愛齊科技 (ALGN) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Align Technology second-quarter 2009 financial results conference call.

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

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce Ms.

Shirley Stacy of Align Technology.

Thank you Ms.

Stacy, you may begin.

Good afternoon and thank you for joining us.

I am 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 PRNewswire and First Call, detailing Align's second-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 12 months.

A telephone replay will be available today by approximately 5:30 P.M.

Eastern time through 5:30 PM Eastern time on August 6, 2009.

To access the telephone replay, domestic callers should dial 877-660-6853 with account number 292, follow by #, and conference number 327280, followed by #.

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

As a reminder, the information 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 third 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 fiscal quarter ended March 30, 2009.

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 has been posted on our website at investor.AlignTech.com under financial releases, and has been 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 second-quarter conference call slides, on our website.

Please refer to these files for more details.

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

Tom?

Thanks, Shirley.

I will begin by covering some highlights from our second quarter, and briefly discuss the progress we've made toward achieving our strategic initiatives.

Ken will follow with additional detail on our Q2 financials and outlook for the third quarter.

I will come back with some closing comments and open the call up to your questions.

Overall, we had a good quarter with better-than-expected results across the board.

Q2 revenue increased to $76.3 million on case shipments of 53,000 driven by strong international growth and continued uptake of Invisalign Teen.

Non-GAAP operating margin was 8.7%, and non-GAAP EPS was $0.07 a share.

Now let me turn to an update on our strategic initiatives.

As you know, the key elements that form our strategy to drive adoption of Invisalign worldwide include initiatives to continue product innovation, enhance the customer experience, improve consumer demand creation, and drive international expansion.

During the quarter, we made progress on each, which I will cover briefly.

I will also discuss the Invisalign product proficiency requirements, review some of the initial feedback we've received, and share a few leading indicators that we are monitoring closely for this program.

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

During Q2, we trained a total of 1,480 new doctors, slightly more than anticipated.

Of those, 965 doctors were trained in North America and 515 were new international doctors.

We continue to evolve our approach to new doctor education with increased focus on ensuring that the doctors we train are more likely to integrate Invisalign into their practices.

In addition, with the new Invisalign proficiency requirements, our overall continuing education focus has shifted a bit towards supporting product adoption rather than just expanding our customer base.

Total utilization for Q2 increased sequentially to 3 cases per quarter, as compared to 2.9 in Q1 and down very slightly from the same quarter last year.

International utilization increased both sequentially and year-over-year.

In North America, the utilization rate for orthos increased slightly from Q1 and as expected was down from the same quarter last year.

For GPs, utilization remained relatively flat compared to Q1 and down from the same quarter last year as well.

Our Q2 results continue to suggest that most North American GPs remain on the sidelines, and their procedure mix has shifted to more traditional services rather than actively marketing Invisalign or other high-value procedures.

Among North American orthos, strong sequential growth of Invisalign Teen drove and increase in utilization.

This was particularly the case for the core group of active customers who began using Invisalign Teen when we expanded a pilot in May of last year.

This is consistent with our view that orthos will steadily adopt Invisalign into practice over time as they experience outstanding clinical results from their finished cases.

Among international doctors, Q2 is historically a strong quarter and case volume increased 22% sequentially.

Q2 growth was strong across all products and major countries with Invisalign Teen contributing nicely.

On a year-over-year basis, case growth increased compared to same period, driven in part by international availability of Invisalign Express and Teen.

I will now move to an update on our products, focused primarily on Invisalign Teen.

It's important here to note that, as we discuss product performance, with the exception of Vivera, our comments reflect cases shipped instead of revenue, which is net of deferrals.

Invisalign Teen is now a key contributor to our results.

It has been available in North America for a year and was launched internationally on March 2.

In Q2, total Teen case shipments increased 53% sequentially to 11% of volume, up from 8% in Q1.

Not surprisingly, some North American orthos are increasingly using Invisalign Teen instead of the full product on their adult patients because they like its additional features.

Over time, we believe this trend may also extend to Europe, as international doctors become more accustomed to using the Teen product.

In addition to Teen, we continue to make solid progress with other new products.

In Q2, total Invisalign Assist cases increased nearly 35% sequentially to approximately 2% of volume.

Vivera retainer revenue, which is reported in non-case revenue, increased 24% sequentially, and we are pleased with the growth these products demonstrated in Q2, albeit off a small base.

On the consumer marketing front, we continue to generate effective demand for Invisalign and at the same time have begun to test and understand the response to the new Teen campaign.

You may recall that, last quarter, we introduced a very innovative Teen PR campaign to reach and educate prospective Teen patients and their parents all further engaging those practices with a large Teen patient base.

The Teen campaign includes national PR and digital media, including website, search, social media and mobile placements.

It is still early in the campaign but we are already seeing lists in ad awareness and familiarity for Invisalign Teen in the marketplace.

The aggressive digital component of our new media mix applies to both teen and adults, and early results suggest it is driving a strong flow of new traffic to our website.

This activity is helping us drive better efficiency in creating demand in the form of qualified leads when compared to last year.

Teens and parents continue to engage with the Invisalign Teen brand on social networks and online blogs.

Many posts can be found in the top parent websites such as Mommy Blogger, and some of the social network sites such as Facebook and YouTube have seen exponential growth in Invisalign-related activity.

We continue to ensure that Invisalign Teen is engaged in activities and visible in places where teens spend a lot of their time.

Following our appearance on the Tyra Banks show in May, Invisalign Teen seen in American Cheerleader magazine.

We were also hosting a "What Makes You Smile?" booth at the US Open of Surfing, which began today in Huntington Beach, California.

Teens can record Invisalign Teen branded videos and photos of themselves and share them on social networks or via e-mail.

Later in August, the "What Makes You Smile" booth will join the [Do] tour, a multi-city action sporting event featuring skateboarding, BMX and freestyle motocross.

As part of the Invisalign Teen activation at these upcoming lifestyle events, we will be working closely with our local doctors to help field parent/teen questions and ultimately help drive cases.

Next week, we will kick off a back-to-school media tour showcasing Invisalign Teen on morning TV programs in local markets as part of live spots on cool tech for teens.

These teens know what's cool, and they love the idea of a great smile without wires and brackets.

Now, I would like to spend a few minutes on the new Invisalign product proficiency requirements, which require every Invisalign provider in North America to start at least ten Invisalign patients in treatment, which we measure by case shipments, and complete at least ten Invisalign specific CE credits each calendar year to remain in active provider status.

Align's vision is to help our customers create healthy, beautiful smiles for their patients, healthy, beautiful smiles.

We focus every day on helping ensure patients get great outcomes and our customers' practices are as successful.

