愛齊科技 (ALGN) 2010 Q2 法說會逐字稿

Welcome to the Align Technologysecond quarter 2010 financial results.

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

A 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.

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 our second quarter fiscal 2010 financial results press release today via globe Newswire and First Call, which is available on our Web site at Investor.aligntech.com.

Today's conference call is being audio webcast, and will be archived on our Website for approximately 12 months.

The telephone replay will be available today by approximately 5.30 PM Eastern Time through 5.30 PM Eastern Time on August 4.

To access the telephone replay domestic callers should dial 877-660-6853, with account number 292 followed by #, and conference number 353357 followed by #.

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

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

These forward-looking statements are only predictions and involve risks and uncertainties, such that actual results may vary significantly.

These andother risks are set forth in more detail in our Form 10-Q for the fiscal quarter ended March 31, 2010.

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 the reconciliations to the comparable GAAP financial measures where practical, are contained in today's financial results press release which we have posted on our Website under Financial Releases, and have furnished to the SEC on Form 8-K.

We encourage listeners to review these items, we have also posted a set of GAAP and nonGAAP historical financial statements, including the corresponding reconciliations and our first quarter conference call slides, our second quarter conference call slides on our Website under Quarterly Results.

Please refer to these files in more detail for information.

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

Thanks, Shirley.

On the call today I will cover some highlights from the second quarter and provide an update on our strategic initiatives.

Ken will follow with some detail on our second quarter financials and outlook for the third quarter.

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

Q2 was an outstanding quarter for Align.

Our Invisalign business continues to outperform our expectations, resulting in our third consecutive quarter for record revenues and case shipments, even without the positive effects from the release of $14.3 million of previously deferred revenue for Invisalign Teen, as well as a credit of $8.7 million from an insurance settlement related to the OrthoClear litigation.

Overall Q2 volumes were strong, particularly for our international channel which helped drive sequential and year-over-year growth for Align.

We are pleased to see continued strong interest among our leading customers at key customer eventsincluding the AAO and CDA in North America, and several smaller meetings in Europe, we have had a chance to spend time with many of our customers, and gain a current view of how they are doing, and what we can do to help continue, what we can do to help them do to grow their businesses.

On a sequential basis, we also saw improvement with our lower volume customers.

Field sales repsin North America continue to focus their efforts on helping those doctors that want to increase their confidence in treating with Invisalign and grow their practices.

A significant number of our lower volume customers are very interested in increasing their use of Invisalign, and practice development programs such as Invisalign Days, in which a full day is allocated for Invisalign consultations case management, have been particularly helpful for those practices.

The primary way we are building our business is to continue driving adoption of Invisalign into existing practices, while expanding our customer base by training the right practices in North America and internationally.

We made progress in both these areas in Q2, so let's review the key metrics that measure our performance.

Utilization rates are what we call same practice sales of our product,and the number of new doctors trained.

In Q2, total utilization increased across our customer base, and was up again both sequentially and year-over-year to 3.7 cases per quarter.

This is compared to 3.5 in Q1, and 3.0 in the same quarter last year, and reflects an increase of 6% and 23% respectively.

By customer channel, Q2 utilization increased to 5.8 cases for Ortho, 2.8 cases for GP, and 3.8 cases per initial doctor.

An increase of at least 5% sequentially, and 24% from the same quarter last year for each channel in North America, an increase of 4% sequentially, and 8% year-over-year for international doctors.

This performance is consistent with our goal of increasing utilization of Invisalign in practice as we gain share.

During Q2 we trained 960 new doctors, compared to 915 in Q1, and 1,480 in Q2 a year ago.

Of those, 565 were North American doctors and 395 were international.

Now I would like to turn to an update on our strategic initiatives.

As you know, our strategic game plan has a series of key elements that we discuss briefly each quarter.

The first is to accelerate product and technology innovation, which includes products like Invisalign Teen, as well as significant evolution in new features and functionality, and in customer-facing software.

Second, continually working to enhance the customer experience, which we typically address through evolutions in those customer-facing systems.

Third, increasing the effectiveness of our consumer demand creation process and extending brand awareness for Invisalign.

And finally continuing to drive international growth principally in Europe, while we are opening up additional new markets around the world.

Starting with product first, I will provide a brief update on Invisalign Teen, which for us means both the specific Invisalign Teen product and the all-important teenage orthodontic segment.

