愛齊科技 (ALGN) 2011 Q4 法說會逐字稿

Welcome to the Align Technology Q4 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.

Is now my pleasure to introduce Shirley Stacy of Align Technology.

Ms Stacy you may begin.

Good afternoon everyone.

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 our fourth quarter and fiscal year-end 2011 financial results press release today via Globe Newswire, which is available on our website at Investor.AlignTech.com.

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

A telephone replay will be available today by approximately 5.30 PM Eastern time through 5.30 PM Eastern time on February 6, 2012.

To access the replay domestic callers should dial 877-660-6853 with account number 292 followed by pound and conference number 386750 followed by pound.

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

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

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

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

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

Most of these items together with the corresponding GAAP numbers and the reconciliations to the comparable GAAP financial measures, where practical, are contained in today's financial results press release which we have posted on our website at Investor.AlignTech.com under Financial Release.

And have been furnish to the SEC on Form 8-K.

We encourage listeners to review these items.

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

Good afternoon everyone.

On the call today, I'll briefly recap Q4 highlights, review our performance by product and customer channel, and update you on our strategic growth initiatives, including the activity and investments surrounding our scanners and CAD/CAM services business.

Ken will discuss our Q4 financial results and outlook for Q1 in more detail and provide some qualitative commentary on how we view 2012.

I'll come back and summarize a few key points and open the call up to questions.

The fourth quarter was a strong finish to the year for Align, and we're pleased to have delivered better than expected revenue and earnings, driven by increased Invisalign case volume and lower than projected operating expenses.

We continue to see solid performance of Invisalign across all customer channels, and believe that our continuing focus on Invisalign product evolution and market expansion is at the core of this progress.

I'll start with an overview of key highlights for Invisalign where our record Q4 Invisalign case volume of 82,600 cases increased 4.1% sequentially and 30.1% year-over-year.

Like I said earlier, a strong finish to a good year.

For North American GP dentists, Q4 case volume increased 6.4% from Q3 and 31% year-over-year to a record 33,100.

During the quarter, we saw solid growth of Invisalign across our GP customer base, particularly with Invisalign Full and Assist.

Results from a recent customer survey which included 300 GP practices shows that GPs attributed increased use of Invisalign to better marketing of their practices, increased clinical confidence with Invisalign and increased patient demand overall.

The survey also found that overall satisfaction with Invisalign has increased among GP dentists over the past year, particularly among newly certified doctors.

We believe this is due in part to the improved Invisalign doctor's site and ClinCheck's software user interface launch with Invisalign G3 that has proven to be far more intuitive and easier to use.

North American Ortho case volume for Q4 was 29,890 cases, a slight decrease of a few hundred cases from Q3 as expected due to normal seasonality in Orthodontic case starts.

Recall that more teenagers begin treatment in the summer than in the fall, and our North American Ortho starts are typically down somewhat in Q4.

On a year-over-year basis Q4 Ortho case volume increased 36.3% reflecting increased penetration of Invisalign across our Ortho customer base from all products.

Since the launch of Invisalign G3 in October of 2010, we have continued to see strong growth among Ortho customers.

The customer survey I just referenced also included 200 Orthos, who attributed increased use of Invisalign to a number of factors, starting with higher patient demand created by our consumer advertising, along with clinical improvements that have resulted in improved predictability, delivered better outcomes and given them increased confidence with Invisalign.

This input is consistent with other feedback regarding Invisalign G3 that we've heard from customers all year.

We believe the additional new features and innovations launched in Invisalign G4 will continue to build on the progress we've seen to date with Invisalign G3 and help doctors gain greater confidence and achieve even better clinical results when treating more complex cases.

On the International front, Q4 case volume of 19,600 cases increased 7.9% sequentially driven, by our core European countries.

Specifically, we saw an uptick in Italy, France and Spain as they rebounded from their seasonally slower Q3 summer period while Germany and France continued solid growth.

On a year-over-year basis, international case volume increased 20.3%, reflecting that good growth from Germany and France, which are benefiting from increased sales force coverage and marketing program investments over the past year.

In addition, growth from our distribution partners in the Asia-Pacific, EMEA and Latin America regions continues to outpace the rest of the world and contributed to strong year-over-year growth.

Now let's review the key Invisalign metrics that measure our customer penetration.

Utilization rates, or what we call same practice sales of our product, as well as the number of new doctors trained, as we continue to grow our base of submitting practices.

Overall, Q4 utilization increased to 4.1 cases per doctor.

Utilization among North American GPs increased to 3 cases per doctor.

Utilization among North American Orthos decreased slightly to 7 cases per doctor reflecting the seasonality in their teen case starts.

International doctor utilization increased slightly to 4.1 cases per doctor.

During Q4, we trained a total of 1,925 new doctors compared to 1,585 in Q3.

In North America, we trained 955 new docs, an increase of 30% from last quarter, as we typically train more GPs after the summer months.

Across our international geographies, we trained 970 new doctors, up from the 855 we trained in Q3, and of the newly trained international doctors in Q4, several hundred were trained by our distribution partners in anticipation of full commercial Invisalign launches in Russia and the Middle East.

It also reflect our direct efforts to support the continued ramp in China by training some new doctors.

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

To do that, I'll start with product and clinical innovation by providing a brief update on the launch of Invisalign Express 5.

I'll touch on our continued progress in the Teenage Orthodontics segment using all Invisalign products including Invisalign Teen and increased use of Invisalign Assist with newly trained GPs.

I'll also touch on our efforts to accelerate development for our scanner technology including new software releases, as well as some of the new offerings announced by Straumann and BIOMET 3i.

Let's get that started with Invisalign.

We recently announced Invisalign Express 5, a cost effective treatment option for very minor crowding, spacing or Orthodontic relapse treatments requiring 5 or fewer stages of Invisalign aligners.

We believe that many patients want to correct a little crowding or other minor malocclusions but don't actually pursue or accept treatment because they believe Orthodontic treatment is too expensive for those minor corrections.

Invisalign Express 5 gives doctors a new option for these patients, and unlike lab-based manually produced aligners, Invisalign Express 5 has all of the cutting edge technology of Invisalign and delivers the benefits of straighter teeth at a price consistent with those minor fixes.

Invisalign Express 5 is a shorter duration option to Invisalign Express 10 and is available to our North American customers beginning this week for $549.

This product ensures that Align can be a more complete competitor in clear liner therapy by addressing a growing segment with a best in class product at a very competitive price.

Since announcing Invisalign Express 5 in early January, initial feedback from customers has been very positive and we are excited about the potential for Invisalign Express 5 in the market.

Now, moving on to the 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 they represent a great opportunity for us to continue taking share from existing Wires and Brackets case starts to increase our share of share.

In Q4, the number of teenagers starting treatment with Invisalign products was 18,140 or 22% of total case volume, as compared to 20,170 or 25.4% of total case volume in Q3.

As expected, Teenage cases declined sequentially, reflecting normal seasonality in the Orthodontic market.

