愛齊科技 (ALGN) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the fourth quarter earnings conference call.

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

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

Ms.

Stacey, you may now begin.

Thank you.

Good afternoon, everyone, and thank you for joining us.

I'm Shirley Stacy, Senior Director of Corporate and Investor Communications.

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

Before we begin, let me cover some housekeeping items.

We issued our fourth quarter fiscal 2010 financial results press release today via GlobeNewswire, 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.

A telephone replay will be available today by approximately 5.30 pm Eastern Time through 5.30 pm Eastern Time on February 9, 2011.

To access the telephone replay, domestic callers should dial 877-660-6853 with account number 292 followed by pound and conference number 364595 followed by pound.

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

As a reminder, the information that the presenters discuss today will include forward-looking statements, including without limitation, statements about Align's future events, product outlook and expected financial results for the first quarter of fiscal 2011.

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

These and other risks are set forth in more detail in our form 10-Q for the fiscal quarter ended September 30, 2010.

These forward 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 the 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 posted on our web site at investor.aligntech.com under financial releases, and have furnished to the SEC under 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 web site at investor.aligntech.com under quarterly results.

Please refer to these files for more detailed information.

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 updating our key strategic initiatives.

Ken will follow with some detail on financial results and our outlook for the first quarter, as well as some qualitative comments about how we view 2011.

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

Our fourth quarter results were solid with revenue case shipments at the high end of our guidance.

Despite a soft start in North America for Align, as well as much of the domestic dental industry, Invisalign case submissions rebounded in the second half of the quarter, and this has continued into the first quarter of 2011.

Overall, we've seen a strong uptick in North American case receipts reflecting increased patient traffic in our customers' offices, trashing for the new Advantage Rebate Program, programs such as Invisalign days to help practices build sustainable growth as well as positive impact from consumer marketing initiatives.

Q4 EPS was slightly below our outlook, primarily due to cost associated with the Cadent relationship we announced recently, as well as higher than expected participation in the Advantage Rebate Program as a higher percentage of doctors push to achieve premier provider status or to reach a higher level in the program for 2011.

For the full year, non-GAAP revenues of $372.8 million increased nearly 20% over 2009 on volume of 261,000 cases.

From a geographic perspective, North American case volume was down sequentially, as we expected, given the softer conditions we saw in the dental market as we entered Q4.

Volume was down 5.8% for GP dentists, and 5.3% for orthodontists.

The sequential decline among North American orthos primarily reflects seasonality in orthodontic case starts.

Recall that more teenagers begin treatment in the summer than in the fall.

As our penetration into the teenage segment increases, our results are more closely in line with the overall orthodontic market, which we believe decreased a bit sequentially from Q3.

On a year-over-year basis, Q4 North American case volume for GPs decreased 8.8% while North American orthos actually increased 10.8%.

On the international front, Q4 case volume increased slightly from a stronger than expected Q3 and was up 20.2% from the prior year.

We continue to make good progress in Europe and Japan, as well as through our distributors in the APAC, EMEA and Latin America regions whose collective growth rate continues to out pace Europe, although off a small base.

Now 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 Q4, total utilization was unchanged from 3.6 cases per quarter in Q3, and increased slightly from 3.3 in Q4 of 2009.

North American ortho and GP utilization saw minor to sequential decreases to 5.6 and 2.6 cases per doctor respectively.

Utilization among our international doctors increased sequentially to 3.9 cases, and despite the softer overall market conditions, on a year-over-year basis, total worldwide doctor utilization in Invisalign increased 9%, reflecting increased use across all customer channels.

During Q4 we trained a total of 1,235 new doctors, a 50% increase from 825 in Q3, which traditionally has fewer training classes.

In North America, we trained 740 new doctors of which 665 were GPs, and 75 were orthos.

During the quarter we held twice the number of CE-1 courses than in Q3 and trained the highest number of new GPs in the past year and a half.

In addition, 175 GPs reactivated their accounts in Q4 for a total of 740 GP reactivations in 2010.

For international, we trained 495 new doctors, up substantially from the 275 trained in Q3, which again, had fewer training events.

In terms of training new international doctors, I do want to set some expectations for 2011 here.

Given the upcoming international release of G3 in the second quarter, and the numerous countries and languages we will be dealing with, the international team tends to pull back a bit on training until the rollout is complete.

Let me now shift to our strategic initiatives.

Our strategy has a series of key initiatives that we typically discuss each quarter, and I want to focus on that now, as we are making significant progress in each area.

The first is to accelerate product and clinical innovation, which includes new products along with significant evolution in new features and functionality.

Second, continuing to enhance the customer experience, which we typically address through evolution in customer facing systems.

Third, increasing the effectiveness of our consumer demand creation process and extending brand awareness, and finally continuing to drive international growth, principally in Europe while we're opening up additional new markets around the world.

To start with the product and clinical innovation, I'll provide a brief update on the launch of Invisalign G3 and our progress in the overall teenage orthodontic market segment.

In October, we launched Invisalign G3, a collection of innovation engineered to deliver even better, more predictable, clinical results and make it easier for our doctors to treat more complex cases.

To date, with a quarter's worth of use and feedback, Invisalign G3 has exceeded our very high expectations.

In order to ensure a great launch, we established key training adoption and usage metrics and have monitored them to gauge our performance.

In terms of our initial training goals, we aimed to train 3,000 doctors through the live G3 Ask the Expert Webinar on October 1, and we actually had 4,000 sign up and participate.In addition, another 2,000 have since viewed the archived training on our Align Tech institute web site, for a total of 6,000 doctors trained on G3 by the end of Q4.

Our ClinCheck software adoption, we have far exceeded our goal to have 60% of doctors using ClinCheck 3.0 by the end of Q4.

