愛齊科技 (ALGN) 2009 Q4 法說會逐字稿

Greetings, ladies and gentlemen.

Thank you for standing by and welcome to the Align Technology fourth quarter and fiscal year 2009 financial results.

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

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

(Operator Instructions) As a reminder this conference is being recorded.

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

Ms.

Stacy, you may begin.

Thank you, good afternoon everyone I'm Shirley Stacy, Senior Director of Investor Relations.

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

Before we begin, let me cover some housekeeping items.

We issued a press release today via Globe Newswire and First Call detailing Align's fourth quarter fiscal 2009 financial results.

The press release is available on our website at www.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 p.m.

Eastern time on February 10, 2010.

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

And conference number 341731 followed by pound.

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

As a reminder the information that the presenters discuss today will include forward-looking statements including without limitations statements about Align's future events, product outlook and expected financial results for the first quarter of fiscal 2010.

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 fourth in more detail in our Form 10-Q for the fiscal quarter ended September 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 comparison to previous quarters.

Most of these items together with the corresponding GAAP numbers and a reconciliation to the comparable GAAP financial measures were practical are contained in today's financial results press release which has also been posted on our website at investor.aligntech.com under financial releases and have been furnished to the SEC on Form 8-K.

We encourage listeners to review these items.

We've also posted a set of GAAP and non-GAAP historical financial statements including the corresponding reconciliation and our fourth quarter conference call slides on our website.

Please refer to these files for more detailed information.

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

Tom?

Thanks, Shirley.

On the call today, I'll cover some highlights from the fourth quarter including key adoption metrics and then I'll provide a brief update on our strategic initiatives.

Ken will follow with some detail on our fourth quarter financials as well as outlook for the first quarter.

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

The fourth quarter was a strong finish to a good year for Align and I'm pleased to report sequential and year-over-year growth for Invisalign.

Our Q4 results reflect strong international growth, increased demand across the GP and ortho channels in North America, continued adoption of new products including Invisalign Teen and Assist and continuing diligent expense management.

Our goal is to drive adoption in Invisalign worldwide.

So let's start with two key adoption metrics, the number of new doctors trained and the utilization rates or what we call same practice sales of our product.

During Q4, we trained approximately 870 new doctors up slightly from Q3.

Of those, 460 were North American doctors and 410 were international doctors.

For the year, we trained a total of approximately 4380 new doctors of which 2825 were North American doctors and 1555 were international.

Our new doctor training in North America is evolving to identify and focus on practices that are interested in gaining the skills and experience necessary to be successful with Invisalign.

In the past, many doctors completed this training course as a means of learning more about Invisalign or leveraging the marketing benefits of Invisalign but then only sporadically submitted cases.

Building on our experience with the proficiency requirements going forward, doctors are more likely to attend our CE1 training course when they are actually ready to begin using Invisalign in their practices right away.

As a result, over time, we're likely to have a more focused engaged and committed customer base that maintains a baseline of up-to-date Invisalign product knowledge.

In Q4, total utilization increased sequentially and year-over-year to 3.3 cases per quarter.

Q4 utilization rates for international doctors increased 8% sequentially and 11% from the same quarter last year reflecting a strong finish to the year.

The Q4 utilization rate for North American GPs increased approximately 9% sequentially and year-over-year, the largest sequential increase in utilization for GPs ever.

It's also the first time GP utilization has grown three quarters in a row.

Utilization for North American orthos was up slightly from Q3 which was a strong team quarter for orthos and increased approximately 7% from the same quarter last year.

Over the next year, we expect to see some fluctuation in our utilization rates as practices adjust to the proficiency requirements and the average cases per doctor varies throughout the year.

In the interim, we'll consider additional metrics to share with our investors that may provide more insight into adoption utilization through this period.

In 2009, we generated the highest levels ever of case shipments and revenues despite a difficult economic environment.

In Q4, Invisalign case volume reflects sequential and year-over-year growth for international as well as for GPs and orthos in North America.

Strong international growth in Q4 was driven by record volume across our core markets in Europe, the UK, Italy, Germany, France and Spain following their typically seasonally slower summer period in Q3.

Total international volume accounted for 22% of Invisalign cases worldwide.

In North America, the combination of new products such as Invisalign Teen and Assist along with expanded new features across the entire Invisalign product platform is helping give doctors greater confidence in what they can achieve with Invisalign.

Q4 volume was driven by record GPK shipments including Assist and a continued adoption of Invisalign Teen in the ortho channel.

Our strong sequential growth in Q4 is also likely due in part to our customers efforts to achieve the new proficiency requirements or to qualify for the six-month additional qualification period.

These results were significantly better than our expectations and were the product of our continued hard work and the execution of key strategic initiatives.

Our broader strategy has a series of key elements.

The first is to continue to accelerate product and technology innovation while at the same time extending clinical effectiveness or efficacy.

Second, we still have many opportunities to enhance the customer experience for our doctors and for their staff and to eliminate the remaining barriers to adoption that we've identified.

Third, while we're doing that, we are increasing the effectiveness of our consumer demand creation process and reenergizing the Invisalign brand identity.

And then finally, we are continuing to drive European growth while we are opening up additional new markets around the world.

I'll now move to our products, starting with a brief update on Invisalign Teen.