So along with ongoing improvements to our products and expansion of the product lineup, including the addition of Invisalign Teen and Assist, we continue to evolve our initial training, startup and ongoing support programs to help ensure that Invisalign-trained doctors have the product knowledge and experience to fully integrate Invisalign into their practices.

We are committed to doing everything possible to help doctors achieve success with Invisalign.

But ultimately, treatment outcomes are in the hands of our customers.

As awareness and acceptance of Invisalign has grown, so has consumer demand and the size of our trained doctor base.

Today, there are more than 43,000 Invisalign-trained doctors in North America.

Each year, about 3 million perspective patients visit our North American website looking for a qualified provider.

Align wants to confidently direct any one of those potential patients to any Invisalign practice and feel comfortable that the patient will receive the best treatment experience possible.

Over the past year, we evaluated several strategic initiatives to address this issue.

We had extensive discussions with our clinical and academic advisory boards, key customers, shares of leading Ortho departments, and deans at major dental schools.

We concluded that there is simply no other way for Align to ensure a doctor's knowledge of the Invisalign system and Invisalign-specific skills than by establishing a baseline through continuing education and hands-on product use.

After we established these proficiency requirements, we conducted a top-down analysis of the likely impact on our customer base and the business.

We developed a detailed model which identifies the total number of doctors who treat less than ten Invisalign patients a year, and grouped these customers into three tiers -- those that treat seven to nine, those that do for to six, and those that do zero to three cases per year.

We then applied reasonable assumptions about trends and utilization to each of these tiers project the percentage of customers that would either increase to ten or more, or potentially discontinue Invisalign.

I am not going to through all of the analysis in detail, but what I can tell you is we believe a vast majority of customers in the seven to nine group move up to ten or more, a portion of the customers in the for to six group move up to ten or more, and a number of those below four may eventually choose to continue with Invisalign.

In addition, we asked our sales management team to prepare a bottoms-up view for each region, territory and account in order to project how those accounts would likely respond to the proficiency requirements.

The analysis for both top-down and bottoms-up views were consistent and gave us confidence that we could manage through this without any material impact to the business in the near term and drive growth over the long term.

Since the launch of the program, we have been monitoring several leading indicators on a weekly basis in order to track progress and measure the effectiveness of the program relative to our expectations.

The new proficiency requirements represent a significant change for our customers, and we have received a lot of feedback, both positive and negative.

If you have been out on the message boards or have done channel checks lately, you probably know that a lot of Invisalign-trained doctors are pretty surprised by this new program.

Proficiency requirements are routinely used in other medical device sectors for other procedures, but they are not very common in the dental industry.

The decision to implement proficiency requirements was a business decision, yet the responses from some customers have been very emotional.

On a base of over 43,000 trained doctors in North America, to date Align has received complaints from approximately 2,000, or around 4.5% of trained doctors.

As expected, the vast majority are from low-volume doctors or from practices that have never submitted a single case.

In addition, of the 2,000 negative responses we've received, 1,400 were based on a form letter drafted by the Academy of General Dentistry for us by its membership.

Curiously, around 170 of those form letters were from dentists that had never even been trained to be an Invisalign provider.

We continue to respond to the complaints we receive as well as monitor those posted on various message boards.

We are reaching out to our customers, educating them on the program and developing plans to help them achieve the proficiency requirements by the end of the year.

In many cases, after talking with their sales rep or other Align Teen members, their attitudes change and they begin focusing on how to move their practices forward.

In addition, we are engaging with a number of the governing bodies for the dental industry like the American Association of Orthodontists, the American Dental Association and the Academy of General Dentistry to make sure they know that we are listening to them, that we empathize with any concerns from their constituents, and that we are committed to their success.

Align has also received tremendous support and accolades from customers across North America, including comments from practices thriving with Invisalign despite being in some of the most economically challenged communities.

For those practices to be prospering in this economy tells us there are still ample opportunities to do ten cases a year, or what amounts to less than one case a month.

The doctors who oppose the proficiency requirements are definitely more outspoken, but many customers recognize that the proficiency requirements are intended to ensure the best possible treatment outcome for their patients and ultimately greater success for their practices.

Usage of our online CE courses are one of the leading indicators that we have been monitoring weekly, because there would be no reason for doctors to continue to take Invisalign-specific CE unless they intend to move forward with Invisalign.

To date, I am pleased to report that, since the announcement, online CE course participation has soared, particularly for our lower-volume customers, those with three or less cases per year.

Further, we just hosted roughly 800 doctors and staff members, representing about 300 GP practices, at our biggest annual clinical education and practice development event, Invisalign Summit in Las Vegas.

Roughly 35% of the practices at the Summit had already the proficiency requirement of ten annual case starts, meaning the other two-thirds came to the summit knowing about the proficiency requirements and planning to energize their practice.

By simply attending the summit conference, all of the doctors were able to receive 11 CE credits, efficiently meeting of the new CE requirements in one weekend.

It is still very early in the implementation of this program, but overall the leading indicators that we are watching suggest that our plan is on track and in line with expectations.

We continue to believe that there will not be any material effect to our business in the near term.

Over the long term, we believe that the proficiency requirements will help ensure successful integration of Invisalign into practice and great treatment outcomes for patients.

Before I turn the call over to Ken, I would like to comment on the press release we issued Monday regarding the patent lawsuit with Ormco.

Align has had ongoing litigation with Ormco since 2003, when they sued Align for patent infringement and Align won a sweeping summary judgment.

Ormco appealed that decision and in August 2007, the Federal Circuit Court of Appeals ruled that 86 of Ormco's 92 claims were invalid and not infringed by Align.

Ormco pursued those six remaining claims, which relate generally to a process of gathering and organizing tooth data, in a lawsuit against Align which was tried by a jury last month.

On June 25, the jury delivered a verdict in favor of Ormco.

We believe that the facts and the law do not support the jury's finding of infringement and are seeking to return the verdict in post-trial motions.

As expected, Ormco has filed a motion for a permanent injunction and other injunctive relief against Align.

We believe that Omco's motion for a permanent injunction should be denied and will vigorously oppose it.

We are very disappointed with the verdict and believe that the jury got it wrong.

However, this is just another phase of ongoing litigation with Ormco.

We have successfully defended against Ormco's claims in the past and will continue with the process.

This verdict doesn't enable Ormco or anyone else to compete with us in clear aligner orthodontics, as it does not affect Align's patents in any way.

I will now turn the call over to Ken for more detail on our second-quarter financials and our outlook for Q3, and then I will come back for a few closing remarks.

Thanks, Tom.

Now let's review our second-quarter financial results, beginning with the income statement.

