still early in commercialization, and we are gaining valuable experience by increasing adoption rates for those newly trained GPs.

Along with continuing improvements to product, we will continue to evolve our entire training, start-up and support model as we learn more about how to accelerate GP adoption of Invisalign into practice.

Overall, our retention business, including Vivera retainers, continues to grow nicely.

Vivera has been in the market for just over a year now, and we continue building momentum with both our GP and ortho customers.

During the quarter, we extended the Vivera product line to now include patients currently wearing lingual wires or who have missing teeth and want a pontic placed in the space to hide the opening.

While these were both released later in Q1, we are already seeing volume from the expanded market of customers that have patients with these unique needs.

Overall, we continue to be pleased with the progress of Vivera and will continue looking for opportunities to drive adoption and utilization with our customer base.

On our consumer marketing front, we significantly adjusted our media mix in Q1 to focus predominantly on direct response TV and online digital media, eliminating large, national print advertising all together.

We also introduced a very innovative Invisalign Teen PR campaign, which we believe is adding substantially to our overall awareness among both consumers and practices.

We made these changes to stretch our consumer marketing investment further, especially as high-quality media print advertising is very expensive.

The goal of the Invisalign Teen campaign is to reach and educate prospective teens and their parents while further engaging practices involved with teens.

Some key highlights from Q1 on this side of that education include over 60 million media impressions and counting, 100-plus video news segments ran across the country, nearly 400 radio hits, 300-plus online placements including Teen Vogue and L.A.

Parent, "in the know" health segments aired during Oprah, Ellen and Rachael Ray, and we recently had an exciting opportunity to have Invisalign Teen showcased in a Tyra Banks prom extravaganza show.

Taping for that segment just wrapped last week and will air in two weeks on March 6, so set your DVRs.

I think you'll really like it.

In Q2, we're launching new Teen ads and collateral with completely new creative, supported again with more online media.

Our new Teen material will begin to appear in May in conjunction with several ortho-focused events like the AAO, the big annual meeting for the orthodontists.

As you can tell, there's a lot going on in the consumer marketing front, and we are very excited about the positive momentum we're building in support of Invisalign Teen and for Invisalign overall.

I'll now turn the call over to Ken for more detail on our first-quarter financials along with our outlook for Q2, and then I'll come back for a few closing remarks.

Ken?

Thanks, Tom.

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

Q1 revenue and shipments were down sequentially from Quarter 4, although not as much as expected.

Q1 net revenue of $70.1 million and case shipments of 50.1 thousand decreased 5.4% and 4.9%, respectively.

As Tom discussed earlier, the North American ortho channel gained traction this quarter with case shipments exceeding our expectations.

Invisalign Express case volume was also better than anticipated and offset the lower training revenues.

On the international front, revenue decreased 12.2% sequentially as expected due to seasonality.

On a year-over-year basis, international case volume increased 18.1%; however, revenues were relatively unchanged, largely due to the impact of foreign exchange rates as the dollar has strengthened against the euro over the past year.

Q1 revenue by channel consisted of 44% for North America GPs, 30% for North American orthos, 20% for international and 5.5% for non-case revenue, which includes the retainer business, training revenues and ancillary offerings.

Q1 gross margin was 75.2%, compared to 72.7% in Quarter 4 and 73.8% in the same quarter last year.

The sequential increase in gross margin primarily reflects lower manufacturing-related costs.

Additionally, the lower training revenue in the quarter had a favorable impact as training carries nominal gross margins.

Q1 gross margin included $386,000 in stock-based compensation expense, compared to $455,000 in Quarter 4 and $390,000 in the same quarter last year.

Q1 GAAP operating expense was $47.4 million, compared to $52.6 million in Quarter 4 and $50.5 million in the same quarter last year, and included stock-based compensation expense of $3.3 million, $3.4 million and $3.6 million, respectively.

In Q1, there were two one-time items that impacted GAAP operating expense.

On the plus side, we received a $1.5 million insurance reimbursement of legal costs associated with the OrthoClear litigation.

This was partially offset by a $910,000 restructuring charge related to the actions we took last October.