On a worldwide basis, we've now trained over 4750 orthos on Invisalign Teen.

We remain pleased with its continued uptake.

In Q4, total Teen case shipments increased 4% sequentially comprising 13% of worldwide volume.

As anticipated, we had less sequential growth in Teen cases because teenagers start orthodontic treatment but more teenagers start orthodontic treatment in the summer.

It's hard to know for sure given the lack of third party market research, but we believe our sequential growth in Teen reflects share gains in the overall orthodontic market which is typically flat to down from Q3 to Q4.

In Q4, Invisalign Assist volume increased substantially, approximately 81% sequentially to nearly 5% of volume compared to 3% in Q3.

Assist is the only Invisalign product that includes built in product support throughout treatment and was designed to meet general dentist demand for an instructive, integrated approach to case selection, monitoring and finishing.

In October, we rolled out new and enhanced features which expanded Assist product capabilities to treat a wider range of patients.

We believe the strong sequential increase in volume in Q4 reflects the positive response to expanded features in Assist as well as a full quarters benefit of making Assist the focus of our CE1 training course.

Even with all this progress with new products, total Invisalign case starts are still small relative to our total served market.

During 2010, you'll begin to hear more about our efforts to demonstrate clinical efficacy and to work towards a long term goal of becoming the standard of care for orthodontic treatment.

We know we still have a lot of work to do to accelerate innovation and extend clinical efficacy, but we know when improvements are need and we're confident that we can deliver.

On the consumer marketing front, we continue to be successful with programs that more effectively and efficiently generate demand or pull for Invisalign.

In 2009, we became more efficient in our approach and grew overall lead generation and awareness on lower total spending.

We also shifted our marketing mix from conventional media towards more digital marketing and social networking activity.

On the call last quarter, I talked about the evolution of the Invisalign brand strategy and our plans to refresh the Invisalign look and feel including a new and more modern logo and new brand positioning focused on treatment outcome and practice growth.

In January, we kicked off the rebranding initiative by completely updating our consumer website, Invisalign.com.

You'll begin to see the new brand identity across all of our critical marketing elements and trade shows.

Now, I'd like to provide an update on the Invisalign proficiency requirements and share our progress to date relative to the analysis that we've described in our last few calls.

So first, let's briefly review the program.

The proficiency requirements were designed to help insure that every practice that works with Invisalign can achieve great clinical and commercial outcomes and every patient in Invisalign treatment gets the wonderful smile they want along with a great treatment experience to match.

Every Invisalign provider in North America is required to start at least ten cases and complete ten Invisalign specific CE hours each calendar year to maintain active account status.

Those who meet the requirements have the added benefit of being recognized as Invisalign preferred providers for that year.

A special designation that helps consumers seek out doctors who have met the proficiency requirements.

This last October, after seeing a strong effort by our lower volume doctors, to reengage with Invisalign we announced a six-month additional qualification period.

This one-time extra qualification period allows doctors who started at least one case and got one CE hour by the end of 2009 to secure their Invisalign status for 2010 provided they reach at least five case starts and five CE hours by June 30, 2010.

Like all other doctors, they must subsequently meet the full year requirements of 10 and 10 by the end of the year to maintain active account status for 2011.

During 2004, our North American customers showed continued progress.

In the ortho channel, sequential case growth was relatively consistent across high and lower volume doctors.

For GPs, sequential case growth was driven by doctors that were midway to just under ten cases per year.

We also had a significant increase in doctors investing in continuing education, especially through our online clinical education website, Aligntechinstitute.com where doctors completed over 29,000 CE courses in Q4 alone.

So how did we do?

Well, as of January, we had approximately 22,000 active Invisalign trained doctors in North America.

Of those, more than 6,000 doctors met their Invisalign proficiency requirements for 2009 and another 16,000 doctors met the criteria for the additional six-month qualification period.

Of those 6,000 that met the proficiency requirements, over 5,000 are in preferred provider status.

These results are consistent with the expectations we described in the Q2 call that projected the vast majority of our customers in the seven to nine group will move to ten or more cases and a percentage of the customers in the four to six group would move to ten or more cases and then a number of those below four may eventually choose not to continue with Invisalign.

After year-end, we deactivated approximately 10,000 Invisalign trained doctors who had never submitted a single Invisalign case.

In addition, we've limited the account status of approximately 13,000 doctors who did not meet the proficiency requirements of ten and ten or the additional qualification period of one and one in 2009.

These doctors will not be able to submit new Invisalign cases but they can continue to manage any in progress cases they may have from previous years.

We are completely committed to helping those doctors finish their in progress cases successfully and sincerely hope that they will consider making Invisalign part of their practice again in their future.

Last week, we began distributing new preferred provider marketing materials including the new Invisalign logo.

We also updated our consumer marketing programs including the Invisalign.com website to direct potential patients towards preferred providers and to make it easy to find practices that are committed to being successful with Invisalign.

We intend to become a more valuable partner for those practices and help them grow and flourish.

Finally, I'd like to touch on how we'll continue to drive European growth and open up new markets outside North America.

The international business is increasingly important to Align and accounted for 23% of our worldwide revenues in 2009.

We've continued to build our base of employees and total investment in the key countries of Western Europe and have leveraged distributors for smaller country markets in the Asia Pacific and Latin America regions.