Q2 revenue and shipments were up sequentially from Quarter One, significantly better than expected.

Q2 net revenue of $76.3 million and case shipments of 53,000 increased 8.8% and 5.9% respectively.

As Tom mentioned, strong international growth and continued adoption of Invisalign Teen contributed significantly to our results.

Sequentially, we also benefited from a full quarter of shipments in North America at the new pricing, which took effect in January, as well as the benefit of exchange rates associated with international shipments.

This was partially offset by an increased amount of deferred revenue related to new products such as Teen.

On a sequential basis, international case volume revenues increased 22% and 27% respectively.

On a year-over-year basis, international case volume increased 24%.

However, revenues only increased 10%, largely due to the impact of foreign exchange rates as the dollar has strengthened against the euro.

Q2 revenue by channel consisted of 42% for North American GPs, 28% for North American orthos, 24% for international, and 6% for non-case revenue, which includes the retainer business, training revenues, and ancillary offerings.

Q2 gross margin was a record 76%, compared to 75.2% in Quarter One and 74.7% in the same quarter last year.

The sequential increase in gross margin largely reflects higher ASPs in both the domestic and international regions.

Q2 gross margin included $406,000 in stock-based compensation expense, compared to $386,000 in Quarter One and $471,000 in the same quarter last year.

Q2 GAAP operating expenses were $51.7 million, compared to $47.4 million in Quarter One and $55.8 million in the same quarter last year, and included stock-based compensation expense of $3.9 million, $3.3 million, and $4.3 million respectively.

Q2 GAAP operating expenses reflect the increased spend associated with the Invisalign Teen PR campaign, several major customer events, including our European summit a the AAO tradeshow, and costs related to the Ormco litigation.

Also, in Q1, GAAP operating expenses included a $1.5 million insurance reimbursement of legal costs associated with the OrthoClear litigation.

Q2 non-GAAP operating expenses were $51.3 million, compared to $46.5 million in Quarter One, excluding restructuring charges of $409,000 and $900,000 respectively.

Q2 will be the last quarter that we will be recording restructuring charges related to the October 2008 actions.

While the transition of shared services to Costa Rica is now complete, we know we still have a lot of room for improvement and will continue to focus on achieving that same high level of customer satisfaction in Costa Rica as we have had in Santa Clara.

In Q2, we generated non-GAAP operating income of $6.7 million or 8.7%, compared to $6.2 million or 8.8% in Quarter One and $3.9 million or 4.8% in the same quarter last year.

On a year-over-year basis, non-GAAP operating income increased 72%, or 390 basis points, as a result of our continued focus on expense management.

Q2 GAAP diluted EPS was $0.07, compared to $0.04 in Quarter One and $0.06 in the same quarter last year.

Q2 non-GAAP EPS was $0.07, unchanged from $0.07 in Quarter One.

There was no difference between GAAP and non-GAAP EPS in Q2 of 2008.

Now, let's move onto the balance sheet.

Cash, cash equivalents and short-term marketable securities were $143.1 million compared to $110.2 million at the end of 2008.

In Q2, we generated roughly $18.5 million from cash from operations, compared to $10.6 million in Quarter One and $10.5 million in the same quarter last year.

Q2 DSOs were 63 days, compared to 66 days in Quarter One and 57 days in the same quarter of last year.

In Q2, deferred revenue on the balance sheet increased by $3.5 million, or 17.7% sequentially, to $23.1 million.

This primarily represents the revenue deferrals associated with new products such as Invisalign Teen and Assist.

Deferred revenue from new products will begin to be recognized in the P&L as the initial cases complete towards the end of 2009 and early 2010.

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

For Q3, we expect revenues to be in a range of $71 million to $74.5 million on case volume of 51,000 to 53,000 cases.

The summer is typically the busiest time for ortho practices that have a high percentage of adolescent and teenage patients because most parents want to get their teens into treatment before school begins.

As a result, adult appointments, including Invisalign case starts, are often pushed further into the late summer or early fall.

This year will be the first time we will be able to compete for some of these teenage starts.

We believe the availability on Invisalign Teen will help moderate the historic trends we have typically seen for North American orthos.

Over time, as more orthos continue to use the Teen product, we will be able to compete for a greater share of share.

As case volume for new products like Teen continues to increase, a greater amount of revenue will be deferred to the balance sheet.

Keep in mind that approximately 24% of Invisalign Teen revenue is deferred upon initial shipment for the six free replacement aligners.

This revenue is recognized when the replacement aligners are used for when the case completes.

Among North American GPs, we continue to believe that most practices will remain conservative because of the economy and not actively market Invisalign or other high-value procedures.

Given the typical summer seasonality in Europe, we expect international to be down on a sequential basis.

As international volumes have increased as a percentage of our worldwide mix, this may have a more pronounced impact than in prior years.

Worldwide training revenues are expected to be lower as we typically train fewer doctors during the summer months due to holiday and vacation schedules.

We are now anticipating to train approximately 3,000 new doctors in 2009.

We expect Q3 gross margin to be in a range of 75% to 75.5%.

In Q3, we expect GAAP operating expenses to be in the range of $49 million to $50.5 million.

During the quarter, we will begin to realize the cost benefits from the transition of shared services to Costa Rica which will be offset somewhat by continued investments in geographic expansion, media advertising and ongoing litigation with Ormco.

In Q3, we expect GAAP operating margin to be in a range of 6% to 8% and GAAP EPS to be in a range of $0.03 to $0.05.

We expect the effective tax rate in Quarter Three to be in the range of approximately 35% to 40%.

We expect diluted shares outstanding for Quarter Three to be approximately 68 million shares.

From the balance sheet perspective, cash on hand at the end of Quarter Three is expected to be approximately $150 million to $155 million, and DSOs to be in the mid 60s.

For fiscal 2009, we've continued to expect revenues to be down relative to fiscal 2008, but given our solid performance in the first half of the year, the gap has been narrowed.

For fiscal 2009, we expect stock-based compensation expense and diluted shares outstanding to be approximately $16.8 million and $68 million, respectively.

Now, I will turn the call back to Tom for some closing comments.

Thanks, Ken.

In summary, we had a good quarter, and I am pleased with our results.

Over the past year, we've made significant progress towards our strategic initiatives and despite a challenging economic environment have focused on what we can control, such as the launch of Invisalign Teen and Assist, expense management and cost reduction, and improvements in operational efficiencies.

During Q2, we completed the transition of shared services to Costa Rica, which now provides comprehensive services to our customers and internal organizations, as well as the transition to run the Juarez, Mexico manufacturing operations as our own facility.

As you can see from the results over the first half of 2009, we are beginning to see the benefits from our new products, efficiencies from productivity and process improvements, as well as continued focus on managing operating expenses, resulting in operating leverage for our business.

