愛齊科技 (ALGN) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Align Technology Q4 fiscal year 2012 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 Shirley Stacy of Align Technology.

Miss Stacey, you may begin.

Good afternoon, and thank you for joining us.

I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations.

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

We issued fourth-quarter and fiscal 2012 financial results press release today via Marketwire, which is available on our website at www.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 8, 2013.

To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 406337, followed by pound.

International callers should dial 201-612-7415 with the same 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 2013.

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

These and other risks are set forth in more detail in our Form 10-K for the fiscal year ended December 31, 2011.

These forward-looking statements reflect the 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 comparison to previous quarters.

Most of these items, together with the corresponding GAAP numbers and the reconciliations to the comparable GAAP financial measures where practical are contained in today's financial results press release, which we have posted on our website under Financial Releases and have 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 reconciliations and our fourth-quarter conference call slides on our website under Quarterly Results.

Please refer to these files for more detailed information.

In Ken's comments today, he will not review the total dollars excluded for non-GAAP gross margin, operating expense and operating margin; instead, we refer you to our press release tables.

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

Thanks, Shirley.

Good afternoon, everyone.

On the call today, I will provide an overview of our fourth-quarter results and discuss the performance of our two operating segments, Invisalign clear aligners and scanner and CAD/CAM services.

Ken will cover Q4 financial results and the outlook for Q1 in more detail, and then I will come back with a few closing comments and open the call to your questions.

I'm very pleased to report a solid fourth quarter, which culminated in a record fiscal year with over 17% growth for Invisalign volume, reflecting continued adoption and increased utilization.

Our continuing focus on Invisalign product evolution, market expansion and share gains are at the core of this growth.

Q4 revenues were at the high end of guidance, even without the positive affects from the release of $4.9 million of previously deferred revenue for Invisalign case refinement, which Ken is going to cover in more detail shortly.

Better than expected Q4 revenues reflect increased Invisalign ASPs due to lower advantage rebates driven by lower utilization in Q4, especially among our North American orthodontists.

In addition, we got some lift for international sales from favorable foreign exchange rates.

Let's start with an overview of key highlights for Invisalign.

For Q4, total Invisalign case volume was 90,500, an increase of 10% year-over-year and a decrease of 2% sequentially.

The sequential decline primarily reflects lower volume from North American customers.

Year-over-year growth was driven primarily by North American orthodontists and international doctors and compares to an especially strong Q4 a year ago, to Q4 of 2011, which increased 30% year-over-year and 4% sequentially over Q3 of 2011.

As reported previously, in Q4, we saw continued softness in Invisalign case volume, due to broader market conditions as well as disruption of our customers' practices from Superstorm Sandy.

This major storm affected our customers in the mid-Atlantic and Northeastern region, with the greatest impact on the major Metropolitan areas in New York and New Jersey.

We saw change in Invisalign case volume and practice patterns after the storm hit those areas, which continued throughout the quarter.

While fairly few practices experienced serious damage, most reported delayed or canceled patient appointments or consultations, which impacted their case starts.

When we compare the affected area relative to the rest of the US, we estimate that we lost approximately 1000 to 1500 cases in Q4.

Many residents in the area are getting back to normal, but we can't predict when these prospective patients will start to seek Invisalign treatment again.

Notwithstanding the impact from Sandy, overall Invisalign case submissions rebounded in December, and this trend has continued into the first quarter of 2013.

Overall, we've seen an uptick in North American case receipts, reflecting increased patient traffic in our customers' offices, as well as traction from customer engagement and practice development activities.

We've also seen increased customer interest in Invisalign related to the launch of SmartTrack, our next-generation aligner material which is commercially available now.

For North American orthodontists, Q4 case volume of 33,500 cases declined 7% sequentially, due primarily to the expected decrease in Invisalign Teen case starts.

Year-over-year, our North American ortho customers increased case volume by 12% driven primarily by Invisalign Teen, reflecting our continued share gains in this very important teenage orthodontic segment.

To top that off, we've seen strong adoption of Invisalign Express 5, our cost-effective treatment for very minor fixes, which was launched commercially a year ago and is targeted at our higher volume ortho customers.

During Q4, we ran a promotion, a new promotion which offered doctors $200 off list price for Invisalign Express 5, which was intended to drive higher trial and repeat usage, and we've seen good uptake on that as a result.

For North American GP dentists, Q4 case volume of 34,600 cases was essentially flat from last quarter and reflects an increase in Invisalign Express, offset by a decrease in Invisalign Teen, which is fairly typical coming off the summer teen season.

On a year-over-year basis, North American GPs increased 5% driven primarily by Invisalign Express.

Even amid an industry slowdown, our performance in this channel has been solid.

For our customers outside of North America, Invisalign volume of 22,300 increased 2% sequentially, reflecting a seasonal rebound in Europe.

This growth in Europe was offset primarily by a decrease from our Asia-Pacific distributor, which is historically down in Q4.

On a year-over-year basis, international volume increased 14%, reflecting growth from almost every country, as well as increased utilization of all products, especially for Invisalign Full.

Growth also reflects positive response to new predictability features of Invisalign like Invisalign G4, introduced over the past year or so.

In our direct European geographies, Q4 sequential growth was driven by a rebound in Italy, as well as growth in France and the CEU countries of Germany, Switzerland and Austria.

We were also up a bit in Spain, albeit off a small base, despite a very challenging economic environment there.

Q4 year-over-year growth was led by the UK, France, and the CEU countries.

We've seen strong acceptance of Invisalign i7 in the UK, equally across GP and ortho channels.

We expect our new i7 offering will also benefit from renewed interest for less complex treatments as we launch it across Europe.

In terms of the teenager orthodontic market in Europe, we don't see the same seasonal pattern that North America experiences, so Invisalign Teen was up sequentially and year-over-year.

Our recent product and technology innovation is resulting in improved clinical confidence and greater acceptance for using Invisalign to treat those teen cases.

In addition, we continued to successfully build on our consumer campaign called The Right Bite in the CEU countries.

We are also now seeing increased utilization of Invisalign Teen in France, which is especially the case among our highest volume customers, who are now using Invisalign on more of their teen patients.