Two weeks ago, we announced that we're adding a third international distributor partner, one that will focus on smaller country markets in the Europe, Middle East and Africa region which is commonly called EMEA.

We have been planning to add a distributor in this EMEA region for some time and given the potential of the market and the continued progress of Invisalign worldwide we're now ready.

As part of the new distribution agreement for EMEA, at the end of the first quarter in 2010, Gil Laks, our VP of International will be leaving Align to take on new role as owner and operator of this new distributor.

For the remainder of Q1, Gil will continue to oversee the international business and will help to ensure a smooth transition of his responsibilities.

We've initiated a search for a new VP of International and hope to have this position filled as soon as practicable.

In the meantime, Michael Lewis, our VP and General Manager of Europe along with the rest of the team will be assisting in the transition.

Gil will leave behind a great team that will continue the international growth and progress of the past several years.

Please join me in wishing Gil well in this next stage of his career.

I'll now turn the call over to Ken for more detail on our fourth quarter financials and our outlook for Q1 and then I'll come back for a few closing remarks.

Thanks, Tom.

Now, let's review our fourth quarter financial results beginning with revenue.

Record Q4 net revenues of $86.6 million and record case shipments of 61.1 thousand cases increased 9.3% and 8% respectively from quarter three.

The sequential increases in revenue reflects higher case volume and ASPs.

The increase in Q4 ASPs resulted from the benefit of foreign exchange rates associated with our international shipments and lower levels of discounting.

During quarter four we also updated the estimated fair value of Invisalign Teen replacement Aligners.

As a result net revenue includes a one-time benefit of $1.1 million of previously deferred revenue.

Q4 revenue by channel consisted of 42% for North American GPs, 29% for North American orthos, 24% for international and 5% for non-case revenue which includes the retainer business, training revenues and ancillary offerings.

Before I move on I'd like to take a moment to identify the items that are included in our GAAP financials that for comparative purposes to previous quarters are excluded from our non-GAAP financials.

Ormco royalties included in gross margin were $4.3 million in Q4 of 2009 and $1.9 million in Q3 of 2009.

Ormco settlement costs included in operating expenses were $69.7 million in Q3 of 2009.

Restructuring charges including operating expenses were $4 million in quarter four of 2008 and EPS included a one-time benefit from the release of a tax evaluation allowance of $64.6 million or $0.97 per diluted share in quarter four of 2008.

With that let's move on to the rest of the income statement.

Q4 GAAP gross margin was 73.7% compared to 74.4% in quarter three and 72.7% in the same quarter last year.

Stock based compensation expense was $400,000 in quarter four compared to $359,000 in quarter three and $455,000 in the same quarter of last year.

Excluding Ormco royalties, quarter four non-GAAP gross margin was a record 78.6% compared to 76.8% in quarter three and 72.7% in the same quarter of last year.

The sequential increase in non-GAAP gross margin was primarily driven by the favorable impact of higher case volumes and the resulting manufacturing operating efficiencies, higher ASPs, as well as the additional $1.1 million of previously deferred Teen replacement revenue of which 100% flows through to gross margin.

Q4 GAAP operating expenses were $49.2 million compared to $119.2 million in Q3 and $52.6 million in the same quarter last year.

Stock based compensation expense was $2.7 million in quarter four compared to $3.6 million in quarter three and $3.4 million in the same quarter last year.

Excluding Ormco settlement costs and restructuring charges, Q4 non-GAAP operating expenses were $49.2 million compared to $49.5 million in quarter three and $48.5 million in the same quarter last year.

Q4 GAAP operating income was a profit of $14.6 million compared to a loss of $60.2 million in quarter three and a profit of $1.3 million in the same quarter last year.

Excluding Ormco royalties and settlement costs and restructuring charges, Q4 non-GAAP operating income was $18.9 million or 21.8% compared to $11.4 million or 14.4% in quarter three and $5.4 million or 7.2% in the same quarter last year.

On a year-over-year basis, the significant improvement in Q4 non-GAAP operating margins reflect higher case volumes, increased manufacturing efficiencies, as well as our continued focus on expense management.

Q4 GAAP earnings per share was $0.15 compared to a loss of $0.72 in quarter three and $0.98 in the same quarter last year.

Excluding Ormco royalties and settlement costs, restructuring charges and a one-time benefit from the release of a tax evaluation allowance on specific deferred tax assets, Q4 non-GAAP diluted earnings per share was $0.16 compared to $0.13 in quarter three and $0.07 in quarter four of last year.

Now let's move on to the balance sheet.

Cash, cash equivalents and short-term marketable securities were $186.5 million.

This is compared to $110.2 million at the end of 2008.

In quarter four, we generated roughly $34.3 million in cash from operations compared to $10.8 million in quarter three and $8.8 million in the same quarter last year.

Quarter four DSOs were 57 days compared to 63 days in quarter three and 64 days in the same quarter last year.

The decrease in DSOs reflects substantially higher collections in Europe as doctors were back in the office after the summer holiday season.

In addition with the transition of the North America credit and collections team to Costa Rica complete, the team is up and running and had a solid quarter in collections.

In quarter four, deferred revenue on the balance sheet increased by $4.4 million or 15.7% sequentially to $32.3 million.

This increase primarily represents the revenue deferrals associated with new products, Invisalign Teen and Assist.

