愛齊科技 (ALGN) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Align Technology's Third Quarter 2011 Earnings Call.

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

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

(Operator instructions)

As a reminder, this conference is being recorded.

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

Ms.

Stacy, you may begin.

Good afternoon, 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 Ken Arola, Vice President and CFO.

Before we begin, let me cover some housekeeping items.

We issued two press releases today via Globe Newswire, one detailing our third quarter fiscal 2011 financial results, and a second announcing that the board of directors has authorized up to $150 million stock repurchase program.

Both are available on our website at Investor.AlignTech.com.

30 PM Eastern Time through 5:30 PM Eastern Time on November 10, 2011.

To access telephone replay, domestic callers should dial 877-660-6853 with account number 292, followed by pound and conference number 380473, 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 outlooks, expected impact of our recent acquisition of Cadent on our business, and the expected financial results for the fourth quarter and full fiscal year 2011.

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

These and other risks are set forth in more detail on our Form 10-Q for the fiscal quarter ended June 30, 2011.

These forward-looking statements reflect beliefs, estimates, and predictions as of today, and Align expressly assumes no obligation to update any such forward-looking statement.

Please also note that this conference call will -- on this conference call, we will provide listeners with several financial metrics determined on a non-GAAP basis for comparison to previous quarters.

Most of these items, together with the corresponding GAAP numbers and their reconciliations to the comparable GAAP financial measures where practical, are contained in today's financial results press release, which we have posted on our website under Financial Releases and have 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 third quarter conference call slides on our website 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 Technology's President and CEO, Tom Prescott.

Tom?

Thanks, Shirley.

Good afternoon, everyone.

On the call today, I'll briefly recap Q3 highlights, review our performance by product and customer channel, and update you on our strategic growth initiatives, including the launch of Invisalign G4 and the release of the iTero 4.0 platform.

Ken will discuss our Q3 financial results and outlook for Q4 in more detail, and then I'll come back and summarize a few key points and open up the call to questions.

I'm very pleased to report another good quarter for Align, with revenue and EPS higher than our outlook.

Better-than-expected results were driven by increased Invisalign case volume from North American orthodontists and international doctors, as well as higher earnings that benefited from lower-than-projected operating expenses.

We had strong growth of Invisalign Teen across all customer channels despite normal summer seasonality in core Europe and North American GP offices.

These results reflect our continued penetration into the very important teenage orthodontic market, where we believe we gained significant share this quarter.

Q3 results also reflect a full quarter of sales from our intra-oral scanner and CAD/CAM services products which continue to benefit from our sales and marketing resources as we do our best to leverage Invisalign in industry events, to introduce iTero and iOC scanners to our customers.

I'll start with an overview of key highlights for Invisalign.

Our record Invisalign case volume increased sequentially and year over year across all customer channels and geographies.

North American ortho case volume for Q3 was a record 30,070 cases, an increase of 5.4% from Q2 and 30% from the same quarter last year.

Continued demand for Invisalign Teen drove growth with North American orthos in Q3, which includes the peak of the summer season for teenage orthodontic case starts.

For North American GP dentists, Q3 case volume increased slightly from Q2 and 16% year over year to a record 31,120.

This increase primarily reflects continued expansion of our GP customer base, as well as increased utilization of Invisalign Assist, which helps newly trained or lower-volume GPs gain confidence in treating with Invisalign.

In addition, Invisalign Teen cases increased sequentially among GPs as some may have used the Invisalign Teen product more this quarter in order to receive a free Vivera retainer subscription as part of a promotion we ran in Q3.

On the international front, Q3 was a solid quarter with better-than-expected volume of over 18,000 cases, an increase of 8% sequentially and 12% year over year.

Within core Europe, Invisalign case volume exceeded expectations, not withstanding the normal Q3 seasonality in countries like Italy, Spain, and France, as doctors and their patients took summer holidays.

While we typically expect seasonality in the southern part of Europe, we believe that there was also some softness in Italy and Spain related to a more challenging economic environment.

We saw some progress in the UK this quarter, which grew sequentially from Q2 but was still down year over year.

During Q3, we brought out a new UK country manager, and we're starting to see some early impact from recently added sales coverage.

There's still more work to do as we continue to focus our efforts on restaging growth in the UK, and we're confident we can make that happen.

In Germany, we had good sequential case growth, including Invisalign Teen, albeit off a very small teen base.

In July, we launched educational campaign in Germany with Matthias Sammer, a famous retired professional football player -- or soccer, to those of us in the US -- and now the director of youth football development in Germany.

The campaign slogan, The Right Bite, is intended to increase the awareness and importance of proper dental alignment as a foundation for improving dental health, especially among teens.

We expect programs like this to help build on our solid base in Germany while expanding the market.

Our international expansion also reflects continued strong growth from the Asia Pacific region, which continues to outpace the rest of the international business.

We had good growth in Japan this quarter, one of our direct geographies, and our APAC distributor continues to deliver successful growth in a number of smaller but important Asian country markets, particularly in Hong Kong, Australia, Singapore, and Taiwan.

