愛齊科技 (ALGN) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Align Technology Q1 2011 earnings call.

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 your host, Shirley Stacy, of Align Technology.

Thank you, Ms.

Stacy.

You may begin.

Good afternoon and thank you for joining us.

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

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 first quarter fiscal 2011 financial results press release today via on GlobeNewswire which is available on our website at investor.aligntech.com.

Today's conference call is being audio web cast and will be archived on our website for approximately 12 months.

A telephone replay will be available today by approximately 5.30 Eastern Time through 5.30 Eastern Time on May 3, 2011.

To access the telephone replay, domestic callers should dial 877-660-6853 with account number 292 followed by pound and conference number 369895 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 statement, including without limitation, statements about Align Technology's future events, product outlook, expected financial results for the second quarter of fiscal year 2011, and closing of the Cadent acquisition.

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

These and other risks are set forth in more detail in our form 10-K for the fiscal year ended December 31, 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 the this 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 has been posted on our website under financial releases and have been furnished to the SEC on form 8-K.

We encourage listeners to review these items.

We've also posted a set of GAAP and non-GAAP historical financial statements, including the corresponding reconciliation, and our first quarter conference call slides our on our website at investor.aligntech.com under on R-on our website at investor.aligntech.com under quarterly results.

Please refer to these files for more detailed information.

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

Tom?

Thanks, Shirley.

On the call today, I will cover some highlights from the first quarter, including an update on our key strategic initiatives an the acquisition of Cadent.

Ken will follow with some detail on our financial results and outlook for the second quarter, as well as some additional information on Cadent's historical financials.

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

I'm pleased to report strong first quarter results with revenue, case shipments and EPS above the high end of our guidance.

Case shipments were a record 71,400 and net revenues of 104 million marked our first 100 million plus quarter.

The strength we saw in the business toward the end of 2010 continued throughout the first quarter of 2011, particularly for North American orthodontists.

This positive trend reflects increased patient traffic in our customers' offices along with renewed interest in high value procedures like Invisalign.

In addition, we had good execution in the business, we were able to achieve traction from the new Advantage Rebate program and success with practice development programs that helped customers bill sustainable practice growth.

From a geographic perspective, North American ortho case volume for Q1 was a record 26,890 cases, an increase of 23% from Q4, the highest sequential growth rate ever.

On a year-over-year basis, North American ortho has increased 21% and much of this growth was from demand for the Invisalign full product.

For North American GP dentists, Q1 case volume was about the same as last year and increased 12% sequentially as GP practices also reported increased office traffic and interest in higher value procedures.

We've also seen a continued mix shift towards Invisalign Assist as a result of our efforts to encourage both newly trained and lower volume doctors to utilize Assist as their main Invisalign offering.

On the international front, Q1 case volume was solid, roughly unchanged from Q4 and up 25% year-over-year.

The Asia-Pacific region continues to deliver strong volume growth and out paced the rest of the world.

In Europe, Germany, France and Spain are doing nicely.

Italy is recovering from a slower start to the year and the UK has been a bit softer given the widespread austerity measures in both public and private sectors.

Now, let's review the key metrics that measure our performance.

Utilization rates, or what we call same practice sales of our product, as well as the number of new doctors trained.

In Q1, total utilization increased to a record 3.9 cases per quarter driven by a record 6.5 cases per doctor for North American orthos reflecting continued penetration of more engaged ortho practices driven by a number of factors which I will touch on shortly.

North American GP utilization increased to 2.8 cases per doctor while international utilization was unchanged at 3.9 cases per doctor.

During Q1, we trained a total of 955 new doctors compared to 1,235 in Q4.

In North America, we trained 790 new doctors, an increase over the 740 in Q4, primarily all new GPs.

As we are so close to the international launch of Invisalign G3, we had planned on training fewer doctors until after the release so we wouldn't have to retrain them again later.

As a result, we trained 165 new international doctors compared to around 500 in Q4.

We expect to get back to training more international doctors later in the year.

As for our strategic update, you know our strategy has a set of key initiatives that we typically discuss each quarter.

I've described these for a number of quarters now and since they're detailed in the corresponding slide deck posted on our website, I will just remind you of each one and then discuss our continued progress in each area.

First, we're accelerating product and clinical innovation.

Second, we're enhancing the customer experience.