Overall, I'm pleased with our continued progress and better than expected results.

2009 was a challenging year given the economic environment, but with continued focus and execution of our strategic initiatives, we grew our business and expanded our operating margin substantially.

Now let's turn to our business outlook for quarter one 2010.

2010 is off to a good start.

Industry observers are anticipating an increase in dental visits this year and orthodontic case starts are expected to be up.

With our expanded product platform including new products like Teen and Assist and the new features we rolled out across all products this past October, we believe that we will continue to grow and gain share during the year.

Still, there are several factors for us to be thoughtful about as we consider the 2010 outlook.

First, the proficiency requirements may result in greater variability among customer activity, particularly in the second half of the year after the six-month qualification period expires.

Second, the economy is still challenging and we don't see any up lift or economic recovery on the horizon.

And last, in the near term, we do not see any catalyst from new geographic markets and we will remain focused on continued good execution in North America and Western Europe.

Now let's go through more detail on the outlook.

For Q1, we expect revenues to be in a range of $85 million to $88 million, on case volume of 60,000 to 62,000 cases.

Consistent with Q4 volume of 61.1 thousand cases and revenue of $86.6 million which included the one-time benefit of $1.1 million of previously deferred Teen replacement revenue.

During quarter four, we saw continued growth from our low volume doctors in North America, particularly among doctors who have been a key focus of our proficiency requirements.

While we're pleased with the continued progress it's unclear whether these doctors will maintain the same pace in the near term.

On the international side of the business, volumes are historically down in quarter one from a seasonally strong quarter four.

We expect Q1 GAAP gross margin to be in a range of 76.3% to 76.8% including approximately $800,000 for Ormco royalty expense.

Q1 non-GAAP gross margin excluding Ormco royalty expense is expected to be in a range of 77.3% to 77.8%.

In quarter one, we expect GAAP operating expenses to be in a range of $51.8 million to $52.8 million.

The sequential increase from quarter four reflects our continued investment in international expansion including sales coverage and consumer advertising in Europe, as well as employee related compensation and benefits.

In Q1, we expect GAAP operating margin to be in a range of 15.3% to 16.8% and GAAP EPS to be in a range of $0.11 to $0.13.

Excluding the Ormco royalty cost of approximately $800,000 in cost of sales, we expect non-GAAP operating margin to be in a range of 16.3% to 17.8% and non-GAAP earnings per share to be in a range of $0.12 to $0.14.

In quarter one, we expect the effective tax rate to be in a range of approximately 32% to 34%.

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

We expect diluted shares outstanding for quarter one to be approximately 77 million shares and from a balance sheet perspective, cash on hand at the end of quarter one is expected to be approximately $200 million to $205 million.

Now let's move on to the full year fiscal 2010.

I will provide directional comments and perspective on some elements that we can influence and manage such as operating expenses.

From a revenue perspective, we believe we will continue to grow and gain share of our served market.

We believe we can maintain our gross margin levels comparable to Q4 2009.

And with that said, keep in mind that the impact from volumes given our relatively fixed manufacturing cost structure and exchange rates can move margins up or down in any particular quarter.

Additionally, the levels of promotional discounts and several other factors can impact average selling prices and thus revenues and gross margins.

Moving on to operating expenses.

We've been clear about our strategic initiatives and will continue to invest in these areas to drive long term growth and increased profitability through continued diligent expense management.

For the year, we expect Q1 non-GAAP operating expenses to be the base level of quarterly spending.

During the year, there will be fluctuations from this base level of spending given the timing of media spend, significant trade shows and industry events and continued international expansion.

Stock based compensation expense for fiscal 2010 is expected to be approximately $20 million.

Shares outstanding for fiscal 2010 are expected to be approximately $78 million.

Now I'll turn the call back to Tom for some closing comments.

Thanks, Ken.

Overall, our goal in 2010 is to continue to accelerate our progress from 2009.

For the last two weeks we've held our international and our North American sales meetings and I've had a chance to spend time with our sales forces, our marketing teams and other key leaders.

Our team is focused on our goals for this year, committed to our long term strategy, and confident that with continued hard work, we can help more practices treat a greater number of patients successfully with Invisalign.

I look forward to updating you on our continued progress in the next earnings call and now let's go back to the Operator for some questions.

Thank you, (Operator Instructions) Our first question comes from the line of Tao Levy with Deutsche Bank.

Please proceed with your question.

Good afternoon.

Hi, Tao, how are you?

I'm good, thanks.

So, a few questions.

First on the pricing front, Ken, you mentioned on the call, is that the extra million in change?

That would impact just the US ortho primarily and we would see that reflected in kind of the ASP that we're backing out of it?

That's correct.

That would show up predominantly in the ortho ASP.

Those are the doctors predominantly using the Teen product in their practice and what happened during the quarter is in our normal process at year-end, when we go through and evaluate and do an analysis on fair value of the deferrals we've been doing, with the Teen product itself as it turns out, doctors are taking the replacement liners.

Originally we were anticipating they would take on an individual basis one by one as replacements for the Teens.

And what they're doing is taking a few Aligners at a time as replacement so actually it's reducing our freight cost to ship it and that's the adjustment we made.

So if I do the quick math you get to like 1,266 as an ASP on the ortho.