Note that in Q4 2008, GAAP operating expense included a $1.7 million asset impairment charge and a $4 million restructuring charge.

Q1 non-GAAP operating expense was $46.5 million, compared to $48.5 million in Quarter 4, excluding restructuring charges.

Q1 GAAP diluted EPS was $0.04, compared to $0.98 in Quarter 4 and $0.07 in the same quarter last year.

Recall that Quarter 4 included a one-time benefit from the release of a tax valuation allowance of $64.6 million or $0.97 per share.

Q1 non-GAAP diluted EPS was $0.05, compared to $0.07 in both Quarter 4 and in the same quarter last year.

Now let's move to the balance sheet.

Cash, cash equivalents and short-term marketable securities were $124.7 million, compared to $110.2 million at the end of 2008.

In Q1, we generated roughly $10.6 million in cash from operations, compared to $8.8 million in Quarter 4 and $3.2 million in the same quarter last year.

Q1 DSOs were 66 days compared to 64 days in Quarter 4 and 57 days in the same quarter last year.

As discussed on our Q4 earnings call, the economy is having an effect on our customers and their patients.

As a result, some of our customers are slower to pay.

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

Although it is taking a little longer to collect, to date we have not experienced changes in bad debt exposure.

In Q1, deferred revenue on the balance sheet has grown by $2.9 million, or 18% sequentially.

This predominantly represents the revenue deferrals associated with Invisalign Teen and Assist.

This revenue will begin to be recognized in the P&L as cases complete toward the end of 2009 and early 2010.

Now let me turn to our outlook for the second quarter of fiscal 2009.

For Q2, we expect revenues to be in a range of $67.5 million to $70.5 million on case volume of 48,000 to 50,000 cases.

Due to normal seasonality in the orthodontic business, we anticipate some geographic shift in Q2 revenue, with the North American ortho channel being down sequentially as orthos will typically spend less days in the office with Spring Break, holidays and attending industry events such as the AAO.

This is offset by some growth internationally.

In addition, keep in mind that we do business in Europe in the euros, and if it softens against the dollar like it did in Quarter 4 of 2008, there may be an impact on revenues.

We expect Q2 gross margin to be in a range of 74.5% to 75%, and is expected to include $500,000 in stock-based compensation expense.

Just last week, we completed a transition to run the Juarez manufacturing operation on an independent basis and will begin to benefit from the cost savings over the remainder of the quarter and fiscal year.

Also, as a result, approximately 495 employees from a third-party service provider are now Align employees, and our headcount next quarter will reflect that increase.

In Q2, we expect GAAP operating expense to be in a range of $50.5 million to $52 million, which includes approximately $4.4 million in stock-based compensation expense and approximately $600,000 in restructuring charges.

Excluding the restructuring charges, we expect Q2 non-GAAP operating expense to be in a range of $49.9 million to $51.4 million.

The sequential growth in operating expense reflects an increase in media advertising, including the launch of our Invisalign Teen PR campaign, continued investments internationally, as well as spending related to several major customer events, including the AAO trade show and our European summit that occur in the second quarter.

In Q2, we expect GAAP operating margin to be in a range of approximately break even to 1%, and non-GAAP operating margin, which excludes restructuring charges, to be in a range of approximately 1% to 2%.

For Q2, we expect GAAP EPS to be in a range of break even to a $0.01, and non-GAAP EPS to be in a range of $0.01 to $0.02.

We expect diluted shares outstanding for Quarter 2 to be approximately 67 million shares.

From the balance sheet perspective, we expect cash on hand at the end of Quarter 2 to be approximately $122 million to $126 million and DSO to be in the mid 60s.

For fiscal 2009, we are updating our outlook for stock-based compensation expense and diluted shares outstanding and expect them to be approximately $17.5 million and $67 million, respectively.

Now, before I turn the call back over to Tom, I would like to provide a brief update on our transition to Costa Rica.

Overall, we have made good progress and the transition is on track.

We have hired and staffed the positions in Costa Rica for customer care, credit and AR and event registration.