As you may recall, we hold large-scale customer events called Invisalign summits every other year for our channel, Ortho, GP in North America and then international.

In between those, we hold a series of smaller venues called Invisalign forums.

In Q4, we held a series of forums in Spain, France and the UK, with high customer attendance and peer-to-peer learning focused on sharing of clinical techniques and case studies for more complex malocclusions.

Turning to our direct Asian country markets of Japan and China, we continue to make great progress, both of which had very strong year-over-year growth.

Growth in China is being driven by our continued focus on executing our strategy of working with key opinion leaders and orthodontists in the primary cities, which bodes well for the long-term health of our Business.

In Q4, we cosponsored a clear aligner therapy meeting with Capital University, a major thought leader in China.

More than 80 important orthodontists attended to hear experts present on Invisalign advancement and techniques.

We have strongly engaged customer base that is increasingly recommending Invisalign to their colleagues and their patients.

Overall, 2012 was a great year of progress in China, and we are excited about opportunities for continuing to build our business in 2013.

In fact, earlier this month, we held an Invisalign key user meeting, bringing together the top 15 Invisalign-trained orthodontists in China, many of whom are now lecturing and teaching their peers about the Invisalign technique.

Shifting to our Invisalign distributors in the APAC, the EMEA and Latin America regions, Q4 was down sequentially across all three distributors, primarily due to seasonality.

Year-over-year volume growth of 30% was driven by continued strength in the APAC region, followed by EMEA and the Latin American regions.

Our Asia-Pacific distributor region is comprised of a wide geography covering 12 countries, including larger, more advanced markets in Australia and Hong Kong.

As we disclosed last quarter, we are bringing most of this geography back in house starting May 1. At that time, we will begin to recognize direct sales in our full ASP rather than the significantly discounted ASP under the distribution agreement.

In the near term, operating expenses from assuming the direct team there will offset the uplift to ASPs, but as volumes ramp, we would expect to have a much higher contribution margin on this business.

This means that roughly 3% of worldwide revenue that Asia-Pacific accounts for today become an even more meaningful contributor to top line growth beginning in May of this year.

While we often talk about the importance of product in clinical innovation, to drive adoption and utilization growth in North America, the fact remains that it is even more important outside North America, given the significantly greater complexity of cases treated.

As a result, the set of innovations we have introduced over the last few years really resonates with the international doctors and has been key to increasing their confidence in Invisalign.

We expect this trend to continue with the recent launch of SmartTrack and Invisalign G4 feature enhancements, particularly in Europe, where these innovations will be the focus of numerous launch events throughout Q1 and Q2.

We continue to focus on expanding our customer base, primarily with North American GPs and International doctors, as well as increasing utilization among new and existing practices.

Year-over-year utilization was essentially flat, reflecting continued adoption growth by North American orthos, offset a bit by North American GPs and international doctors.

Sequentially, utilization was down a bit, consistent with lower volume from North American orthos.

Q4 saw lower utilization among our highest volume doctors, which also accounts for lower advantage rebates paid out.

In Q4 of 2012, we trained a total of 1775 new Invisalign doctors.

By channel, we added 75 North American orthodontists, 920 North American GPs and 780 international doctors.

For the full year, Invisalign growth was driven primarily by the continued expansion of our customer base, as we trained a total of 6845 new Invisalign doctors, which reflects the addition of 388 North American orthos, 3305 North American GPs, and 3150 international doctors.

For international, around 50% of these new doctors were in our direct country markets, and the other 50% were in our distributor geographies.

Moving on to product innovation, on January 21, we announced that our next generation aligner material SmartTrack, is now the standard aligner material for Invisalign clear aligners in North America, and will be commercially available in all of the international markets where regulatory approval has been obtained on February 4. We previously highlighted SmartTrack on the Q3 call, and since many of you have already viewed the press release, I'll just touch on a few key points, here.

SmartTrack is a highly elastic proprietary new aligner material that delivers constant -- consistently low force to improve the control of tooth movements with Invisalign clear aligner therapy.

Orthodontic literature cites consistent low or moderate force as ideal for ensuring predictable tooth movement.

The elasticity in SmartTrack also appears to allow for greater patient comfort and easier removal of aligners.

In combination with our other innovations such as Invisalign G3 and G4, our customers have told us that SmartTrack is already delivering greater predictability and in turn inspiring greater confidence to use more Invisalign.

A record 5900 of our customers registered for the SmartTrack Ask the Expert webinar we held on January 18, the largest number ever registered for one of these webinars Following the call, we received 3000 survey responses regarding the impact of SmartTrack and this webinar on their future use of Invisalign.

The survey respondents stated that based on the webinar and their knowledge of SmartTrack, 95% said their confidence in Invisalign was positively improved, and 90% said they were likely to recommend Invisalign to their patients more frequently -- great feedback.

So feedback from this webinar reinforces what we already learned about SmartTrack from our large-scale pilot that began last May.

Analysis of over 1000 patients treated with SmartTrack shows statistically significant improvement in control of tooth movements, especially for the most difficult such as rotations and extrusions.

And to quote Dr. Clark Colville, an orthodontist and a member of our clinical advisory board, he says the fit around the teeth from aligner to aligner is better than with any group of patients I've previously treated with Invisalign.

Without a doubt, SmartTrack is the most exciting change in Invisalign technology among the many that have been introduced in recent years, close-quote.

The Align team is committed to extending this continuum of product and technology innovation to improve the performance of clear aligner therapy.

We are pleased with the initial response to SmartTrack and are excited about its potential to helped drive continued adoption and utilization growth for Invisalign worldwide.

Overall, 2012 was a year of significant investment to extend and sustain our growth in North America and internationally.

Our go-to-market approach in North America is based on a team of territory managers, and, to a lesser extent territory specialists, which we deploy to enhance coverage in larger territories, especially with the mix of lower volume GPs.

Over the past couple of years, we have piloted different coverage and deployment models and found that territory specialists are particularly successful and cost-effective in building our base of GP customers.

We see this as the right time to invest in incremental coverage in high-growth or heavily concentrated areas, with a large number of low-volume GP customers.

In 2013, we will add sales head count in North America and in Europe, with the bulk of those in North America.