Third, we're increasing the effectiveness of our consumer demand programs and, finally, we continue to drive international growth.

I will start with product and clinical innovation by providing a brief update on our continued progress with Invisalign G3.

I will touch on penetration of the ortho practices as well as the overall teenage orthodontic market segment.

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

In February, we conducted a quantitative survey of about 500 of our customers, both orthos and GP's.

The survey findings confirmed that Invisalign G3 continues to have a positive effect on the ability of doctors to use Invisalign to treat more complex cases as well in their overall use and recommendation of Invisalign treatment.

The key take-aways are that most of our customers, virtually all of our highest submitting doctors, are aware of the Invisalign G3 improvements.

The doctors say Invisalign G3 is enabling them to treat more complex cases, that Invisalign G3 is improving doctor's perception that they can achieve better clinical outcomes with Invisalign which is key for us as we continue to build our brand and perhaps most importantly, doctors say that Invisalign G3 gives them greater confidence and clinical outcomes as having a positive effect on their likelihood of recommending Invisalign.

We're pleased with the continued positive feedback from our customers regarding Invisalign G3.

We believe it is a key reason that our penetration continues to increase in ortho practices and is helping to create for us what appears to be faster growth in the overall market.

Additionally, since most of our customers outside North America are orthodontists, the upcoming international launch of Invisalign G3 beginning on May 16 is extremely important for continued growth both in our existing markets and to support our expansion in new markets like China.

Now, I would like to move on to the important teenage orthodontics segment which, for us, consists of teenagers 19 and younger using any Invisalign product.

In Q1, the number of teenagers starting treatment with Invisalign products was 14,800, or 21% of total case volume, an increase of 8% sequentially and 10% year-over-year.

The majority of the sequential growth in teenage cases was driven by the Invisalign teen product which grew 14% over Q4 to 7,930 cases.

On a trailing 12-month basis, teenage cases grew 20% from the prior 12 month period to 59,810 cases, reflecting continued steady adoption of Invisalign in the largest segment of the orthodontic market.

We are up against strong competition here as all traditional bracket players have higher unit share and great customer relationships that we believe will continue to grow share over time.

On a consumer front, we continue to see increasing awareness and motivation to begin Invisalign treatment thanks to our integrated consumer marketing platform which combines traditional print and broadcast media, PR, event marketing, and the evolving digital media, social networking environment.

Our goal is to continue to leverage this platform to multiply the quality and quantity of Invisalign impressions in the marketplace, especially with teens turning awareness into leads, and leads into case starts for our doctors.

In traditional media, Q1 was a little lighter than normal for Align.

We had limited television advertising during most of quarter as we were completing the development of new TV ads for both traditional and digital media.

As a result, Q1 advertising spend was down compared to last year, but we maintained over 90% of our website traffic and increased our lead capture rate thanks in part to the redesign Invisalign.com website.

In Q2, you will see Invisalign more heavily on TV, supporting both the adult and teen categories as we head towards the summer peak season for teenage ortho case starts.

In addition to the Invisalign twins ad that began last quarter, we have a new TV ad that targets the important adult female segment and was developed based on consumer insights gathered during multiple research sessions.

We started airing this commercial at the end of March and rapidly saw a double digit increase in traffic to Invisalign.com.

In PR and event marketing, Invisalign teen is once again the Official Smile Sponsor of the varsity cheer and dance championship with a presence across all their national events, reaching 350,000 teen girls each year.

Invisalign teen also hosted three of varsity's largest competitions in February and March where we had a unique opportunity to connect, educate, and learn from 30,000 teenage girls and their parents.

Our goal at these events is to motivate teens and their moms to take action and ask for Invisalign by name.

On the digital and social media front, you may remember, I previously introduced Invisalign Studio, a new entertainment-based marketing platform we launched last year, to create excitement for Invisalign teen.

The studio, which is an orthodontic practice based in Beverly Hills, and staffed by one of our most experienced local orthodontists, now includes 11 celebrities, who are currently in treatment, including teen sensation Ciara Bravo, Bailee Madison, and the band Allstar Weekend.

15 additional celebrity cases are in process and we will be updating you as they evolve.

The Invisalign Mom Advisory Board is off to a great start as our new brand ambassadors are already actively engaging with and educating other moms online about Invisalign and sharing their own personal experiences or those of their kids.