In Q2 we continued to gain traction in the teenage market segment for orthodontic case starts.

Teenage patients 19 and under using Invisalign products increased 10% sequentially, and 40% year-over-year to make up 22% of total worldwide volume.

This is compared to 20% of worldwide volume in Q2 2009, and 17% of the total in Q2 2008,reflecting continued studies share gain in the teenage segment.

In addition to gaining share of the teenage segment overall, the average age of our teenage patients has begun shifting towards younger patients, 11 through 17 years old, which represents the bulk of teen orthodontic case starts.

In Q2 the average age of our teenage starts was about 15.5, and we would expect it to get a bit young younger as our penetration of this segment continues.

In terms of our Invisalign Teen-specific products, Q2 revenues were $8.4 million,or 9% of total revenues, an increase of 3% sequentially, and 53% from Q2 a year ago.

Q2 Teen volume was 6,800 cases, or 10% of total volume, a slight decrease from 7,400 cases, or 11.6% of total volume in Q1.

As mentioned on the Q1 call, the initial Invisalign Teen promotion was intended to drive initial usage and repeat rates, and it was very successful in getting doctors to use in Invisalign Teen on their patients, both teens and adults alike.

Now that the promo has been changed to exclude adults, the comps are masking the continued underlying growth of teenage patients.

For Q2, North American teenagers using Invisalign Teen increased 10% sequentially, and 62% from the same quarter a year ago.

This nice progress plus faster growth in the teenage segment overall, means we are continuing to gain share.

Beyond new market-specific products like Teen, we continue to deliver significant evolutions in product features and functionality, as well as customer-facing systems, like the one we released last October.

And this fall we will launch the largest such evolution in our history, a collection of innovation that will touch every product, and virtually every system at Align, that has been engineered to deliver even better,more predictable clinical results, with wider applicability, that will allow our doctors to treat more complex and challenging cases.

As part of this launch, significant improvements and enhancements are being made in our customer-facing systems, like like VIP and ClinCheck.

These improvements are designed to make it easier for our doctors and staff to communicate their treatment plans, reduce ClinCheck treatment plan revisions, and manage account details.

We are very excited about what is coming because we believe these new features and overall improved performance will have an even greater positive impact on adoption, than we saw with our very successful release last October.

Over time we expect the significant evolution will continue to support more widespread adoption into our customers' practices.

As we get closer to release we will have more details to share with you regarding these very exciting developments.

Turning to consumer demand initiatives, consumer interest remained strong during Q2, thanks to our integrated consumer marketing platform, which integrates conventional print and media, PR and event marketing, and digital media and social networking.

On the conventional print and media side, our overall advertising spend remained flat compared to Q1, but was up compared to Q2 of last year.

Our advertising messaging has been focused on two key targets, reinforcing the value of adult treatment, and reminding younger consumers about Invisalign Teen.

With media emphasis on national cable networks, such as Bravo, Lifetime, The Travel Channel, and TBS.

On the public relations front, we continue to focus on programs that reach and educate prospective teen patients and their parents, while also integrating adult treatment messaging.

In Q2 we generated great local and national media coverage in more than 220 markets through our spring beauty tips and trends, and family summer survival and family fun satellite media tours, which were focused on Invisalign Teen.

As for event marketing, summer offers a good opportunity to reach teens and their families at events where they live, play, or vacation.

In Q2 we kicked off the Journeys Backyard Barbecue Tour as an official sponsor and event participant.

This nationwide action sports tour hosted over 81,000 attendees in five major cities.

In addition to our Invisalign smile station at each tour stop, we hosted a lead generating sweepstakes with onsite and online entry opportunities, and brought in and involved local area doctors to do Q&A and consumer education.

Q2 also marked the launch of a new entertainment-based marketing platform to create even more excitement for Invisalign Teen.

This is a great example of how event marketing, PR and digital media can work together to leverage our marketing opportunities.

This effort will involve celebrity Invisalign patients in a variety of marketing activities, including public relations efforts with the press, and social media activity online.

We are very excited about launching this marketing platform in conjunction with Invisalign sponsorship of the Annual Teen Choice Awards, which airs prime time on August 9th on FOX.

As part of our red carpet presence, the Invisalign Smile Cam will be on-site with teenage celebrity correspondents, encouraging celebrity attendees to have their photos taken to help support America's tooth fairy, the National Children's Oral Health Foundation, or NCOHF.