In fact, we actually had 60% of doctors submitting cases with ClinCheck 3.0 by day three of the launch, and by the end of Q4 we had 87%.

We have never experienced this sort of pull for new software among our customer base, which suggests we got it right.

For the Precision Cuts features, which makes it easier for doctors to treat Class II and Class III patients, we had a goal of 2,000 new cases submitted, and achieved 3,300 or 65% above our goal.

This is a clear indication that G3 is already enabling a shift towards more complex cases our customers are willing to treat with Invisalign .

Invisalign G3 has been a very successful launch and one of the best technology evolutions in the history of Align.

We have continued to get positive feedback from our customers, especially orthodontists, which brings me to my next point.

Another key element of our strategy is to gain share of the overall teenage orthodontic market, as measured by the total number of teenagers using any Invisalign product, full or teen.

Teenagers 19 and under represent 75% of applicable annual orthodontic case starts and are a big opportunity for growth.

In Q4, the number of teenagers starting treatment with Invisalign products was 13,700 or 21.7% of total volume, compared to 16,400 or 24.8% in Q3.

The sequential decrease in teenage cases reflects the seasonality in the orthodontic market that I mentioned earlier, in which our customers' total teen starts typically decrease in the fall than the busier summer period.

In addition, teenage cases do represent meaningful volume in the GP channel as well, and the softness we saw in Q3 and the first half of Q4 also impacted their teenage cases.

For the full year, the total number of teenage patients was 58,400 or 22% of our volume, an increase of 27% from 2009, so we are definitely headed in the right direction here.

Our goals in consumer marketing are to extend our leadership in clear liner therapy with adults, increase awareness and motivation with moms and teens, and the continued expansion of the clear liner category overall.

In Q4, we continued building awareness and demand through an integrated consumer marketing platform of traditional media, PR and event marketing, and digital and social media.

In traditional print and broadcast media, Invisalign continued to star on morning and afternoon news programming with beauty experts featured on numerous shows touting Invisalign as a celebrity top beauty secret.

Celebrity tie-ins to Invisalign are also a focal point of our traditional media campaign.

Last quarter we told you about the launch of Invisalign studio, an exciting entertainment based marketing platform focused on celebrity treatment and testimonials.

Throughout Q4, we leveraged this new program to identify and recruit celebrities who are in need of treatment, and are willing to share their experience with the world.

Over the next few months, these celebs will start publicizing their treatment experiences through PR placements in teen, and entertainment press, and social media outlets.

We also continue to involve the increasingly important mom audience to help promote Invisalign teen online and in traditional media.

As part of the Mommy Must Have's media tour, which is focused on parents of adolescents, tweens and teens, Invisalign was promoted as the best new modern option for straightening teeth on news programs in 15 markets, generating nearly seven million consumer impressions.

On the digital and social media front, we've kicked off our Mom Advisory Board with Invisalign and Invisalign teen brand ambassadors to document their kids' treatment process online and to help educate other moms, and answer questions that parents and teens have about Invisalign teen treatment.

We also launched a new online community for moms called MomsonBraces.org, which will serve as a premiere destination for moms researching braces and teeth straightening for their children.

Going forward, moms will be targeted through a focused run of print and TV ads increasing their awareness prior to the summer months when most teens visit their orthodontist to start treatment.

We'll also have a significant PR push behind the introduction of Invisalign G3, the consumer audience to educate them on the advanced capabilities of this new product, that makes even the most complex cases possible without fixed appliances.

Shifting to international, Q4 was another good quarter with revenues up 7% sequentially and 17% year-over-year.

Q4 case volumes of 16,300 or 26% of worldwide volume increased slightly over Q3, and was up 20% year-over-year.

The success of the Invisalign Lite product, with more attractive pricing, was visible with Invisalign Lite cases finishing the quarter at 10% of total international sales.

In Q4, the team in Europe enhanced the direct sales organization with a new managing director and the addition of territory managers in targeted markets.We made incremental investments in media activity in the UK, Italy and Germany, coupled with an increase in professional marketing activities just as we prepare for the international launch of G3 and the new Invisalign branding.

The launch of Invisalign G3 internationally is just as important if not more important than the North American launch due to the higher complexity of cases in international markets and the G3 features designed to address those complex treatment issues.

Outside of Europe, Japan continues to exhibit strong growth, albeit on a small customer base; and in China, we're on track and working hard towards the commercial launch of Invisalign in the second half of the year.

Before I turn the call over to Ken, I would like to briefly comment on the joint development agreement we announced a couple of weeks ago with Cadent, a leader in intraoral scanning systems for orthodontics in general dentistry.

The agreement embodies our commitment to innovation and our desire to improve the overall customer experience for Invisalign providers.

With Cadent, we will develop chair-side applications to run on Cadent intraoral scanning systems for use in Invisalign treatment.

The goal is to enhance Invisalign case assessment and treatment planning by bringing digital tools chair-side into practice.

Providing real-time chair-side applications on Cadent scanners will make key aspects more efficient for doctors and will also help them present the case to the patient and more actively involve them in the decision process.

We are accelerating some of our investments to speed these new chair-side applications to market, and expect our first application to be available by the end of the year.

Before we can bring these applications to market, we need to ensure interoperability with the Cadent scanners for use with Invisalign treatment.

As you know, doctors currently submit PVS impressions of the patient's dentition to Align to start a new Invisalign case.

Intraoral scanning gives doctors the option of submitting fully digital intraoral scans of the dentition instead of a physical impression, an option that is more efficient for the doctor and much more comfortable for the patient.

We have established very robust standards for scan quality and accuracy to ensure a specific scanning technology can successfully replace PVS impressions for Invisalign treatment.

Cadent is one of the companies we've been working with for some time, and we are now in final beta tests to validate their systems, and expect to announce interoperability with Cadent scanners in Q2 of this year.