Through their own blogs, our Invisalign sponsored momsonbraces.org community and national blogger events, these women are reaching hundreds of thousands of moms who are in the consideration process for braces and learning about the benefits of an option like Invisalign.

Finally, we produced an Invisalign sponsored segment on MommytoMommy.TV, a witty educational web series for moms that reaches over 1 million online viewers.

In addition, the host of the show, Internet celebrity and author, Kimberly Clayton Blaine, recently started Invisalign treatment and is currently filming a segment that will focus on her own treatment experience, highlight Invisalign's innovative technology, comfort, and ease of use, and discuss the product benefits of Invisalign Teen.

On the international expansion front, I would like to provide a brief update on the launch of Invisalign in China.

As we've said previously, the new features and functionality delivered with Invisalign G3 are even more important outside North America, especially in Asia, due to the higher complexity of cases among the Asian population.

Given the upcoming international launch of Invisalign G3, we're accelerating the launch in China and now expect Invisalign to be commercially available there before the end of Q2.

We have been building our presence in anticipation of this launch and have a small core team in place which includes country management, sales, marketing, clinical education and support.

While we view China as a great long-term opportunity, we expect a fairly slow revenue ramp as much of our international effort are focused on key opinion leaders and early adopters.

To that end, just this week, Peking University hosted a two-day clinical symposium on Invisalign treatment with 340 orthodontists from across China including faculty, private practitioners, and 95% of the country's orthodontic department chairpersons.

The symposium featured clinical lectures by leading Invisalign clinicians from around the world and it was a great opportunity to share Invisalign case studies and techniques with Chinese colleagues.

The launch of Invisalign in China is a significant milestone, and we are very excited about the opportunity and long-term growth potential this represents.

Before I turn the call over to Ken, I would like to briefly comment on the acquisition Cadent.

On March 29, we announced our intent to acquire Cadent, one of the emerging leaders in the fast-growing intra-oral scanning market and as previously announced, our joint development partner for delivering Invisalign applications at chair side.

When I came to Align nine years ago, I thought there would be many opportunities for acquisitions, given the fragmented nature of the dental industry but, over time, I learned that there are few products and technologies as innovative and with as much potential for growth as Invisalign.

Nearly a decade later, we finally found something as exciting as Invisalign in its own right with Cadent that also has the potential to accelerate Invisalign adoption, and positions Invisalign Technology as a leader and one of the best growth opportunities in dentistry and medical devices today.

During the Cadent acquisition call, I provided a brief overview of the acquisition, discussed the strategic rationale, and outlined how the combination of our two companies will benefit our customers, shareholders, and employees.

Today, I would like to briefly recap key highlights from that call and expand on the business drivers we're focused on over the next two three years to generate the greatest growth for intra-oral scanning and Invisalign.

Ken will provide some additional detail on Cadent 2010 financials and how we see our combined long-term model.

The acquisition of Cadent is first about a highly attractive new growth opportunity for Align.

Second, about revenue synergies and increasing strategic leverage.

And finally, about cost improvement and productivity.

Over the next five years, third party research projects that intra-oral scanners will become widely used in dental practices with growth rates that exceed a 20% CAGR over that time.

In addition the use of digital technologies such as CAD cam for assorted dentistry or in-office restorations has been growing rapidly and intra-oral scanning is a critical part of enabling these new digital technologies and procedures in dental practices.

Align is already a leader in digital dentistry and we can extend our strategic leverage by demonstrating the values of applications at chair side to dramatically simplify and streamline treatment, making the entire Invisalign procedure easier on the patient and more efficient for the practice.

As a young company, Cadent has limited sales and marketing resources.

In North America, Cadent has 11 direct sales specialists that focus on GPs that do restorative dentistry as well as orthodontists.

They also utilize a number of distributors but have not been getting the type of push in North America that they would like.

Our plan is to quickly leverage our extensive resources to help their products win in the market and accelerate Cadent's installed base growth.

We will roughly double the number of specialists over the next couple of quarters while leveraging our 150-plus person North American sales force to convert leads into sales.

We will also conduct events like routine study clubs that help turn doctor interest into system sales.

In Europe, Straumann is the exclusive distributor for Cadent and we will continue to work closely with them to build and extend the business.