In direct geographies, it typically takes several quarters to bring new sales reps up to speed, and we are comfortable that we will get good ROI on our investment in this coverage.

In addition, we'll add approximately 15 reps by bringing the Asia-Pacific team back in the direct sales organization.

Turning to consumer, our integrated consumer marketing platform has traditionally focused on the North American market and combines paid media like print, broadcast and digital along with a mix of PR, event marketing and social media outreach.

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

In addition, it is important for us to help these potential patients find a great practice that can meet their needs.

Growth in activity and greater engagement on our consumer website are good measures of progress in this front, as we help educate prospective patients and direct them to get more information, to take an interactive smile assessment based on their own goals for treatment, and search for Invisalign providers in their own area.

We ended 2012 with more than 5.4 million visitors to www.Invisalign.com for the year, up 23% from 2011.

Website leads were up over 33% year-over-year, and find-a-doctor searches were also up nicely from 2011.

We continue to see increasing traffic from mobile device users, with visitors to the www.Invisalign.com mobile site making up around a quarter of our total traffic, especially when our ads are on TV.

All these metrics tell us that prospective patients remain interested in learning more about Invisalign treatment and connecting with providers in their local area.

As of mid-January, in North America, we were back on TV with advertising, and expect to be consistently on-air throughout 2013, with no more than two consecutive weeks off air until December.

We also have a new North American consumer campaign in development that we expect to launch around Memorial Day, to leverage the summer teen season.

We look forward to sharing more about that strategic initiative when ready.

Within Europe, to build on the consumer marketing front, we're launching an integrated consumer campaign in all five direct European country markets this month.

For the first time in Europe, we will be sponsoring TV programs in France, Germany, Italy, Spain and UK Ireland under the campaign theme, Smile and the Whole World Smiles with You.

As part of our TV sponsorships, we will also have extensive presence on each of the TV stations' website.

TV sponsorships will be supported by campaigns across Align's social media platforms such as Facebook and Twitter as well as online through display and banner ads and extensive search engine marketing programs.

We've partnered with one of the world's largest publishers of monthly magazine, Hearst, to further spread our message in consumer print and online titles and will continue to engage with local consumer media to ensure our markets are educated about Invisalign.

Moving to our scanner and CAD/CAM services segment, Q4 revenue was $10 million compared to $9.8 million in Q3, and $10 million in Q4 last year, and yet reflects strong growth of scanner sales in North America, offset by lower services revenues.

Q4 North American scanner shipments grew 23% year-over-year and 59% sequentially, reflecting positive impact from sales of the Invisalign ortho summit in November, as well as a $4000 year-end promotion that was very successful.

Even with this strong growth in North America, it was not enough to offset the gap in Europe.

It's clear we have the right model in North America, where we are successfully leveraging Invisalign resources and events, and customer relationships.

Over time, we will evaluate the best path forward to restage growth in Europe and the rest of the world.

In addition to increased scanner sales in North America, we continued to see increased synergy between our chair-side technology and Invisalign treatments.

This increasing trend in the percent of Invisalign cases submitted with a digital scan rather than a traditional physical impression rose to 17% in Q4 compared to 14% in Q3 and 6% in Q4 a year ago.

We also continue to see an increase in Invisalign utilization among scanner customers, particularly orthodontists, and expect this positive trend to continue.

The drivers for this growth come from better customer and patient experience, along with recent scanner innovations, including the new iTero scanner launching next month, which is garnering great early feedback.

In addition, the recently launched Invisalign outcome simulator brings a valuable patient education tool chair-side to help doctors show the benefits of Invisalign treatment to prospective patients.

I will now turn the call over to Ken for a review of our Q4 financial results.

Ken?

Thanks, Tom.

Before I begin, I want to provide a brief update on the status of our goodwill impairment for the scanner and CAD/CAM services reporting unit.

In Q4 2012, we finalized the step two analysis and recorded an additional $11.9 million impairment to goodwill.

We had previously recorded a preliminary estimate of $24.7 million of goodwill impairment in Quarter 3 2012, bringing the total goodwill impairment up to $36.6 million.

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

Q4 net revenue was a total of $142.8 million, which consisted of Invisalign revenue of $132.8 million and scanner and CAD/CAM services revenue of $10 million.

This is a sequential increase of 4.6%, from $136.5 million in Quarter 3 2012, and a year-over-year increase of 10.8% from $128.9 million in Quarter 4 2011.

The sequential increase in revenue primarily reflects higher Invisalign ASPs, which benefited from lower than expected advantage rebates and favorable foreign exchange rates.

Q4 2012 Invisalign revenue of $132.8 million increased 4.8% compared to Q3 revenue of $126.7 million, and increased 11.7% compared to Q4 2011 revenue of $118.9 million.

Q4 Invisalign revenue includes the release of $4.9 million of previously deferred revenue, for Invisalign case refinements.

Each refinement gives the doctor the option to order additional aligners, typically during the final few stages of treatment, if further tooth movement is needed in order to meet the original treatment goals.

Align defers revenue for case refinement when an Invisalign case ships.

In Q4 2012, we determined that the actual case refinement usage rate was lower than our estimate, and as a result, we released $4.9 million of revenue deferred from case refinements.

Adjusting for this one-time favorable impact of $4.9 million, Invisalign revenue for Q4 was $127.9 million, up slightly from Q3, and an increase of 7.6% year-over-year.

As mentioned, Q4 scanner and CAD/CAM services revenue was $10 million.

This is a sequential increase of 2.1% from $9.8 million in Q3 2012, and was flat year-over-year.

Now, moving on to gross margin and operating expenses.

Q4 GAAP gross margin was $106.5 million or 74.5%.

This compares to $100.4 million or 73.5% in Quarter 3 and $95.6 million or 74.1% in the same quarter last year.

Q4 GAAP gross margin for Invisalign was 78.8%, and scanner and CAD/CAM services gross margin was 18.5%.

This compares to 77.6% and 20.6% respectively in Quarter 3.

Non-GAAP gross margin for Q4 was $106.7 million or 74.7%.

This compares to $100.7 million or 73.7% in Quarter 3, and $96.5 million or 74.9% in the same quarter last year.

For Invisalign, there was no difference between GAAP and non-GAAP gross margin, for the periods Q4 or Q3 2012, and Q4 2011.