We are committed to continuing investment in our key strategic initiatives and driving overall profitability towards our long-term financial model targets.

Now, before we move to Q&A, let me remind you that the litigation with Ormco is ongoing and it would be inappropriate for us to comment beyond what we have already communicated publicly.

As the case progresses, we will inform you of material developments as quickly and as openly as appropriate.

Now, let's to the operator for some questions.

Thank you.

Ladies and gentlemen, we will now be conducting a question-and-answer session.

(Operator Instructions).

Derek Leckow, Barrington Research.

Congratulations on a good quarter here.

Just I want to get some more color, if I could, on the adult segment of your population out there.

Obviously, that has been slowing down with the economy, and I just wonder if you have visibility as to whether that pace of slowdown has either gotten worse or stabilized, or is it getting better?

That's kind of what we want to figure out here.

Well, there's probably two dynamics here.

We don't think the consumer environment has changed appreciably, and we certainly don't -- maybe saying it differently, we aren't the market in dentistry because we are such a small-share player.

The two factors that are going on here is there's still a lot of adults out there that want a better smile and want Invisalign.

We have some docs, especially on the GP side, that are no longer working as hard trying to market either in-practice or to other consumers outside for any procedures like Invisalign or others.

So that is probably a dampening factor.

Everything we see tells us that there's still plenty of consumers there interested in Invisalign.

It is how do we engage them?

The second fact is certainly things like new products, like Teen, with a feature set that are allowing some orthos and others to engage some adult patients in that.

So we know the patients are there, but we don't necessarily believe that the economy is changing.

Our biggest positive factor is our penetration is still very low into a very large opportunity.

So certainly within the Teen, we are going to see some good growth here, and we have seen it and it's pretty impressive, actually.

But within that adult segment, were you just telling me that there's adults that are also being treated with the Teen product and that we haven't seen an improvement as a --?

I am trying to look at this from a velocity -- downward trend -- or is it sort of flattening?

Is the corresponding utilization rate, as it relates to those -- that adult population, is that stabilizing?

What I would say is, if you're asking questions about the broad economy, we are probably not the right player to comment on that.

I would look to the retail sector or others to speak broadly about consumer.

What we do know about our patients and what we do know about our practices is several things.

First, we continue to have very strong demand and interest in the product.

Patients of all ages are shopping more aggressively both for price and for finding the right practice, and that's meaning that Ortho, GPs, everybody are working a bit harder, presenting the case, closing the case, and they are getting shopped.

So that is probably extending their process of getting the case closed and started.

Then the third piece is orthos especially that have had great experiences with Teen on their Teen patients where they initially started are starting to use the Teen product on some of these adults because they do like the feature set.

Okay, I see.

All right.

So it does have application there as well.

Absolutely.

Then finally, just a question on operating expense line here.

I mean, you have some sort of one-timers in here with some of the ramp-up expenses.

Can you guys give us a sense for what the incremental spending would be and get us to a core level of operating expense?

So what we've said all along is that as we start entering the second half of the year, we will start seeing the benefit of the Costa Rica transition that we made.

We will start seeing some of that in Quarter Three.

That is reflected in the guidance that we gave for the quarter.

As I said, we have some offsets to that with some of the legal spend going on for Ormco, but -- and then the additional advertising that we are spending in Quarter Three.

As you think beyond Quarter Three timeframe, typically during the summer months we have our significant customer events.

We have gone to one event per year instead of two events per year for our summit.

So you'll see that reflected in the numbers as well.

So if I were to -- sorry, go ahead.

I was going to say, so going for the remainder of the year, for Quarter Three and then you look into Quarter Four, in Quarter Three we had a significant customer event, as Tom said, so Quarter Four, we are not going to have an event in Quarter Four, so we will see some savings in Quarter Four for the event.

But we will have to see how other things play out as well.

And again, we are starting to see the benefits from our Costa Rica transition, started seeing that in Quarter Three.

We will continue to see the same level in Quarter Four.

In Quarter Four also, we tend to start winding down our TV advertising around the late-mid-November timeframe, so we will see some media spend go down in Quarter Four as well.

So maybe it kind of trails off then.

So if I were to try to quantify media spend, legal expenses, incremental, would I be safe in that $2 million to $3 million kind of range?

You know, it is really hard to say, especially on the legal front.

Again, on the -- pretty much each year for the media spend, we are pretty evenly split this year between Quarter One, Two and Three.

Then again, we taper off more in Quarter Four.

So it's hard to say if it's $2 million to $3 million exactly, but from a directional point of view, I think you are thinking about it the right way, Derek.

Tao Levy, Deutsche Bank.

On the international part, which is obviously really strong this quarter, can you point to anything specific that happened?

You know, was there a flurry of maybe new sales hires in certain countries, or advertising in (inaudible) exceed the growth in Europe?

Was it the Asia-Pacific stuff starting to kick in, like Japan?

Any help there would be great.

Sure.

You know, most of the game is core Europe.

Volumes are holding up in Asia-Pacific.

We don't get as much impact because it is through a partner, but most of the game is in four or five key countries in core Europe.

If I go through them in kind of general order of impact, the UK continues to be very strong.

They certainly are -- while the economy isn't completely recovered, there is strong activity for us there.

Italy is very, very strong.

Again, separate from the broad economy, we are doing very well there.

Germany to a lesser extent, and I think that's more of where you are in Germany and how well the doctors have carved out a position.

And we go from there.

Again, we are still very -- we are more under-penetrated in Europe in those countries than we are in the US, and we still have lots of headroom in the US.

So there's still opportunities for these docs to build their practices there.

Do you feel like, as you went through the quarter -- I mean was the international a surprise in terms of the strength this quarter, or again it was as you guys had expected?

Well, I guess what I would say is Q2 is typically a very good quarter for Europe because the doctors work really hard and then disappear for much of the summer.

And they have a lot of patient activity, they work more days, and then they come back very late in the quarter for us.

So I guess that and was consistent with our expectations.

If there's a little bit of upside in Europe, it is how quickly the interest has evolved around -- and how quickly doctors engage with getting trained on the new Teen rollout that was just launched March 2, and Express.

So while these things aren't really material in numbers for the quarter, if there's an upside, in our view, it is that the interest is there for those practices in the stream of new products we are bringing to Europe now.

As I start to think about the model going forward the next several quarters and as you implement the new comply to the proficiency program, and based on the feedback that you've started to get, is there sort of a percentage that you can point to of folks that we should kind of take out of doctors who are currently submitting today, and then kind of substitute it by higher utilization?

Does that make sense?

Well, yes, the question makes sense.