Two weeks ago, our Asia Pacific distributor held a two-day Invisalign clinical forum in [Fugit], Thailand.

The science behind the smile forum featured clinical lectures by leading Invisalign practitioners worldwide and was attended by nearly 200 orthodontists, staff, and orthodontic students throughout the region.

Forums like these reflect our commitment to training and education, and it was a great opportunity for Invisalign experts to share complex Invisalign case studies and techniques, as well as discuss the new Invisalign G3 features and practice efficiencies.

This event also provided our team with valuable feedback and exciting ideas on how to improve Invisalign treatment for the highly complex cases our customers typically treat in Asian countries.

During this forum, we also demonstrated our iTero and iOC scanners, which received very positive feedback from our customers, and many doctors expressed interest in getting more information on scanners.

Now, let's review the key Invisalign metrics that measure our customer penetration, utilization rates or what we call same practice sales from our product, as well as the number of new doctors trained.

Overall Q3 utilization was unchanged at four cases per doctor.

Utilization among North American orthos increased to a record 7.1 cases per doctor, reflecting increased adoption of Invisalign across the board within low, medium, and high-volume practices.

Utilization among North American GPs decreased slightly to 2.8 cases per doctor, consistent with slower summer activity in GP offices.

International doctor utilization increased slightly to four cases per doctor.

During Q3, we trained a total of 1,585 new doctors, compared to 1,365 in Q2.

In North America, we trained 730 new doctors, lower than Q2, as we typically train fewer GPs in the summer months.

For international, we trained 855 new doctors, compared to around 520 in Q2.

This reflects increased training activity by our international distributors following the international launch of Invisalign G3 in May.

I'll now turn to an update on our key strategic initiatives and discuss our progress in each area.

Starting with our product and clinical innovation, I'll provide a brief update on the upcoming launch of Invisalign G4, I'll review our progress in the overall teenage orthodontic market segment in Q3 -- I said Invisalign G4, I think, back there -- review our progress in the overall teenage orthodontic market segment in Q3, especially with the Invisalign Teen product, as well as briefly touch on the impact we're seeing on new and lower-volume GPs for Invisalign Assist.

Earlier this month, we announced the launch of Invisalign G4, our next generation of clinical and product innovations.

The new features of Invisalign G4 are the latest in a series of innovations designed to address the most important [job] doctors have, which is delivering great clinical results for their patients.

By listening to the challenges our doctors have with their Invisalign treatments, we identify the most challenging clinical situations and systematically address them with new innovations that make Invisalign treatment more predictable in a wide range of cases.

More specifically, the new and improved smart (inaudible) features in Invisalign G4 are engineered to help doctors achieve even better clinical results in more difficult clinical situations, such as with open bite treatment, extrusion of upper laterals, and root control for canines and central incisors.

The Invisalign G4 feature set expands on the success of the Invisalign G3 innovations launched last fall in North America, which introduced new aligner and software features that make it easier to use Invisalign when you're treating class-two and class-three patients.

Now, with the benefits of nearly a year's worth of case experience along with customer feedback, we believe that Invisalign G3 is enabling our customers to treat more complex cases with Invisalign and certainly supports the increase we're seeing in North American orthodontic utilization.

The commercialization launch plans for Invisalign G4 are very similar to what we implemented in the successful launch of G3.

Invisalign G4 was announced on October 7th, and once again, we held an Ask the Expert Webinar, this time with more than 3,200 of our customers participating.

Following this Ask the Expert Webinar, 95% of participants surveyed said they have more confidence in Invisalign as a result of the new features, and over 91% indicated they would be more likely to recommend Invisalign going forward.

We're very pleased with this initial feedback and believe it bodes well for the actual launch and availability of features.

Invisalign G4 will be available across the Invisalign product line starting on November 14th, and this will be the first major Invisalign release to be launched simultaneously worldwide in every market.

Invisalign G4 represents a huge amount of quality work by our employees and it's a tremendous step forward by our new product development and technology teams.

G4 represents the culmination of years of research in understanding orthodontic [force] systems and how to apply them effectively to tooth movements.

We've seen our commitment to the evolution of Invisalign pay off as doctors are more engaged and report greater confidence than ever before.

Our long-term goal continues to be to establish clear aligner therapy as a standard of care for orthodontics.

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

Teenagers are still the largest segment of new orthodontic case starts and represent a very large opportunity for us to continue increasing our share of chair.

In Q3, the number of teenagers starting treatment with Invisalign products was 20,170, or 25.4% of total case volume, an increase of 28% sequentially and 23% year over year.

The majority of the growth in teenage cases was driven by the Invisalign Teen product, which grew 36% sequentially and 54.5% in the prior year to 11,730 cases.

Q3 represents much of the summer season for teenage orthodontic case starts, and over the summer, we invested in increased TV advertising and PR event marketing activity in support of the teen category, all of which helped contribute to this solid growth.

Our strong results suggest we had nice share gains this quarter.

On a trailing 12-month basis, total teenage cases grew 12% from the prior 12-month period to 64,505 cases, which includes all teenager cases using any Invisalign products across all customer channels, including GPs.