The sequential increase in gross margin primarily reflects higher ASPs and lower manufacturing spend.

For scanner and CAD/CAM services, Q4 non-GAAP gross margin was 20.5%, compared to 23.8% last quarter and 30% in Q4 2011.

The sequential decrease in non-GAAP gross margin is primarily ASP driven, as it reflects the $4000 promotion for iTero scanners in Quarter 4.

Q4 GAAP operating expense was $89.4 million compared to Q3 operating expense of $95.8 million.

Operating expense for the same quarter last year was $69.1 million.

GAAP operating expense includes the goodwill impairment charges of $11.9 million in Q4 2012, and $24.7 million in Q3 2012.

Q4 non-GAAP operating expense was $76.6 million, and this compares to $70 million in Quarter 3 and $66.9 million in the same quarter last year.

The increase in Q4 non-GAAP operating expense is primarily due to severance costs, legal fees, and a greater number of industry meetings including the ADA and Greater New York dental show.

In addition, we held a number of major customer events in Quarter 4, including our North America ortho summit and a series of Invisalign forums in Europe.

Q4 operating income was $17.1 million or 12%, and this compares to $5.4 million or 3.3% in Quarter 3, and $26.4 million or 20.5% in the same quarter a year ago.

Q4 non-GAAP operating income was $30 million or 21%, and this compares to $30.6 million or 22.4% in Q3 and $29.7 million or 23% in the same quarter last year.

Q4 GAAP diluted earnings per share was $0.12 compared to $0.00 in Q 3, and $0.25 in the same quarter last year.

In Q4, non-GAAP diluted earnings per share was $0.27, compared to $0.28 in Quarter 3 and $0.28 of Quarter 4 of last year.

Moving onto the balance sheet.

Cash, cash equivalents and marketable securities, including long-term investments, were $356.1 million.

This is compared to $248.1 million at the end of 2011.

In Q4, we generated roughly $50.8 million in cash from operations compared to $40.3 million in Quarter 3, and $42 million in the same quarter last year.

During Quarter 4, we purchased approximately 1.4 million shares of our common stock at an average price of $26.41 a share, for a total of approximately $37 million.

There remains approximately $95.5 million available under the Company's existing stock repurchase authorization.

Q4 DSOs were 62 days compared to 70 days in Quarter 3 and 64 days in the same quarter last year.

Before I move on to the Q1 outlook, I'd like to make a few comments on the full-year results.

Revenue was a record $560 million, up16.7% compared to $479.7 million in 2011.

Adjusting for the one-time impact of the $4.9 million release of previously deferred revenue for Invisalign case refinement, revenue for the year was $555.1 million, up 15.7% year-over-year, reflecting solid growth in all channels, especially North America orthos and international doctors.

In 2012, we shipped 363,500 Invisalign cases, up 17.5% compared to 309,300 cases in 2011.

From a geographic standpoint, North America volumes increased 16% and international volumes increased 22.7% year-over-year.

GAAP operating income for the year was $85.6 million or 15.3%, compared to $90.4 million or 18.8% in 2011.

Non-GAAP operating income for the year was $128.6 million or 23%, compared to $104.7 million or 21.8% in 2011.

GAAP diluted earnings per share was $0.71 for 2012, compared to $0.83 in 2011, and non-GAAP earnings per share was $1.17, compared to $0.97 in 2011.

For the full year, we generated $133.8 million in cash from operations, compared to $130.5 million in 2011, and we bought back 1.7 million shares of Align stock for a total of $47.2 million.

Now let's turn to our business outlook for Q1 2013 and the factors that inform our view.

2013 is off to a good start.

Our customers report patient traffic flow in their office has picked up toward the end of the fourth quarter and has continued into 2013.

We expect our North America business to benefit from the increased activity and volume trends we are seeing, as well as the pricing increase for clear aligners and iTero scanners.

At the same time, as doctors increase their utilization, we are anticipating higher advantage rebate participation, and we are expecting some product mix shift to lower ASP products like Invisalign Express 5. In North America, we anticipate Invisalign case volumes for the GP channel to be flat to slightly up in Quarter 1 and North America ortho channel to be up nicely from a seasonally softer Quarter 4. In the international, we would expect Q1 case volume to be flat to down as doctors have more days out of the office in Q1 for winter holidays.

In Q1, we will begin to consolidate the Vivera retainer product shipments down to one shipment per year, compared to our current process of four shipments per year.

Consolidating the shipments is something our customers have asked for, as it will make it more efficient for their practices.

As a result, our Q1 outlook reflects a higher amount of Vivera revenue than in the past, as we will be recognizing the full Vivera case revenue upon shipment, instead of recognizing it ratably over four quarters.

The net impact will be a $4 million benefit to Q1 revenue.

In addition, we will also begin to realize reduced freight costs as we make this change.

For scanner and CAD/CAM services, Q4 is typically the strongest quarter for dentists and specialists to purchase capital equipment.

As such, we would expect Q1 sales to be down sequentially from Quarter 4. With that as a backdrop, Q1 Invisalign case volume is anticipated to be in a range of 95,000 to 97,500 cases reflecting 11.4% to 14.3% year-over-year growth.

We expect Q1 total revenues to be in a range of $146 million to $150.5 million, and we expect gross margins to be in a range of 72.4% to 73.1%.

The sequential decrease in gross margins primarily reflects a slightly higher material cost for the SmartTrack material, as well as a planned inventory reserve for current safety stock of our previous clear aligner materials.

In Q4, we expect operating expenses to be in a range of $82.8 million to $84.4 million.

The sequential increase in operating expense relates to higher annual compensation and employee benefits, consumer programs including the development of the new consumer advertising campaign Tom mentioned, and incremental sales headcount.

Also beginning in Q1, operating expense will include the new Medical Device Excise tax.

We expect Q1 operating margin to be in a range of 15.8% to 17.1% and earnings per share to be in a range of $0.21 to $0.23.

In Q1, we expect the effective tax rate to be approximately 24%, diluted shares outstanding to be approximately 83 million, and cash on hand to be in a range of $365 million to $375 million excluding any stock repurchases.

Now I'd like to provide some directional comments on full year 2013.