These teams have been cross-training diligently over the quarter, and we are pleased with the progress to date.

We are especially proud of the professionalism and commitment to Align that our impacted Santa Clara employees have demonstrated and thank each and every one of them for their service.

The transition of shared services to Costa Rica is a big undertaking and has not been easy for our impacted employees or for our customers.

We still have a lot to do to rebuild the institutional knowledge that our doctors rely upon, as well as bridge the cultural and language fluency differences.

It is not perfect yet, but we know what to do and are committed to achieving the same high level of customer satisfaction in Costa Rica as we have had in Santa Clara.

Now I'll turn the call back to Tom.

Thanks, Ken.

I need to make one quick correction.

As I finished my prior comments, I realized I gave you the wrong date for the Tyra Banks show.

That show will actually air on May 6, not March 6 as I think I misspoke a moment ago.

All right.

So in summary, I'm pleased with the progress we've made this quarter, particularly in the North American ortho channel.

In terms of the economy, we are not out of the woods yet as many practices and their customers continue to face financial challenges.

In this environment, we're going to remain focused on our top priorities and continue to manage operating expenses very closely.

The actions we took last year to lower our cost base will enable us to continue investing in our key strategic initiatives while driving overall profitability in 2009.

And before we go to Q&A, I just want to share a milestone we recently achieved, one that is a testament to the continued strong demand for Invisalign.

On April 8, Align shipped its one millionth case--its one-millionth case, amazing--to Dr.

James Kohl, an orthodontist in Wilmette, Illinois.

Dr.

Kohl and his practice was one of the first doctors to embrace Invisalign treatment, so we are thrilled to be sharing this milestone with him.

His one-in-a-million patient is 16 years old, and she came into Dr.

Kohl's office today to receive her first set of Invisalign Teen aligners.

Wow.

And with that, let's go back to the operator for some questions.

Thank you.

(Operator Instructions) Our first question comes from the line of Taylor Harris with JPMorgan.

Your line is now open.

You may proceed.

Hi there.

Can you hear me okay.

Yes, Taylor.

You're coming through just fine.

Okay.

Great.

So the business really hasn't fallen off as much as we expected and you expected here over the last couple of quarters.

You're still forecasting another sequential decline, however, in the second quarter.

But I'm curious, just qualitatively as you talk to customers, are you getting more of a sense of stability in practices these days or not?

Taylor, I think what we described forward is as a range of guidance could imply continued declines, and I think Ken said it well.

As we talk to our customers, they seem to be--the answer is it seems to depend.

For lower volume GPs, what we see broadly is they have really stepped back from marketing all kinds of procedures.

At the high end, full-mouth veneers; at the low end whitening; or somewhere in between those.

They're just reluctant to try and sell or upsell other procedures, and they're more reacting to what comes through the door and what patients are requesting for their normal services.

On the orthodontist side, we see orthodontists very engaged, and we think there's probably compression in the overall market.

And we see orthodontists working harder to get starts, and we believe we are part of a difference-maker there.

So I'd say it's--and then on the engaged, the GPs that are in the game, they are very much in the game.

But it's a pretty bimodal view on the GP side.

Orthos are definitely in the game.

The GPs that are engaged are in.

And the rest of it I already said.

Okay.

And I guess in hindsight you guys have certainly been helped a lot by the new products that you've put out into the field.

If you hadn't released those new products, do you think the overall business would have declined at the same rate that the Invisalign Full business did here, which was about 15%?

Or do you think some of these new products are taking--it's cannibalizing the base business?

Well, I don't want to speculate because there's too many moving parts in this environment.

But what we actually--if you use Teen versus Full as an example, that's using your word, "cannibalism," we tried to engineer that.

That's actually a slightly higher price point, and there's broader, different features.

So we actually tried to create some of that as we upsell Teen.

So I can't speculate about what it would have been, but any great company has new products as lifeblood.

Sure.

And then a couple of P&L questions.

Are you expecting operating expenses in the back half of the year to continue to stay about flat?

I think that's about what you're guiding for the second quarter.

Or do some of the restructuring programs start to kick in more in the second half of the year.