Total teenage case starts for North American orthos was up by more than 24% over the past 12 months.

And while it's not easy to obtain reliable third party market share data, our estimates of current orthodontic market growth imply a very low single-digit growth rate.

Against that framework, it would appear we've been able to both gain share, as well as drive overall category growth.

We're very pleased with our results in the teenager segment.

It remains very competitive, and it's not easy to wrestle share away from the traditional wires and bracket suppliers.

That said, we're confident that we'll continue to make steady progress increasing Invisalign's share, especially among the teen population.

Usage of Invisalign Assist, which is designed to help newly trained and lower-volume GPs gain confidence using Invisalign, continues to increase steadily, as well.

In Q3, Invisalign Assist case shipments were 5,250, an increase of 5% sequentially and 33% for that same quarter last year.

Invisalign Assist increases the likelihood of a new doctor becoming a routine user while helping to increase utilization among lower-volume doctors.

As they become more confident in delivering great results for their patients, they're using Invisalign more regularly and on more complex cases.

In fact, over the past year, the mix of progress tracking cases have increased, which means the aligners get shipped in batches as the case progresses rather than shipping all the aligners upfront.

A year ago, the majority of Invisalign Assist cases shipped without progress tracking, meaning they were very simple cases and all liners were shipped at one time, not in batches.

And yet today, the majority have progress tracking, and by definition, are being -- are using progress tracking and being shipped in batches.

That means that Assist users are tackling more difficult cases.

Shifting now to consumer, our integrated consumer marketing platform combines traditional print and broadcast media with a balanced mix of PR, event marketing, and social media.

The goal of this platform is to raise awareness of Invisalign and Invisalign Teen as the best option for a healthy beautiful smile among adults and teens.

In addition, it's important for us to help them find a great practice that can meet their needs.

The end of summer and the back-to-school season of Q3 is traditionally peak braces season for many of our customers.

To maximize our opportunity, with traditional media, we had a strong national TV presence with our twins advertising spot running during July and August on teen and mom-focused cable channels.

In September, we ramped up our national TV advertising targeting adults with spots running on cable and major network channels.

On the public relations front, Invisalign Teen was featured on more than a dozen TV morning news shows as part of a back-to-school satellite media tour, reaching more than three million parents nationwide.

In addition, Invisalign Teen was featured in many regional parenting magazines and news segments across the country.

On a digital and social media front, we continue to focus on building valuable testimonials and social media content, [doing] the Invisalign teen/mom advisory board and blogger events that reach thousands of moms on behalf of Invisalign Teen.

As for event marketing, in Q3, we hit the beach with our third year at the US Open of surfing, which exposed the Invisalign brand and local doctors to more than 400,000 consumers over four days at this huge annual surf and action sports event in August.

September marked a kick-off of Radio Disney's Next Big Thing Tour, powered by Invisalign Teen.

The tours are going to visit eight top markets with Invisalign-sponsored stage show and branded activities in each city, designed to help engage parents and kids with local doctors in the Invisalign brand.

Switching now to international expansion, in Q3, we continued to make steady progress in China with commercialization efforts focused on key opinion leaders in core cities.

Invisalign case volume increased nicely in Q3, albeit off a very, very small base and included initial cases from several key opinion leaders in the top public universities and hospitals in China.

We also saw a broader and more frequent use of Invisalign by a small core group of leading private orthodontists.

We also continue to make good progress outside of core Europe in the EMEA region.

In Q3, our distributor launched new marketing programs and clinical support programs throughout the region, participated in the Orthodontic Congress in Turkey, and began preparing for commercial availability in the Middle East, with the first Invisalign training course in Dubai scheduled for October 30.

We also expect to receive regulatory approval in Russia by the end of the year and shortly after approval will hold our first Invisalign training courses in Moscow with 150 of the top orthodontists in Russia.

As this is our first full quarter with Cadent integrating to Align, I'll briefly discuss the scanner and CAD/CAM services business.

Overall, we are headed in the right direction as our Q3 revenues for both was $11.6 million compared to $6.4 million in Q2, which included only two months of scanner and CAD/CAM services revenue.

In North America, we were pleased to see good progress in scanner sales even though we were still building out the sales team.

Most of the leads were developed by leveraging key Invisalign events, like the GP Summit in July, multiple trade shows, and a series of ortho-focused forums.

Having now completed hiring of our new North American scanner sales team, we expect to see some positive effects start to show up over the next few quarters as this team comes up the learning curve.

In Europe, we continue to make progress in building out the sales, services, support model with our partner, Straumann.

By integrating the Straumann team into major Invisalign events, like our International Summit at the end of Q2, we are introducing them to opportunities among our European orthodontists and GP dentist customers.

A lot of good work is going on here to ensure we can scale this business, and the Align and Straumann teams are working on plans to generate growth.

During Q3, we updated and better integrated the scanner and CAD/CAM services products and rand to be more consistent with the Invisalign branding approach.

In addition, we released new marketing materials targeted (to) both Invisalign and non-Invisalign customers.