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

The ASP impact from the price increase for Invisalign in North America that was effective as of January 1 will be offset somewhat by the expected increase in advantage rebates as we are anticipating doctors to continue their increased utilization of Invisalign, as well as increased volume from lower price products including Express 5 and Invisalign i7.

We believe we can maintain our gross margins in the lower end of the long-term model of 73% to 78%.

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

2013 will be a year of investment in areas around sales coverage in North America and Europe, bringing the Asia-Pacific channel back in-house with approximately 50 total employees, the development of our new consumer campaign and being on air more consistently in 2013, and our continued focus on product technology and innovation.

We believe there will be some quarterly fluctuations from Q1 levels during the year due to timing and amounts of spend relative to consumer marketing, sales force expansion, and significant trade show and industry events.

Given the rebounding case receipts in December, which have continued into Q1, and assuming patient traffic continues to improve, we are confident about our top line growth resuming and expect operating margins to approach the low end of our operating margin targets as we exit the year.

Before I turn the call over to Tom, I'd like to make one other brief comment.

By now, you've probably seen the announcement that I will be stepping down as CFO of Align.

Over the next month, I will continue in my current capacity to ensure that we complete all year-end activities and including the filing of our 10-K.

Beyond that, I would transition my responsibilities and remain an employee through June.

I have truly enjoyed being a part of a great team to bring the Company to where it is today and wish continued success for Align.

It has also been a pleasure to have the opportunity to meet and get to know many of you over the past several years, and I wish you all the best, as well.

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

Before I move to some closing comments, I want to thank Ken for his service over the past seven years.

He has earned some downtime, and he is really going to enjoy that.

Thank you so much.

We have a search underway for a new CFO and expect to complete that by the end of Q2.

During the interim, Roger George will formally pick up responsibility for the finance team and serve as interim CFO.

Now, to wrap up our comments.

Q4 was a very solid end to a year of record Invisalign case volume and revenues.

Despite slower growth in the back half of the year, our strong first-half performance helped drive nearly 17% Invisalign case growth, with 16% North America and 23% international.

We had many significant accomplishments this past year that contributed to that growth, including entry into new market segments with the launch of Invisalign Express 5 and Invisalign i7, expansion into new emerging country markets, and the unveiling of our next-generation aligner material, SmartTrack, which began commercial shipments two weeks ago.

We are starting off the new year with several new products and feature enhancements including the new iTero scanner, Invisalign Outcome Simulator and Invisalign G4 enhancements, which are all commercially available in Q1 of this year.

In addition, our customers are reporting improving trends in patient traffic in their offices, and for Invisalign case starts.

That near-term trend, along with our low penetration into the overall orthodontic market, reinforces our long-term view of top line growth of 15% or higher.

Ken covered our framework for 2013, and assuming patient traffic continues to improve, we believe this will be another solid year in terms of Invisalign case starts.

To summarize, 2012 was a year of delivering solid results in a tough environment with very positive progress for our customers and while initiating a set of important organizational changes for the Company.

2013 will be another important year for us as we commercialize SmartTrack, integrate the Asia-Pacific team back into Align, launch new products, and accelerate our marketing programs.

We are committed to becoming a market leader in dentistry and will continue to build a team to deliver on that goal.

All of these investments in product, programs, and our internal team are focused on one thing, getting us to the day when even our most conservative customers feel confident saying, every case is an Invisalign case.

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

With that, operator, let's get to the questions.

(Operator Instructions)

John Kreger, William Blair.

Tom, can you give us an update on where you think the broader orthodontic market is trending in terms of case-start volumes?

You know, we certainly aren't the whole market.

We're just a thin slice.

Our sense is certainly in the second half of the year, it was a tough place.

Our orthodontists all reported softer volumes.

It was a decent teen year -- summer, but I think adults kind of slipped away from everybody.

So, in general, we would target total segment growth in low single digits, us being able to take share has helped us fuel our growth.

So, we don't think it's been healthy.

We do -- our customers do report increased patient traffic, calendar is filling up with consults in a good way.

Nothing explosive in growth, but solid progress.

We think that points to some improvements in ortho total starts, and we think with that happening, we can get more than our fair share.

Great.

Thanks very much.

I think the one topic maybe you didn't cover in your prepared remarks -- can you give us an update on the IP front and what we can expect out of the ITC trial that I think starts in a week or two?

Better than having me comment, we have Roger George here.

Roger, if you can turn your microphone on and just to give a brief commentary.

Thank you.

Thanks, Tom.

Good afternoon, everybody.

As we've disclosed, the ITC trial begins next week in Washington, DC.

If you know much about that administrative law forum, it works differently than a typical Federal court, a so-called Article III court, under the US Constitution.

The administrative legal courts at the ITC have their own set of rules, live witness testimony is quite limited.

Most testimony is submitted in writing for the court's consideration.

So, we've all submitted our briefs.

Ours was about 600 pages long.

The staff has submitted its brief, and naturally ClearCorrect has submitted theirs.

Because it contains what's called confidential business information, I'm not even allowed to know much of what is in ClearCorrect's brief, only our outside lawyers get to know.

So, the trial will happen over the course of about a week.

The judge doesn't rule from the bench.

He takes everything under advisement.

There will be a period of time afterwards where if particular issues come up at the trial, each side will have a chance to provide some further briefing.

But, really, there's going to be a dark, quiet period where we are not going to know anything more from the ITC until about early May.

In early May, we may find out that they rule in our favor, which will kick off another round of possibilities for appeal by ClearCorrect and acceleration up the chain to the ITC, to the commission itself.

But, that's what immediately is in front of us, concerning that matter.

John, does that cover the waterfront for you?

It does.

Thank you very much.

Steve Beuchaw, Morgan Stanley.

Ken, since you started the ball rolling down the 2013 path, I thought we should pick up the ball.

Because, you made a comment about case-start growth and your confidence, there.

I think we could interpret your comment about the growth outlook a couple of different ways.

I wonder -- and I don't know if this is for Ken or for Tom -- but, given the comment that you think you get back to your normal growth trend, just given what you are guiding for, excluding that $4 million acceleration in the first quarter around Vivera, is it just an incredibly obvious statement to say you're guiding for a pretty material acceleration over the balance of the year?