Yes, Taylor, over the second half of the year, and we referred to this actually on last quarter's call as well, we're moving well as I mentioned with the Costa Rica transition.

We've got the positions filled down there.

We're starting to roll people off here.

But as we move into the second half of the year, we'll start to see some of the savings associated with that move, so you will see operating expenses move downwards over the second half of the year related to that transition to Costa Rica.

Okay.

And my last question--go ahead.

No, that's okay.

Go ahead.

I was going to say, the other thing that we're continuing to do, and you saw some of that in the Quarter 1 operating expenses, we're continuing to take hard looks at discretionary spending, and we continue to do that on a quarter-over-quarter basis and take any of that out that we can.

We were able to take some actions this quarter, and that reflects in our financials; for the first quarter, we had broad savings across the Company of about $1 million to $1.5 million in addition to the insurance reimbursement that we received as well.

Okay.

Great.

And my last question is just on cash flow.

So cash flow was really good in the first quarter.

It looks like you'll give some of that back in the second quarter.

But still I think it's implying maybe $12 million to $16 million increase in cash overall in the first half of the year.

So that's more than the net income that you're projecting.

So what's the difference there?

What's that source of cash that we're missing on the P&L?

So the biggest difference that you're probably missing is the fact that because we have NOLs we're going to be able to take advantage of going forward, we will actually not be paying cash taxes, other than just nominal taxes.

So when you look at net income, you need to adjust for that tax effect.

Okay.

Sounds good.

Thank you, guys.

All right.

Thanks.

Thank you.

Our next question comes from the line of Tao Levy with Deutsche Bank.

Your line is now open.

You may proceed.

Hey.

Good afternoon.

Hey, Tao.

Hey, Tao.

I guess following up on Taylor's question, in terms of the customer flow, not necessarily with Invisalign, but have you gotten any feedback in terms of how orthodontic trends in general are faring in the economy?

Tao, we don't have what we would consider high-quality quantitative data.

We have a lot of qualitative data inputs, and unfortunately, and you know this from trying to model this business, we don't have kind of the IMS type data that you get in other kinds of the device industry or drugs.

We hear things that generally say orthodontic starts are down in North America and down a bit less in Europe and don't have data outside those two geographies.

In our minds, the orthodontic starts for 2009 can be down as much as 10%, so we think if we continue to push through this and kind of mitigate our decline, we're probably doing better than the market in this environment, which means we're probably taking share from somebody.

But we do believe there's pressure into orthodontic starts.

Into dentistry, we hear bits and pieces, and we're certainly going to watch for what the dental distributors report here shortly, that patient visits to offices are down a bit and even in core dentistry procedures are down.

And I think on the real high-value side of dentistry, down sharply.

We again think we're probably doing better than most of the rest of the high-value dentistry procedures, but we certainly feel that in the low-volume GPs I spoke about a minute ago.

But that's kind of the--we don't have great data there, and we're eagerly waiting to see what some of the big players that probably more track the market are going to say here shortly.

(inaudible) your perspective.

Based on your numbers, things certainly look like you've held your own, or at least Invisalign has.

Looking at the guidance that you talked about, sequentially lower in orthodontic starts due to seasonality, when I go back historically, it's always been Q3, not necessarily Q2, where that has hit.

Is there anything different with this Q2 where that maybe has moved up a bit?

I think certainly with the economy right now, we're certainly viewing that as another impact here in the quarter.

A few years ago, you saw the ortho business up pretty significantly in Quarter 1 to Quarter 2 as we were coming off of the OrthoClear litigation and handling 20,000, 25,000 cases in addition to incremental volumes coming from those orthos who were coming back to Align Technology.

But this year with where things are tracking right now and our view of the quarter as we're coming into the quarter, with the economy, we're looking at the ortho business being down on a sequential basis here.

Okay, but not necessarily a focus on--again, that seasonality that we normally see in Q3, this is again you're--

There is seasonality in Quarter 3 as well, but in Quarter 2, if you look back at doctors that were in the game year over year, when we look back at the data that we have internally to look at, we see overall orthos tend to be down in Quarter 2 as well, anywhere from a couple percent to 10%, depending on the year we look at.