In other geographies we will support existing partners while assessing new opportunities.

In addition to Cadent's leading intra-oral scan technology, there are other attractive revenue screams such as OrthoCAD IQ and iCast.

We're acquiring Cadent for their great people, their technology, and all of the revenue streams, not just for the intra-oral scanning technology.

Beyond all that, Cadent is an expert in restorative dentistry and with their help we will find additional new opportunity force growth.

As I said, our near-term focus is on driving revenue synergies but over the long term we will see many opportunities to improve cost through product development and redesign.

We have plans to get after these which we will do over time but the biggest benefit of the Cadent for our shareholders is to accelerate overall revenue, grow share and improve our strategic leverage.

Finally, last week, we announced that we received early termination of the HSR waiting period and we now expect the transaction to close by the end of April or early May.

I will now turn the call over to Ken for some more detail on our first quarter financials, our outlook for Q2, and how we are think become the integration of Cadent in the Align model, and then I will come back for a few closing remarks.

Ken?

Thanks, Tom.

Let's review our first quarter financial results beginning with revenue.

Q1 net revenue of $104.9 million on case shipments of 71,400 increased 12.9% sequentially and 16.4% year-over-year.

Q1 case shipments of 71,400 increased 12.4% sequentially and 12.2% year-over-year.

The sequential increase in revenue primarily reflects higher case volume, especially in North America, as our customers reported that patient traffic in the office increased coming into the quarter and continued throughout the quarter.

International volumes were relatively consistent with quarter four as expected with international revenues increasing slightly due to favorable ASP's.

On a year-over-year basis, Q1 revenue growth was driven primarily by higher case volumes among North America orthos and international doctors.

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

Gross margin for quarter one 2011 was 78.4% compared to 77.2% in quarter four 2010 and 77.4% in quarter one 2010.

The sequential increase in gross margin reflects the impact of higher case volumes.

Q1 GAAP operating expense was $61.2 million, compared to $57 million in Q4, and $49 million in the same quarter last year.

Q1 2011 GAAP operating expense includes legal and accounting fees of $1.5 million associated with the Cadent transaction.

Q4 2010 operating expense includes litigation settlement costs of $1.2 million related to the Leiszler class action lawsuit.

Excluding the acquisition transaction costs and the Leiszler settlement costs, Q1 non-GAAP operating expense was $59.7 million, and compares to $55.7 million in quarter four and $49 million in the same quarter last year.

The sequential increase in operating expense reflects development costs related to the Cadent JDA, continued investment in international expansion, including preparation for the Invisalign G3 and China commercial launches, as well as annual increases in employee-related compensation and benefits.

Q1 GAAP operating income was$ 21 million, and compares to $14.8 million in quarter four 2010, and $20.7 million in Q1 a year ago.

Q1 non-GAAP operating income was $22.5 million or 21.5% this is compared to $16 million or 17.2% in Q4, and $21.5 million, or 23.9% in the same quarter last year.

The sequential increase in non-GAAP operating margin reflects again higher case volumes.

Q1 GAAP diluted earnings per share was $0.20 compared to $0.13 in quarter four and $0.19 in the same quarter last year.

Q1 non-GAAP diluted earnings per share was $0.21 compared to $0.14 in Q4 four and $0.20 in Q1 of last year.

Moving on to the balance sheet.

Cash, cash equivalents, and marketable securities were $322.6 million.

This is compared to $312.4 million at the end of 2010.

In Q1, we generated roughly $16.6 million in cash from operations compared to $32.5 million in Q4 and $18.6 million in the same quarter last year.

Q1 DSOs were unchanged from Q4 at 63 days, up slightly from 59 days in the same quarter last year.

Now, let's turn to our business outlook for Q2 2011.

The outlook I'm sharing with you today is for the Align business only.

In addition, I will provide some general comments to give you a framework of the Cadent business model.

When the transaction closes and we have the purchase accounting completed, we will report the combined Company results in our Q2 earnings announcement and conference call.

We will report Align and Cadent results separately so Align's actual performance can be compared to the Q2 outlook I am providing today.

With that, let's get into the outlook.

2011 is off to a good start with a strong first quarter.

During Q1, we saw increased activity in our customers' offices and an increase in volume trends.

This trend maintained throughout quarter one and into the beginning of quarter two.