Is that kind of a number we should be thinking about going forward or we should ratchet that down a little bit because of the million and change?

Well the variables entail as far as ASPs are concerned going forward would be historically we've always had fluctuations in our case refinement as we go quarter by quarter.

So that could fluctuate going forward.

The other piece is depending on levels of participation discount programs whether it's the volume rebate program or Teen rebate themselves could have an impact on that as well.

Okay, and I can't ignore sort of the strong healthy guidance that you're providing here for the First Quarter.

So obviously the trend that you're seeing are very strong.

Anything in particular that you see that's standing out that's giving you the confidence or is it kind of across-the-board you're seeing rates hold steady?

Well I think as we said on the call that both orthos and GPs certainly been striving to meet the proficiency requirements and getting to the qualification period for the first six months of the year.

We saw that in the Third Quarter.

We saw that continue in the Fourth Quarter.

And now doctors are trying to strive for five and five in the first half of the year and as we looked at the quarter and providing our guidance, we think that has a possibility of continuing.

Although there is some variability there because doctors drove hard to meet getting into the qualification period or the 10-10 by year-end here.

It's a little bit unclear whether they are going to continue at the pace they're been going at but we certainly took that into consideration in providing our guidance.

I'll pile on a little bit.

If you go upstream of that, that timing issue around proficiency and the behavior, the fundamental strength we've been trying to build in the business is based on product evolution, new products and improvements in the products we've got you long with better and improved marketing and I think with great coverage all those things go together.

And it's not an easy marketplace but it's one where we're getting a little bit of traction.

Certainly making it seem easy.

Thanks a lot.

I don't know about that.

Nothing easy about it.

Thanks, I'll step off.

Thank you.

Our next question comes from the line of Jonathan Block with SunTrust Robinson Humphrey.

Please proceed with your question.

Thanks and hi, guys maybe two quick questions.

First just on the leverage was obviously just tremendous with non-GAAP North of 21%.

I know Ken you're guiding to I guess midteens in the First Quarter.

Maybe if you can just walk us through what changes with the spend on why we go back down to midteens.

And then when we think about 2010, any reason why when we get to the Fourth Quarter or at least the back half of next year why those Op margins can't get back to 20% plus.

So a couple things, I'll comment first on the quarterly guidance here on operating margin.

Take into account a couple things, Jon.

One thing is recall we had a $1.1 million adjustment for Teen replacement Aligners.

And that's all margin that occurred in quarter four, revenue margin that occurred in quarter four.

That will not repeat in quarter one.

It has a little bit downward pressure in gross margins in the First Quarter.

And from an operating expense point of view we're continuing to invest internationally, as I said in sales coverage as well as media advertising in the European areas.

And coming into last year with the tough economy, we made some choices last year as we were going through and looking at our infrastructure.

And not only with our restructurings that we did but also we made some choices last year to defer salary increases for employees at the Company given the tough year that we were heading into.

As we've come through this year and we had some nice results here for the quarter.

And for the year as we've looked at it, we thought it was appropriate to come back and put a couple benefits back in place for the employee base at the Company.

One of them was reinstate merit and salary increases for the employees.

And the other one is putting in place which we have not ever had at the Company prior to this is matching on a 401 (k) plan for the employees.

So those are a couple compensation things occurring in quarter one.

And that will stay on the base of spending as we go through the remainder of the year.

The other question you had was on the second half of the year on the margins and currently 20% and why not getting back to 17% to 18% now and getting maybe back to 20%.

On a quarter by quarter basis, I think we'll see some fluctuation as we go through the year on operating margins depending on significant customer events as I mentioned and the way we pace our media spending is we go through the year.

And the other factor here is what happens with the revenue as we move through the year.

So you saw this quarter with a nice uptick in volumes, we saw that leverage through the gross margin line and all the way through the P & L.

And so with our factory costs you'll see us get leverage on that as volumes increase in the near term.

So I think for margins to, we think we'll be able to like I said maintain our base level of spending with some fluctuations as I'd indicated but there's going to be some dependency also on revenue growth over the year.

Okay, great and then maybe just on sort of the proficiency program.

I mean you mentioned the 6,000 or over 6,000 docs that are preferred.

Two questions here.

One, would you share with us what percent of volume those guys constituted in the Fourth Quarter.

And then just so I understand preferred going forward.

I think it said in the slide that it's going to be on a rolling basis.

So will you update that I guess going forward in Q1 and Q2 of 2010?

Yes, sure, I'll take that, Jon.

The second part first the answer is yes.

We want to give them every incentive to reach for that level.

And each quarter we will be refreshing that.

And they will have the opportunity to reach that and get more marketing push or pull.

To the first point now, we've provided some detail over time about the segmentation in our model.

As we get through and finish with implementing proficiency and that becomes a long term element in our relationship with our customers, on the other side we probably will come back and give some view of the evolution in that channel but I think we've provided enough framework with a historical look backward for you to put all of the pieces together here.

So we're not going to shine more light than we've done at this point.

And last one, sort of a bizarre question considering the results.

But we had done some checks and I thought you might run into maybe some deferrals in the Fourth Quarter for people to count it in the First Quarter of 2010 against proficiency.

Do you think you saw any of that.

In other words any sort of thing that might spill into Q1, so people had them in their back pocket for proficiency?