Q4 Teenage case starts increased 32% year-over-year, compared to 8% in Q4 last year.

We had similar trends with the Invisalign Teen product this quarter which declined sequentially, but still grew 41% year-over-year to 9,805 cases.

For the full year, total teenagers using Invisalign were 68,885, an increase of 18% from 2010.

Overall, we're very pleased with our results in the Teenager segment.

Our estimates of current Orthodontic market growth imply a low single digit growth rate and against that framework it appears we are continuing to gain share, while helping to increase category growth over the long-term.

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 Q4, Invisalign Assist case shipments were 5,695, an increase of 9% sequentially and 50% from the same quarter last year.

5-0, 50% from the same quarter last year.

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 consumer platform is to raise awareness of Invisalign and Invisalign Teen as the best options for a healthy, beautiful smile among adults and teens.

In addition, this platform enables us to help prospective patients find a great practice that can meet their needs.

One of the ways we measure progress in this front is through activity on our consumer website where prospective patients can get more information and search for an Invisalign doctor in their area.

In 2011, we had more than 4 million visits to Invisalign.com with a growing number of leads and ever-improving conversion to patient starts.

In Q4, we continued building awareness and demand for Invisalign with this integrated platform although with a significant lower profile in TV advertising due to typical pre-holiday competition for air time and consumer attention.

On a public relations front Invisalign was featured in two of the nation's most popular women's lifestyle magazines, Woman's Day and Woman's Health in articles about Best Treatment Options and Age Proofing Your Smile.

October provided an opportunity to reach more than 17 million consumer households by focusing on the benefits of Invisalign Teen in two Halloween Tips and Treats satellite media tours.

On the digital and social media front, we continued our campaign to develop valuable online advocates and social media content through our Invisalign mount advisory board and blogger events across North America, including a successful Invisalign Teen campaign targeting Canadian moms.

As for event marketing, in December we wrapped up the Disney's Next Big Thing tour sponsored by Invisalign Teen.

The tour gave local doctors and Invisalign reps in each market the opportunity to engage with thousands of parent and kids at each event, and created millions of media and online impressions through its related traditional PR and social media aspects.

Moving forward into Q1, we are stepping up our media spend with national and cable TV advertising, primarily focused on moms and teens and expanding our presence in top markets with radio advertising to complement our TV ads.

Turning now to International.

Our continued growth in these geographies requires us to integrate all of our strategic initiatives, particularly technology and product innovation, which helps doctors treat more complex cases.

In addition, we are very focused on enhancing the customer experience, sales effectiveness and professional education programs across all our direct geographies.

The good news here; Europe and other regions are even more underpenetrated than North American for both Invisalign and Orthodontic treatment, and the cases they treat are more complex.

For that reason, we believe that Invisalign G3 and G4 will continue to support growth into these markets with those more difficult cases.

When we factor in the economic headwinds in Europe into these opportunities, it has motivated us to accelerate some of our planned evolution in sales coverage, sales and marketing efficiency, clinical education and the Invisalign platform itself that we went through several years ago in the US.

We're still early in this process, but are seeing positive signs of progress and are confident we can drive growth here.

Outside of Europe, Japan continues to exhibit solid growth albeit on a small base.

In China, our newest direct country market, we continue to make progress on executing our strategy of working initially with the key opinion leaders and leading public and private doctors.

To that end, the fourth quarter capped off a very successful inaugural year for Invisalign in China.

During Q4, we hosted several well-attended Invisalign Orthodontists' lectures in the key hospitals for our four core target cities, and we held additional Invisalign training courses for opinion leaders and other key doctors.

We also made advancements in getting Invisalign entered into the pricing system of major public hospitals.

Finally, while still on a very small base, we received more initial and follow-on cases from early influential users.

In Q1, we'll continue to focus on execution of our KOL focus strategy and continue heavy clinical education and support for our practitioners.

Overall, the level of interest and encouragement and engagement among doctors who are advocating for Invisalign is strong.

I'll keep you posted on our continued progress there.

We've also continue to expand our base internationally through entry into new countries using distribution partners to cover these smaller, but still very important country markets of Asia-Pacific, EMEA and Latin America.

Collectively, they continue to make very good progress, and represent 14% of international Invisalign revenue, with growth rates outpacing those of Europe and North America.

We recently launched Invisalign in the Middle East and received regulatory approval in Russia which we announced earlier this month.

On a smaller scale, we have good efforts going on in Brazil and Argentina, places that should be a good fit for the Invisalign value proposition for both practitioners and patients.

We have great opportunities in these other regions and while individually these are smaller in scale, collectively they represent great long-term opportunity.

While we're still far behind North America in terms of Orthodontic and Invisalign penetration, it just means we have greater headroom for future growth in all these geographies.

Moving on to our scanner and CAD/CAM services products.

Q4 revenues for both was $10 million compared to $11.6 million in Q3.

Q4 scanner sales were $5.2 million compared to $5.4 million in Q3.

Q4 CAD/CAM service sales were $4.7 million compared to $6.2 million in Q3.

The sequential decrease in Q4 revenue reflects lower than expected scanner sales in Europe, based on lower procedure volume and lab activity, as well as lower scanner-related CAD/CAM services.

In North America, scanner sales continued to benefit from leveraging our sales and marketing resources including Invisalign and industry events to introduce scanners to our customers.

We generated a lot of interest for iTero scanners at the American Dental Association meeting in Los Vegas in October, as well as the Greater New York Dental Show at the end of November.

Overall we are doing better than our original expectations in North America, but yet not enough to offset the softness in Europe.

Part of the reason for that solid performance was our progress in the technology.

In December, we announced a significant software enhancement for the iTero 3D scanning system using dental practices for a wide range of restorative dental procedures.

The latest version of iTero software includes the Invisalign scanning protocol for full interoperability with Invisalign treatment, including links to the Invisalign doctor site and the Invisalign case gallery for patient education.

It also includes important enhancements of software tools that will help deliver faster, more accurate 3D impressions of the patient's dentition and greater efficiency for iTero customers.

The value proposition for intra-oral scanning for GP dentists remain compelling.

As we've described before, GPs primarily do restorative work that makes up the majority of their day-to-day workflow.

When it comes time for GPs to start an Orthodontic case, they have to switch gears to Ortho-mode.

They stop what they're doing on all the restorative work and re-calibrate their office and staff around a procedure they still do infrequently.

To help make it easier for them, we are developing chair-side applications to run on our intra-oral scanning systems for use with Invisalign treatment.

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

Providing real time chair-side applications on our scanners will make it much easier for GPs to set up an Invisalign case, discuss the scope of treatment and set expectations with the patient.

During 2012, we'll start rolling out these chair-side applications to begin helping our lower volume doctors integrate these tools into their practices in a way that complements their existing workflow in the office.

Our first chair-side application is currently in beta testing with a small number of North American GPs.

We'll start to wrap up this beta test soon, then begin collecting and analysing feedback in preparation for a commercial launch this summer.