We're excited about this agreement with Cadent.

It gives us an opportunity to combine our market leading technologies to bring innovative new tools to Invisalign and Cadent customers.

We believe intraoral scanning will become an important part of normal dental practice, and Invisalign can benefit by being at chair-side with these commonly used tools.As we get closer to commercial launch, we will share more information with you on these new applications.

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

Thanks, Tom.

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

Q4 net revenue of $92.9 million on case shipments of 63,500 decreased 3.2% sequentially and increased 7.2% year-over-year.

The sequential decrease in revenue primarily reflects lower case receipts in North America, which we experienced in quarter three and midway through the Q4 time frame.

To a lesser extent revenue was also impacted by lower ASPs in North America as doctors obtained higher volume discounts related to our Advantage Rebate Program.

The lower volumes and ASPs in North America were offset somewhat as international shipments benefited from favorable foreign exchange rates.

On a year-over-year basis, Q4 revenue growth was driven by higher case volumes primarily among North American orthos and international doctors, with worldwide ASPs remaining relatively flat.

Q4 case shipments of 63,500 decreased 4.1% sequentially, and despite some softness in the domestic dental industry, we still increased 4% from the same quarter last year.

The sequential decrease reflects lower North American case volumes, with international case volumes remaining consistent quarter-over-quarter.

On a year-over-year basis, Q4 case shipments were up 20.2% for international and 10.8% for North American orthos, with North American GPs being down 8.8%.

Now let's move on to gross margin and operating expenses.

Gross margin for quarter four 2010 was 77.2%, compared to 78.1% in quarter three 2010, and 73.7% in quarter four 2009.

The sequential decrease in gross margin reflects lower case volumes and higher customer rebates, offset by the favorable impact of foreign exchange rates on international shipments.

Q4 gross margin was higher than the original guidance range of 76% to 76.5% because the cost of the Invisalign ortho summit and other continuing education programs were not included in cost of goods sold as we had expected when we provided Q4 guidance.

When we eliminated the proficiency program annual CE requirements in quarter four, all fees and costs incurred for the continuing education programs, including the Invisalign ortho summit were included in sales and marketing expense.

Q4 GAAP offering expense was $57 million compared to $53 million in quarter three, and $49.2 million in the same quarter last year.

Q4 operating expenses include settlement costs of $1.2 million related to the Leiszler class action settlement.

This is in addition to the $3.3 million recorded in quarter three and brings the total charges recorded for the settlement to $4.5 million.

Excluding the Leiszler settlement costs, Q4 non-GAAP operating expense was $55.7 million, and compares to $49.7 million in quarter three and $49.2 million in quarter four 2009.

The sequential increase in operating expense reflects our continued strategic investments on the international front, including key consumer and professional marketing programs, clinical and customer support, and preparation for the international G3 and China commercial launches.

International spend was also impacted by a stronger euro.

Additionally in quarter four, we held our North American ortho summit, had a significant presence at several major trade shows, including the ADA in greater New York, and incurred costs associated with the Cadent relationship.

Q4 GAAP operating income was $14.8 million, and compares to $21.9 million in quarter three 2010 and $14.6 million in Q4 a year ago.

Q4 non-GAAP operating income was $16 million, or 17.2%.

This is compared to $25.2 million or 26.3% in quarter three, and $18.9 million or 21.8% in the same quarter last year.

The sequential decrease in non-GAAP operating margin reflects lower case volume and increased spending.

Q4 GAAP diluted earnings per share was $0.13, compared to $0.22 in quarter three and $0.15 in the same quarter last year.

Q4 non-GAAP diluted earnings per share was $0.14, compared to $0.25 in quarter three and $0.16 in Q4 of last year.

Moving on to the balance sheet, cash, cash equivalence and marketable securities were $312.4 million, this is compared to $186.5 million at the end of 2009.

In Q4, we generated roughly $32.5 million in cash from operations, compared to $35.7 million in quarter three and $34.3 million in the same quarter last year.

Q4 DSOs were 63 days, up slightly from Q3 of 60, and 57 days in the same quarter last year.

Before we move to our outlook, I would like to make a few comments on the full-year results.

On a full-year basis, GAAP revenue was a record $387.1 million, up 24%, compared to $312.3 million in 2009.

Adjusting for the onetime impact in Q2 2010 of $14.3 million for revenue previously deferred for teen replacement aligners, non-GAAP revenue for the year was a record $372.8 million, up 19.4% year-over-year, reflecting solid growth in all channels, especially North American orthos and international doctors.

GAAP operating income for the year was $102.7 million or 26.5% compared to a loss of $34 million or 10.9% in 2009.

Non-GAAP operating income for the year was $85.1 million or 22.8% compared to $43.1 million or 13.8% in 2009.

GAAP diluted earnings per share was $0.95 for 2010, compared to a loss of $0.45 in 2009, and non-GAAP earnings per share was $0.80, compared to $0.41 in 2009.

For the full year, we generated $129.5 million in cash from operations.

This compares to $74.2 million in 2009.

Overall, I am pleased with our continued progress and better than expected results for the year.

Despite a challenging economic environment, and a slowdown in patient traffic in doctors' offices over much of the second half, with continued focus and execution of our strategic initiatives, we grew our business and expanded our operating margins.

Now let's turn to our business outlook for Q1 2011.

2011 is off to a good start.

Our customers report that patient traffic flow in the office picked up over the second half of quarter four, and industry observers are anticipating increased dental visits and orthodontic case starts.

For Q1, we expect revenues to be in the range of $99 million to $102.5 million on case volume of 67,000 to 69,500 cases.

We expect our North American business to benefit from the increased activity and volume trends we are seeing.

On the international side of the business, we expect volumes to be relatively consistent with quarter four.