We also began a phased rollout of the iTero 4.0 real-time modeling, or RTM, upgrade to ensure training and support was effectively managed for iTero doctors, staff, and lab partners.

The first phase includes the new 4.0 interface, the RTM scanning protocol, and other key software features.

These users will also have improved digital workflows for both Straumann and BIOMET 3i fixture level implant integrations with new detailed implant prescription options.

The second phase will include Invisalign interoperability and will be available by year-end.

In addition, we further extended our commitment to an open architecture platform in September with the launch of STL Export for both the iTero and iOC scanners.

Doctors may now export generic STL files directly from their MyAlignTech account for integration with third party CAD/CAM services, such as [cone] BMCT imaging, implant and orthodontic treatment planning services, as well as for digital laboratory services.

This open approach provides maximum flexibility for our customers in the labs and suppliers they choose to work with.

You may recall that in May we released iOC 4.0 with Invisalign interoperability, and since then, we've seen digital case submissions begin to replace traditional PBS submissions among those practices.

In addition to shorter cycle times for those practices, we are seeing higher-quality data, which makes for a better treatment plan and happier customers and patients.

Finally, while at the ADA a few weeks ago, we were proud to see the iTero scanner received a 2011 Pride Best of Class Technology Award in the Clinical Diagnostic category for Digital Impression.

We're committed to build on this progress and become the leader in the intra-oral scanner market.

As we grow our installed base over the coming quarters, we will describe our broader strategy for the restorative market in greater detail.

I'll now turn the call over to Ken for some more detail on our third quarter financials, as well as our outlook for Q4, and then I'll come back for a few closing remarks.

Ken?

Thanks, Tom.

Before I get started, I want to remind everybody that for comparative purposes, our Q2 2011 financial results include two months of scanner and CAD/CAM services and Q3 results include a full quarter.

In addition, there are several items that we exclude from our GAAP results when we report non-GAAP results.

For 2011, these include acquisition-related costs, amortization of intangible assets, integration costs, and severance and benefit costs for the New Jersey consolidation.

For Q3 2010, it includes costs related to the Leiszler class action settlement.

For our discussion today on the conference call, I will not review the total dollars excluded for non-GAAP gross margin, operating expense, and operating margin and instead will refer you to our press release tables, reconciliation of GAAP to non-GAAP key financial metrics, and the business outlook summary for a complete reconciliation.

Now, let's review the third quarter financials beginning with the revenue.

Q3 net revenue was a total of $125.9 million, which consisted of Invisalign revenue of $114.5 million and scanner and CAD/CAM services revenue of $11.6 million.

This is a sequential increase of 4.8% from $120.1 million in quarter two 2011, and a year-over-year increase of 31.2% from $95.9 million in Q3 2010.

Q3 Invisalign revenue of $114.3 million increased slightly compared to quarter two of $113.6 million and increased 19.1% compared to Q3 2010 revenue of $95.9 million.

The sequential change in Q3 reflected increased North American ortho and international case volume.

This volume growth was partially offset by international ASPs, driven by higher mix of revenue from distributors, and foreign exchange rates.

Additionally, in North America, there were deferrals associated with the teen Vivera promotion, and there was an increase in advantage rebates.

In Q3, we had very strong growth in the teenager segment, as seen in the Teen volume, which increased 36% sequentially.

On a year-over-year basis, Q3 Invisalign revenue growth was driven primarily by higher volumes across all customer channels and the benefit from foreign exchange rates on international shipments.

Q3 Invisalign case shipments of 79.4 thousand increased 4.4% sequentially and 19.8% year over year.

The sequential increase in Invisalign volume was driven by North American orthos and international doctors, primarily from our Asia PAC distributor.

Q3 scanner and CAD/CAM services revenue was $11.6 million, of which 5.4 is related to scanners and $6.2 million is related to CAD/CAM services.

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

Q3 GAAP gross margin was $92.4 million, or 73.4%, and this compares to GAAP gross margin of $91.1 million, or 75.9% in quarter two and $74.9 million, or 78.1%, in the same quarter of last year.

Non-GAAP gross margin for quarter three was $93 million, or 73.9%.

This compares to non-GAAP gross margin of $91.4 million, or 76.1%, in quarter two, and there was no difference between GAAP and non-GAAP gross margin for Q3 2010.

The sequential decrease in Q3 non-GAAP gross margin primarily reflects a full quarter of cost of sales from scanners and CAD/CAM services, including costs for the Israeli scanner operations that were previously included in operating expenses.

Additionally, gross margins were impacted by the teen Vivera promotion, the advantage rebate program, and international ASPs, which were impacted by mix and foreign exchange rates, as mentioned.

Q3 GAAP operating expense was $56.1 million.

This compares to GAAP operating expense of $74.5 million in quarter two and $53 million in the same quarter last year.

Q3 non-GAAP operating expense was $63.8 million, and this compares to $68.1 million in quarter two and $49.7 million in the same quarter last year.

Q3 non-GAAP operating expense was down $4.3 million sequentially and less than our original outlook.

This was primarily due to timing and the ramp of additional North American scanner sales force, marketing programs in both North America and international, which were delayed to quarter four, as well as the aforementioned move of Israeli scanner operations costs, from marketing expense to cost of sales.