Well, we do channel checks of our own all the time.

We have lots of opportunities to talk to our customers, our sales reps, our customer support and clinical people.

And there were probably on the margin some docs that may try to do that late in the year.

But I think in this economy if a patient decides they want to do treatment and they've got a timing in mind, most practices are reluctant to try to manage that if I can use that term loosely.

And for the reason that people are shopping around more, they're afraid they've got a patient ready to go if they try to keep the patient until mid January for some reason of their own, they are afraid that patient may go start with somebody else.

So in this environment what we've seen is practices be acutely aware of once they've gotten that patient committment, the patient wants to get going.

So there maybe some of that behavior.

We didn't see much out there but again, I think it's a practical level a little hard for these guys to do in this environment.

Next question, please?

Our next question comes from the line of Taylor Harris with JPMorgan Chase.

Please proceed with your question.

Thanks a lot.

So you guys have obviously had a great positive (indiscernible) from the proficiency program so far it sounds like.

You may have been a little bit surprised at the reaction from some of these lower volume doctors.

But to follow-up on that last question, help us think through what happens starting in the third quarter when the 16,000 providers who haven't met the requirements yet when they're either in or out.

So can you give us any framework for thinking about how many of them are really on the bubble or any way to think about what's going to happen in the third quarter?

So, I think as we've been trying to frame for you from the very beginning, we took a very careful look at where each of our practices were in their trend lines and developed a segmentation model and game plans to engage each of those groups of customers and they need different things.

You say we were surprised.

We were pleased maybe is a way to say it because we had as we went through Q3, we saw a greater response than we had expected or projected, use that word, from the lower volume customers, those one to four.

And we after working through this we projected certain percentage of them hard to pick which ones but a certain percentage of them would commit to and elevate their practices to make us an important enough part to get their ten and ten.

We saw great response in Q3.

It's partly significantly what lead to our in October additional qualification period for six months.

So what we expect is for that effort to continue.

If they weren't going to continue there's no benefit for them just to squeeze out six more months.

And it's a bit binary.

So we would expect them to continue to work and to continue to do CE and continue to engage our reps and our team to do in practice marketing and to make it a more important part of their practice focus.

Those activities result in greater case starts.

It's not like we just go and sit in their office and wait for them to do that.

So when we see a practice responding in this way, doing the in practice marketing, getting caught up on CE, starting to talk to other patients coming through for routine care about the value of a better smile, then we know that's going to lead to a greater number of case starts a month later, two months later, whatever.

So we would expect that activity to continue to help.

As to what happens in July 1, we expect and we've said over time, we'll have a smaller total customer base.

And I just said a little bit ago, we deactivated a group that had made 10,000 almost that had never done a single case.

There's simply no reason for us to be spending our time, they on us and us on them so right there, there's one compression.

Over time those practices that choose to move forward with us and we hope they all do, we're going to be a bigger part of their practice and investing in their practice and they are investing in this effort.

So again we'll talk in more detail after July, talking about what it looks like and how it will continue to evolve.

Not just after July but beyond and how we can be a better partner for them and really help insure they get success in practice.

I hope that gets at the first part of your question.

Yes, I think so and maybe just a follow-up.

You did commit to revenues continuing to grow throughout the year, so at this point, is all that we should assume that is at a quarter by quarter statement, in other words in the third quarter of 2010.

You think revenues will grow, you just don't know by how much, is that fair?

Well, what I don't know if it's fair or not, what I'd start with is we believe there will be opportunities for us to grow this year and we base that on a variety of data.

We don't think we're the right party to determine what market growth is for orthodontists.

We're not the leader in this industry.

But if you look at what a number of leaders and others are saying around dental visits and share of wallet increasing again and restoring procedures starting to go up again, we believe there will be opportunities for orthodontics to grow again.

We believe in general whatever that growth rate is we can grow a bit faster.

So that said, we haven't provided a frame work.

What we've said is the proficiency activity and looking at how we will get through Q2, Q3, Q4 makes us be a bit thoughtful about that opportunity because we don't have certainty about how this will evolve through the end of Q2 and into Q3.

So I don't want to say whether we'll grow sequentially every quarter.

We believe there are opportunities for us to grow the top line and continue to drive improvement in the business across the year.

Okay, Ken, and thanks for that.

Ken a couple questions for you.

Gross margin to make sure I understood what you said, you said comparable in 2010 to what you did in the Fourth Quarter of 2009 I think.

Is that the unadjusted number in the Fourth Quarter?

In other words the one that benefited from the $1.1 million of revenue or an adjusted number?

That's based on an adjusted number taking out the $1.1 million.

Okay, got it.

So I mean that comment though would lead us to believe that you think volumes are at least, you're not going to take a leg down in volumes?

Well, again, there are some elements of our business that are less dynamic than others.

Ken talked to everybody about ASPs and there are some things that move ASPs in the nearer term.

The things that most tie out to gross margin are really volume in a given period against a fixed cost.

And so we think we've got a reasonable view of that.

And if we don't see volumes declining then I think you could make the assumption that we think we've got a handle on how to deliver a range of gross margin.

Okay, that's great.

Thank you guys.

Yes.

Thank you.

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

Please proceed with your question.

Matt?

Mr.

Dolian, your line is live.