Is this another pretty strong double-digit year in the top line, as you are thinking about it?

I think, Steve, I guess we've said what we've said.

Along with the framework that Ken provided in broad strokes, the Q1 guidance in more specific strokes, we felt it necessary to comment on our long-term financial model, which both Ken and I did comment on in different ways.

I think that stands for itself.

We think this business can grow at that kind of level.

If this is a softer year for us in 2012 and we grew it16% or so, I think most people would love to have that problem.

Ken, I will let you pick up the rest of the question.

Yes, Steve, I think, again, it's dependent partly on the fact that you want to make sure that patient flow is still there and operating in the office.

So one of the things we made a comment on is -- that can be predicated on that, if we see softness in the industry, that growth may not be there, which we saw late in the fourth quarter until we started exiting it here.

We are very confident.

We have the right strategic lever that we are working on and have in place, we are going to be adding the sales force to drive additional growth in the business, and we are upgrading our advertising campaigns, again, being on air more to drive more patient interest.

So, we are doing a lot of things to push consumers into the doctors' offices this year, as well as get after getting increased sales in Invisalign with a broader sales force.

As long as patient flow is there, we think we will continue to grow the business.

Okay.

That's very helpful.

I will follow-up though, Tom, and ask you, as you think about the way that the business trends over the course of the year, we understand that around the end of 2012, probably the real big issue that was pressuring patient starts was the macro uncertainty around the US.

And some of that might have been, I would say, the fiscal cliff, some of it might have been the election.

What do you think are the two or three important levers that you are going to follow over the course of 2013 as you try to get a sense for what the patient flow looks like?

Thanks so much, guys.

Sure, Steve.

We will leave the high-end macroeconomic forecasting to folks like you.

That's hard enough to do.

We try to see what's going on at a trend level, and then try to understand how our customers are feeling in the office.

We know if we can keep our orthodontist customers in North America and Europe kind of on offense with the right new products and interested and engaged, and ensure they can get great results, and if we can keep -- and if the patient traffic is sufficient that GP offices that are more moderate users can feel comfortable to lead with a product like Invisalign, then we know we can get more than our fair share.

Those are the more secular trends we track closely, Steve.

I appreciate that very much.

Ken, all the best you.

It's been great working with you.

Matt Dolan, Roth Capital Partners.

Hi, guys, good afternoon, and Ken, congrats on the tenure there.

Thank you.

I wanted to continue on your longer-term commentary, but shift over to the operating margin you are guiding to, 16% or 17% op margin in the first quarter, which is lower than what we've seen in many recent quarters.

Then, you indicated that you could be exiting the year close to your -- the low end of your long-term target, which is 25%.

So, that's quite a move in a few short quarters.

Is that a sales growth dynamic that you might have touched on in the previous question?

Or, is there some spend in the first quarter that isn't sustainable throughout the year?

Maybe just walk us through how that progression might take place.

Sure.

I guess I would first make a comment on -- if you think back to 2011 or 2012, even this year, we came in -- typically with the first quarter, we have a step up in spending every year.

We start out the year usually in a high teen range in operating margins.

We've been able to grow it each quarter as we move through the year this year and be able to exit the year at 23% operating margins for the year, kind of approaching that low end of the range on an annual basis.

We are entering this year at a little lower base here as far as operating margin is concerned, with the step up in spending that I was referring to.

That spending is going to be there for the year.

It might go up and down a little bit, based on timing of activities and those types of things.

We are really looking at driving top-line revenue here, and getting the growth back into the top line with Invisalign sales, getting leverage off of an expanded sales force, as well as a lot of the chair side apps, like the outcome simulator with the iTero scanner, in driving more Invisalign volume.

We are really focused on driving top-line volume and maintaining our gross margins in that low to mid-range of our long-term guidance and growing into the OpEx here.

Matt, if I can pile on for just a second.

Nothing's changed in terms of our ability to toggle spending -- absolute spending up and down, although in a given quarter, it acts more fixed in general.

We believe over the span of the year, if things improve, we can dial up.

If things come undone a little bit, we can dial back as we have proven in the past.

Some of the investments we are making around coverage and all that, we don't do those all the time.

They are always a little lumpy when we lay them in.

We are in the mode right now of bringing more reps online in North America.

That started actually in Q4.

So for us, we have gone through the cycle of analysis and believe that is both strategically and tactically a good choice.

Especially with our Q1 step up, typically step up in spending, it shows up a bit more.

But again, just as we are pretty comfortable -- and in general, we can live with our long-term model in the top line, even through the investments we've been making, we're pretty comfortable as we at least exit the year we can get back towards at least the low end of our long-term operating margin model, as well.

Okay.

That's helpful.

Second question is more on the utilization side.

It flattened out in the fourth quarter, if anything.

I know you had spoken about the summer being a little slow for adults on the ortho side.

So, can you give us some specifics on what's giving you confidence that the volume growth you are expecting to see, which is low double digits in Q1 and then it sounds like improving through the year, which one of those utilization variables are specifically driving that trend?

Thank you.

I guess, maybe the clearest read is into the ortho practice.

Ortho practices are a bit busier than they were.

They had very quiet late summer, early fall, literally September, October, some orthodontists remarking that it was the softest they'd seen since the meltdown of 2008.

And they got to work, and we got to work.

Whether it's -- one customer asked me if it was tied to the election because shortly after the election, traffic picked up in their office.

I have seen -- it's too hard to understand, as I told he earlier caller.

We read the macroeconomic forecasting, but we don't make it.

We really watch patient traffic, doctor behavior, closely.

And on the ortho side, they are engaged, they are more encouraged with Invisalign as a product, more comfortable.

They're getting better results with it, it's easier to use, and that bodes well for whatever that will be.

On the GP side, it is obviously more difficult to forecast.

We have thousands of GP customers that do one or none cases on a given quarter, and calling that as a forecaster is probably our continuing biggest challenge.

With that said, we do multiple top-down bottom-up practice-by-practice forecast during each quarter, and we are getting better visibility into what they're doing.

If we have the traffic in the offices, and we have our customers on offense, we are going to get case starts.

May I have the next question please?

Robert Jones, Goldman Sachs.