For every celebrity that takes a photo, Align will donate $1,000, and those celebs smiles will be uploaded to the Invisalign Teen Facebook page during pre-show broadcasts.

In addition, we will offer each of the five nominees in the Choice Smile Award category, the opportunity to gift Invisalign treatment to an underserved youth.

We are working closely with FOX to coordinate an exciting and high-impact red carpet presence at the show, as well as heavy digital media sponsorships and social media activity leading up to, and surrounding the Teen Choice Awards.

Shifting to our international growth initiatives, our international team delivered a strong quarter, with record shipments in every region.

Q2 case volumes of 16,000 are nearly 24% of our worldwide volume, increased 23% sequentially, and 33% year-over-year.

Q2 non-GAAP revenues of $22 million, or 23% of total, increased 10% sequentially, and 22% from the same quarter last year.

At the beginning of Q2 we launched Invisalign Lite, and so far it is off to a good start with positive adoption across Europe.

Recall please that Invisalign Lite replaced Invisalign Express in Europe, and offers doctors a new option for less complex orthodontic cases, such as short-term aesthetic cases, relapse cases, and pre restorative treatments, using a limited number of aligners at a more affordable overall price.

To ensure that our international team continues to deliver those great results I am very pleased we now have Richard Twomey on board as our new VP International.

Richard has extensive senior management experience with several large med tech companies, including 13 years leading Johnson and Johnson's DePuy Orthopaedics International business.

His first day on the job was July 12th, and he is quickly coming up to speed on our market and our business.

Richard will ultimately be based here in San Jose, and I am sure many of you will get a chance to meet him some time in the near future.

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

Thanks, Tom.

Q2 was a great quarter across the board, and I am very pleased with our results.

Before I review our second quarter financials in more detail, I would like to describe two items that are included in our GAAP financials that for comparison to previous quarters are excluded from our non-GAAP financials.

First the release of $14.3 million of previously deferred revenues for Invisalign Teen replacement aligners.

Recall that Invisalign Teen includes up to six free replacement aligners, and revenue for those aligners were deferred based on 100% of the fair market value for the aligners, or approximately $350 per case, until the case completed or the aligners were used.

Over the past two years we have evaluated the usage experience of Invisalign Teen replacement aligners, and now have sufficient historical evidence to support a deferral for estimated usage of approximately $20 per case.

As a result, in Q2 we reduced deferred revenue on the balance sheet for all in-process teen cases, to reflect the new estimated usage and recognized $14.3 million of incremental revenue.

Going forward, for all new teen case shipments we will defer approximately $20 per case for replacement aligners, and recognize replacement aligner revenue as it is used.

With this significantly lower estimated usage, we expect minimal deferral impacts to the P&L and balance sheet related to all new teen case shipments.

Although on a sequential basis Q2 to Q3, there will be some favorable impact to revenue, as a result of the change in estimated usage.

The great thing is that teenagers are being very compliant and not losing their aligners.

Second, operating expenses reflect an $8.6 million credit for an insurance settlement related to the OrthoClear litigation.

Now let's review Q2.

Q2 net revenue was $108.2 million, an increase of 20.1% sequentially, and 41.8% from the same quarter last year.

NonGAAP net revenue which excludes the release of $14.3 million for previously deferred revenue just mentioned was $93.9 million, an increase of 4.2% sequentially, and 23% year-over-year.

The sequential increase in nonGAAP net revenue reflects higher Invisalign case volumes, offset somewhat by lower ASPs.

The decrease in Q2 ASPs resulted primarily from the foreign exchange rate associated with international shipments, as the dollar has strengthened against the euro, higher levels of volume discounting including the 15% additional rebate we offered to elite and premiere providers in Q2, and to a much lesser extent the consumer rebate.

Case shipments of 67.5 thousand in Q2 increased 6.1% sequentially, and 27.3% from the same quarter last year.

Strong international volumes drove sequential growth in Q2, North American Ortho and GPs continued to remain engaged as a greater number of doctors attained advantaged rebate discounts during the quarter.

On a year-over-year basis, case growth was strong across all customer channels.

Q2 nonGAAP revenue by channel consisted of 39.8% for North American GPs, 31% for North America orthodontists, 23.5% for international, and 5.7% for noncase revenue.