We are not sure we can answer it at this point, and we are just two months in, not even.

To be very clear here, we would love to pull every customer, every practice along with us to help them be successful.

That's our goal.

The primary goal is that the patients are thrilled and the practices are successful.

It's just too early.

We've got months and months to go before we are getting close to the end of the year, and I think, Tao, it is just too hard to call at this point.

My last question on the deferral piece -- as I start to think about Q4 and in 2010, do you have a sense of when a patient goes on Teen and then you end up collecting the deferral?

Is it going to average about a year or 18 months?

So a Teen case probably will take as long as a full case to complete.

So let's just use an average of about a year from a case starting to a case completing.

As the teenagers use the replacement aligners, we would certainly recognize the revenue as they are being used.

Interestingly enough, we are finding out that, to date at least, they are not losing them any more than an adult would lose.

So right now, we are looking at most of that revenue probably being recognized as the case completes a year after it's started, some small percentage of that would get recognized on an as-you-basis as they use that.

So that (multiple speakers)

(multiple speakers) quarterly, Q2 2010 basically whatever was deferred in Q2 '09, just kind of (multiple speakers)?

Yes, I think that's a fair assumption.

It is certainly dependent on case length and so on, but if you use an average of about a year and something that is shifting Quarter Two this year, that those replacement aligners would either be recognized at the latest probably Q2 of next year.

Okay, great, thanks a lot.

Sean Fitz, Stephens Inc.

Guys, we are trying to kind of walk through a scenario analysis and come up with some kind of tangible data in terms of the proficiency program.

Tom, you kind of alluded to maybe three segments of your customer base -- seven to nine cases per year, four to six, and zero to three.

Could you provide us some kind of just bookends in terms of what percentage of the docs fall in each of those three categories?

You know, the short answer is no, we are not doing that at this time, but I would point you back towards the analyst day presentation in detail which we provided that you could do your own assessment of that.

We updated it at the end of the other quarter.

Beyond that, as you develop your scenario, I would point you towards Shirley and Yin to calibrate, at least, with the analysis you're doing.

Okay, so we have done a little bit in some of the data from the analyst day.

If we look at the slide where you kind of break down the cases per quarter, it looks like, if you look at just the clinicians that are doing one case per quarter, so four a year, that you've got about 5,000 GPs in that segment and about 1,200 orthos in that segment.

So those clinicians would have to more than double production in order to meet your proficiency requirements.

I guess I am trying to grapple with how some of those cases don't just away.

I guess you are advocating that there is going to be no impact to your business.

It seems like you've got maybe -- you're looking at 5,000 GPs and 1,200 orthos that are only doing four a year.

So I guess I am just trying to sync that up with your all's opinion and analysis that suggests there won't be any impact.

So if you could kind of maybe help me understand where you think those cases go and how that doesn't negatively impact your case volumes?

Sure.

You know, the problem is the devil is in the detail here for you and it would probably be more helpful if you had a very detailed view showing where practices are and the number of practices that were actually increasing versus static, versus trending down.

Without that, it is just averages and I realize that is difficult for you.

With that said, in a given year, I think the last time we updated this view, we had about 19,000 GPs at least submit a case in the last trailing four quarters.

I think that was as of Q1 when we did this.

We have over 5,000 orthos that at least did a case.

This is just North America.

So what you know is there's a very long tail, and some very high volume docs and then the cascade.

So what matters inside of that is directionally where those practices are going, and it literally does -- the averages can take [you] sideways.

What really matters inside each territory, each region and the business in whole is which practices are actually investing in Invisalign and effort in growing and practice from two a quarter to four to six to eight.

If you look at that -- and this is exactly what we did top-down -- at the trending week over week, month over month, quarter over quarter, and then asked our sales team to do -- you get a very consistent view that says, "Boy, if there are those that decide not to put the incremental effort into go-forward, we believe they will more than be made up for by those that go forward." Now, that's the nearer term and why we said we don't expect material impact this year.

Longer-term, we think this is very positive for the business, in numerous ways, to have a base of customers that are more committed in practice that we can accelerate the pace of innovation and product evolution and new tools and new approaches to -- at the same time we create more leverage in the business in terms of our support model to bring them along.

So again, it really matters to look at velocity and practice and what trending is going on inside those averages.

And that's about where I've probably got to stop for today.

Okay, Tom.

Just so this deadline -- if you don't meet the proficiency requirements as of January 1, 2010, you are cut off?

Am I understanding that correctly?

Well, you know, look.

It's not -- we are trying not to be harsh here.

What we're saying is, on all the things we could do, this is an appropriate step.

You can do several things.

First of all, you're going to get to finish your cases.

We are not firing anybody here, as a discussion I had with one customer.

In fact, we will break our backs to help them be successful in practice, and we will get reps in there and clinical support and whatever else they need to do.

So for an incremental bit of effort on the practices part, and we've got -- now we've got five months to go get after -- four full months -- and a lot of activity remaining in the year, and we've got the field team already out there scrambling on them.

We will help them do the things that help them get the practice rolling.

If they don't meet that then they've got a couple of options.

They can continue the cases they are doing, finish those cases.

We will support them to do that, and then they can discontinue use of Invisalign, or they can finish those cases and while they're doing that re-enroll in a new CE program, get restarted in the practice.

We are not trying to make money on training; we are trying to get them committed in practice and skillful at using the evolving skill-based technique with a dynamic part that changes through the course of treatment.

So our goal is not to fire anybody.

Our goal is to help bring every practice along.

That is how we are approaching it.

Thanks, Tom.

Great.

The last question -- ASP for Teen relative to your core product, could you just remind me where that shakes out?

Yes, ASP for core product is 15.9, and for the Teen products it is 16.49, so $100 more for the doctor.

Taylor Harris, JPMorgan.

I have a couple on the quarter and then want to talk about the proficiency program as well.

So the quarter was surprisingly good.

I am just curious.

In the US were you more surprised with the adoption of Teen or with the stability in the adult business?

So, when we came into the quarter, if I step back, Taylor, and we think about the Ortho side of the business, last quarter we said that ortho was starting to get back in the game.

We've certainly see them continue to do that.

They are having to work harder than they have in the past; they are having more consults than they have in the past to close the cases.

But it is their sole source of income, so those doctors are working very hard right now as we see it, and they've continued to see nice case volumes coming in from those doctors.

As Tom mentioned, the Teen product certainly has helped, as a lot of those doctors are starting to integrate it into their practice, and they have started using some of the Teen products on adults because they like the features.

So that was probably a little bit better than we expected.

We knew doctors were going to be out of the office a little bit more in the quarter, but they've also set more time aside to do consults in their weekly schedule as well so they can get the same number of cases closed and move forward in their business.