Just hoping you guys could help me reconcile a few items from a high level.

Obviously, it looks like you're calling for some very healthy case growth in 1Q, and clearly ASPs were much better than what we were looking for, across the portfolio that is, in 4Q.

What's driving -- if you could summarize for us, what's driving the lack of EPS growth in 1Q?

Just trying to get a better understanding of what's going on in the spending side and how we should be thinking about that throughout 2013.

This is Ken.

I'm going to refer you back to some of the comments that we just made on the call.

We have typically a step up in spending in Q1 sequentially, related to compensation and benefit programs at the Company here.

That happens every year.

This year, we've also had, in the first quarter, starting recognizing expenses related to the Medical Device Excise tax.

Then, we had the investments going on, which we've been talking about on the sales force expansion, the consumer platform, et cetera.

So, we are going to see spending step up from around $76 million, $77 million in Quarter 4 to about $83 million-ish in Quarter 1. Those are the items that are driving the spending.

When we get the headcount on board, like Tom said, it takes about several quarters to get a salesperson really up to speed in their new territories, so we will start getting leverage out of those sales people as we move through the year.

As well as being on air more, with our consumer programs, we get a nice uptick in traffic through our website when we're on the air.

We see that pretty consistently.

Hopefully, those turn into cases, as well, ultimately.

That's what's driving the OpEx increase.

Like I said, we think that's going to be relatively at that level, give or take a little, for the year.

Given timing, big events like the AAO or ADA that occur in different quarters or maybe some of our own summits we put on for our doctors ourselves.

As far as gross margin, we think that's going to be pretty consistent here.

We got a little bit of headwind with some of the material cost coming in.

But, we think we can overcome that with volumes in the business, here.

From a manufacturing point of view, we actually should get less breakage on the line and better yield out of the aligner material, being it's a little bit softer.

So, it really gets back to top-line growth and making sure we manage these expenses appropriately here.

But we are investing for some strategic purposes here and adding those types of resources, as we mentioned.

No, that's helpful.

Then just, if I could, dig in on the teen line and the pace of uptick there.

It does seem like in the quarter, the year-over-year growth seemed a little bit light even after factoring in the 4Q seasonality.

I know you talked positively about the express line and the expectations there.

Maybe if you guys could just share with us how the trend of teen has been, relative to your internal expectations, and how are you thinking about that penetration as we move forward?

You know, I guess I will jump in here, Bob.

The general direction for us on teen has been very, very successful.

We continue to see progress quarter over quarter and year over year.

I think that, if there is some market growth in the ortho segment, we get even more growth.

If there's less, or say even negative growth in ortho segment, that's a bit of a moderating effect.

But, if you look, for example at our webcast slides, you see that spike in Q3.

It's a very consistent profile year over year, quarter over quarter, with that same kind of pattern, except the amplitude gets greater.

The second thing that's going on inside that, that gives us confidence that we can continue this direction is the types of cases we are getting that are teen cases.

In the earliest days, three years ago, four years ago, we got just the simplest cases because mom and dad weren't willing to kind of say, well, I'll do Invisalign if it's good enough.

They are going to get braces or Invisalign or whatever, getting their teeth straightened, and they want perfect.

The more our doctors believe they can deliver perfect to the teen, to mom and dad, the more they're going to use our product.

So, with G3, G4, SmartTrack, we can actually score the complexity of an incoming case.

We actually look at the complexity of incoming cases on teens.

That is the hardest share for us to take from traditional brackets and wires.

Yet, we see that we are getting harder and harder cases in.

That portends well for our continued progress.

Again, it doesn't happen overnight.

But our goal is, every teen season to do better and better and get more and more than our fair share.

Again, good steady progress, even though the total amplitude, I think, was down, because I think that's kind of a dampening effect to the broader economy.

I appreciate all the comments.

Glen Santangelo, Credit Suisse.

Tom, just two quick ones.

I wanted to follow up on the comments regarding gross margin in Q1.

It kind of sounds like there's some type of inventory reserve that's going to be taken.

Could you maybe elaborate a little bit on that?

Secondly, I wanted to also talk about the mix issue.

If I look at the Invisalign Full this quarter, the case volumes grew only 4%, which I think is the slowest quarter on record.

It seems like the mix is clearly shifting toward the Express categories and obviously teen grows, but teen also slowed as well.

So, I'm kind of curious, if I look at your guidance from 1Q, it kind of seems like you are guiding ASPs continuing to go down.

I'm wondering if that is explained by the mix.

Is that saying anything about the long-term trend, or how we should be modeling margins over the longer term?

I tell you what, we will divide and conquer here, Glen.

I will take the broader market mix directional questions, and I'll ask Ken to come in and talk a bit about the reserve as we transition materials.

You pointed to two or three different things at once.

I will see if I can unpack them.

First, we are trying to accelerate in a value-based area for Express 5, for i7, i14 in the UK and a few other countries in Europe.

That's purposeful, because we found small labs, et cetera, doing some very simple cases and it was an opportunity for us to bring better value at basically the same price they were selling it for and far better results for our customers.

So you should expect that to continue.

The reason why it appeared to accelerate on a mix basis had two drivers.

One was that we were trying to push greater usage of, say, Express 5 in North America, with a promotion, which did get some trial and repeat usage.

At the same time, the denominator got smaller because it was a softer overall quarter on Full, on adult, and everything else.

So, on a -- if we were maybe to adjust for the softness, you would see a little bit of mix shift.

But it wouldn't be as pronounced as maybe shows up here -- again, more of a softer market dynamic.

The second thing is, as we've talked about, a lot of the volume came in late in the quarter.

That didn't necessarily -- we are commenting on it because it's important and it sets up a Q1 discussion.

We generally don't comment in detail or quantitatively about receipts, only the extended points to our business flow.

What I would say is that, the business generally came back.

And as we look at Q1, there's a more normal -- we would expect a more normal balance of adult starts and all that, versus a very, very soft first half of Q4, meaning that mix shift for Express and those kind of things were even more pronounced.

I will stop there for a second on the mix story and let Ken pick up on the inventory reserve for SmartTrack.

First of all, with a big transition like this going from one material to another, it's a significant move for the Company, here.