For Q2, we expect revenues to be in a range of $106.5 million to $110.5 million, on case volume of 72,500 to 75,000 cases.

We expect gross margin to be in a range of 78% to 78.5%.

In Q2, we expect operating expenses to be in a range of $68.1 million to $69.1 million which includes investment banking, legal, accounting, and advisory fees related to the Cadent transaction.

This range excludes any charges that may result from the completion of the purchase accounting analysis.

Excluding these fees, we expect non-GAAP operating expenses to be in a range of $62.4 million to $63.4 million.

The sequential increase in non-GAAP operating expense reflects a step-up in consumer advertising to build awareness and excitement ahead of the busy summer months for teenage case starts and our continued investment in international, including geographic expansion, and Invisalign G3 commercialization.

We expect Q2 GAAP operating margin to be in a range of 14% to 16% and GAAP EPS to be in a range of $0.13 to $0.15.

We expect Q2 non-GAAP operating margin to be in a range of 19.4% to 21.1% and non-GAAP EPS to be in a range of $0.19 to $0.21.

In Q2, we expect the effective tax rate to be approximately 27% 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 $81 million and cash on hand to be approximately $340 million to $345 million before paying for the Cadent transaction.

Before I turn the call back to Tom, I would like to provide a framework for the Cadent financial model by sharing a few general comments on their 2010 results.

Cadent currently employs approximately 250 people with a strong technology team in Israel, manufacturing operations in both New Jersey and Israel, and small but focused marketing and sales teams.

In 2010, Cadent had approximately $40 million in sales of which about 40% was from the sale of intra-oral scanners and 60% was from recurring service revenue for lab services, 3D digital modeling, and scan fees in that order.

Gross margins of the business are approximately 50% in aggregate.

Scanners sold directly in North America carry approximately a 50% gross margin with lower margins in Europe as Cadent sells through a distributor model with Straumann who also provides customer support.

Gross margins for the services component of the business runs somewhat higher than 50%.

As mentioned, our near-term focus is on driving revenue synergies, but over time we believe there are ample opportunities to realize cost savings through product improvement and redesign.

Overall, Cadent operating margins in 2010 were almost break-even.

So many of you asked the question, what does the acquisition of Cadent do to our long-term financial model?

First and foremost, it gives us increased confidence on delivering on the model.

The scanner sales growing at a 20% CAGR combined with our plan to add head count to the Cadent sales team and having Cadent leverage our Align sales team, we believe we can accelerate Cadent and Invisalign revenues.

This reinforces our confidence that we can maintain our long-term growth CAGR of 15% to 25%.

In thinking about gross margins, if you consider 2010 results for both Align and Cadent, Cadent would represent about 10% of the combined Company revenues and even if we did nothing to drive cost reduction or margin improvement, we would still be within the long-term model of 73% to 78%.

With that said, over the long term, we believe there are ample opportunities to realize cost savings and improve growth and net margins.

In terms of operating expenses, as mentioned, we will be investing in sales force, marketing programs, and R&D projects to drive Cadent and Invisalign revenues.

In summary, we believe we're focused on driving revenues will far outweigh the additional costs we will incur and we are more confident today in delivering our long-term operating margin goal of 25% to 30%.

With that, I will now turn the call over to Tom for some closing comments.

Thanks, Ken.

These very strong Q1 results demonstrate the great work being done by the Align team.

Over the next few months, you will see a lot more from Align including the Invisalign G3 international release, commercial launch in China, our participation at the AAO meeting which is our largest and most important orthodontic conference, the EU Summit in Barcelona for our international doctors, and our GP summit in Las Vegas which has already sold out with over 1600 GPs and staff signed up.

That little preview of key upcoming events shows you how focused we are on driving continued strong performance for the Invisalign franchise.

Additionally, since we now have the HSR waiting period behind us and expect to close the Cadent transaction within a few weeks, ensuring a successful integration as business is at the top of my team's priority list.

We are looking forward to a busy and exciting quarter and are working very hard to get more than our fair share of the summer teenage case starts.

We will update you on our continued progress in the coming weeks and months and at the upcoming financial conferences we've got scheduled May and June.

And with that, I will turn it back to the operator for some questions.

Operator?

Thank you.

(Operator Instructions).

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

Please proceed with your question.

Hi, guys.

Good afternoon.