On the GP side, as we said, we still see them sitting more on the sidelines doing more core procedures in their office, not really pushing so much Invisalign or other high-value procedures.

So that's kind of the phenomenon we saw.

So both of those we saw play out, but I would say the orthos just are working really, really hard right now to continue to sell cases.

Okay.

One last one before we get to the proficiency program -- obviously, like you said, the summer is a big season for teenagers, so any early read from June and July on whether we are going to have -- how big of a step-up we could expect to have in Invisalign Teen?

I just want you to calibrate expectations for us as we get ready for the third quarter.

Sure.

Taylor, you know, I think we are very, very satisfied if we get slow, steady progress.

Again, the docs that are most likely to be more aggressive and assertive about using Invisalign are those that got started earlier.

There was a phasing in the case experience for those doctors.

The practices that are now doing in some cases close to 100 cases a quarter, lots of teens got started very early in the pilot process.

So we think that progression has to happen; they have to see those great finished cases before they are really comfortable kind of featuring Invisalign.

So slow, steady progress -- look, we will be happy if we don't get crowded out as much as we always did in the summer start process.

You know, Q3 was typically a tougher quarter for us because adults got pushed to the side.

So what we are hoping to do is just compete for a little more of that and I think that's where we are headed.

Okay, that makes sense.

So Tom, on the proficiency program, you mentioned that this is a business decision.

I just want you to clarify and spell out for us what exactly that means.

I can think of a couple possibilities.

Maybe you could comment on these.

One would need that low-volume doctors just aren't giving patients a good enough clinical experience, and so they are bad for the brand, perhaps.

The second would be you get patients who to low-volume doctors, and they end up getting actually dissuaded from using the product.

So obviously you don't want that happening.

So, maybe comment on those or talk to us more broadly about the business decision here.

Let me go back.

I am not going to disagree with either of the assertions you made but let me back to a higher-level goal, which is we think we've got a terrific product and great technology.

The only way we are going to continue to build this business for the long term is if patients get great outcomes and practices are successful, and we find a way to help reach the tens of millions of people that simply aren't willing to use brackets and wires but want a better smile.

That is the whole game.

So yes, we believe it's very important about what being an Invisalign provider means, and we think it's -- we are willing to support them, work with them, create demand for them.

But by the same token, we have some customers that just put a very low modicum of effort into using the product and might go two years between a case.

There's a very different -- you used the words "patient experience".

That's something we use here.

For a practice like that, it's not a good or bad practice; that's not our job to judge.

It is what the patient experiences and how easy it is for that practice to get that result.

Because the product isn't the same as it was two or three years ago and it, frankly, isn't the same as it was six months ago.

So for that reason, starting with the patient and wanting to ensure that patients get great outcomes and continue to be thrilled with their new smiles from Invisalign, and then knowing that that's what's going to lead to great success in practice for the docs, or those RGPs, that's what we're about.

Now the second part is that really relates back to how efficient or effective we can be at doing that.

An outsized number of the calls and support effort that goes towards supporting our large customer base goes towards supporting those very low-volume customers.

The typical way we do that is to help them but then engage the sales rep to get back into that account and encourage them to go to study clubs or workshops or continuing education.

We've made it so easy now.

We have online clinical education; we have study clubs and workshops in cities all over America and in Canada and in Europe.

When a practice refuses to even do the basics of staying -- doing online clinical education, either lunch break or in the evening or on a weekend, on demand for their schedules when they aren't willing to even put a basic effort into trying to market the product and deliver the kind of result we are all looking for, then at some point we can't invest effort in helping them do that.

So what we are trying to do is to help them.

We want them to elect to go forward with us.

We are going to make it really easy for them to do that, but after a lot of advice from clinical education experts and deans of dental schools and all of that, they collectively believe there is a balance.

They've got to get the continuing education to stay current in the evolving technology, and they've got to get a certain number of at-bats with the product to practice it.

That's how we got to where we were.

Okay, thank you.

My last question -- you know, I think everybody looks at this big number of cases being done by low-volume doctors, and they say "Okay, those are going to away." So I guess my question is what are your assumptions or do you have any data around the percentage of those patients who are simply going to your website and getting directed to a low-volume doctor, who -- you know, if those doctors aren't on the website, they are going to get directed somewhere else?

Any data around that, so that we could calibrate, well, how likely are people just to -- they really want the product, they are going to go get it done somewhere?

The answer is yes.

Because the Invisalign brand has become very ubiquitous in the dental industry, patients will find providers.

What we do know -- we get lots of comments and questions and complaints from patients that over the years have said, "I went to this provider that's an Invisalign provider, and I don't think they know what they are doing.

They tried to put me in braces, or slap full-mouth veneers on me or whatever they were going to do.

I want Invisalign.

My friend has Invisalign; I want Invisalign.

Can you recommend another doctor?

And we do that.

We want being an Invisalign provider to really mean something, and we intend to make that even more worthwhile for the providers that are with us.

But it goes back to the patient experience, and we are going to ensure that we can all comfortably -- doctors and the Company -- ensure that any practice they get to that is an Invisalign provider is going to get a great experience and a great outcome.

Okay, thank you very much.

Matt Dolan, Roth Capital.

Good afternoon.

Thanks for the questions.

A couple of follow-ups -- first, just in thinking, Tom, about your visibility here, especially longer-term, what did you see throughout the quarter relative to your base business?

I know you don't want to comment on how the macro dental industry is tracking, but it appears that things improved month-by-month relative to your expectations.

So could you just have us maybe some commentary on the trajectory of your business in providing that upside we saw and the upside to our expectations in Q3?

With that consideration, when do you think we could see a return to growth in the domestic business?

Well, maybe I will start with that last piece.

Somebody, a company -- I forget who it was but said it well.

Maybe is the new growth story in this environment.

But I'm going to say we are pleased to be, as Ken said, closing the gap a little bit with the decline in revenue.

For us, that was one of our goals.

We didn't know if we can pull it off this year or not.

We are tracking towards that direction of minimizing that gap, and from our perspective that's a good thing.

It is not accidental; a lot of hard work has gone into that -- new products, the right effort, all that stuff.

If I step back to what has evolved in a quarter, I think Ken said it very well earlier.

That is that orthos are working harder across the board.

They are competing for cases.

They are not necessarily liking getting shopped, whether it's for braces or Invisalign or anything else, but consumers are out there looking for the best value and making sure that they've got the right practice.

What we see there is that Invisalign can be a difference maker for them.

They are more likely to give the consumer what they want if they ask for Invisalign.