And those are doctors that have been in the business again on a year-over-year basis.

And again there's two different things maybe at work here, and I want to make sure we're clear about your question.

One is orthodontic seasonality total market; another is Invisalign.

And when we look back in history, we didn't have the same seasonality as the market had because we weren't into the mainstream of orthodontics.

So comparisons are a little more difficult for us.

We believe over time as products like Teen make us more relevant, we will more track the natural seasonality.

So for example, a softer quarter for us typically were the summer months, our Q3, because when we were strictly doing adults, we got crowded out of that office during the busy summertime when moms and dads were taking the kids in for getting started on braces.

Now that we're starting to get at some of that market opportunity with things like Teen, we think we will not get caught out so much.

So Q2 has a seasonality for orthodontics, and that is just literally the orthos are in the office fewer days with travel, with Spring Breaks, with AAO and that sort of thing.

It really comes down to office days worked, which we try to chart.

Okay, great.

And that kind of ties into my next and last question, and it's as that Q3 approaches, and historically it's always been the softer one, it's more challenging for you guys to predict, does that--should we take a whole different look at that as we approach this Q3 because of Teen?

Could there be more business for Teen in that Q3?

We're not providing guidance because we'll talk about Q3 when we get--three months from now, but we don't think there's anything significant this year.

We think Teen's going to take a while to build into becoming mainstream.

We're making terrific progress, but you know orthodontists change behavior slowly, and I think we're giving them lots of reasons to change, but we do believe it's blocking and tackling and it will take us some time to wrestle that market share away and help them change behavior.

So I don't see a step function change here.

We just see slow, steady progress.

Great.

Thanks.

Sure.

Thank you.

Our next question comes from the line of Matt Dolan with Roth Capital Partners.

Your line is now open.

You may proceed.

Hey, guys.

Good afternoon.

Hi, Matt.

Afternoon, Matt.

Tom, a question on this concept on being in or out of the game and looking at your utilization rates declining here.

Obviously we're in a tough economic time, but historically on calls as we've talked about, a high-end, high-volume Invisalign user base with a large tail of lower-volume users.

So can you help us dig into this utilization rate and really characterize where you're seeing the falloff?

Is it merely the high-volume guys seeing declines in patient volumes through their door, or are you losing some accounts that were in that lower utilization group?

Well, to the latter part of your question, the answer is no.

And an example of that is we had a record number of GPs submit cases in the quarter, but that long tail you spoke about a moment ago is what drives total utilization down.

We have a growing group of GPs that are really in the game, but the total average utilization number gets really impacted by the large number of small-volume GPs that have decelerated.

And it's pretty much across the board.

So the gap between those GPs that are in the game that are doing five, ten and more a quarter is getting larger between those that are just going along very slowly.

And really the way that plays out is when a patient asks for it.

Nobody in the practice is really selling it, is really talking to them about the value of a better smile and better hygiene and all those other things.

So that behavior's very different in the GP office that's not in the game.

And it's not just Invisalign; it's for other procedures as well.

And we notice from surveying and talking to lots of customers.

At some point, intermittently, we'll probably come along and unpack these numbers in more detail as we did during the investor day in November.

It's a lot of work.

We're not going to commit to doing it routinely.

I think at appropriate points every so often, we'll probably come in and give all of you a much deeper view of what's going on in the utilization trends.

Okay, fair enough.

Very good.

On the marketing side of things, your consumer campaigns out there, I know you eliminated some national print.

Can you give us any data on where you're seeing returns?

Are you testing that from a revenue or a profitability standpoint?

And then secondly just overall maybe for Ken, what does the budget in '09 look like for this marketing campaign relative to last year?

I'll start.

I'm pretty sure what Ken's answer in a second will be.

That is, we track--there's forms of media where we can track explicitly with lead flow, and there's other elements of media that are broad effect.

But there are still ways to track and calibrate payback.

We continue to believe we're getting very good bang for our buck and believe we can tie out revenue flow from investments in this area.