Can you hear me?

Yes, we can.

Hi, Matt.

How are you doing?

Good, thanks.

Congrats on the quarter.

The first question, Tom, on revenue.

Last quarter, you had a large number of, especially North America, docs that were trained and yet your utilization rate still increased nicely sequentially which appears to be a good sign.

Can you give us some more color on rebound you saw exiting last year into this year, maybe through Q1 and into the early part of Q2 here?

Is that continuing to accelerate or is it kind of flattening out here to the upside?

Again, we're not the whole industry.

I'll start with that qualifier.

We're going to be paying attention to when the leaders in the dental industry, the much-bigger players, the distributors and others, report.

But, again, the first driver is increased patient traffic in our customers' offices and willingness, sometimes even requesting, higher value procedures.

That dynamic is maybe the large secular trend.

Now, inside that we've had great execution.

So -- and you especially saw that when the right product, G3, comes together, teen, comes together though initiative.

So, those trends continue as of today and we certainly hope they continue on.

Okay.

And, then, for Ken, on the operating margin, I think last call, you mentioned that you would be approaching 20% operating margin for the Invisalign business this year which you are obviously exceeding already.

And, then combining that with your commentary on Cadent and how that layers into your business, our quick calculation suggests that, that's still, on a combined basis, probably a realistic scenario this year.

Can you help us calibrate the operating margin this year a little better?

So, as you know, Matt, we don't provide annual guidance.

We did provide an EPS range on a call a couple of weeks ago to talk about the Cadent business of about $0.70 to $0.75 for the full year.

As we go through the second half of the year and we start integrating, there's going to be some impact on operating margins just as we're adding costs to integrate the Company and sales teams but the idea there being you get leverage out of that and drive more Invisalign revenue as well as Cadent revenues, and we talked about it being a bit dilutive here in 2011 and, then moving to an accretive position in relation to our internal plans in 2012, and we maintain that same view.

Okay.

And, then, on the Cadent topic, Tom, you mentioned doubling their sales force.

Now that you've had a few weeks to digest the announcement, can you just give us a little more color on your thoughts of how the Invisalign sales force will be able to sell this device alongside Invisalign itself or do you have a little bit more of a distinct two-channel sales model there?

Well, I think this is going to be a single channel.

We're going out to GPs and orthodontists and we call on both.

Each of our reps, 150-plus people out there touch both orthos and GPs in their geographies.

And, we're not going to have them drop Invisalign and go sell scanners or other lines of Cadent revenue.

On -- the other lines of Cadent revenue come in very nicely, even with very little coverage and support.

So, we expect that will continue and maybe we can grow that.

On the scanner side, we're going to use our field team and their great relationships, and ability to qualify, which they do very, very well, those kinds of leads that deserve follow-up from the specialists.

So, we're going to move quickly to expand kind of the specialist team and we will be deploying those people appropriately around the country to go after those opportunities.

And, there are all kinds of -- as I use study clubs as an example, there are all kinds of normal activities for Invisalign where for a little bit of incremental time we can bring an iTero system in or an IOC system in for a GP or an ortho group and bring a specialist in very efficiently with no diminution of the effort for Invisalign.

In fact, in the eyes of the customer, this is a net value added.

So, we think that can be very efficient as a lead, as a very high quality lead-generating and relationship tool, whereas in the other days Cadent would drop in with no relationship with a customer, and try and track it.

So, that's how it will work.

And, I expect that there will be a bit of a pop for the Invisalign rep if they get -- if their customer buys a system, but they won't have a quota.

The specialist will have the quota.

And, they're going to have to make their Invisalign number, I imagine, or they wouldn't be even subject to even getting a pop for the system that goes in.

Pretty simple.

Got it.

That's helpful.

Thank you guys.

Thanks, Matt.

Next question, please?

Our next question comes from the line of Spencer Nam with Madison Williams and Company.

Please proceed with your question.

Hi, guys.

Thanks very much for taking my questions.

Just a couple of quick questions here.

First of all, on the second quarter guidance, you guys obviously are showing some strong upside from the first quarter.

Maybe, any color on how you guys see the US ortho, the US GP and international playing out in terms of, for example, the G3, Invisalign G3 adoption?