We expect gross margin to be in the range of 77.3% to 77.8%.

In quarter one, we expect operating expenses to be in the range of $59.5 million to $60.5 million.

The sequential increase from quarter four reflects development costs related to the Cadent joint development agreement, continued investment in international expansion, as well as annual increases in employee related compensation and benefits.

We expect Q1 operating margin to be in the range of 17.2% to 18.8%, and earnings per share to be in the range of $0.15 to $0.17.

In Q1, we expect the effective tax rate to be approximately 28%, and from a cash position, we expect to pay minimal cash taxes as we utilize net operating losses on our tax returns.

We expect diluted shares outstanding to be approximately 79.2 million and cash on hand to be approximately $315 million to $320 million at the end of quarter one.

Finally, in Q1, we expect capital expenditures to be in the range of $8 million to $10 million, which includes investments in our Juarez manufacturing facility to add incremental capacity.

Given our need to expand manufacturing capacity to meet demands from expanding volumes and continued international expansion, we're also evaluating other potential locations for an additional aligner fabrication site, which would likely be outside of North America.

Now I'd like to transition to provide some directional comments and perspective on 2011.

From a revenue perspective, we believe we are focused on the right strategic levers, and with our expanded product platform, including the new features of Invisalign G3, we believe we will continue to grow and gain share during the year.

We believe we can maintain gross margins at the upper levels of our long-term model range of 73% to 78%.

Recall, elements that can impact our gross margin structure, either positive or negative, are significant shifts in case volume quarter-to-quarter, movements in foreign exchange rates, particularly the euro, and levels of advantage rebates and promotional discounts attained by our customers.

Turning to operating expenses, we expect some quarterly fluctuation from Q1 levels during the year due to timing and amounts to spend relative to consumer marketing, international expansion, R&D investments, product commercialization efforts, and significant trade show and industry events.

We have been clear about our strategic initiatives to drive long-term growth and profitability in the business.

We still have many attractive strategic investment opportunities with high MPVs, and while we experienced slower case receipt levels in Q3 and the first half of Q4, we remain committed to investing strategically to create long-term value.

Given the rebound in case receipts in the second half of Q4, which have continued into Q1, we're confident about our top-line growth resuming and expect operating margins to approach the 20% level in the second half of 2011.

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

Thanks, Ken.

Overall, I'm very pleased with our performance in 2010.

We had many significant accomplishments this year, including the launch of new products; Invisalign G3 and Invisalign Lite, which have been very well received by customers.

We continue to gain share in the very important teen orthodontic segment and expect this to continue, especially since we've added G3 features to address more complex cases.

We continue to build awareness and demand through an integrated consumer marketing platform, which is a significant differentiator for us from any competitor; and as far as international growth, we added a third international distributor to cover the EMEA region and we received regulatory approval for commercial launch in China, which is on track for the second half of the year.

As a result of that good execution, we've had strong revenue growth and achieved record operating margins.

As we've demonstrated before, if changes in the marketplace impact our volume, then we are capable and committed to running our business on a lower-cost basis.

That said, we're optimistic about the recent trends in volume, and we're confident that we will make progress in operating profitability as we go through the year.

Now that we're off and running in 2011, I want you to know that the market opportunity and value proposition for Invisalign is strong as ever, and that we will continue to execute our strategy to drive adoption worldwide.

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

And with that I'll turn it back to the operator for some questions.

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

(Operator Instructions)Matt Dolan, ROTH Capital Partners.

Hello, guys, good afternoon.

Thank you for taking my question.First on the quarter, just looking at the impact of Cadent and the rebate program, can you tease that out for us?

How much was it in total and how much from each category?

Well, Matt we don't specifically want to call out what we spent in relation to getting this Cadent relationship going, but I will say that there was some consulting that we incurred in relation to setting up that agreement and some legal and a little bit of accounting fees as well.

But if you combine that with the volume rebate, those two combined and you add them together, it probably gets you a couple of percentage points on the -- a percentage point to 2 percentage points on operating margin where we had an impact for the quarter; and then probably if you go down to EPS, probably $0.01 - $0.02 impact on the bottom line.

$0.01 - $0.02 Okay, great.

And then looking to the first quarter guidance, since you're expecting flat volumes for the international business, can you help us understand what you've seen in North America that's going to give you that sequential rebound, coming out of Q4 and into the early parts of January here?

There must be something that's perked up here for you to see that nice sequential uptick.

Yes.

Maybe I'll start and maybe Tom can add some color to it as well.

So, as we came through quarter 4, we saw a slowness in case receipts as we had mentioned in the first part of the quarter; and as we started moving out of the quarter towards the GP side of the business, started rebounding probably in the early November mid-November time frame.

The ortho side of the business really accelerated from a case receipts rebounding right towards the end of the quarter.

So we had a little bit of buildup of receipts in the system.

We had our shipments laid out for the quarter.

So one of the things that you'll be seeing is, because we had case receipts and ClinChecks occur right at the end of the quarter, those will translate into revenue for the first quarter, and as we started moving through the first quarter here, we've seen case receipt flow still pretty strong here.

Tom, you want to add anything to that?

May I just say it's kind of a broad-based effect.

We see practices back in the game, and consumers shopping carefully.

But far more activity in practices all across the board.

We don't see softness in international really.

They've had a couple of tough comps with very strong Q3, for example.

But, again, Ken spoke to strong solid rebound in the flow of traffic; and what that means for us to get cases started, and pretty good visibility at least well into Q1.

Okay.

And then last one, on the expenses for the year, Ken, you touched a little bit on 2011.

Maybe you can help us understand the ebbs and flows of your spend as compared to Q1.

You talked about fluctuations.

I'm not sure if we're at the high end or the low end, and then getting towards the 20% margin.