As of October, the scanner sales force is complete and the entire team is onboard.

Q3 GAAP operating income was $26.3 million, and this compares to GAAP operating income of $16.6 million in quarter two and $21.9 million in the same quarter a year ago.

Q3 non-GAAP operating income was $29.2 million, or 23.2%, and this compares to $23.3 million, or 19.4%, in quarter two and $25.2 million, or 26.3%, in the same quarter last year.

The sequential increase in non-GAAP operating margin primarily reflects higher Invisalign case volumes and lower-than-projected operating expenses.

Q3 GAAP diluted earnings per share was $0.24 compared to $0.14 in quarter two and $0.22 in the same quarter last year.

Q3 non-GAAP diluted earnings per share was $0.27 compared to $0.20 in quarter two and $0.25 in Q3 of last year.

Now, moving on to the balance sheet.

Cash, cash equivalence, and marketable securities were $211.1 million.

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

In Q3, we generated roughly $41.6 million in cash from operations, and this compares to $29.7 million in quarter two and $35.8 million in the same quarter last year.

During Q3, we purchased a new manufacturing facility of approximately 150,000 square feet in Juarez, Mexico for $3.2 million in cash.

We plan to transition aligner fabrication from our current facility and the scanner and CAD/CAM services activities from New Jersey into this new facility during 2012 and plan to be out of the current facility in Juarez by mid-2013.

Q3 DSOs of 62 days were unchanged from quarter two and up slightly from 60 days in the same quarter last year.

At this point, I'd like to take a minute to talk about the press release we issued today announcing that our board of directors authorized their stock repurchase program of up to $150 million.

The timing and actual number of shares repurchased will depend on a variety of factors, including share price, corporate needs, regulatory requirements, and other market conditions.

Our strong balance sheet and healthy cash flow enabled the Company to continue investing in our strategic growth initiatives while returning excess cash to our shareholders through a share repurchase program.

It will also help offset dilution from our employee equity plans.

The board of directors believes that our stock represents an attractive investment for Align and its investors and the repurchase program demonstrates the Company's ongoing commitment to increasing shareholder value.

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

For Q4, we expect revenues to be in a range of 124 to $128.5 million.

The Invisalign case volume is expected to be in a range of 78 to 80.5 thousand cases.

Let me point to a few factors [in a full review] of Q4, as well as how to compare Q3 to Q4 growth.

First, Q3 is historically the peak season for teenage orthodontic case starts, and we believe we've gained shares in the quarter across all customer channels.

Q4 is historically a slower period for teenage orthodontic case starts, and although we believe we will continue to take share, we would expect our teenage cases to reflect normal seasonality and to be down sequentially from Q3 to Q4.

Also, since we are not offering the teen Vivera promotion in quarter four, North America GPs and some orthos may not do as many Invisalign Teen cases in quarter four.

Second, while our customers continue to report steady patient traffic in their offices, we are being thoughtful about the near-term consumer sentiment and the potential impact on dental visits and high-value procedures like Invisalign.

And, last, while we continue to grow nicely outside of core Europe, we're mindful of the challenging economic environments in Europe, especially in the UK, where we also had some execution issues in Q2.

With new leadership in the UK and expanded sales coverage, we expect to restage growth but will take a few quarters.

Now, let's move on to gross margin.

We expect Q4 GAAP gross margin to be in a range of 70.9 to 71.5%, and we expect non-GAAP gross margin to be in a range of 71.9 to 72.5%.

The sequential decease in Q4 non-GAAP gross margin primarily reflects increased Invisalign training costs as we anticipate training more doctors in Q4 compared to Q3.

Remember, training carries nominal gross margins.

We're also expecting a slight increase in Invisalign costs, including an increase in number of aligners per case as we are addressing more complex cases with Invisalign G3 and some increase in freight costs.

In addition, as we move the scanner and CAD/CAM services operations from New Jersey to Juarez and Costa Rica, we will be incurring transition costs in cost of goods sold and operating expenses starting now through the third quarter of 2012.

Until we complete the New Jersey consolidation and the move of aligner fabrication to our new facility in Juarez, we would expect gross margin to remain at the low end or slightly below our long-term range of 73 to 78%.

After completion of the New Jersey consolidation, we expect to realize the cost savings of approximately $4 million annually.

Also, as Invisalign volumes grow, we expect to gain manufacturing efficiencies and improved absorption of factory costs.

In Q4, we expect GAAP operating expense to be in a range of 68.9 to $70.4 million.

We expect Q4 non-GAAP operating expenses to be in a range of 66.9 to $68.4 million.

The increase in Q4 operating expense reflects headcount additions to the North America sales force, including the scanner sales team, implementation of marketing programs in both North America and international that were delayed from quarter three, and cost to commercialize Invisalign G4.

It also reflects ongoing investments in R&D projects focused on accelerating installed base growth for scanners and increased adoption for Invisalign, as well as costs associated with the New Jersey consolidation, as just mentioned.