What are you seeing in -- what have you seen in the first quarter that you think is going to carry over to the second quarter and maybe it's not necessarily pent up demand or anything like that, but what aspects of this adoption do you believe will continue to move on to the future quarters?

Well, I guess if we take these in pieces, Spencer, starting with the North American ortho.

I think we're moving closer to -- I wouldn't say we're perfect there yet by a long shot.

We're moving closer to closing the real gaps in performance between what Invisalign treatment can do and what a bracket and wire system can do and we haven't closed those gaps completely.

We're still trying to close the perception gap.

And, so, the good news is with G3 we're not only closing the real gaps in performance, to be able to do more complex class one, and as well as class two and class three cases, but we're now closing the perception gap as the research we had pointed out.

So, we expect, again, slow steady incremental adoption inside each ortho practice.

The patients are there.

They're asking for Invisalign by name and these orthos are increasingly comfortable in using Invisalign as their offering.

So, we expect that to continue.

Again, it is not going to go crazy.

This is different from some med tech examples where share changes and growth rates jump overnight almost.

This will take a while to build.

The second piece, GPs, I'll call -- maybe there is a new normal kind of post-efficiency that settled out, and what we do know about our GP dentist customers, when their patients are asking for more procedures and they feel comfortable about the economy, they are a bit more assertive about recommending treatments like Invisalign or restorative procedures and so we think that is at work here.

And that's part of the broader secular trend that is very positive in dentistry.

On the international front, there is seasonality for sure internationally, and Q2's typically a solid quarter.

Q3's softer with the holiday season and what not and then Q4 is a bit stronger.

So, again, notwithstanding what I talked about in the UK, which has been a bit softer, we expect solid progression and a normal quarter, but solid growth for international.

So, I think we have reasonable visibility into that.

The G3 launch is a big effort for us internationally.

And, that's going to take a while to fully roll out, but all of those things will support the growth of the international business.

I see.

It sounds like what you guys are saying, from what I can gather, it's really the overall customer volume just growing with improving environment, if you will.

The customers perceiving things differently with respect to Invisalign.

Is that fair then?

There's no real particular factor that is really contributing to this sort of rapid growth, but we're just seeing a recovery, if you will, or the re-balancing or return of the -- of what it used to be.

Well, I don't know, first of all, it's not just like the tide coming in and out there.

There is a lot of great execution going on.

By dental standards and orthodontic standards, the kind of growth we're experiencing is very rapid.

So, from that framework there is -- so we've got the patients are back, practices are engaged, we're delivering what they need for product and support, and we've got a lot of great marketing programs that is creating demand and asking -- and getting Invisalign to be asked by name.

So, what I'd say, all of those things together, good execution across the board, the team is working very hard and we're seeing the benefits of that.

Thanks.

Great.

Thanks, Spencer.

Next question, please?

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

Please proceed with your question.

Thanks and good afternoon, guys.

Maybe first question, for you, Tom, I'm just trying to get a little bit more granularity on the utilization in the ortho channel which was just -- which was huge.

And where I'm going was my initial reaction was I thought it was going to come from teen, when you delve into the numbers, that doesn't seem to be the case.

So what is it, do you think it is mostly G3?

I know we've done some work there which slowed that would bring on sort of the incremental complex case, and the reason why I ask is, if that's where it is coming from, do you think we can then apply that to international markets as G3 gets rolled out over the next several quarters?

Any different doc behavior from your US ortho versus that internationally with G3?

Thanks.

I think -- so to answer your question specifically, I think that is one of the important factors that has contributed to this.

Again, there is the larger trend of healthy dental industry.

There is the -- which we're benefiting from.

There's the effect that the real product gap has closed.

G3 for orthos, we designed it with them.

When we tested it, they said we're getting it right.

We executed very well.

We're not a year in yet, but they are responding in a way that we find great.

So, that is one of the factors.

But there's also -- we're helping them grow their market.

Patients are already kind of pre-sold, if you will, on Invisalign.

And, so, that makes it easier for them.

So, if you combine available patients, pre-sold and warmed up for Invisalign already, they don't want braces, and better execution of the product, it's just easier for them to make this a bigger part of their practice because the patient flow is there.

G3 is a big help there.

The second part of your question is a little more complicated.

There's -- we can't think of international in a homogeneous way.

The -- and we can't even think of Europe in a homogeneous way.