Q2 nonGAAP revenue by product consisted of 71.9% for Invisalign Full, 9.3% for Invisalign Express, 9% for Invisalign Teen, 4.1% for Invisalign Assist, and 5.7% for noncase revenues.

Moving onto gross margin, Q2 GAAP gross margin as 80.4%, compared to 77.4% in Q1, and 76% in the same quarter last year.

Stock-based compensation expense included in gross margin was $401,000 in quarter two, compared to $435,000 in quarter one, and $406,000 in the same quarter last year.

Q2 nonGAAP gross margin which excludes the impact from the release of previously deferred revenue was 77.4%, compared to 78.3% in quarter one, and 76% in quarter two 2009.

The sequential change in nonGAAP gross margin primarily reflects the benefit from higher case volumes, offset primarily by the impact of foreign exchange rates, and higher levels of volume discounts.

Q2 GAAP operating expenses of $41.7 million include the $8.7 million credit for an insurance settlement related to the OrthoClear litigation.

This is compared to $49 million in quarter one, and $51.7 million in the same quarter last year.

Stock-based compensation included in Q2 operating expense was $3.8 million, and compares to $3 million in quarter one, and $3.9 million in the same quarter last year.

Q2 nonGAAP operating expense which excludes the credit for insurance settlement was $50.3 million, compared to $49 million in Q1 2010, and $51.3 million in the same quarter last year.

Q2 non-GAAP operating expense was relatively unchanged from Q1 2010 and Q2 last year, and reflects lower than anticipated spending related to G&A expenses and international marketing programs during the quarter.

Q2 GAAP operating income was $45.3 million, and compares to $20.7 million in Q1 2010, and $6.3 million in Q2 a year ago.

Excluding the impact from the release of previously deferred revenue and the credit for an insurance settlement, Q2 nonGAAP operating income was $22.4 million, or 23.8%.

This compares to $21.5 million, or 24% in quarter one, and $6.7 million, or 8.7% in the same quarter last year.

Our strong operating margins this quarter reflect leverage in our financial model from continued overachievement in volumes, as well as lower than expected spending.

Q2 GAAP diluted earnings per share was $0.42, compared to $0.19 in Q1, and $0.07 in the same quarter last year.

Q2 non-GAAP diluted earnings Per share was $0.21, compared to $0.20 in Q1, and $0.07 in Q2 of last year.

Now let's move on to the balance sheet.

Cash, cash equivalents, and short-term marketable securities were $244.8 million.

This is compared to $186.5 million at the end of 2009.

In Q2 we generated roughly $42.6 million in cash from operations, compared to $18.7 million in quarter one, and $18.5 million in the same quarter last year.

Q2 DSOs were 60 days compared to 59 days in Q1, and 63 days in the same quarter last year.

Deferred revenue on the balance sheet decreased to $27 million at the end of the quarter, as a result of the release of previously-deferred seen revenue.

Now let's turn to our business outlook for the third quarter of 2010.

Before I get into the details I would like to outline several factors that contribute to our view of Q3.

The summer timeframe is typically the busiest time in ortho practices that have a high percentage of adolescent and teenage patients.

Last year we saw solid sequential growth from Q2 to Q3, and expect that we will continue to gain share in this very important segment this summer.

We believe the expected growth in teenage case starts will be offset somewhat by slower traffic in GPs and European doctors' offices.

Also because of the summer vacation schedules, we typically hold fewer training classes during summer months, and therefore expect to have less training revenue in quarter three, as compared to quarter two.

And lastly, approximately 90% of our international business is done in Europe, where we are exposed to the euro.

Therefore major changes in quarter to quarter and foreign exchange rates can impact top line revenue and gross margin as we saw in quarter two.

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

For quarter three we expect case volume to be in the range of 66,000 to 68,000 cases, and revenue to be in a range of $92 million to $95 million.

We expect Q3 GAAP gross margin to be comparable to quarter two, and be in the range of 77.3% to 77.8%, reflecting some impact from foreign exchange rates offset somewhat by lower levels of discounting, and lower levels of training revenues which carry nominal gross margin.

We expect Q3 GAAP operating expenses to be in a range of $52.5 millionto $53.5 million.

The increase in Q3 operating expenses reflects increased spending in international sales and marketing, to expand sales coverage and media advertising, consumer demand programs in North America, including advertising and media, especially for Invisalign Teen around the Teen Choice Awards, as well as continued investment in product and technology innovation.