Among our core Invisalign Orthodontist customers, we are leveraging our direct sales force and also utilizing established customer events like our series of Invisalign Regional Ortho forums to help drive sales of iOC scanners.

This is especially attractive for those Ortho customers who are looking to differentiate their practices by further integrating digital technology such as intra-oral scanners and replacing the cost and unpleasant experience of PVS impressions altogether.

This trend towards accelerating digitization is very positive, as we have been one of the very few treatment modalities in dentistry that rely fully upon digital technologies.

As the Invisalign process is improved for our customers, more and more initial Invisalign case submissions are transmitted to us on a digital basis, including digital records like x-rays and photos and treatment plan, except for the physical PVS impressions themselves.

Approximately 80% of our incoming Invisalign case submissions now are fully digital except for those PVS impressions, which patients consistently report is the worst part of their otherwise wonderful Invisalign experience.

Since making interoperability with Invisalign available on iOC in May, we've seen digital impressions begin to replace traditional PVS impressions among Ortho practices with our scanner.

In fact, of the 80% of the cases I just referenced, 6% of them now are fully digital and include that IOS digital impression instead of a PVS impression.

This trend is positive for both Align and our customers as they get their ClinCheck and final cases faster with less hassle for patients, and all reports to date indicate aligner fit is even better.

Straumann, our distribution partner in Europe and BIOMET 3i are both leaders in dental implants.

They each provide custom dental implant abutment solutions on the iTero scanner and because we have an open architecture platform anyone can use what we call our STL files.

That means the customers can export our STL digital files to any third party lab of choice for additional restorative options.

We've entered into a limited market release for the Straumann Implant Analog Digital Workflow.

This workflow allows oral surgeons, periodontists and general dentists the ability to take an iTero scan of the Straumann scan body and utilize a stock Straumann repositionable analog and abutment to complete the restoration.

This new digital workflow gives the clinician open choice to utilize the Straumann digital workflow with custom and stock abutments.

We expect the analog workflow to be in general availability in the near future.

Beyond these product initiatives, we continue to work with the Straumann team on re-staging growth in their European territory.

We are also continuing to actively collaborate with BIOMET 3i to support their BellaTek Encode digital workflow with the iTero scanner.

Our collaborative educational and marketing events are providing exciting opportunities for BIOMET 3i implant customers to adopt the new digital workflow with iTero.

We expect this collaboration within our field sales and marketing teams to grow over the coming months with expansion of our iTero field sales team.

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

Ken?

Thanks, Tom.

Before I get started with the financial results, I would like to comment on a few items.

First, to provide greater transparency to the underlying performance of Invisalign and the scanner and CAD/CAM services, beginning this quarter we will include in our earnings release a breakdown of revenue and gross margin for both segments of the Business.

Second, I would like to remind everybody that for comparative purposes, our 2011 financial results include eight months of scanner and CAD/CAM services.

Finally, 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 benefits costs for the New Jersey consolidation.

For our discussion today on the conference call, I will not review the total dollars excluded for non-GAAP gross margin, operating expenses 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 our fourth quarter financial results beginning with revenue.

Q4 net revenue was a total of $128.9 million, which consisted of Invisalign revenue of $118.9 million, and scanner and CAD/CAM services revenue of $10 million.

This is a sequential increase of 2.4% from $125.9 million in Quarter Three 2011 and a year-over-year increase of 38.8% from $92.9 million in Q4 2010.

Q4 Invisalign revenue of $118.9 million increased to 4.1%, compared to Q3 revenue of $114.3 million, an increase to 28%, compared to Q4 2010 revenue of $92.9 million.

The sequential increase in Q4 revenue reflects increased North American GP and International case volumes.

This volume growth was partially offset by lower ASPs driven by foreign exchange rates as the dollar strengthened against the Euro, and increased advantage rebates, as a record number of doctors received rebates and are moving up in the program tiers.

On a year-over-year basis, Q4 Invisalign revenue growth was driven primarily by higher volumes across all customer channels.

In Q4, scanner and CAD/CAM service revenue of $10 million decreased slightly from $11.6 million in Q3.

Moving on to gross margin and operating expenses.

Q4 GAAP gross margin was $95.6 million or 74.1%.

This compares to $92.4 million or 73.4% in Q3 and $71.8 million or 77.2% in the same quarter last year.

Q4 GAAP gross margin for Invisalign was 78.7% and scanner and CAD/CAM services was 20%.

This compares to 78.6% and 21.5% respectively in quarter three.

Non-GAAP gross margin for Quarter Four was $96.6 million or 74.9%.

This compares to non-GAAP gross margin of $93 million, or 73.9% in Quarter Three and there was no difference between GAAP and non-GAAP gross margin for Q4 2010.

For Invisalign, there was no difference between GAAP and non-GAAP gross margin for Quarter Four and Quarter Three of 2011 and Quarter Four of 2010.

Q4 non-GAAP scanner and CAD/CAM services gross margin was 30% compared to 27.1% last quarter.

The sequential increase in Q4 non-GAAP gross margin primarily reflects the increased case volume of Invisalign, which was partially offset by foreign exchange rates and advantage rebates.

Q4 GAAP operating expense was $69.1 million.

This compares to GAAP operating expense of $66.1 million in Quarter Three and $57 million in the same quarter last year.

Q4 non-GAAP operating expense was $66.9 million.

This compares to $63.8 million in Quarter Three and $55.7 million in the same quarter last year.

The sequential increase in Q4 non-GAAP operating expense was primarily driven by the full quarter's effect from additions to our sales force, including North American scanner sales headcount, the implementation of marketing programs in both North America and international, and cost to commercialize Invisalign G4.

Q4 GAAP operating income was $26.4 million, this compares to GAAP operating income of $26.3 million in Q3 and $14.8 million in the same quarter a year ago.

Q4 non-GAAP operating income was $29.7 million or 23%.

This compares to $29.2 million or 23.2% in Quarter Three and $16 million or 17.2% in the same quarter last year.

Q4 GAAP diluted earnings per share was $0.25 compared to $0.24 in Quarter Three and $0.13 in the same quarter last year.

Q4 non-GAAP earnings per share was $0.28 compared to $0.27 in Quarter Three and $0.14 in Q4 of last year.

Now let's move on to the balance sheet.

Cash, cash equivalents and marketable securities were $248.1 million.

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

In Q4, we generated roughly $42.3 million in cash from operations.

This is compared to $41.6 million in Q3 and $32.5 million in the same quarter last year.

In Q4, DSOs were 64 days compared to 62 days in Quarter Three and 63 days in the same quarter last year.

As you may recall, last quarter we announced that our Board of Directors had authorized a stock repurchase program up to $150 million.

At the end of Quarter Four, we repurchased approximately 300,000 shares at an average price of $24 per share for a total of $7.8 million.

We have $142.2 million remaining under the authorization.

Before I move on to the Q1 outlook, I would like to make a few comments the fiscal year results.