What I will say in general, because we haven't spoken in detail about the total consumer spend, we're getting more for less.

And as we've said in January at our year-end call and as we talked about 2009, and as both Ken and I spoke qualitatively shortly ago in our prepared comments, we have shifted the mix of media and the mode.

And because of the kind of jazz factor around a very cool product, Invisalign, because of Teen and a richness of all this, we are very heavily blogged, and we can take full advantage of that in very cost-effective ways.

A good reason for our PR campaign that is starting to really bear fruit now, we've been working quietly behind the scenes for the last six-plus months, and you'll see a lot more of in the coming months or so, is that all that content, all that editorial content and everything else, plays very well into that blogosphere and into consumers.

So we believe--what I'd say is total spending in consumer is down a bit year over year.

We've added to it a bit in Europe.

But we're committed to stretching the dollars we've got.

We view it as a strategic investment, and we're committed to stretching the dollars further--if Ken wants to pile on--but we have not provided any detailed information about the amount of dollars there.

No.

The only thing I'd add, again I think Tom said it well, which is we're getting more for less by doing more digital media advertising and the like.

The difference between this year and last year I would relate to more of how we're going to spend it during the year, the timing of it.

Last year we spent it more in Quarter 2 and Quarter 3, trying to stay out of the election and the Olympics, kind of way.

And then this year we're going to be spending it more evenly as we go through the first three quarters, and typically we taper off a little bit in Quarter 4 each year.

So that would be kind of how I see it playing out this year compared to last year differently.

But again, going back to what Tom said, I think it's absolutely right that getting more bang for our buck and how we're spending our advertising going forward.

Maybe one more data point, not on spending, but our goal was spending less, changing mix and mode.

We wanted to at least maintain in the same neighborhood qualified lead responses and flow.

And to this point, we've been able to do that.

Okay, so your primary metric of success is qualified lead generation.

Not primarily, but it's one that we've talked about externally.

We have a lot more data we use internally with this investment, and it's important, but what we've talked about externally is lead generation and lead flow.

And that was one of our goals is spending less, changing mix.

We wanted to at least make sure that we could stay at that level.

And there was some uncertainty there because of the economy, but we've been able to do that thus far.

Okay, perfect.

And last one on Teen.

Obviously doing fairly well there and offsetting some of the declines.

What are your goals for Teen as a percentage of case volume here over the next year or two?

We really haven't--we have internal plans, and we challenge the team pretty hard to wrestle share away from very high-quality competitors that are entrenched with share positions and orthodontists that have been doing it a certain way for a long time.

But what I'd say it's going to be a slow, steady build as we drive that behavior change, and we really haven't been more precise than that externally.

Okay.

In the past we've talked about maybe getting to 20% of a typical orthodontic practice, and yet we're already at 8% of cases here in the quarter, so I'd say it's tracking well.

Am I too low on that 20% target?

I don't recall specifically having us talk about what we think we can earn.

What we've talked about in more detail is the mix by age and the types of cases we're going after, we think there's a pretty big--that 75% out there that we've talked about that we're a small slice of today, we think opening up Teen gives us a pretty big avenue to go after more.

Frankly to be really clear, over the long term we believe patients would rather have Invisalign type products than traditional brackets and wires.

And so we'd like to set the goal that over the very long term, every patient has removable appliances, period.

And that's the long-term goal, which is an aggressive one, but that's the long-term goal.

All right.

Thanks a lot, guys.

All right.

Thank you.

Our next question comes from the line of Spencer Nam with Summer Street Research Partners.

Your line is now open.

You may proceed.

Thanks for taking my questions, guys.

I just wanted to ask you a couple of questions about--I think some of the questions have already been asked about guidance, but I just had a quick question on time that the lead is generated to the time that you guys send out the trays.

I thought that there was a little bit of a lead time between the two, and so for a particular quarter, by the time that you provide guidance, that you get a little more view than typical retail visions where there isn't as much of a lead time.

Q1, when you guided Q1 numbers, we're looking at 44,000 to 47,000 cases, and now with the 50,000-plus cases, where did that difference come from?