The individual country markets, UK, Germany, Italy, Spain, France, are all very different, they're almost different models.

In countries like the UK, there are both orthos and GP's that do orthodontics, Invisalign, and Europe virtually all orthos.

I think the good news is most of our higher volume customers are orthos.

They're going to recognize the G3 features.

They typically treat more complex cases there, longer treatments.

That said then, the rollout of G3 we're going to do over a longer period of time and it's a bit more challenging with all of the languages and the support model and all that.

The offset to that is, we have a more -- the high volume customers are a more concentrated part of our base, at least in Europe.

So, I guess I'm coming around to say I wouldn't want to you kind of graph these results in our biggest market where we've got the most ability to drive volume through marketing and that's support against product.

I would guess that there will be a more diffused impact from this in each of these individual country markets over time but, again, that said, there are more orthdontically focused on more complex cases, so these features will be viewed more valuably.

So, there are a lot of puts and takes but I don't think there will be the kind of step function change we just saw with ortho.

Okay.

Perfect.

Very helpful.

And, second one, Ken, this might be a little bit more for you.

Just when I tie out, excuse me, tie out the realized ASP here in the USGP channel, it's the highest that it has been in several quarters or years.

And, so, I'm just trying to figure out what is a function of.

Is that fewer rebates coming on or is that the deferred assist revenue coming that took place in 2010 coming on the books in 2011?

Thanks.

It's actually related to the Assist product.

There are a couple of things.

One is a little bit of the deferred that you're referring to.

But, also, as we've been really telling doctors they should use Assist after they come out of their CE training classes.

You've seen the volumes grow pretty significantly in the product itself and also those doctors are using more progress tracking cases.

In the past, we actually deferred progress tracking cases, the full revenue, until they got the last batch of the product.

But, now, as we move into this year, we're actually recognizing revenue as we ship -- theoretically in batches, as we ship a batch, we'll recognize revenue, so you're getting more revenue recognized up front for Assist cases an doctors are using it more frequently.

Perfect.

Thanks, guys.

Thank you.

Operator, we'll take one more question, please.

(Operator Instructions).

Our next question comes from the line of Shawn Bevec from SIG.

Please proceed with your question.

Thank you, guys.

Just to be clear, your 2Q guidance, does that include any revenue contribution from Cadent being that it's going to close in April or May?

No, it does not.

Our view of the outlook is an Align only outlook and, like I said, we'll update at the end of the quarter when we report out Q2 earnings for the combined companies.

Are you guys then updating your annual EPS guidance from the 70 to 75?

No, we're not.

In fact, when we gave that out a few weeks ago on a call when we announced the Cadent transaction, that number contemplated the Cadent transaction closing and that's getting revenues and costs associated with that over the second half of the year.

That was a non-GAAP EPS range, correct?

That was a non-GAAP EPS range, correct.

So, I guess my -- I'm trying to grapple with why, in the back half of the year, so even if the low end of your Q2 EPS range, we're looking at $0.40 for the first half of the year.

That would be $0.35 to get to the high end of your annual range for the second half of the year.

Can you explain what expenses or costs you're going to be running through that is really going to drive that?

Sure, Shawn.

A couple of things.

So, as the transaction closes we think in the next several weeks they will become part of the Company and, again, we will talk about that when we get to the Q2 earnings call, but we will start incurring the expenses associated with running the businesses on a combined basis.

We'll also be adding resources on to the -- into the team.

As we mentioned, sales force, we'll be doubling the size of the sales force in North America.

We'll be running additional marketing programs and developing marketing programs to drive sales of the Cadent business.

We'll have additional costs in the R&D area as we build out product initiatives.

And, then, lastly, we will have costs associated with, in the first year, they're a private company so they're going to come into a public company, we got to build out the SOX compliance requirements and the like.

So, we'll have expenses -- incremental expenses that we'll be adding in starting as early as quarter two and then that will continue through Q3 and 4.

Okay.

Thank you.

Thank you, Shawn.

Well, thank you, everyone.

That concludes our conference call today.

We look forward to seeing you at upcoming financial conferences and industry association meetings.

If you have any follow up questions, please contact Investor Relations.

Goodbye.

Ladies and gentlemen, this does conclude today's teleconference.

Thank you for your participation.

You may disconnect your lines at this time and have a wonderful day.