On a full year basis, revenue was a record $479.7 million, up 23.9% compared to $387.1 million in 2010.

Recall that 2010 included a one-time favorable impact of $14.3 million for previously deferred Teen revenues.

Invisalign revenue of $451.7 million was up 16.7% year-over-year and reflects growth across all customer channels.

Scanner and CAD/CAM services added $28 million for the eight months of 2011.

GAAP operating income for the year was $90.4 million or 18.8% compared to $102.7 million or 26.5% in 2010.

Non-GAAP operating income for the year was $104.7 million, or 21.8%, compared to $85.1 million or 22.8% in 2010.

Our GAAP diluted earnings per share was $0.83 for 2011, compared to $0.95 for 2010, and non-GAAP earnings per share was $0.97 compared to $0.80 in 2010.

For the full year, we generated approximately $130.7 million in cash from operations, and this is compared to $120.5 million in 2010.

Overall, we are pleased with the continued progress in the business and financial performance for the year.

The solid non-GAAP operating margin of 21.8% reflects continued strong underlying performance of the Invisalign business while investing in the scanner and CAD/CAM service business to deliver long-term value.

Despite a challenging economy in Europe and North America, we have continued our focus and execution of our strategic initiatives and demonstrated our ability to grow the top line.

Now let's move on to our business outlook for Q1 2012.

2012 is off to a good start with patient flow in North America doctors offices remaining healthy.

For Q1 we expect revenues to be in a range of $125.4 million to $127.9 million.

The Invisalign case volume is expected to be in a range of 82,500 to 84,000 cases.

I would like to take a moment here to point to a few factors that inform our view of Quarter One, as well as how to compare Q4 to the Q1 revenue projections.

For Invisalign, the typical seasonality we see for both North America Orthos and GPs is for case volume to increase sequentially.

For international, Q4 is generally their strongest quarter and Q1 is typically down a bit, especially in Europe, with fewer in-office days for doctors due to holiday schedules.

In addition to these seasonal trends in the business, we expect recent movements in the Euro to have downward pressure on International ASPs.

Also, with continued progress in utilization growth, we expect to see higher levels of advantage rebates in Quarter One.

Finally, while customers in North America and Europe report steady patient flow in their offices, we continue to be thoughtful about near-term consumer sentiment and the impact on dental visits and high-valued procedures like Invisalign, particularly in Europe.

On the scanner and CAD/CAM services side of the business, while it is newer to us and we have not experienced a full annual cycle, Q4 is typically the strongest quarter for dentists and specialists to purchase capital equipment.

As such, we would expect Q1 to be down sequentially.

In addition, we continue to focus on how to re-stage growth in Europe and are working with our distribution partners to make that happen.

Now let's move onto gross margin.

We expect Q1 GAAP gross margin to be in a range of 72.1% to 73.3% and we expect non-GAAP gross margin to be in a range of 72.7% to 73.9%.

The benefits to gross margin from an Invisalign case volume are expected to be offset by the anticipated impacts from foreign exchange rates and advantage rebates just mentioned.

In addition, we are continuing to incur transition costs in cost of goods sold and operating expenses as we move scanner and CAD/CAM services operations from New Jersey to Juarez and Costa Rica.

In Q1, we expect GAAP operating expense to be in a range of $71.4 million to $72.7 million.

We expect non-GAAP operating expenses to be in a range of $69.7 million to $71 million.

The sequential increase in non-GAAP operating expense reflects increased media spend in Quarter One after being off fare for much of the fourth quarter and annual increases in employee compensation and benefits programs.

We expect Q1 GAAP operating margin to be in a range of 15.2% to 16.4%, and GAAP earnings per share to be in the range of $0.17 to $0.19.

We expect Q1 non-GAAP operating margin to be in range of 17.1% to 18.4% and non-GAAP earnings per share to be in the range of $0.19 to $0.21.

In Q1, we expect the effective tax rate to be approximately 26%, diluted shares outstanding to be approximately $81 million, and cash on hand to be in the range of $250 million to $255 million, excluding any stock repurchases during the Quarter.

Now I would like to transition to provide some directional comments and perspective on the full year 2012.

From a revenue perspective, we plan on continuing to execute on our Invisalign and scanner and CAD/CAM services strategy.

We believe the evolution of the Invisalign product platform, including Invisalign G4 and Invisalign Express 5, we will continue to make progress in adoption growth and drive Invisalign volumes and share gains during the year.

We anticipate this expected increase in adoption and utilization will lead to higher levels of participation in the advantage rebate program.

We also believe we'll be facing stronger headwinds from foreign exchange rates in 2012, which, along with increasing advantage rebates, will impact ASPs.

We've also been implementing an aggressive plan to enhance our scanner and CAD/CAM services business.

As part of that plan, we have now completed the hiring of the North American scanner sales team and delivered Invisalign interoperability for the iOC and iTero scanners.

We believe scanner sales in North America will continue to be solid, and as I've already described expect Europe to be off a bit.

Moving onto gross margins.

As mentioned, we are in the midst of moving the scanner and CAD/CAM service operations from New Jersey to Juarez and Costa Rica, and will be incurring transition costs in cost of goods sold and operating expenses now through the third quarter of 2012.

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

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

Turning to operating expenses.

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

In summary, we believe we can continue to drive Invisalign volumes and adoption growth to build this business.

We're pleased with the better than expected progress in scanner and CAD/CAM services in North America, but it's not enough to offset softness in Europe for now.

Against that, with this exciting business, we remain committed to investing strategically in the same areas where you saw us deliver value in 2011.

To put a finer point on it, as we complete the transition out of New Jersey and bring up our new manufacturing facility in Juarez, we would expect operating margins to return to the low 20% range in the second half of 2012.

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

Thanks, Ken.

Well, overall, I'm very pleased with our results this past year.

The strong performance is a result of good execution of our plans and strategies.

I'm extremely proud of the Align team that worked so hard to deliver these results.

We had many significant accomplishments in 2011, including the acquisition of Cadent Holdings, followed shortly after by the introduction of interoperability with Invisalign on both the iOC and iTero scanners, as well as other improvements.

When we put together the strategic rationale for the Cadent acquisition, we believed that Invisalign interoperability on IOS scanners would improve utilization.

While it's still very early, we're already starting to see greater Invisalign case utilization among our busier Orthodontist iOC scanner users.

If fact, on a small base, those practices are up more than all of the Orthodontist offices by about 10%.

On the GP side, Invisalign interoperability became available in the iTero scanner last month.

Once it's more broadly in use across our installed base, we should get a better read on the leverage we can expect to see for Invisalign cases going forward.

These early results are more positive than we expected, especially since chair-side applications aren't available yet.

These early trends in this positive direction reinforces our confidence in our strategic direction, as well as our long-term growth rate targets.

2011 also represented the biggest evolution in the Invisalign platform's history with the rollout of Invisalign G3 internationally, launch of Invisalign G4 worldwide, as well as the introduction of Invisalign Teen and Vivera retainers in Japan.