So where are we relative to the overall magnitude of your increased spend this year?

And I'll leave it there.

Sure.

So I'll give you kind of an order of direction.

So there are probably two or three things I'll talk to.

First of all, on the international side of the business in Europe, we've been behind in some of our head count ads.

As we've moved through this year, we got a new VP of International on board mid-year.

We added a new managing director in Europe just recently and we've been executing on getting some head count on board during the fourth quarter.

And with that head count, we're able to now execute on some marketing and sales programs in Europe.

So we'll continue to look at staffing Europe from a sales staff perspective in the major countries as we move through the year, albeit on a small base of about 40 or so reps right now.

But we'll still be adding reps and customer facing people in the various regions.

Looking at also with G3 being launched internationally, in the second quarter here, we'll be ramping up here for some commercialization efforts as we go through the first half of the year, and then China, on the international side, will also be incurring, incremental expenses on a quarter-over-quarter basis, again, coming off a smaller base, but still incremental in relation to launching in China over the second half of the year.

And then, if you look at investments in North America, it's the levels of spend we put into every quarter in relation to TV media or I'll say consumer demand in general, whether it's TV, digital or PR, and then various trade shows that we attend during the year.

I think you guys know which quarters those are typically occurring in.

And then we have our summits for international doctors and for our North American GPs next year.

Next year it's in Quarter Three - our GP summit.

Those are significant events for us as far as costs are associated with it.

That's kind of how I see the expense flowing out next year kind of qualitatively.

And as I say you should probably think about the timing of significant industry events we attend.

So it sounds like it's generally increasing, not necessarily fluctuating.

I think you may see some quarters where it might be up and some quarters where it might be down a bit depending on timing in some of these industry events.

Okay.

Thanks a lot, guys.

Jose Haresco, GMP Securities.

A couple of questions.

Again, this is kind of going into the spend question.

Of the expenses incurred in the fourth quarter in relation to the rebates and Cadent, are any of those going to flow forward into Q1, Q2, Q3, or is that, for all intents and purposes, should I consider those one-time expenses?

I'll start with Cadent.

So we announced a joint development agreement with Cadent in the first week of January.

We said we would be spending several million dollars over the next few quarters in that development effort working with them to accelerate getting to chair-side with scanners that can incorporate Invisalign into their process.

So we'll be incurring costs for there as we go through the first part of the year.

The other one, in relation to the volume rebates, we had a lot of doctors really striving to meet the minimum requirements to get into the Preferred Provider Program at the end of the quarter.

They're kind of setting out for Quarter One going forward, and then we'll look at that as we go through the year.

But, I think it's the good thing from my perspective is that we had a lot of doctors reaching to 12 plus cases, and even doctors that are at 12 cases going to 13, 14 or 20 cases in the quarter.

And they're moving to levels they can sustain their business on a go-forward basis with incremental Invisalign.

Just to build on that maybe, some of the volume at the end of the quarter that we may have experienced in terms of pricing didn't all ship through.

So there's some of that volume growth is going to be into the Q1 numbers.

Some of that cost for us, in effect, in rebate was in Q4.

So in that way, that timing issue, that will not be a carry-forward issue.

Okay.

As mentioned, you trained a lot of GPs in North America in the fourth quarter.

Is that -- in fact, you said more than you've trained in the last 6.

Can you point at anything in particular that led to that?

And again, how long should we expect those types of activities to continue?

I think Tommy mentioned the European training is going to be a little slow because of the rollout of G3 in Q2.

Should we expect North American training to offset that?

Well, I guess the way we think about it in general, Jose is we are still very under-penetrated both in terms of how adoption can go into practice of our existing customers, and in terms of the number of docs around the world in most of our major geographies that would like to think about adding Invisalign to practice.

So our base of customers can certainly continue to grow.

These are really two different situations that we could go ahead and continue to train doctors in the first part of -- in Europe in the first part of 2011, but we would have to go back and substantially redo that with all of the changes that happen with software and systems and protocols.

So that the choice -- and frankly, testing this with some customers, we schedule the international trainings well in advance, and they would rather wait and get it done once G3 is out there and in hand.

That's kind of better for all of us.

So that's not a big driver of growth, per se, outside the US, but there's a big appetite for that.

So with G3 out there commercially, I think we'll see some resumption of that as the year evolves.

But again, most of that resource is going to go into making sure we really get it right on the launch.

In terms of North America, we continue to have interest in demand both from GPs that are reactivating or coming back, as I indicated during the call, as well as university programs where we continue to train new orthos and GPs, again, smaller numbers, and then finally with GPs that have signed up for kind of post-training events; and if we get more interested, we add additional training events.

So we have had good interest from the GP community, and then again it goes to the fact we've still just trained a small percentage of the total GPs in North America.

I think there are still a lot of practices out there that have an interest and could be a great fit for us.

So again, that's going to grow incrementally over time.

We think of that more as a strategic issue than a tactical one.

Last question, on Advantage, how long is that rebate program going to continue?

Say again.

How long has it been --

How long will it continue?

The Advantage program has been around for a few years.

We've enhanced it and rolled out a series of changes this year that made it in effect way more valuable to be a partner to Align.

We added a new category from Premiere Provider to Elite to Super Elite, and so I think, at different levels, there is different value associated with being along with us, including extra marketing and consulting support for your practice and all that stuff.

So we actually saw -- again, we actually introduced that to customers in Q3, and we formally rolled the program out initially in 2011; but we had a lot of traction in the field from practices that really wanted to reach that, not just for discount, but for some of the other program benefits it brings.

So Advantage has been around for five or so years, but we've really taken the opportunity to beef it up, and with the new software, the new doctor web site we've got, every time they look at their web site, they can see where they are -- kind of like an advantage program, if you will, in the airline industry where you can see where you are month-to-date, year-to-date on your status.