Guys can you hear me?

Yes, now we can.

Okay, good afternoon.

Just another way to look at the growth outlook here, Ken you mentioned you had a good start to 2010.

And you're guiding to low 20% growth year-over-year in Q1.

So I guess you're reluctance to provide full year guidance, is that relative to the uncertainty in the market.

And should we assume since you've been kind of a relative out performer here, even in the down quarters that if the market stabilizes, you should continue to outperform in a way we've seen historically?

Well, Matt, start with the last question first about outperforming.

I think if you look at the past year, there is specific things we would point to on why we outperform.

So if you go back to quarter one and we gave guidance coming into the year, we were coming off a really bad quarter four with the economy starting to tank and a lot of doctors on GPMs.

and ortho side just going to the side line.

To our surprise as we indicated through the First Quarter orthos got back in the game besides they needed to learn how to sell to the patients.

And they surprised us a bit with the volumes for the quarter that they came in with.

And then in quarter two, that phenomenon just continued for the orthos.

Coming into quarter three, team did a little better than we were anticipating coming into the quarter.

It was our first full summer that we could participate in the Teen space.

And we did better than we were anticipating in that quarter.

So three things there on why volumes were a little bit higher and also in the third and Fourth Quarter.

Certainly GPs and orthos were doing more business, trying to meet the proficiency requirement and/or the qualification period as well.

So a few things going on.

I guess the other thing I'd point to is we're shipping roughly 55,000 to 60,000 cases a quarter and we overshoot it by a couple 2,000 or 3,000 cases so about 3% of the overall volume so I look at that as pretty reasonable accuracy and forecasting given we have broad base of individual proprietors we are dealing with in the doctors offices, 20,000 a quarter that we're shipping to.

So we can be within about two or 3,000 cases I'd call that success from our point of view.

If you break it down to an individual doctor, 2,000 cases over 20,000 doctors is .1 case per doctor accuracy, so as we look at the year now, our visibility in the quarter is no different than it has been.

We've taken into account factors of like we described on the call the economy, the fact that we are more dental visits in the offices, orthodontic case starts being up on a year-over-year basis.

And as Tom said growing gaining share maybe a little bit faster than the broader market in general.

That's kind of the way we're calling it.

But if I go back a little bit to how we thought about the business this time last year and before, we prepared for a scenario that was worse than we saw.

But it wasn't just worse than we saw because of the external environment.

There were a lot of things we did that we're not comfortable.

We got a couple very large restructurings which in doing that while painful helped create some leverage for us over the long term.

We accelerated some product development initiatives and market initiatives.

And we cut some costs with an eye towards investing in the business.

So we had room so what I'd say is we're very very pleased to have the outcome we've got.

We'll take some luck and a few good bounces, but it's also part of some hard work and the team delivering the important new products on time.

And getting some head room in a pretty competitive marketplace.

So we couldn't have projected the potential upside in all of these little areas that we got, but we'll take it.

And then it's a great time for us to stay hungry and keep pressing forward to continue to do better.

Okay.

And then following that, in terms of your investments in the business, you talked about international and some marketing and in 2009.

It looks like you got better leads on lower costs.

What's the strategy overall for sales and marketing domestically in 2010.

More reps, more marketing?

Just directionally what's going on there?

So two different things.

Let's maybe separate international and North America.

I think what Ken described there's some incremental spending on a pretty small base of consumer demand in the countries in Europe where it makes some sense to do that.

There is some incremental investments in headcount in core Europe and there's incremental spending in countries like China where we're working through a regulatory cycle and moving ourselves towards a view to commercialization.

We've got a ways to go there, but there's incremental investments off of what we're doing last year.

In North America, there's no incremental investment in sales force.

And we continue to hold the line pretty tightly on total consumer spend seeking additional productivity as we adjust mix and approach and seek greater conversion rates, better efficiency all that/ So in general, you've got effort on technology development and product development and a lot of other things, but these are incremental changes over the base you saw Q3, Q4 of last year.

Okay, great.

Thank you guys.

Sure.

Thank you.

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

Thanks for taking my questions.

I just have a couple of questions, quick ones.

In your table, the Invisalign proficiency requirements?

There are 15,800 dentists who have started more than one case but they have fallen short of the requirement and they got until June 30th.

I mean, of those do you guys have any sense how many of those people could get up to the minimum five cases for half year?

Spencer, yes, we do.

We actually project by practice and the sales reps and region Managers and area Directors all own that along with the marketing team to support it and the clinical education team to support it to help them accomplish their objectives.

By definition, they've said we want to be on board and we're working to do that.

So there's a distribution within that of people that are frankly by the end of January almost getting their 10 cases in for the year with the opportunity and then there are people that are still trying to elevate their practices.

What we gave them as a path with the additional qualification period that with effort, especially if they are starting in Q3 or something from very low base, that if they were making the effort and energy, both on getting up to speed on the evolving product through the CE courses online as well as starting to work in their practice increasing focus and legitimately trying to get going, we're going to support that.

And so as we said a few minutes ago, more of those practices than we originally projected were actually making that effort and we wanted to reward that and give them a bit more ramp.

So our hope is all of them are expectation is not all of them make it but our hope is they all make it.

And we do have a projection practice by practice about where they will all sort out.