We also continued to gain share in the very important Teen Orthodontic segment in existing markets, while expanding into new geographies including China, Turkey, the Middle East, and Russia.

Finally, we continued to make progress in establishing the Invisalign brand more strongly among dental practices and consumers alike.

Invisalign has become one of the most recognizable brands in dentistry and while we're still in the early stages of our growth, we're well on the way of establishing Invisalign as one of the more valuable product franchises in dentistry or devices.

All in all, one of the most outstanding years of overall performance in the Company's history and as I said before, I'm really proud the Align team that delivered these results and I'm very thankful to our customers and their patients that allowed us to be part of that treatment.

Now, we're off and running in 2012.

Over the past few weeks, I've been on the road meeting with our Domestic and International teams.

Our gang is optimistic about recent trends in volumes and believes we'll continue solid execution of our current plans.

We'll also continue to focus on our top priorities and actively manage the Business while making appropriate investments to support these strategic initiatives.

With all the signs of progress in this Business, I'm confident that these are the right drivers for continued growth.

I'm also confident that we'll make progress in operating profitability as we go through the year and look forward to sharing that with you as the year unfolds.

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

Operator?

(Operator Instructions) Matt Dolan, ROTH Capital Partners.

First question, Tom, maybe on the general environment it looks like Invisalign has been accelerating over the last two quarters in terms of its year-over-year growth rate, as opposed to Cadent now here in Q4 showing some softness in Europe, what are you seeing generally in your Business?

Are you seeing an inflection point in the Invisalign business and Cadent is something that's Company specific, just needs to be managed through or how should we think about what we've seen in the last two quarters?

Let me break those into two pieces.

First of all, we're pretty excited with where our business is in general.

We like our problems.

The Invisalign business continues to evolve.

I don't know that there's an inflection point there but we continue to make progress and I think you've seen, if we get the product evolution right and provide the right support and can create demand for these doctors, they'll take advantage of that and so over time we would expect to see continued adoption.

It looks differently among Orthos and GPs but we'd expect to see that continue and then play out differently around the world.

On the Cadent side, certainly this is our first year of owning this business.

As Ken said, we have not been through the full cycle.

Again, we started with -- it was a young Company without a lot of resources.

We had to move quickly to build a sales force in North America.

We believe we're getting really good traction there again, leveraging a bigger Invisalign base, we're getting great traction in North America.

That itself hasn't been enough to offset softness Europe and it's too soon for us to tell whether that's secular and wide in dentistry and the economy in general but we are committed with our partner, Straumann, to re-stage that growth and I guess that's where I'd leave it.

Okay.

Then Ken, maybe on your operating margin commentary, we've gone through a couple of quarters here where you've had similar thoughts and now the margin actually comes in, in the low to mid 20% depending on a GAAP or non-GAAP basis.

Just give us the outlook into 2012.

Are these added expenses year-over-year or is most of the margin impact due to maybe a lower gross margin and just trying to weigh that with some of the new things we have like legal and several of the marketing programs, et cetera?

So just help us understand the moving parts there?

Sure, Matt.

I guess I'll start with gross margin which is the comment I made on the call here, which is that we think we're going to continue to run at the lower end of the range, maybe slightly below.

That's going to certainly be dependent on Invisalign volumes as we go over the quarters here.

But once we complete that transition, we should start seeing margins move up on the scanner side of the business in particular, and then also as we continue to fill out the new factory with volume as we move through 2013, we'll see that start to improve as well.

On the operating expense side of the business, what we see with relation to the comment on employee compensation and benefits-related programs, each year in the quarter-one timeframe, we go through annual review cycles, salary adjustments and those types of things and benefits programs that people get signed up for in the quarter-four timeframe -- about halfway through the quarter and that starts taking effect in the New Year as well.

So those are a bit of step up in spending on a year-over-year basis and then in the consumer marketing area, we're off quite a bit in quarter four with the holiday seasons, off air.

When you come into quarter one here we're actually stepping up our advertising.

We typically do in quarter one off of quarter four.

I guess the other comment I would make on media spending is, this past year we stepped it up in quarter two and quarter three with the Teen season and I would expect this year we do something very similar to that.

Probably the only difference being working around the Olympics a bit.

We'll probably be a little heavier on spending in quarter two in relation to some of the media and maybe more so than we had in the past.

But we'll be looking at that to drive Teenage case starts as we move through the summer months.

Just to clarify, sorry, if we hold gross margin constant for 2012 are you seeing leverage in the operating expense line or are these -- some of those examples you went through, above and beyond the growth of what we should anticipate on the top line?

I think -- if you step back from it all and you look at top-line growth on Invisalign on a quarterly basis here and you look at where FX rates were a year ago even or you look at where they were last quarter to this quarter and what we see now coming in -- last quarter to this quarter being Q3 to Q4 and where they are coming into quarter one there certainly is an impact on top line which is having some impacts on gross margin.

Now as far as -- yes, we think we'll get some leverage in our spending, as Tom mentioned.

We're more efficient and effective in our advertising and lead generation.

We'll be feathering in a few headcount in the North America sales team on a smallish basis to look at supporting the continued growth.

But I believe as we move through the year and you see top line continuing to grow, we'll start seeing the leverage again in the operating expense line.

Okay, thanks.

John Kreger, William Blair.

Just to come back to the situation around Europe.

From your comments does it seem like your Invisalign shipments have really not been impacted yet in Europe but the scanner shipments have?

And if that's true, why do you think that you're seeing the difference?

Well, this is Tom here, John.

The businesses are really in two very different places.

With our partner -- literally Cadent was just getting going with a relationship, with a very new technology and kind of getting early adopters going.

With Invisalign, we've been at it for the better part of ten years in Europe.

In the last several years have made substantial progress in gaining adoption support, et cetera.

So, I think you could take a snap shot and these are technologies and products -- Invisalign's maybe in the second inning, third inning and our scanner business is literally -- they're just still warming up.

If I come back to what's going on there, difficult for us at this point to sort out large secular trends in dentistry given the very early penetration of scanner technology from general economy to capital equipment purchasing, there are some signs that dentists and specialists are being conservative about capital spending and a variety of other things.

So, we choose to believe that once we get ourselves organized properly and with the right product programs and support, we can even drive into a difficult economy and we certainly see that with Invisalign.

But again we haven't even had the scanner business for a full business cycle yet and so, again, I'm going to lean back on what some of the larger dental companies are reporting around what is going on in Europe.

For the Invisalign case, we're pushing through that, although we've adjusted our game and we're even back to improving in the UK again.

Several years ago when Germany was down, we invested in coverage and approach.

So we've re-staged growth in countries like Germany and France, even in this environment.

So, it may be a very long answer to your short question, we believe it's possible to get that going again, but I don't know that I would say we have complete closure on all of the issues behind re-staging growth on the scanner side.

But we're working on it.

That's helpful, thanks.