So it gives the territory manager a good opportunity to talk about moving them to the next level.

Okay.

All right.

Thank you very much.

Shawn Bevec, SIG.

Looking at the rebate again, does that hit total -- does that just reduce total revenues?

Is that where the impact is coming from?

That's exactly right.

It impacts gross revenues.

So it nets out on net revenue line and then also has an impact on gross margins.

Okay.

And then the changes that you guys made, that's going to just continue indefinitely?

The changes we made to Advantage?

Yes.

Yes.

We're going to continue to enhance that.

We -- what we've said over time is we want to become a more important part of our customers' practices.

In addition bringing discount, as they get better and more committed to Invisalign in practice, they really consume less resource from us, from our territory manager from clinical support.

So we want to share that with those higher volume customers.

They get more efficient; we get more efficient.

So the discount part, obviously rational.

We've really beefed up other elements in terms of the program for our very top customers, things like free summit attendance and a dedicated clinical technician, and a lot of other things that have real value for the practice.

So we expect to continue to build value into that program over time.

I think you saw some good traction towards the end of the year as people really stretched a little bit to take their practice to the next level.

The good news is for us, when they get there, they typically stay there and grow from there.

They don't typically fall back.

Okay.

Can you remind us how you achieved the rebate and what the savings is?

Well, it greatly depends on where you are.

They have to get to a quarterly basis of the minimum of 12 cases.

-- Let's get to the details.

The way the program has been running historically is, if a doctor gets to 12 cases, they get a certain amount off on cases that they bought in the quarter, and it ranges anywhere from $500 off to about $700 off depending on the level of cases a doctor gets in.

So we have a tiering that goes 12 to 23 cases, and then 24 to 35 cases, and then over 35 cases they get a different level of discount as you go up those tiers.

Okay.

Great.

One last question.

The ortho summit and the CE costs, those were all in sales and marketing.

Can you quantify that?

We don't talk about it specifically.

It's a pretty significant event, so it's definitely $1 million or more overall cost for us to run those kinds of programs.

So the uptick that we saw from the ortho summit this quarter, we should probably expect that in Q3 of 2011, something similar?

Well, the summit -- we run our ortho summit every other year, and we run a GP summit every other year in North America.

So next year we'll have a GP summit.

In 2011 we'll have a GP summit.

Yes, in 2011 we'll have a GP summit, and then in 2012 we'll go back to an ortho summit.

That will be in Q3 for us, the GP summit, and typically the ortho summit is later, in Q4.

The other thing we'll do -- and we haven't put an exact time frame on it is to have an international summit this year as well.

So there will be some additional costs in there.

I think Ken tried to point to that earlier in the call.

Okay.

Thanks, guys.

Spencer Nam, Madison Williams and Company.

Just a couple of questions here.

Let me try to ask the expense question a little differently.

So it looks like as a percentage of the revenues, your expense SG&A line kind of went up to somewhere in the low 50s, and it looks like you're guiding to kind of similar sort of percentage for 2011, Q1 of this quarter.

And you have been in the 50s for awhile and then you really brought it down the last 12 to 18 months.

Are you now suggesting that you guys -- we should think about this as sort of back to the low 50s on a going forward basis.

How should we think about that?

So I guess the way to answer that, Spencer, is we've been going through a little bit of slowness in receipts here as we move through the fourth quarter.

We started to see a rebound; but we feel we have very important strategic investments we have to continue to make here in the business, and those are things like continuing in China, this Cadent relationship that we just entered is very important for long-term value in the business.

Some of the activities that we do programs in relation to consumer is important to do strategically.

And we decided that it's important for us to continue with those investments and not back off on those for what we viewed as what was going to be maybe a shorter-term slowdown in case receipts in the business.

So we've continued to invest in those areas, it's important long-term from our strategy point of view, and when you think about the long-term value in the business and the long-term model we laid out back in the October, November time frame, we think we have the right strategies over the long term, and the right people to execute upon those strategies.

And again, driving long-term value, top-line growth as well as continuing delivering on operating margins.

Our goal is to return close to 20% operating margins as we move through the year and continue to drive toward those long-term models of 25% to 30%.

Okay.

I appreciate that.

And then on the international case receipts or case volume, is there a particular region where you guys are going to see a little bit of a breather in the first quarter?

I recognize that the comp is tough; but if there is any particular reason where you feel like they've made a strong push for the last 12 months, we're going to take a little bit of a breather before we recharge.

Is there any particular area like that here, or is it just over all sort of recalibration of the expectations here?

Not really.

We've had -- you know, we've had a reasonably consistent pattern in Europe especially.

And this last year, Q3 was stronger than we had seen in the past, and obviously if we could explain all, that we would probably be in your job.

But that made Q4, which was a very solid quarter a little tougher comp sequentially, but still a really nice growth year-over-year.

We don't see any reason why -- we have all the normal concerns we would always have as we do around the North American consumer as we look into Europe, and yet we continue to see demand and interest and practices engaging on Invisalign.

So we continue to see that the Europe business goes forward, grows nicely and probably even the less penetrated distributor geographies outside, if you will, mainstream Europe grow even faster on a volume basis.

So still investing significantly into supporting that growth and believe that we're an order of magnitude less penetrated there than we are here, where we are already underpenetrated.

So for our purposes, no breather.

Solid progress continuing.

Always watching the economy and all that, but we are making investments with an eye towards continuing to grow the top line nicely.

Final quick question.

Compared to the -- your analyst day a couple of months ago, how much more confident are you guys in terms of China launch, the early second half of this year?

We're -- we continue to execute very well for China.

We've cleared most of the hurdles in terms of the regulatory filings, the company and the entity filings, and so everything now is around how we do it.