We expect Q4 GAAP operating margin to be in a range of 15.3 to 16.7% and GAAP earnings per share to be in a range of $0.17 to $0.19.

We expect non-GAAP operating margin to be in a range of 17.9 to 19.2% and non-GAAP earnings per share to be in a range of $0.20 to $0.22.

In Q4, we expect the effective tax rate to be approximately 27%.

We expect diluted shares outstanding to be approximately 81 million and cash on hand to be in a range of 220 to $225 million, excluding any stock repurchases during the quarter.

With that, I'll now turn the call back to Tom for closing comments.

Thanks, Ken.

In summary, we're very pleased to report another strong quarter of results for our shareholders, both on the financial side, as well as on a range of key programs and initiatives.

We are committed to extending our lead in [clear] aligner therapy even against the tough competitors in our market and continue to press ahead on key strategic initiatives to maintain that momentum.

We are well along with the integration of Cadent into the Align business and over time expect to see both market and earnings leverage from putting our two innovative companies together.

And, finally, we continue to see great opportunities to build this franchise into a leader in dentistry and the medical device industry, yet are mindful of the challenging economic environment and are committed to run the business prudently.

We look forward to continued progress and we'll report back to you at the end of the year.

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

Operator?

Thank you.

(Operator instructions)

Matt Dolan, ROTH Capital Partners.

(No response)

Next question is coming from Jonathan Block from SunTrust Robinson Humphrey.

Please proceed with your question.

First by default.

I guess I'll take it.

Hey, guys, good afternoon.

The first question that I have is just on the expense structure, I mean obviously OpEx came in considerably lower than your guidance and what we were looking for, and I knew you guys too well that you're not going to give us guidance looking out, but maybe if we can just speak to the variables that come into play.

Ken, you talked about having the entire Cadent sales force, I believe, up and running by October.

You look at your 4Q non-GAAP operating expenses.

Can you walk us through what would be incremental to those expenses going forward, or is that sort of a good run rate to look at now that everyone's onboard from Cadent?

Thanks.

Sure, John.

So I think about it this way.

First of all, the guidance we gave about 67 to 68 million roughly in overall spending for the fourth quarter, we're currently working on our plan as we move into 2012 right now, and we're actually working through that.

I think about it like this.

First of all, we finished building out our sales force on the scanner side of the business, so we'll get some full impact of those people as we move through the year, and we had started out with about 10 reps on the Cadent side of the business and we're now ramped up to about 23.

So you've got that incremental headcount playing out for the year.

The other piece of it, I think it's fair to assume that we'll add some additional sales force into the Invisalign business as the business continues to grow.

And then from an R&D perspective, we've got a lot of good ROI projects in the works.

We're working on additional improvements to our Invisalign, like G3 and G4, and we'll continue to put out evolutions in technology there.

And then we're also looking at chairside applications and looking at what we can do from an R&D perspective to bring those to chairside on the scanner side of the business.

And then I guess if I wrap up and talk about the international side of the business, yes, it slowed more near-term here, but it's still been growing faster than North America and we're still adding resources in there from a sales perspective into the core regions of Europe and in building out and making sure they have the right infrastructure from the sales and marketing perspective.

So we'll be feathering some expense in as we go through 2012, but I would kind of stop there I guess at this point without giving guidance.

Hey, John, I'll pile on.

There were a couple of the areas where we underspent, not by plan.

It just took a little longer to get the right people, both here and international, and there were a few programs that were deferred because we didn't have everybody onboard that we needed.

So obviously in this economy, you'd think it would be easy to find great people, but you've still got to find the right ones.

So those weren't good misses, but it certainly didn't impair us on the revenue line.

Got it.

And then I'll just combine a couple questions into the last one.

Tom, I'm sure there was a lot of moving parts by region, but maybe can you speak to how things were in third quarter?

I mean did you come out of September with the same sort of momentum that you had in July?

Was it pretty equally weighted?

Maybe you can speak to that a little bit.

And the last one would be unless I missed something -- I was hopping between a couple calls -- where are you guys with interoperability on the iTero?

I heard you allude to the 4.0, but when do we see the interoperability with the iTero for the GPs?

Thanks, guys.

That's, at best, a tenuous roping together of two very different questions, but we'll go there anyway.

The simple fact is that notwithstanding what you read about the consumer and they're still shopping despite consumer sentiment being low, patient traffic has held up reasonably well in most of our major geographies, and ability and interest in spending on a considered purchase like Invisalign has also held up.

We did describe the hard-to-separate normal summer seasonality overall internationally was higher than we expected, and so what we do feel is a little bit of softness in a couple of countries -- Italy, Spain -- but, again, we have low penetration, so we're trying to sort that out -- then we're pretty comfortable we can restage the UK.

Germany's been pretty solid and continues to be, again notwithstanding all the headlines.

North America was a bit better than we thought.

We got a little more out of GPs than we expected, and the orthos were, simply put, busier than we had hoped, and we overperformed a bit there.

And then we go to Asia with our distributor out there.

Their volumes continued to outpace the rest of international, and we've got the right base there to build out nice businesses in each of these individual smaller but still very important country markets.