A quick follow-up.

Are you seeing any change in the competitive landscape for scanners and might that explain any of this?

Yes, well short answer is no.

There's a lot of people working on scanners.

There's very few releases and launches.

There's not volume being lost to other people.

This is just very early in the evolution of technology, so there's a lot of noise.

Don't sense that that's the issue why people are not buying or they're buying more slowly.

And again, capital equipment purchasing is very sensitive to that.

But there's no -- as I said there's no new competitors, no x-factors that have worked into that market lately.

Anything that was going to be coming out in market was discussed during IDS going on a year ago and most of those launches have not happened at scale yet.

So, again, I would say it's really more of a market dynamic than it is a competitive dynamic at this point.

Great, thanks very much.

Brandon Couillard, Jefferies.

Tom and/or Ken, if we look back last year when you announced the Cadent transaction, I believe you indicated you expected the deal to be accretive to non-GAAP EPS in 2012 and understanding some of the restructuring actions won't be completed until the second half, but do you still feel comfortable with that view or do you at least expect Cadent to achieve breakeven status in 2012?

Then as a corollary, any chance you would be willing to give us the Cadent operating income or loss in the fourth quarter?

Yes, Brandon, this is Ken I'll start it and maybe Tom can add to it.

So from a financial point of view and you look at the business and where we are right now, as we said we're going to have restate some of the growth in Europe here with our business partner, and that will probably take a little bit of time here, but overall we have been investing pretty heavily in the Cadent business in the near-term here to bring salespeople on board in various marketing programs and get the business moving.

We've had investments in relation to having interoperability with the iOC and iTero scanners and as Tom mentioned moving towards applications in chair-side.

So we're investing on the R&D side of the business.

We think as we continue to re-stage that growth we'll start moving towards a level of profitability that's greater than what it is today.

With that, I will say we do not track inside the Company specifically, operating margins for the scanner side of the business.

Though from a functional basis, all organizations, marketing, R&D, sales, et cetera is fully integrated into the Invisalign business which is why on a go-forward basis we'll be tracking gross margins and reporting them out to you.

But below that because there's a lot of cross functional work that goes on across both sides of the business, we're not going to be tracking that on a go-forward basis.

What I would say is that it's probably going to take us a little longer to see the acquisition become accretive to us, but I think we're making some great strides in the short-term here, over the last six months and getting things in place to do that.

Brandon, if I could bolt onto that a little bit.

If we choose to, because we thought that was the best way to deliver economic value to our shareholders, we could have operated this in a more traditional stand-alone basis and we could have exactly done what we originally described.

When we really got into detail in the integration planning, we saw enormous opportunities for better leverage in the business to drive medium to long-term growth much higher.

To drive medium to long-term margins higher on products in the services stream and to take advantage of what's a pretty rapidly evolving -- we'll call it new digital restorative -- I hate to use the word, but I'll use it ecosystem.

So we moved very quickly to fully integrate this business in and actually to accelerate some spending.

A really good example here is, we aren't just moving the New Jersey facility to Juarez for a cost reduction.

In fact, the principal initial driver was we felt we could really scale that business.

But to scale it in New Jersey, to add a lot of new capital, potentially have to move it and to do so at a quality and level of kind of digital control that we wanted, that we had in Juarez or Costa Rica, we made the choice to invest in accelerating that program which initially we hadn't planned on doing for maybe years or more.

So that's an example of where we can scale better, deliver better quality to customers, enable some fully new kinds of products and get $1 million a quarter or better gross margin improvement out of the business once completed.

So that puts a little more pressure in the near-term but as we look even a mid-term outlook for this business we believe -- A, we can drive better gross margins on the product and services mix, and then over the long-term substantially better; and then B, we can support scalability dramatically better.

So that investment is playing out all across from sales and marketing side touching customers, all the way through the technology and the IT infrastructure to the manufacturing base and we're just working very hard to completely integrate that into what we do here.

So those were choices we made once we got in and really understood the business in a more detailed way and elected to make those investments.

So it is a little bit of more near-term pain, but we believe the pay backs on those are outstanding.

I think in general, if you look at our track record for Invisalign and the choices we've made around optimizing manufacturing management and flow, in general we've shown we know how to do that well.

Okay, that's helpful and then, Ken, what was the impact of FX on revenue growth in the fourth quarter and the full year?

And then any chance you could give us the anticipated revenue impact that's embedded in your first-quarter revenue guidance?

Let me make a comment about -- start with the fourth quarter here.

So coming into the quarter in Q3 FX rates were around the Euro were averaging around $1.40, $1.42.

This past quarter they averaged around $1.35.

So if you look at our international revenues and you do the calculation, you'll come up with roughly about $1.5 million impact or so, $1.7 million impact on revenues on a quarter-over-quarter basis.

In relation to our quarter-one guidance, we have our view of where exchange rates are currently and where they've been over the past month or so, down as low as $1.27ish and maybe even a little bit lower than that and right now bouncing around $1.31.

So we think there's going to be some quarterly impact on a quarter-over-quarter basis.

I don't want to put a finer point on that, but that's kind of how we're reviewing things.

We have our own view of where we think exchange rates are going to be and the flow of product for the quarter impacts.

On a year-over-year basis, if you think about where exchange rates were in 2010, they were anywhere from $1.35, $1.40ish range and they stayed there early this year in 2011 for the first couple of quarters and then over the last part of the year they've come down dramatically.

It's several million dollars of impact on the full-year basis.

Okay, thank you.

Jose Haresco, JMP Securities.

Just not to beat a dead horse here, but on the gross margin side, something you mentioned.

It looks like we're splitting the difference between FX and some of these rebates.

One, can you remind us again of the Advantage Rebate Programs, how that actually plays out, the discounts to the docs.

What kind of an ASP should we be modeling for -- call it the first half or so and are some of your operating margin comments abut it hitting in the low 20%s at least predicated partially in the assumption that ASPs climb back up in the second half?

Sure, Jose, this is Ken.

In relation to the Advantage program, the way it works is if a doctor does 12 or more cases a quarter they start participating in the program as far as discounts are concerned.

The highest level of discount a doctor can get is up to $700 off your cases.

So effectively brings their price on a full case from roughly $1,500 down to roughly $800.

It tiers from there.

Anyway -- a doctor going from 12 case then 24 cases and it moves up from there.

So at 12 cases they get $500.

At 24 cases or more they get $600 and then 36 or more in a quarter they get $700 off.

What we've been seeing here in the past several quarters as we've been driving utilization here in the business with G3, G4 and other advertising that we've been doing, et cetera, doctors feeling more confident in using product, we've seen doctors start to move up several quarters ago now in the tiers themselves and more doctors attaining rebates, where in fact this past quarter was a record number of doctors that attained rebates from us over the quarter-four timeframe.

Our anticipation as we continue to drive Invisalign volumes will continue -- more doctors will continue to participate in that Advantage program.

Now with that said, that it's a very good program for us.