We're certainly wanting to ensure that we've released G3 internationally, as I think Richard spoke about during his presentation, our VP of International, given the higher complexity of cases in places like Japan and China; we want to make sure that our best tools are out there to be able to deal with those more complex cases.

But working with key opinion leaders is continuing.

Laying the ground work for taking us to market is continuing, and we're highly confident that we're going to see that in the second half in terms of commercialization.

So we're right on track.

Okay thanks.

Jonathan Block, SunTrust Robinson Humphrey.

Maybe the first one, just if you can speak to a little bit on R&D; in other words, you gave a lot of details on Cadent, but just looking out, and I'm not asking for guidance, but is you guys putting up some R&D dollars, is that going to be the norm?

Like you said, you're going to work with other players in the field, so you get Cadent on board here in 2011 and then when we look out to '12, it will sort of be a revolving door with you guys putting some dollars up with some of the other players, or will the economics be different since those guys are probably bigger than Cadent?

Again, I don't want to speculate.

We obviously have discussions going on with a broad number of players and technologies; and if we find other technologies and other players that can bring advantage to the chair-side and help customers and patients and bring advantages to each company, we're interested in doing that.

We do tend to believe in open systems and letting kind of the best technology win.

So Cadent was a little bit of a special case because they're smaller, they were very focused on their trajectory, but they did understand orthodontics very well, and they were an easy fit for us to move ahead, and they were further along in terms of our -- we were working on a rational process with any potential technology to qualify it for interoperability.

They were moving ahead more rapidly than the other players and ensuring that we got the accuracy and resolution we needed to be confident about being able to build Align cases that would fit.

So with that progress they made, we've started exploring other choices, and given that they were a smaller company, we had the opportunity to put a few of our dollars in the cash pile to work here and to accelerate some progress with priorities that they couldn't fund bootstrapping it.

So I think, to your last point it is likely the case that other players out there in the industry that are bigger, or divisions of very big companies are going to be in a different position, and what we'll do is work through how to integrate kind of best in class technology.

And we want to make sure we're like-minded about the way this will all work out, but we are interested in working with multiple other players to bring those kinds of good technologies to chair-side.

It's unlikely we'll have to do as much funding of those much bigger firms.

Okay.

Thanks.

Very helpful.

To shift gears over to teen, there was a noticeable step down in the year-over-year growth.

I know you talked about sequential, but again looking year-over-year.

Am I look looking a little bit -- too into this, if you would?

It seems like you shifted some of your focus away from teens and more to moms and are you seeing that's where the bottleneck may lie?Any commentary there will be very helpful.

No, the short answer to your last part is no.

We already have good awareness among adults.

We still have fairly small awareness that Invisalign is a good solution for teens, and part of that is getting to mom and dad.

So that's going to continue to be an opportunity to educate and ultimately mobilize.

But, we're -- in terms of orthodontic success, we're screaming along, in a reasonably slow growing market, which frankly we think -- we don't know all the numbers yet, but we think the second half of the year and certainly Q4 was pretty soft for a lot of dental categories, we think probably orthodontics as well.

With that said, 27% year-over-year growth is, we think, high quality, and we know we're fighting for share.

As -- so the second part of that fact is, with the strong kind of growth at year end, in December from orthos, if that had been earlier in the quarter, you probably would have seen a bit better, because in that growth there was a nice chunk of teen as well.

You'll see some of that in Q1, and certainly you can see that ortho volume reflected partly in our guidance and top-line for Q1 guidance.

So there's a bit of a timing issue here with when our ortho practices really went jamming back on it.

And what ortho practices do coming out of summer is they shift back to adults and others kind of catching up.

A lot of them came screaming back, and we got a nice bolus of teen cases kind of towards year end that didn't turn into shipments.

The broader issue is we're going to -- on a trailing basis, we'll know more of what 2010 will looked like for orthodontic starts over time.

And we'll get a better sense of if we took some more share; but our sense is we are still taking share, which says it was a softer second half for ortho, even taking into account the summer.

Okay, perfect.

Fair enough.

One last one.

Just on G3.

You had a lot of comments there.

Seems like it's going well; we've done a lot of checks there, and again seems things are really strong in the field.What I'm trying to drill down on -- what's incremental if you would?

If you look at the slides, you did have some commentary that your goal was 2,000 new cases submitted, but you achieved over 3,000.

Tom, in your mind, those 3,000 cases, is that what would have gone the way of wires and brackets in the past that Invisalign is now capturing that and to go a step further, if you annualize out at, gosh, 250,000 cases this year, again, what is incremental from G3, where you're really growing the overall volume?

Well the first thing, you'll notice we were careful not to say these were purely incremental.

We can't always be certain even if doctors report that the case they would have done in brackets and wires -- that they wouldn't have tried to do it in Invisalign and done in-office modifications.

What we do know, Jon, is that the hassle factor is dramatically reduced if they're going to try to use class 2 elastics or try to treat a less complex class 3 case, and what we do know when we look at the case complexity of what's coming in where Precision Cuts and some of these other features are being applied with G3, they are more complex.

We have software that scores them almost instantaneously and kind of describes the nature of the malocclusion.

And we are seeing in the usage of these features more complex cases.

Whether or not we're anywhere near understanding what that means, it's explicitly part of our strategy to assert we can be used on the more complex cases.

We do know that those 3,300 cases, that progress we're making means orthodontists are trying them on harder cases, and we know they're going to wait some time before they do more routinely, but this is the same thing we started with teen where they would do a few teen cases, see them progress and then do some more.

The second thing is a lot of the available market to us is in teen and they're more complex cases.

So until we brought G3 out, as we tried to assert to a doctor to use more of Invisalign, they say, look at this case.

I'm more comfortable doing this with brackets and wires.