So I think when we look at the total mix, we're back to the same basic thesis -- difficult environment in general but very underpenetrated into the potential market and a very, very differentiated high-value product for people that want it.

So our hope is we can continue to drive through the choppy times here, but knock on wood, we'll take it.

As the second part of your question around interoperability, with all the software flow out, that is, we've said, interoperability for the iTero will now be before the end of the year.

We've moved that out a little bit to support the flow of some of these other restorative features out to the customer base that are really embedded in and around the 4.0 for iTero.

And I'll remind you that the iOC has had interoperability since May.

That was the orthodontist version.

Okay, thanks, guys.

Okay, next, can we go back to see if Matt Dolan is online, Operator?

Certainly can.

Matt Dolan, ROTH Capital Partners.

Ken, just to clarify, the adjusted GAAP number, so to speak -- I see a non-GAAP number here of $0.27.

If we do the math, it's a $0.02 delta.

What's the right apples-to-apples number for earnings?

As far as the non-GAAP versus GAAP?

Is that your question or--?

Yeah, [adjusting] GAAP.

I mean not taking out stock-based comp but relative to your guidance.

Yes, well, we don't take stock-based comp out for non-GAAP anyway, so the only difference between GAAP and non-GAAP has been some of the costs associated with severance in New Jersey, integration costs that we're going through with the Cadent business.

So 27 versus guidance of 17 to 20?

Yes.

Okay.

And then, Tom, maybe you can just help us on the general environment on a number of fronts.

I mean we certainly had questions coming in about the consumer.

We've had a resurgence in inquiries around competition, yet the Invisalign business is growing close to 20%, with Cadent layering it on top of that.

What's your feel as we go into 2012 on a macro environment what the base dental business -- base dental market could do and, therefore, how well you could outperform?

Well, again, we're careful to stay away from guidance.

I'll describe how we think about the marketplace and the environment we're headed into.

As Ken said, we're still working on our operating plan for 2012.

Probably be better for me to share that with the board before I preview it here.

The simple environment we think of is, much like today, going to be choppy, not going to be a lot of good news, probably more headwind in general, and I think as many companies that are much more closely tied into consumer than we are have described, a very bifurcated consumer environment.

You know, the best thing we have going for us is we have great products that people really want, very, very differentiated products, and we have very low penetration still into the opportunity base.

So those are two very good things for us as we think through even difficult times.

Doesn't mean that we couldn't see slowing in growth, and I think we're going to run the business in a way, as we have shown before, that we can dial up or dial back spending in a number of areas based on what's going on in the environment.

With all that said, we think there's still solid patient traffic.

There's still a lot of people asking for Invisalign by name in many geographies.

We're doing a better job in countries where we can in Europe, starting some basic consumer programs.

That's having an impact since our penetration is an order of magnitude less than it is here in North America.

And we have got lots of good starts going on around the world in some of these countries where we're now starting to get a little bit of critical mass among the leading clinicians.

And importantly here, the evolutions in Invisalign technology, G3, G4, play very well in these parts of the world that have much greater case complexity and where most of the cases are done by orthodontists.

So as our game gets better, we're in a better position to ask for more of their business, and it's starting to happen.

So all that said, we're going to take the best the market has for us and we think we'll be able to do better than most everybody, whether that's a better market case or a worse market case, and then we'll adjust spending and priorities around that, and that's kind of the way we've been trying to do it.

Really, a lot of learning came out of '08/'09.

We're trying to think about it in the same way.

Flexibility but pushing ahead on strategic initiatives.

Okay, thanks, Matt for your question.

Operator, we'll take the next question.

Thank you.

Brandon Couillard, Jefferies and Company.

How do we think about -- either Ken or Tom -- how do we think about the dynamic internationally given the context of the fact that you've ramped international doc trainings in the quarter?

Should we expect a stronger sequential acceleration that we might otherwise normally see in those markets, particularly in the context of what appears to be some softness in some of the periphery European countries?

Oh, there's a -- I'll start and Ken can dive in -- there's a couple things going on at once.

Let me separate basic demand.

We pulled back from training as we were getting ready to launch G3, so we had been training and had been increasing the level of training.

As we were getting ready for G3, we thought there's no point to continue doing new training on software and clinical protocols that we're going to change dramatically, so we pulled off of that.

And you saw a resurgence of training really in international, which is typically during a quieter period.

But as soon as we got past the launch of G3 in international, we saw much more training going on, and we think that's going to continue for a while.

The second thing is there are some new geographies opening up, and -- so back to the first question, training.

You should start to see volume growth over time, but this doesn't happen overnight.

The process of getting comfortable with Invisalign is starting to integrate into practice, whether they're a GP dentist or an ortho, takes a period of time, and in Europe, in general, the case complexity that they treat is higher.

Many people that have more moderate cases don't even seek treatment, so while the incidence and prevalence has actually been higher of malocclusion, the number of people that get treated is lower.

So they're treating a more complicated base, which means, in our view, that's a little more conservative ramp in Europe than is generally in North America.