Our bet with this overall thing is on the other side of this, we'll have a slightly smaller more focused and more engaged customer base that is having a lot more success with Invisalign and that we spend our time helping them get that success in practice.

So yes, we do have a pretty refined view of how we want that to project.

We're going to have to wait until the end of Q2 to see how it all plays out.

Very good, appreciate that.

Second question, the limited and deactivated group, if they have to cake clear principles, do they have to pay and if they do, how much do they have to pay?

The answer is yes.

And this was described before the end of the year.

So they can understand if they want to continue, they would have to pay the regular price which is around $2,000 for the CE-1.

And we're prepared if we get a lot of doctors that want to come back on board to hold as many CE-1 courses as we need to.

So they would pay, they would get started again, and they would have the expectation to go ramp up and to get their ten and ten.

Great.

Thank you.

Sure.

Thank you, (Operator Instructions) Our next question comes from the line of Jose Haresco from Bran Murray.

Good afternoon folks and congratulations on a good quarter.

I have a couple of questions.

Remember back in the Analyst day in late 2008 you put up a slide up there that showed remind me of the numbers a little fuzzy but large percentage of the revenue about maybe 68% or so was generated by a small number of providers maybe it was 25% or so.

Do we know what that looks like as of the end of 2009?

Yes.

What does that number look like these days?

Well, I guess, yes we do know what it looks like.

We're choosing not to provide a lot of visibility into the specifics because we're in transition.

And I think as we're trying to layout enough of a frame work with very detailed data showing you kind of which buckets practices are in.

But the second part of that is it would be reasonable to assume based on what we want to create is that our average practice will be more engaged with Invisalign and the lowest volume practices will be doing ten a year versus today they might be doing one.

And the reason for us to focus on this is we've tried everything we could imagine to engage them.

And yet our team, our clinical support group wind up when they do one case a year, one case every six months, it feels like the first time they've ever done a case.

And they struggle and then we have to drop in and help them kind of relearn all that.

Now what we're really after is with an evolving product line Invisalign, we want them if they don't stay up on it, it will feel like a new product if they do it once a year and twice a year.

So you should expect that to evolve that we've said explicitly that's our goal for that to evolve.

And again we would love everybody to come along but we're going to do our part to help each of these practices that want to be successful with Invisalign get that.

But it's already a smaller base, right?

As we've described, it will be a smaller base from what we've described as the total in the past but they by definition will be more committed and engaged with Invisalign.

Okay, referring back to this table where you've got the limit the and deactivated.

Is that as of the end of 2009 that you have 9,600 accounts deactivated and 13,400 in limited status?

That is correct, as January 1.

Should we also make the assumption the break down within each category similar to the ratio of orthos and GPs you typically work with or is it more towards one or the other?

I would say you shouldn't make that assumption.

There's a lot of movement and as I said before, you had, before you had a view of this from the Analyst day a year ago roughly before we introduced this idea.

And those numbers are changing.

As I said one dynamic is the larger number of relatively low volume practices are really making efforts to try and track.

And to say okay, let's make this part of what we're doing.

And that was part of what we had in Q3 and a little bit in Q4.

That itself is going to change what that base looks like.

So you shouldn't make the assumption that the segmentation we showed by volume back in November of 2008 is the same distribution today.

Okay, fair enough.

But again I don't want to beat this issue.

When we get through this and we have a view post proficiency kind of July 1 beyond, we will share with you the evolving view of what our customer base looks like.

But it's not going to be a snapshot.

We expect this to be part of our business for a long time.

And so this will continue to evolve over time.

Okay.

Last question.

Something you'd mentioned throughout the course of 2009 and the economy was that your GPs in particular were just afraid to sell.

It doesn't matter whether it was straighter teeth or teeth whitening or whatever else.

Just were afraid to sell because of the economy they were in.

Have you qualitatively seen a change in that behavior?

Yes, and there's things we've seen that we can speak to and then conversations I've had with leaders of other businesses that are in capital equipment or other areas, there is A, a little more money available to borrow for a practice that's indecent shape and B, less uncertainty about the end of the world scenario we had roughly a year ago kind of September 08 and through a good part of 09, so what I'd say, and there is some geography involved, there is more engagement by GPs to try to up sell services than there was a year ago.

What I'd say is in general more GPs are more comfortable being reactive to what comes in the door than seeking to choose a line of practice and emphasize it.

And there are differences.

But let me just say also, inside that broad statement, we have some customers that are just doing a great job in places like Michigan and Ohio where you would say there's ground zero for the economy being on its tail.

So in all that, our message to our customers is there are opportunities for you to elevate your practice.

And we can be part of that solution.

So but slowly I think there's a bit of a thaw.

It will be interesting to hear what some of the dental leaders come out with as they talk about dental visits starting to grow again and upscale services starting to grow slowly.

But I think that's going to come back slowly.

And I think the specialists will always be a little more focused on marketing and those activities.

Okay, great, thank you.

Sure, thank you.

And thank you, everyone for joining us today.

This concludes our conference call.

We look forward to seeing you at upcoming events including the Roth conference in March.

If you have any further questions please contact Investor Relations.

Bye-bye.

Thank you.

Ladies and Gentlemen, this concludes todays Align Technologies teleconference.

You may disconnect your lines at this time.

Thank you for your participation.