In Q3 we expect operating margin to be in a range of 20.2%to 21.4%,and earnings per share to be in the range of $0.16 to $0.18.

In quarter three we expect the effective tax rate to be in the range of approximately 28% to 30%.

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 three to be approximately 78 million shares, and from a balance sheet perspective, cash on hand at the end of quarter three is expected to be approximately $255 million to $260 million.

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

Thanks, Ken.

Just to recap, Q2 was another great quarter for Align, and I am pleased with our results.

Even without the two positive effects we previously discussed, we had our third consecutive quarter of record volume and revenues, and our operating margin was 24%, significantly higher than our expectations.

As you can see from our results over the first half of 2010 we have also made significant progress towards our strategic initiatives.

We are continuing to see the benefits from our new products, including the new features and enhancements we launched last October, and we are even more excited about the upcoming release this fall.

We continue to make steady progress in the teenage segment, and are looking forward to competing for our share of share in the ortho's office over the remainder of this summer.

And finally I will remind you to watch for us on August 9 at the Teen Choice Awards.

And with that I will open up the call to your questions.

Operator?

Thank you.

(Operator Instructions).

Our first question comes from the line of Derek Leckow.

Please proceed with your question.

Hi everybody.

Thanks a lot and congratulations on a great quarter.

Especially congratulations on that Teen information.

That is really nice to see.

The teenage patient volume being up 10% sequentially, you said that was masked by the fact you had this promotion going on.

Will we see that become more a parity number, where the number actually equals the teenage population adopting the product next quarter?

Probably a quarter or two we are going to see some kind of comparative effects until we actually get past the time when we had that promotion in play, which is really the end of the year.

But I think what we are trying to do is show you as you just described in two ways, one is what is going on with the Invisalign Teen product, as well as what is going on in the all-important teenage segment.

And I think as we have described we are sequentially growing in virtually every quarter which is our primary goal.

And does this have more of an impact over the summer months, as you mentioned this is when we see more of the balance of teenage case starts beginning here in this quarter?Will we still see that as with the comparison with fourth quarter gets, it will be tougher for us to see that I think in the fourth quarter, is that right?

Well, I guess maybe stepping back, we do know that the lion's share, an outsized percentage, and we have heard numbers as high as 35% or 40% of the pediatric and adolescent starts in the North American ortho's office happen during those summer months, kind of June to the beginning of September.

So that is where the traditional orthodontic suppliers do most of their volume, we are trying to elbow our way and get some of that share.

So if we can show sequential increase through the whole cycle that is positive, we still have a lot of headroom to grow.

I guess I don't want to get into Q4 yet.

Let's see where we wind up through the end of Q3, and then we will talk about our expectations for continued teen growth into the fourth quarter when we get there.

I think what I am trying to gauge here, Tom, is the rate of penetration.

I think you guys mentioned you were at you thought 3% or 4% penetration in the Teen market overall.

I just wanted to know what you thought would be a reasonable goal to achieve by let's say next year at this time?

Let me just come back.

What we think is I can't guarantee every quarter is going to be sequential growth, right?

Because of seasonality and everything else.

But what we believe is the kind of growth in general into the teenage segment is sustainable for a while.

Because with the opportunities there is to continue to gain share.

Again to do that we have got to execute well, we have got to have the right evolution in products and everything else.

But I think we have a view that we can continue to grow share for some period of time.

And just one more quick question here.

The new product you are launching in the fall, does this have anything to do with your collaboration with Danaher, or is this a different product?

No, this is another significant evolution, a more significant evolution than what we did last October, which really touched virtually every product,Features, functionality, software, et cetera.

And this will be probably one of the largest releases in our history.

Derek, this is Ken just to add to that.

It is not specifically a product but as Tom says, features and functionality in the product, and easier to use, engagement with the doctors and through our software system.

If I can go back to your last moment just to tie this one down, one of the drivers that we have to fight for is, are the orthodontists comfortable enough that we can handle the toughest cases in their office, teenagers and kids.

With us being able to widen the clinical applicability of the product which we are going to get at very directly with this evolution in October, later this fall that timeframe, we will be able to argue for a bigger share of that share.

And does this deal with the collaboration with Danaher?

This is simply Align.

We are still in the early stages of defining a very different unmet set of needs for extremely complex cases.

Today they decline treatment because they don't want just brackets and wires.

And today most orthodontists wouldn't use Invisalign as their first choice.