Did it suddenly show up in the last few weeks of the quarter, if you will?

Suddenly case shipment took off?

Or how did that really come about in terms of case shipment trend during the quarter?

Hey, Spencer, this is Ken.

A couple things that I'll make a comment on here.

First of all, we mentioned that as we came back in Q1, orthos started gaining traction as we moved through the quarter.

We got back into the game, so to speak, and we saw more volume out of the orthos in general than we were anticipating coming into the quarter when we gave our guidance.

The other piece of it is on Express.

If you recall, we changed some of our pricing.

Actually, on Express we increased the price about $150 back in January.

When we did that, when we formed our outlook our view was that we would probably see a lower level of mix coming from Express, and maybe those cases coming from full cases instead, that doctors would move away from Express.

In fact, what we saw in the quarter is that doctors, both orthos and GPs, are using Express to sell to those value-conscious customers, and we saw volume basically was consistent with prior quarters as a percent of mix, and we were anticipating that to go down.

So those were the two biggest drivers in volume being higher than we had anticipated.

Spencer, I'll pile on for a second.

There's nothing unusual in our flow or our timing or our current cycle times.

It's kind of business as usual, and we're just pushing through it.

Nothing else unusual going on.

I see.

And added to that, the follow-up question is do you--are you, based on your current guidance, are you saying that the next three months, or this month, next month and then June, you actually expect a worse performance from your current doctors who are doing the cases because of the economic situation?

Or if there are--I mean, I recognize there is the seasonality issue, but given that you were still able to ship 50,000 cases in probably three of the worst months in decades, I'm just trying to figure out where the bottom is on this story.

Whether you feel like there's a little bit of a floor, despite the environment, or that you may consider the continued downward trends as we move on to the next three months here?

Yes, Spencer, so first of all we're not out of the economy yet, so certainly we're not going to try to get out in front of ourselves in trying to take our own view of the economy and where it's going.

So we're still looking at that very seriously and how it impacts our customers, and I know Tom has made reference to that in his prepared remarks today.

As far as the range of guidance we gave of 48,000 to 50,000 cases, that's basically flat to slightly down, and the biggest impact on the downside is really orthos being out of the office again more this quarter than they are in previous quarters.

In North America.

In North America specifically.

So we're expecting that the ortho volume will be down on a sequential basis, some of that offset by international growth and seasonality.

We usually see Quarter 2 as an up quarter for international.

The other piece of it is with our training revenues, we talked about training less doctors, so we'll be seeing less training revenues from that as well.

Appreciate that.

That's helpful.

One final question I have is whether it's in the teen population or adult population, I would expect that a certain number of patients who are interested in orthodontic procedures or treatment--if you think about competing against more of this wire-driven treatment versus traditional braces treatment versus Invisalign, are you seeing more wins against them nowadays versus, say, a year ago?

Or is the split very similar?

So if you've got ten cases that are available for either braces or Invisalign, are we seeing a growth in how many cases you take away from braces now versus before?

Or are you still seeing a similar kind of pattern as compared to a year ago?

The short answer is yes, we believe we are taking some share from the traditional brackets and wires manufacturers, and we believe part of that is being driven broadly with Invisalign.

But specifically we are re-engaging with orthos that were small, medium or large users of Invisalign with products like Teen that are giving us an opportunity to become a much more significant part of the mainstream part of their practices, which is teens and kids.

So short answer is yes, we believe we're getting share at a time when even the other manufacturers are under a little pressure.

But it's good news.

Great.

Thank you so much.

At this time, there are no more questions in queue.

I'd like to turn the floor back to you, Ms.

Stacy.

Great.

Well, thank you, everybody, for joining us today.

This concludes our Q1 earnings call.

We look forward to seeing you at upcoming conferences.

We'll be at the Bank of America Merrill Lynch conference in New York on May 12 and at the Deutsche Bank conference in Boston on May 19.

Thanks, and have a great day.

Ladies and gentlemen, this concludes Align Technology's teleconference.

You may disconnect your lines at this time.

Thank you very much for your participation and have a wonderful afternoon.