Even if they are not a high-volume Invisalign doc, they frankly, maybe in their heart, they would rather use braces, but they certainly don't want that patient to walk out the door.

So as Ken said, we expected that the orthos will be out of the office a lot, which they were, given trade shows and conferences and the end of spring breaks and maybe the early part of summer, and that all was true.

But we think they've put in a lot of effort and are working very hard for those case starts.

In our case, that paid off for us, giving the patient with they wanted.

The second thing is I think, again I also said this, there's -- when we bring new products into markets like Teen and Assist in Europe, there's an opportunity to re-energize practices.

So we've got an opportunity to go back to some customers that are maybe at more of a flat level, and reengage with them in practice and say we've got some new things for you to use.

So I think not so much in the revenue per se or the case we see flow, but we measure a leading indicator, kind of this re-engagement or amount of effort a practice is putting into Invisalign.

One of the great things about new products is that presages all those -- those activities around rolling new products and new training for new products into practices usually leads to growth in those practices.

So I would say those are seeds we have been laying for the last couple of quarters, and we are just now starting to see that.

Okay, great.

Then on Teen, you've characterized the I guess expected uptick there as likely being a little more gradual over time as these orthos get comfortable with the product, but it appears that it is taking off pretty well.

Is this tracking in-line with your expectations, or are you seeing some patients coming in through whatever channel, whether it is marketing or from the office itself?

But can you help us just kind of characterize how many patients are coming as expected and how many might just be coming ahead of your expectations, and what proportion of volume can Teen become here in the next year or two?

Well, you know, you've asked about four questions there.

I think the first way I would answer it is we -- it's an evolving view for us.

This is the first significant new product we've rolled out to the ortho channel in many years.

What we do know about orthodontists and dentists is they have to touch and feel it and use it themselves, and they have to see how a case progresses and to see how it finishes.

So the good news is we ramped up our pilot in July of last year, May to July of last year.

The practices in North America that are expanding the fastest use of Teen, including doing some adults now with the Teen product -- are those that were off and running the earliest.

So I mean that hypothesis is proving true.

So we believe, as we continue to train the base, as they continue to get good results, they are going to continue to be comfortable using us on more of their core business, the teens.

So as I said before, we are happy with solid, steady progress here.

If we have an opportunity to do better than that, great, but I think that is the realistic view.

The second thing is none of the conventional brackets and wires players are going to give up share easily.

You know we are out there in a battle with them.

They dominate in market share.

You know, the major players have dramatically -- have larger sales forces, greater resources, and 100 years of experience with orthodontists.

So they've got much more money into greater resources to throw at this, so -- and they are getting there at their game.

So it's hard for us to earn that share, practice-by-practice, but we are wrestling slowly but surely a little bit away from these guys.

Okay, and the last one, a follow-up on the proficiency program.

You've touched pretty well on the rationale.

We have calculated a fairly significant percent of customers and historical volume being impacted.

So can you just finish that thought by commenting on the timing and the magnitude of the program?

Why now, and why such a blanket move?

So it's a great question.

The way usually I get asked the question around why now is given this economy.

The answer to that part of the why-now is our view is the economy doesn't look dramatically different in 6 or 12 months than it does today.

We see, if anything, some progress and some slow improvement.

But the bigger factor for us is we are under-penetrated.

The longer we wait to start initiating this, the longer -- this is a multiyear process for us of evolving how our entire base, how effective our entire base is together with us because ultimately treatment outcomes do depend on our doctor.

We are only successful if they are successful and the patient is thrilled.

So, the why-now, given the economy, it's not a great time but it's also not going to get any better.

So waiting a year or six months with a slightly improved economy has marginal to no impact on us.

Now, you could argue maybe it might have a little bit of impact on the practices, but we have yet to find any economic research that predicts strong rebounds or a V-shaped improvement anytime soon.

So I think that is wishful thinking.

The second part of this is, why so broadscale?

Now, first of all, we've spent the last year and a half to two years not just thinking about our customers and their success in patients' outcomes, but thinking about how the product evolution will play out.

You are seeing some of that with some of these new products.

There is more to come with our evolving approach around the world and our initiatives around the world, our evolving support model, the way we've dramatically scaled up the Align Tech Institute and our online, on-demand training and the kind of content and course capability we've got.

We scaled all of those elements up in advance of doing this.

We had evolutions take place with the Assist product, and changes in the way we start doctors out of the first CE, including pre-training before they get there, setting clear expectations.

So this is not an isolated event and we just said "Oh, let's just figure out how we help doctors do more cases." This was part of a much broader strategy that ties together product, consumer demand generation over time, evolution of our support model, and then ultimately how do we ensure patient success and practice success?

So this was the last element to start moving on with all those other pieces in place or in motion.

Now the third part you asked, although it wasn't in the third order, had to do with impacting a big base.

It is impacting all of our customers in one way or another.

And even some customers that are high-volume customers, first ration, if they didn't understand what we are trying to do, might have been Tuesday to say, "You can't tell me how to practice." And the simple answer is we are not.

In fact, that's not our job, anything but that.

What we are trying to say is, boy, we know the difference between a process that is successful and one that isn't, that is struggling with Invisalign.

There's a lot of moving parts here, as I said on one of the earlier questions.

We looked very closely at the trending of practices.

When we look closely at the trending of practices inside an individual territory, or in a region, or in a part of the country, we see for incremental effort what happens to get that practice to accelerate.

It doesn't take a huge amount of effort, and we literally have broken it down territory-by-territory.

We have expectations up out what is going to happen.

So if I back up, the first thing we expected was we would get to this process of explaining it and defining it and understanding it, and then engaging with those practices that wanted to get going.

All of those things are happening.

Those practices and others are going on to get their online education out of the way.

"Let me go back and re-engage; I haven't been using it very much.

Let me see what's new.

Gee, ClinCheck is really new.

Man, I've got to get going.

I guess I didn't know that feature was there.

Now let me get my rep in here and let's get going on some initiatives.

What can we do in our office?

What is local best practices for who is really successful?

How can I get back in the game?"

Our reps tell us, territory-by-territory, the practices that are trying to accelerate are taking all of those steps to reengage, and there will be those practices that choose not to forward.

We want that to be their choice, not ours.

We are trying everything we can to engage with them, to help them move forward and to be successful, but ultimately if they choose not to forward or not now, then that is ultimately their choice.

We would be happy and we would be thrilled if they would all come along but realistically we know not every practice is going to want to put that incremental effort in.

So with that said, I think we've beat this a little bit to death, but we view, in the near term, no material impact on the business from all those moving parts -- in the longer term, a real positive story that starts with great patient success and then moves onto great outcomes for the practice.

Ben Forrest, Summer Street Research.