The second (sic) thing is that now with going to some new geographies where we haven't had the product available, we think there may be the opportunity, again on a small basis like we're seeing in Asia, the chance to start some new growth opportunities there.

And you see that potentially in Turkey and the Emirates and Russia and those.

None of them will be huge markets in their own right, but collectively together, they'll matter.

So I think what it ought to point to is the opportunity for good, sustained steady progress outside US and a lot more opportunity to come.

But that's more of a longer-term driver of growth than a near-term.

Okay, that's helpful.

Thanks.

And then, Ken, a two-part question.

What was the impact of FX on composite revenue in the third quarter?

And then any chance you could provide us with the Cadent operating loss in the third quarter?

I believe you discussed that, some of the P&L metrics, in the second quarter.

Yes, I'll go to the second question first.

We did that last quarter to kind of give some framework on how to think about the business on a go-forward basis.

We've been fully integrated, the functional teams, into the Align structure, and we actually are not reporting out operating margins on the Cadent business separate from the Invisalign business, which is why we're -- we do try to give information on revenue so you can understand where the business is going, but we wanted to do that for the first quarter just to give everybody a sense of what the business was generating at that point in time and also just sharing that we're investing into that business as we're integrating.

And your first question again?

I'm sorry.

It was if you could quantify the impact of FX on revenue in the quarter.

Right.

So it was roughly about five, $600,000 impact in the quarter.

Great.

Thank you.

(Operator instructions)

[Steve Boscoe], Morgan Stanley Smith Barney.

I wonder if you could update your thinking on the outlook for specifically orthodontist utilization.

Number one, when can Cadent be visible as a supporter of that utilization with orthodontists?

And given that you now have Cadent, as well as G4, can you get utilization up one to two cases per quarter over the next two to three years and repeat the performance of the last two years?

You know, I don't want to size it.

The short answer is yes, that's part of our strategy, and I think I'll talk ortho -- or the orthodontist's office for just a moment [in the operatory] and then maybe we can switch over to the GP, where there's maybe even a more significant strategic impact.

It's too early.

We had the first ortho users with the iOC literally submit cases during the AAO in May, the same day we turned this feature on, and we've seen many of those practices go completely to digital submissions, and there's a lot of positive things that come out of that.

It's too early to tell yet whether they're also increasing their total number of cases, but we're going to be sorting that out over the next couple quarters.

Our view at this point is that they are using this as a better patient experience, as a way to reduce cycle times for themselves, and as a way to ensure they don't get a callback for a bad impression, all of which are really good.

On our case, we get a little freight reduced, we get better quality, and we certainly can help reduce cycle time for them.

And so we think all those things together just make it easier for the orthodontist, which already is not giving us all their cases.

They're giving us a slice, some cases larger, in most cases smaller.

If we can make it easier, reduce the friction for that whole experience for the office, the patient, and the doc, then we believe we're going to be able to support that drive for share gain.

I know you and I may see share a little differently here.

We can talk about that.

But we believe we're gaining share, especially in the ortho chair.

This kind of technology will help.

If I switch over to GP for a minute -- and, again, we focused a little more on the platform in the nearer term around some of the restorative market features that we really wanted to make sure they had -- continuing on the trajectory where Cadent had been headed, but as we start bringing interoperability out by year end, meaning they can submit cases, we think there's really elasticity there as we make that an easier thing.

They'll already be using the iTero scanner for a lot of things in their office, for most of the restorative procedures, so this will be an everyday tool for them.

And I think we're going to get a good read probably by the middle to latter part of next year about what kind of elasticity that has for us for getting more cases out of GPs, and then when we start driving higher-value chairside applications and making it easier for them to discuss that case with a patient and get that case started, we think that's an additional thing.

So your question goes right to the heart of why we thought it was important to put these two companies together.

It's too early to call yet, but the strategy sure seems to be getting affirmed by our customers.

On that note on Cadent strategy, back when you did the deal, if memory serves me correctly, you'd indicated that it would take you about six months to get a sense for how you might get bigger specifically in restorative with Cadent.

Is there anything new on the thinking there you could share with us?

What I think I described a few moments ago was that we're already pushing ahead on some of the important initiatives on the restorative side, working with implant partners and others.

We've rolled out a capability to allow a dentist to use whoever in their ecosystem they want to, very differentiated from other players, so that our goal is to help enable digitization large in dentistry, and so that should point you towards our general strategy to be open platform and to try to connect the world.

And as we do that, there are opportunities for us to capture small, medium, and large pieces of that value chain depending on software and tools and new products that we bring out.

We've got a little work to do the next few quarters as we start to build this thing out, but we will be coming out within the next few quarters talking more broadly about the bigger restorative strategy here.

Okay, thanks, Tom.

And then, Ken, could you -- I apologize if I missed this, but could you quantify the impact on gross margins from Vivera and the Advantage program in the quarter?

We haven't talked about that specifically.

It's -- it was, I would say, roughly a quarter of a point or so of overall margins.

Great.

Thanks, guys.

Thank you.

Thanks, Steve.

Well, thank you, everyone, for participating in our call today.

That concludes the formal part of our call.

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

Have a great day.

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

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