Now with G3, we take away the hassle factor and it's a little more comfortable for them to try that case.

So it's all in the direction of good.

I don't want to start annualizing any numbers yet.

We would like to have two, three, four more quarters and really look at the profile of case complexity to ensure we are really widening our clinical applicability.

But on the right track.

Perfect, thanks guys.

Our next question comes from Robert Gold, Brigantine Advisors.

I just had another question back on Cadent.

When that was originally announced, there was a comment that there would be a spend of several million dollars over the next few quarters.

And I was just wondering, was that including the Q4 spend, and I guess, how is that going to track?

Are we going to look at more spending beyond the first quarter?

I guess is that part of the second-half operating margin expansion, as some of the spending goes away beyond Q2?

Yes Rob, this is Ken.

So the spending quarter 4 was really to make sure we got this joint development agreement set up appropriately for us from a legal and accounting point of view.

Going forward, it will be for R&D development efforts, and they'll spend over several quarters as we continue to work with the Cadent team.

Okay.

So that's going to show up in the SG&A solely expense?

Show up as R&D costs.

R&D costs.

Okay.

Thanks.

And just getting back to -- you mentioned that you saw some nice traction with the higher-volume docs during the quarter, and I was wondering, can you give a little color on what's happening toward the lower end of the spectrum, some of the physicians that weren't meeting proficiency requirement levels?

What's happening in that part of the business?

First of all, I guess at the lowest level there are already a significant number of practices that have reactivated after they were deactivated.

So we have a number of practices that have come back, and some of them went back though training, and again we're working through in terms of the Leiszler settlement how to engage with those folks in a complete way.

There will be more as the year evolves about how we're going to reengage with the lowest volume players.

But if you go to what's going on inside the Advantage program, we had two dynamics at work.

We had -- and we saw this at the GP level for sure where practices where we had focused on over the last year or so, they were doing two, three, four a year, we had moved up to eight, nine,10.

We're doing two a quarter, or a bit more.

And with the sustaining activities that our field team does, the marketing programs like Advantage -- a significant number of those customers qualified for the first time for Advantage at the lowest level, which is 12 cases and then they'd begin getting discounts on 13 and beyond.

So that's a good news story that they're getting kind of rewarded, if you will.

They're on the web site now, they get a little more traffic in their office and they get a bit of a discount.

So that reinforces that value and they get incremental practice revenue, so those things are all good.

At the other end of the spectrum, we had movement up the scale to higher levels of the Advantage program from Preferred Provider to Premiere to Elite and beyond, and virtually at every level we had movement up into a higher level, and that comes along with both other benefits as well as some incremental discount.

So the good news, as I think we said earlier, we beefed up the Advantage program to be much more than a discount, and we really have practices all the way from first level all the way up to high levels where it can be pretty hard to do that.

That's a good thing.

As far as the lower level customers, we're going to know more as we go through the year as we engage with some of those folks that were dropped, but again we're happy to have anybody with us that wants to work hard to make this a part of that their practice.

If I can add to that, this past quarter we ran out of a significant amount of Invisalign days in doctors practices in order to get the doctors at two, three, four, five, six cases moving up to 12.

And we've had some pretty good success here with that program during the quarter.

It's something we're going to continue forward with, and our sales team will target doctors on a quarter-over-quarter basis -- new doctors every quarter, but they'll also go back to doctors they've had Invisalign days with this quarter, and then the future quarter holds another one with them.

What we do know is when they help multiple Invisalign days over periods of time, those doctors tend to sustain at those levels of the new case volumes they are hitting.

I appreciate that.

I guess just one final thought there.

As this rebate program becomes increasingly successful, I guess it's going to be important for us to understand a percentage of the docs just roughly maybe that are maybe at 20 cases or above.

Is there any kind of -- how do we look at the percentage of docs that are moving really to the Premiere levels.

A couple years ago when we did an analyst day, we provided very granular detail on our customer base on a quarterly and annual basis.

We haven't done that for awhile.

We do provide some commentary in general.

We still have the largest number of customers are not in the Advantage program yet.

If you take a look at an average quarter how many orthos, this is -- by the way Advantage is just North American focus.

We have a different program outside in Europe.

It's a little different, a committed volume program.

We still have a pretty small fraction of the total customers that submit cases to us that are in Advantage, so it continues to be an opportunity for them to grow.That means that we've got some high volume committed practices and a pretty long tail.

Got you.

Thanks a lot.

Operator, we'll take one last question please.

Drew Jones, Stephens Inc.

In the past, you guys have run rebate programs in addition to the Advantage program.

Can you remind us when and what type of these incremental programs you guys had in place in 2010, and are any of those still in place now?

We had -- we ran one program back in the quarter 2 time frame where we offered some additional kickers in the rebate program to some of our Premiere doctors for one quarter, and we also ran a program in the same time from a patient perspective that they could get some -- they could get a rebate from us if they started a case during the quarter directed directly at the patient themselves.

Those were 2 specific programs we ran in that particular quarter after we moved away from the case requirement for the proficiency program.

We haven't run anything else like that and there's no plans to do something specifically like that going forward.

What we've done is -- and what we've been talking about -- is we've enhanced the Advantage Rebate Program to give doctors who reach different levels in case volumes some additional benefits as part of the program.

Okay.

What was the average age of your teen user in the fourth quarter?

It's about stable, about 15 and a half.

It continues to be there.

Okay.

All right.

Thanks, guys.

Thank you, Drew.

Well, thank you, everybody.

That concludes our call today.

We appreciate you spending the time with us today.

If you have any further questions, you can follow up with investor relations.

We look forward to seeing you at our future events.

We'll be at the Chicago mid winter show in February, and we'll be at the ROTH conference in March.

Thanks and have a good day.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.