That is really what that is after, a totally different opportunity.

Thanks.

Let me jump back in the queue.

Appreciate all of the questions.

Thanks a lot.

Thank you.

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

Please proceed with your question.

Good afternoon.

Congratulations on the numbers.

Thanks, Matt.

First question, Tom, maybe you can help us with the pacing of the business that you saw throughout the quarter now that proficiency minimum case requirements are behind you.

Did you see that anticipated drop in usage from your lower volume group, or was there less of an impact than you expected?

Well, maybe I will take the high level and Ken can speak in context of guidance.

But again when we sat here three months ago, we literally were announcing this to our customers as we announced it to you.

So there was some uncertainty for us.

What played out during the quarter looked a little more normal for summer, orthodontists were out of their office at trade shows, and other kind of things we saw, GPs that were trying to grow their practice, continued trying to grow their practice.

Those GP practices that weren't that engaged didn't do much.

So we didn't see anything precipitous with the minimum case requirements going off the board.

And again, I think we have worked through that.

Now we can put it behind us.

I think we have pretty good visibility going forward.

Yes.

And if I add to that, Matt, as you think about some of the events we were at over the past quarter like the AAO as an example, we saw good engagement with the orthodontists at that show, that was right after we had changed the case requirement.

The doctors were very pleased, they were engaged, our booth was full all day long with the doctors getting training, and the like.

So it just as one data point, the enthusiasm is there from the ortho perspective.

And the overall from a quarterly perspective, the GPs maintained their volumes in total, relatively consistent with last quarter, quarter one to quarter two.

One of the other things I am really pleased about is we did have more advantage rebates that we gave out, but we had more doctors hitting those levels of cases for the quarter, so that is a good thing.

Okay.

That is helpful.

And if we can shift to the international business, we have seen several quarters now of very strong growth there.

How sustainable do you feel that is?

Are you opening up new territories in Asia or South America, or is this just the core business in western Europe still just kind of taking off?

And is that a sustainable trajectory?

So the short answer is yes.

And it is both.

We continue to make progress again on a small relative basis, in each of these market we are still small players.

In some markets orthodontic penetration is lagging far behind North America.

So if I take those in pieces, core Europe which is the biggest part of the volume continues do very well.

They are a bit seasonal, and as you know everybody takes a holiday for an extended period in the summer months.

We typically see Q2 as a solid quarter for them, and they showed that.

This was across the five major countries in Europe that we support.

And pretty consistent, solid progress in each.

And in each of those places we have opportunities to grow share, and take more of the existing volume plus grow market in those places where we can add a little bit of consumer demand.

When I come to the other geographies, certainly China is a long-term opportunity.

There is no revenue there yet.

Japan grew a little on a very small base for us.

And then we have all of the distributor geographies growing very nicely on volume, not quite as much revenue impact because of the distributor margin, but growing actually at a rate faster in general than even Europe.

So very pleased with that, but again it is coming about from implementing new products, all of the new technologies we have talked about here, and as we make the product better and get the offerings better, and create better support, more localized support, customers do predictable things and use us, and let us be a bigger part of their practice.

So we are pleased but we still have a lot more go.

So I am not going to make a long-term projection, but we are still very underpenetrated into the existing market in core Europe, and I think there is a lot more latent demand there to be had.

Okay.

And then finally, there has been a fair amount of market chatter out there surrounding competition, and pending competitive launches.

Can you may be give us your general take on Invisalign's competitive landscape as it stands today?

Well, look, we take every competitor very seriously.

We are very prepared to compete.

And we are going to compete through continual evolution of the product, making it better, becoming a more indispensable partner with our practices that work with us, helping them grow their volume and their practice, bringing patients to their office, covering them with the best and largest sales force in the orthodontic industry.

Our nearest competitor has as a sales force less than half our size, and they focus on brackets and wires and maybe some day a little bit of clear liners.

Our team focuses only on clear liner therapy, and is more practice-management consultant than sales rep.

So in addition, across the board we are prepared to compete.

That doesn't mean we are looking forward to it, but it is predictable that the leaders in this industry are going to do things like try to enhance their existing products.

In Dentsply's case, their MTM which they have had for many years, and in Oremco's case the SIMPLY5.

I think they are probably looking around at the wreckage after the last economic downturn, saying this is probably one of the only segments in the dental industry that actually grew.

So if I was in their shoes I would do the same thing.