It's -- the economics around that particular program are very favorable to Align Technology in relation to driving incremental volume.

So as I see rebates increasing, I look at that as a good thing because we're getting more doctors doing more cases on a year-over-year basis.

Unpack that from FX, the second part of the question.

Yes, I was just going to move on to that.

So, from an FX point of view as I said a few moments ago and you look at our predominantly all of our business internationally being in core Europe, we get impacted on a quarter-over-quarter basis, as those rates are moving around.

And more recently they've moved around pretty quickly here in the past quarter or so, so I had negative impact on our overall margins in the business.

And as we move through the year, we have our views of where exchange rates are going to be as we built our plans out, but as we move through the year, the operating margin expansion that I referred to is really going to come from driving top-line revenues in the business, increasing Invisalign volumes, taking shared share and the North American scanner business is going very well for us and we think that will continue to go well.

We've only gotten the sales team on board from the scanner side of the business just recently.

So we haven't even really seen the leverage from the sales team prospective.

We've seen it through events and other trade show events that we've been at, as Tom was referring to on the call.

And over the next year as we get more traction with the sales team on the ground, I think we'll start seeing some effects of that as we move through the second half of the year.

It's going to take them a quarter or two to really come up to speed and as volumes increase, as we move through the year we'll start seeing that leverage in the business.

Can you share with us what percentage of your customer base right now in either channel is taking advantage of the Advantage Rebate Program.

You said it was -- you said you had the highest percentage of docs you've ever seen using this rebate.

But if you look at your total worldwide blend of ASPs.

It really didn't decline all that much.

So is there something else?

There seems to be a disconnect there, because you're only off by like $25 on your ASP.

The reductions you talk about are really quite drastic.

Again, the Advantage Rebate Program itself there was a record number of doctors, but it's not the entire base of doctors that participate in the program.

(Multiple speakers) Remember from an utilization point of view, they have to be doing 12 cases or more a quarter to participate in the program.

Once they start getting that volume.

So it's a smaller percentage of the doctors.

As far as GPs and Orthos, it's across both channels where doctors are participating.

You can imagine on the Ortho side of the business with their utilization rates being a little higher.

Those doctors are earning probably a little more rebate.

We have a fair amount of GPs that are earning some very nice rebates as well.

Okay.

Just last question is where do you guys think are you in terms of penetrating the Teen market in terms of percentage of total volume in 2011?

Where do you think [that's going to be year end]?

Can you ask that again, Jose?

Sure.

What percentage of the total US Teen cases do you guys think you did in all of 2011?

I think the first question is we don't see the whole market so we're not the best arbiter.

But with that said, we think the numbers we generally describe in terms of market size are reasonably accurate and we think what we've seen lately from a variety of sources is -- implies kind of 3% to 4% total growth at least in the segments that matter for us.

So, I think with the numbers we've used before for market size you could add those and then take our numbers -- it implies we're gaining share pretty quickly and it probably understates the category expansion we're delivering.

But I think if you go look at Teen for example, we're still a very small low-single digits in terms of total penetration into Teen.

We've got a lot of head room there and if you get into Europe and places like that, it's an order of magnitude less.

Okay, thanks guys.

Steve Beuchaw, Morgan Stanley Smith Barney.

This is Jon Demchick in for Steve.

Tom, you took a bit of a more active role in the marketing department during the fourth quarter, I believe.

Can you tell us why you did that and what you were looking to accomplish with the changes there?

Well, I guess that's why things aren't working so well, huh?

I -- actually I'm only involved, other than my normal mode -- we look at marketing as everybody in the Company is involved.

We all own the customer.

We all own evolution of the product and we all own execution of the game plan which includes marketing and other things in it.

So at some level absolutely nothing's changed.

At another level I actually -- my level of involvement was to place Tim Mack in charge in December, a very, very experienced technology guy and GM and long-term dental expert, restorative dentistry and elsewhere.

He's doing a terrific job for us, while we have a search going on for part of the role.

The second part of the role, we have a very, very good consumer team that is doing a terrific job and I'm just trying to ask enough questions and stay out of the their way and so that's my level of involvement.

Okay, thank you, very, very helpful.

No problem.

Tom, a few weeks ago at an investor presentation you indicated that you see the lower end of the market, say the five tray market as growing the fastest within the clear aligner market.

Could you put some numbers to that?

How big is that market?

How fast is it growing?

Why move into that segment rather than pushing more aggressively toward the more challenging cases?

Well, first of all we are.

The first thing is, we are going both ends and our goal was to be better complete coverage from end to end so to speak.

We have been -- all of our efforts over the last five years roughly in terms of science and technology and evolving the product have been targeted at getting us those complex cases.

Our goal some day is why would anybody want to have braces if we could do everything braces could do, better?

That's the goal.

That's still our goal.

At the same time, we've seen a number of customers ask us, there's still patients out there that, gee for what Invisalign Express 10 at the time cost and for what they have to charge there's still some simple relapse cases.

More and more where we see the growth coming from is, to a lesser extent the OEM companies like ourselves, the Danaher's or others with a low-end product like Simpli5 or whatever; to a greater extent it's the hundreds and hundreds of dental labs that are making at $100 a liner or something.

These five or six stages of trays and then when patients wear them they report they aren't as satisfied with them.

The doctors don't know quite when they're going to be finished and they have to talk to the patient about, what will I be able to get you to?

What level of correction and can I treat that chief complaint.

That gap or that little bit of crowding.

We figured why not get after this as we now have all of the initiatives in hand.

All the initiatives in hand with getting after more complex cases, why not bring the same leverage down at the low end where our value proposition can be better for a very cost effective approach and the feedback we've gotten since releasing it has been very, very positive.

So, that's why to do it.

It's just to be a much more complete competitor across the line of clear liners.

Jonathan Block, SunTrust.

Maybe the first one is just if you can talk to -- Tom, you discussed a lot more in the cases that are being submitted digitally and that's obviously a benefit of the Cadent acquisition.

If you can talk to what you're seeing from those accounts in terms of their overall utilization, where were they prior to submitting with Cadent and where have they gone after submitting a completely digital case?

Sure.

The two qualifiers are put around this is, number one, this is mostly Orthodontists because we're just now getting bit of a read given iTero interoperability.

So I'll remind you that it was just Orthodontist, started back, middle of May when we released interoperability on the iOC scanner.

Secondly in general, the Orthodontists that ran out and bought scanners were in general higher volume.

Not maybe off of the top of that map, but higher volume than our median Orthos.

So the short answer inside that is they have, in general -- after you adjust for other factors, market growth, G3, everything else that's happening, they have grown utilization faster up to 10% than the other doctors.

So, they report after minimal startup -- patients a lot happier, staff happier, fewer re-impression, bring the patient back in for rejected impressions, aligner fit better et cetera, et cetera, et cetera on virtually every measure.

Significant enough that it really matters to us and it really matters to the patient.

So that's kind a virtuous cycle.