This is Spencer Nam here.

Thanks for taking questions.

Just a couple of follow-up questions -- I know this proficiency program has been really talked out but we spoke with a couple of dental students, and their concerns were that, graduating from school, they are not going to be as well-established as existing general dentists, and if they were trying to promote Invisalign in their own practice, it's going to take a while before they can get to probably ten cases per year.

They felt that the annual fee requirement to keep the license current seemed a little bit of a disincentivizing element in the whole program.

Given that you guys have invested a lot of time and cash in really getting these young dentists up to speed on Invisalign, I was wondering if you guys -- how you guys think about really getting these not just existing guys who have to make a choice but the new guys who really want to do it but they just -- the structures are really helpful for them.

Do you guys have a specific strategy to address that?

Yes, a great question, Spencer.

I actually had a discussion with a dentist who has just been in practice a year and has gone through that exact scenario of buying with financing a smallish practice that was not booming and having to rebuild it a bit.

This dentist is actually doing pretty well, but he said, "Wow, I am glad I am a year into it.

That first year would have been harder"

Let me give you the simple answer.

For any newly trained Invisalign doc, in university or not, there's a different expectation for the ramp rate and the timeframe to do it.

So they aren't expected to, in the same -- we prorate them, first of all, and we prorate them at a lower rate.

That's true whether you are in an existing practice or a new practice.

Over time, we may evolve the university approach to moderate that even more, but I think, when I explain that, I said I can go out and get a couple of cases a quarter if I get a running start.

And that's really where it is for a brand-new trained doc.

It is prorated, A, and B, it's a low number.

I appreciate that.

That's very helpful.

Then on the second question is related to this lawsuit with Ormco.

I know you guys can't talk about much, but how much of a confidence do you guys have in terms of your -- if you want to call this a contingency planning or disaster planning?

I mean, have you guys thought through all of the possible scenarios?

Do you have solutions to each of the scenarios, in case it does transpire, that you guys are prepared to take actions that's going to continue to essentially keep the business unaffected by the outcome?

Or, I mean, how should I think about your planning here?

Let me just react to the very first thing you said, which was we probably can't say anything about this.

The answer is yes.

I tried to be really clear in both we were pretty complete in the press release several days ago, and in my comments.

I don't want to get into speculation or anything else.

Obviously, there's we put a lot in and we take this seriously.

We are pretty good at this.

We've been very successful in our legal matters externally to date.

And we've spent a lot of time thinking about a lot of scenarios.

But that's as far as I'm going to go today.

Thanks, Spencer.

Operator, we will take one last question, please.

Jose Haresco, Brean Murray.

Congratulations on a great quarter.

Let's see here.

Just going back up to some of these numbers, on the gross margin line, Ken, you mentioned that you started to see the impact of that move to Costa Rica in the second half of '09.

One, on a more longer-term basis, how much more of the manufacturing -- and I guess a customer-facing aspect of this business -- do you see moving down there?

How does kind of the hardware manufacturing component of this business and the savings that you see by moving down there compare to the call it the human element of the manufacturing process, if you were to move the down there?

And over what time frame should we see the impact of that?

Well, let me back up first, Jose.

The customer-facing organizations that we just moved down are not manufacturing-oriented; they are SG&A-oriented.

That's where you'll see the savings start to show up is in our SG&A lines as we move forward.

From a manufacturing perspective, you know, we have our laborers down in Costa Rica, and we can flex our labor base down there within probably 90 to 120 days to scale up or down our capacity.

In Juarez, very comparable kind of time frames.

We have some capital equipment items in Juarez that we have to keep our eyes on, make sure we get the appropriate leadtimes.

But I think, if you go back a few years and think about the OrthoClear settlement and the cases that we had to run through our factory in a very short order of time of a quarter or two, we were able to scale capacity by an incremental 25,000 cases or so over a couple of quarter period of time, as well as at the same time delivering all of the cases to our doctors that we had in process.

So we have opportunities to do that.

Over the past few years, we've continued to do automation in the factory and process improvements in the factory, and been able to scale and gain more efficiencies from a gross margin point of view.

From a structural point of view, what are the things can we move down there?

You know, we look at things that are oriented to the customer, in particular because that's where the focus is in Costa Rica working with doctors on ClinCheck, which is why we moved our order -- our customer care group down there, as well as our collections and credit group and the Accounts Receivable group.

But to the extent there's other organizations in the Company that might make sense to do move down there, we can do that.

We've considered things like can we build in a bigger base of R&D down there over time?

We've gone to Moscow for R&D but we also have a small contingency of R&D resources in Costa Rica that work with the team down there, as well as customers.

So there's lots of different things that we can be looking at and we continuously look at here, on an ongoing basis, from a structural point of view.

I don't know.

Tom, is there anything I should add to that?

Yes, maybe, Jose, if you were headed towards how much automation versus how many people, we have -- if I go back, I don't know, maybe -- I've been here going on 7.5 years -- if I back 7 years, we did about a quarter of the volume with roughly the same number of people, so we've kind of gone -- the same number of employees.

We've kind of gone 4 to 5 times on volume in seven years, and actually gone down slightly on employment.

So we have in fact driven manpower out of the equation and substituted automated capital in general.

We like doing that.

We are on our -- we have had multiple generations of automation technology in Juarez, and we have gone through multiple generations of software automation in Costa Rica.

That's going to continue where it can drive quality, cost improvement, and cycle time.

But we are on that journey and I expect it all to continue.

Okay, thanks.

Just a last question on Invisalign Teen -- you mentioned earlier the people who had started early on Teen are more or less getting the most or having the fastest ramp-up now that we are a few quarters into this.

What else can you tell us about where this product is being best adopted?

Are you seeing patterns in regionally, demographically?

I mean, what else are you seeing out there that could help us think about the adoption of this product as we forward?

There is really no stark differences.

It is in general more ortho than GP, and the GPs that are using Teen in general do fixed appliances and there's GPs that do some fixed appliances.

It started out very much on teens.

It is migrating to some adults, both young adults and 40, 50-year-olds because they like the docs, like the feature set depending on the case.

So what I would say is the staging of this is really a function of doctor and practice experience.

I think that is a pretty typical effect in orthodontics.

Where they gain comfort and familiarity and see great results, they do more.

And along the way, if they don't see those results, they do less.

So the good news is, as I said earlier to one of the questions -- I think Taylor -- we are satisfied with solid, steady progress because it's consistent with how these doctors have come on and begun integrating their practice.

So we are happy with that progression.

But there's really no big differences geographic-wise or demographic-wise, other than there is a younger skew to it because it really started around teens.

Okay, great, thank you very much.

Congratulations again.

Thanks, Jose.

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