And we are going to make sure that we are prepared to compete with that.

Okay, great.

Thanks for the time, guys.

Sure.

Thank you.

Our next question comes from the line of Jose Haresco with JMP Securities.

Please proceed with your question.

Hi folks.

And congratulations on a really strong quarter.

Thanks, Jose.

Let's talk about those margins for a bit.

Ken you mentioned that as long as you guys keep seeing those increases in volume, that it will really help the gross margins?

At this point it has surpassed most my expectations for where those margins could go.

So could you give us a more longer term outlook on the three to five-year basis?

Where can we see those margins go in the long run?

Well, Jose, I guess I would answer your question as the following.

We have our long-term model out there.

We have articulated that in the past.

We are certainly very pleased that we have been exceeding that model in the recent quarters, but for the long term prospects of the business we still think that is the right long term model to be running under.

And it does a couple of things.

It allows us to continue to invest on strategic initiatives, at the same time we think it is providing us an opportunity to drive additional shareholder value over the longer term while making those investments.

So we are still thinking kind of in the high-70s range, again of over the long run?

The model we have out there is 73 to 78.

And we are not providing any update on that.

And we think we will be driving within that range for the foreseeable future.

Okay.

Could you differentiate between how much of that improvement could be volume-driven versus further investments in the manufacturing technologies and the production lines that you have got in South America?

Well, most of our, the biggest driver as far as margins are concerned, gross margins are concerned is volume.

So as you know when we have a significant uptick in revenues on case shipments in a quarter, that gives us more leverage in our factories, because we are relatively fixed costs in the factory, both in Juarez as well as Costa Rica, at least in the short-term perspective.

Over time given case volumes and projected growth in the business, we continue to look at capacity and those types of things.

We think we have ample capacity right now.

So if we continue to drive additional case volume in the business, we will have some potential keeping those margins in the range that we have out there as our long term model.

The other thing I would say is, don't forget that we do business in core Europe in the euros, so we are subject to exchange rate impacts there.

We saw some of that this quarter from quarter one to quarter two, which puts a little bit of downward pressure on margins.

And then we are continuing to just every year drive additional efficiency into the factories.

Okay.

Thanks again.

Thanks, Jose.

Thank you.

Our next question comes from the line of Jonathan Block from Suntrust.

Please proceed with your question.

Thanks and good afternoon, guys.

First question just maybe on the consumer rebate program, you mentioned it sounds like the program was successful.

I don't believe you are running that in Q3.

So maybe just what you guys experience through that program,is that something that you will bring up once a quarter on an annual basis, did it reach sort of the MTV goals, et cetera?

Thanks, Jonathan.

The short answer is it was successful, and it wasn't used as much as we had anticipated.

The reason why we spoke about it in the detail we did, was because from an accounting perspective we had to project the worst possible impact of about $1 million in costs.

And it got integrated into our guidance.

And so with that as a framework, it was used substantially less, and the way it worked out it was targeted at those lower volume GP practices that were wanting to elevate their practice, and doing marketing and making efforts with the Align rep.

And during those Invisalign Days or other marketing activities, the rep in the office having one of those in their pocket, if they felt there was a consumer that was on the fence ready to start or not start a case, they could use that for a $250 coupon which could be redeemed if they started before June 31.

The fact is probably less than a third or those of around a third of those were actually used for what were distributed out to the sales force for these purposes.

And feedback which is great feedback from our customers said, it wasn't required to get them to say yes.

So that is a wonderful, wonderful problem.

So it wasn't used as much, there are no plans to do that in the future right now.

And it was a bit of a pilot.

And it accomplished a lot of its objectives.

Perfect.

And then maybe just to switch gears moving over to proficiency, it would seem through your numbers and maybe even more importantly, through your guidance that should be behind investors.

But just maybe if you can speak to what your sales reps are encountering every day out in the field, is proficiency in your mind sort of rear-view mirror?

I mean, it is over and done with?

Or is it still cropping up some angst amongst some docs here and there?

Well, we had a great opportunity, the answer is it's really in the rear-view mirror for everybody.

And there are no minimum case requirements.

We have had lots of opportunities to talk to thousands of our customers, orthos and GPs.

And for the most part the discussions we are having with them is even if they didn't really like it, they understand what we were trying to accomplish.

And many of those practices are now significantly more engaged than they were before.

So the short answer again is yes, that that is in the rear-view mirror.