It's reinforced and we've had some of those Orthodontists that have maybe several offices go out and buy one for each office and just commit themselves to going completely digital.

So, as I said over the last year or so our percentage of fully digital incoming submissions other than PVS has gone up nicely to where now it's about 80%.

Then secondly, this is growing very nicely, the all digital for us now of that 80%, a full 6% and climbing nicely are completely digital no-PVS impression and that has lots of benefits for everybody, for us, for the doctor.

An example, two extremes, we have a doctor that puts a case in on Monday and they're getting liners shipped out in states by Thursday or Friday without hustling or expediting a case.

In Europe where it might have been four weeks for a full cycle, they're getting aligners back within a couple of weeks and they're getting immediate feedback within a day or two of seeing their ClinCheck.

So a lot of positive effects for everybody and the most important thing, it appears the liners fit and therefore, we think ultimately performance will even be better.

Okay, great.

Very helpful and then the last question I'll ask and sorry to go back to sort of the margin/leverage question.

But can the 1Q '12 guidance on the top line is somewhat similar with what you put up on the top line for 4Q '11.

Yes the non-GAAP op margins are down almost 500 bips q-over-q.

So can you just walk us through -- I guess I'm a little perplexed.

Gross margin on the non-GAAP comes down 200 basis points but yet I believe you started the Cadent transition actually in the fourth quarter.

So, can you maybe walk us through with a little bit more granularity where that 500 bips sequential deleverage is coming from?

I know FX has something to do with that.

Thanks.

Yes.

So just to make a point, we started the Cadent business obviously in the April timeframe when we acquired them on April 29, right?

So, they were not part of our result.

Then when we report out this quarter, we report out Invisalign only for quarter four last year.

This year it's obviously a combined business.

On a sequential basis, when you look at overall gross margins in the business you have a couple of things going on.

The two most significant are, FX which I spoke to, and the other one is we're continuing to expect that doctors will move up in their tierings and attain more rebates from the Advantage Rebate Program based on what we've seen over the past several quarters.

Those are probably the two biggest offsetting items to the volume growth that we're seeing in the business from quarter four to quarter one on a sequential basis.

Does that make sense?

Then operating margin on top of that.

Getting it down to the operating margin line.

Right.

Yes, I understand.

I can follow-up offline.

I guess what I struggle with is your overall case volume for Invisalign is somewhat similar.

1Q '12 versus 4Q '11, so why would the rebate ratchet up so dramatically q-over-q?

That has to do with the fact that again, more doctors are participating in the Advantage Rebate Program, attaining the minimums they need, to get a rebate from us.

Where a year ago, doctors were starting to make that move in quarter four but as we progressed through 2011 each quarter we're seeing more and more doctors reach the levels to participate in the Rebate Program.

Again this quarter, quarter four was a record number of doctors that have achieved that rebate.

So again, the number of doctors that achieve rebates when you talk about doing business on a quarterly basis with 12,000 GPs and 4,000 or 5,000 Orthos, again, that entire base is not receiving a rebate.

A small percentage of those doctors overall are receiving the rebate but as they're moving up it's having a bit of an impact on ASPs on a quarter-over-quarter basis.

Yes, understood.

Thanks guys.

Spencer Nam, ThinkEquity.

Just a couple of quick follow-up questions here.

Let me start off with the Invisalign Express 5.

We've been hearing some speculations that one of your competitors will be coming out with a new tray product that could be pretty competitive.

Could this be viewed as your strategic action in anticipation of this launch of a potentially competitive product?

You always make choices around products with a full context of what do customers want and what's growing the market and what's your competitive set doing so I guess at some level, the answer is sure.

This was not a tactical response.

We've been working on this for a 1.5 years and then doing some testing about the best way to do it.

Frankly, with the evolutions in G3 and G4, our view is with our 5-stage product you have got to be able to do more with that product more predictably than anybody else in the world.

So if you can get a 5-stage product from anybody why wouldn't you get it from us as long as the price was right.

We did a little testing with some different price points and felt that $549 for a 5-stage product with potential refinement and a guarantee on getting to that final position was a pretty compelling offer.

So, this was motivated more by ensuring we could be the toughest competitor across the range of aligner-based treatments and then certainly we're still running around in a world of much bigger multi-national companies as competitors and they've got divisions that would love to compete more aggressively with us.

So we're always mindful of that and we always kind of stay humble and hungry and make sure we can move faster than them.

Appreciate that.

And then on your guidance, the one question I had.

Clearly, you mentioned the factors about the Rebate Program, also the FX effect that's going to impact revenue line, but it seems like there's some level of weakness that -- there's material level of weakness coming from the scanner business that leaves you to guide at where you guided.

If you look at the third quarter and fourth quarter of last year, you -- actually the scanner business did more in the third quarter than the fourth quarter.

So, should we -- how should we think about the sequential down on scanner business?

Should it be off the third-quarter level or off the fourth-quarter level?

And it looks like third quarter is actually the strongest quarter rather than the fourth quarter.

So, I know -- Ken's already given some guidance.

I'll let that stand.

He can comment.

I'll just talk in general about the business.

We concluded this acquisition at the very end of April and from May on have been working very hard on making choices about the best way to drive value for our customers and our shareholders.

And we're still right in the middle of that.

There's a lot of moving parts still going on.

As Ken said, we just got our sales force built out by the end of Q4 and even with that Q4 was very strong.

It was very strong in North America and we expect that trend to continue.

We're kind of calling it as we see it.

I think we've tried to be very, very clear that we can't, at this point at least, sort out the absolute drivers to softness in Europe.

We're going to be able to.

We can't yet today.

And we're working very hard with our partner to re-stage that growth.

The second thing is we're pretty darn comfortable that we're on the right track in North America, and with sales force together, with a lot of integration of customers and opportunities for leverage in our Invisalign business and those other docs, we're just getting started in the GP side really.

So I think there's the good news story.

The bad news story is Europe's softer.

We're going to figure that out and get after it.

But it's no more complicated than that.

Capital has a little longer fuse.

So we have got reasonable visibility into activity.

That's what is going on.

Ken, I don't know if you want to pile on.

No, I think Tom, you covered it pretty --

It sounds like you guys are being -- I don't want to put any words in your mouth, but you guys are being conservative in terms of the outlook and want to make sure that you have something that you guys can work with.

Is that fair?

Spencer, our posture on outlook has not changed.

We try to call it as best we can see it.

We understand the visibility as well as you do, what we see on the Invisalign side as far as 30 days or so into a quarter.

We're getting a little more familiar on the scanner side of the business as we've gotten into it over the past few quarters.

But our view of it is we try to put all of the factors together, try to call it as we see it.

Make our own assumptions on where we see exchange rates going and volumes in the business going and as Tom just mentioned, the volume in the business in North America is going well for the scanner side of the business.

We're having a little bit of an issue.

We're working one in Europe as we referred to and the way we look at the Invisalign business is no different than we've always looked at it.

All right.

Well, I think we'll conclude it here then.

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