Okay.

Last one if I can just slip it in.

Ken I will sort of follow up on Jose's question instead of gross margins, op margins.

I think revenues I believe were up 23% year-over-year in non-GAAP OpEx I think was down on an absolute basis.

So what is going on there?

Is it sort of all the restructuring investments in 2009, and where can op margins go long-term?

Thanks, guys.

Sure.

So I will go back to kind of the same answer, which is our long term model out there.

We are not updating at this point in time.

We still again feel it is the right model to be running the business under.

Over the long-term just going back to investments we want to make, I will use China as an example, where we are looking at regulatory approval, and then we will be building up a team over there a small team, but an investment for us for long term revenue opportunities.

Over the past quarter we had some savings in the G&A area on our OpEx, for reasons that were good reasons, our Receivables are in excellent shape on Days Sales Outstanding.

So we were not, we had no requirement for bad debt reserves in the quarter.

We underspent in some legal fees in the quarter and other areas.

And we are seeing that flow through the P&L here right now.

So I think we are being very mindful of our spend in the business, and the restructurings we took were in late 2008.

We started seeing some benefit in late, over the second half of 2009, and we are just continuing to be diligent about our spending, and making sure we are spending on the right things.

Thank you.

Thanks very much.

Thank you.

Our next question is from the line of Robert Gold with Brigantine Advisors.

Please proceed with your question.

Great quarter, guys.

Really very strong.

Just a quick comment.

We have heard from a lot of the comments across the med techs space, and also in the clinical testing markets, that some patients are deferring physician visits, and some elective surgical procedures have been deferred.

So just kind of a question about the overall market dynamics in Europe and the US, given the uncertainties right now, and what you are hearing from the clinicians in kind of a pushback on that level?

So the geographies we are talking about are very different with very different dynamics.

I guess it was slightly better news that came out today about European, kind of the 16 countries in the Euro zone reporting slightly better economic activity and growth, which maybe takes some broad risk off the table.

I don't know if that is the answer.

But the bigger fact for us, Robert, is that we are just very, very underpenetrated into an existing market.

And then on the margin, our cost effective efforts to expand the category, expand the market are being rewarded.

So there are still a very large number of potential patients.

We are decades behind some of the other esthetic procedures, and growth into the latent demand for opthalmology and some other esthetic kinds of procedures.

So I think the blessing for us is that we don't yet track the broader market, because we have such low penetration.

If I break that down a bit more, what we hear from our customers in North America and Europe is, schedules are solid and full, they are doing a lot of consults, they have learned to fight a little more for the business, they aren't taking it for granted, so I think they are probably working a bit harder.

The orthodontists that we talk to are extremely engaged.

In North America this is their real busy time, and they are at it hard.

In Europe they are kind of tying up loose ends before everybody disappears for, the middle of July kind of turns to the late August, and they disappear on holiday.

So it is pretty quiet over there.

But business is solid.

If I get more focused in Europe, probably Germany has been a softer market in general, probably a bit more conservative.

UK, Italy, Spain, and some others have been really good.

But again, the bigger fact is that our penetration is still very low, and at least where we are as a player and as a segment, we don't yet track market.

That is very helpful.

Thank you.

And just finally, outside of the US you mentioned that the ASPs in Q3 may be under a little bit of pressure, and you mentioned that it was largely due to currency impact.

Is there anything else at play there in terms of overall mix or discounting?

So with our guidance in relation to currency we think there is going to be some impact and we built some impact in there just like we saw this past quarter for core Europe.

Other than that the only other things really impacting ASPs is actually more in a favorable direction offsetting some of that potential FX impact.

This past quarter we had an additional 15% rebate that we provided to our premiere and elite doctors.

That was a one quarter promotion for those doctorsin Q2.

And we are not repeating that in Q3.

So we will have some upside from a little less discounting there, as well as we only ran the rebate program in Q2, and that is not repeating in Q3,so that will have some upward pressure on ASPs.

Got you.

Okay.

Thank you very much.

Thank you, Robert.

Thank you, Robert.

Ladies and gentlemen, at this time I would like to turn the floor back to management for any closing comments.

Thank you.

And thank you everyone for joining us today.

That concludes our conference call.

If you have any further follow-up questions please contact Align investor relations.

Thanks and have a great day.

Thank you.

Ladies and gentlemen you may disconnect your lines at this time.

Thank you for your participation.