As we anticipated that move and planned for it, we wanted to make sure we had enough safety stock around of the current material that we had been using to date.

We planned to have 100% cut over to the new material when we turned it on, which is exactly what we did.

We wanted to make sure that we were covering ourselves to make sure we had enough of the older material or current material around in case we had a glitch for some reason.

At the end of the day, the good thing is that everything has gone very, very smoothly.

The transition to the new material has gone really well from a manufacturing perspective.

We knew we would have some inventory around, we weren't sure exactly how much, depending what happened.

But, essentially, we're not going to use that old material.

It has a shelf life of just a very short period of time, about a quarter's period of time.

We will actually be writing that inventory off as we go through the quarter here.

You should consider that to be success because that was safety stock.

Using that inventory reserve meant that the transition to SmartTrack didn't go well.

Not using it, signaling the reserve is going to get charged in Q1, says the transition has gone very well.

Okay.

Thank you.

Jeremy Feffer, Cantor Fitzgerald.

Most of my things have been answered.

Just wanted to come back quickly on guidance for 1Q.

You mentioned that currency was positive in 4Q, so can we expect, or at least as implied in your guidance, that you don't really see any future FX headwinds in 1Q?

Well, Jeremy, I guess it depends really where it goes.

We have our views of it.

As we know today, it's running a little bit higher euro to the dollar than it was a month or two ago.

So, we take views of that into account as we develop our guidance.

We will have to see how it plays out for the quarter.

Okay.

Then just following up on that, so then the conclusion then to draw from the expected revenue growth to be slower than the expected volume growth, that's purely a case of mix?

And also, an improvement in utilization driving higher advantage rebate usage?

Is that correct?

What I would suggest you do, is you look at the volume growth from Q4 to Q1, roughly 5% to 7.5% in our guidance.

If you look at the revenue growth, and if you exclude the case refinement adjustments that we made in Quarter 4 here and, based on the revenue, that would get you $137 million, $138 million of revenue adjusted.

And take that against the guidance we gave for revenue, that tracks back to about a 6% to 9% growth in revenue, roughly.

Okay.

That includes the Vivera, as well.

Okay.

That's very helpful.

Thank you very much.

Next question, please?

Brandon Couillard, Jefferies.

Ken, how does the deferred revenue benefit in the fourth quarter break down between North American orthos and GPs and then versus international?

Any color you can give us by product line would be helpful.

Well, it goes across pretty much all of our products, based on the volume of products that we have been shipping over the past several years.

We actually don't really disclose that on a unit-by-unit -- product-line basis.

I can tell you from a geographic perspective, the majority of the adjustment for case refinement is related to North America shipments given the volumes we've had in North America over the past several years compared to international.

Does that help a little bit?

Yes.

Then, could you give us an update on the Cadent facility transition?

I believe that should be complete by now.

Then, you still expect, is it still rational to assume $4 million of annualized savings accrue in '13 from that move?

Well, we've completed the transition, actually last year, at the end of the year.

Coming into this year, we were pretty much all into the new facility down in Juarez.

As far as the $4 million savings goes in cost of goods sold, because of the move, yes, we have seen the savings there.

But, I will tell you, we've also had to deploy other resources against the business which offset that $4 million in savings, in relation to the iTero issues we had several quarters ago, in [customer] support and technical support.

So, technically, we've seen the savings with the move through facilities cost savings as well as overhead and labor costs.

But, again, we've deployed some of that against other activities in the Company.

We spent it back on other activities.

Right.

Some of it, not all of it.

Brandon, did you have another question?

Just one more quick one, is that all right?

Yes.

Any chance you could just quantify exactly how many Invisalign sales reps you ended '12 with and how many head counts you expect to add in '13?

Will these be focused on Invisalign or the scanner side of the business?

We are going to finalize that.

I will take a look at that just before we file, here, I guess.

Because, we get a forecast from the field each week as they are making offers and bringing people in.

We actually want to make sure they are on board.

I'll tell you, we probably had a dozen or so already start just as the year ended.

So, I don't know, Ken, did you size it in more detail for North America?

No, we did not.

So I think I'd pull up short of that.

It's a meaningful addition.

Obviously, when we feather in the support team and the sales team in APAC, as well as some incremental coverage in Europe, it's a year of significant expansion in our go-to-market side.

We wanted to talk about it in those terms.

By the time we file, we will wrestle down absolute numbers in terms that you can see growth, quarter over last quarter.

All right.

Thank you.

Next question, please?

Spencer Nam, Janney Capital.

Ken, we're going to miss you.

Good luck to you going forward.

Just a quick question on the amortization intangibles.

What kind of impact will that have now that you guys are not going to be taking out of the non-GAAP numbers?

What's the estimated impact for 2013 on that?

The amortization of intangibles is about $1 million a quarter.

We've been consistently showing that between GAAP and non-GAAP this past year.

But given the fact that those charges will continue for 10 to 13 years depending on the intangible, we just felt it was more appropriate to include it in the non-GAAP at this point in time.

About $4 million a year.

Great.

Helpful.

On China, Tom, maybe you could comment on this.

So, we're going to start seeing some numbers from China.

My understanding was that you guys had been kind of building the pack of data, if you will, with samples and thought leaders.

I'm curious, how those early work -- what kind of results you guys have gotten, how confident you guys are that the experience that you guys have put together, so far, is going to affect the adoption -- early adoption here?

Kind of a multi-part question.

I will try to give a simple answer.

That answer would be, our goal has been to take the top, most respected orthodontists and dentists in China, have them get actual experience with the product -- which is why it was essential we had G3, G4 and these other innovations in their hands when they started -- have them complete lots of cases, and then be able to, with us, work on developing training for all their colleagues across China and the major cities and even second-tier cities.

That's happening.

We now have -- with some of the forums I talked about recently, we have these Chinese doctors showing finished cases for very, very complex 1.5-year, 18-month 24-month cases, extraction cases, and very complex Class 2 and Class 3, even some surgical cases.

So, with them showing their own results with the Invisalign product, it is a fairly dramatic statement.

Again, we are trying to build the right foundation and moving slowly, and still have a pretty small business.

I think we identified in our annual report last year just how small it was, in total.

But, I think it has the potential still to be very large.

That's why we are going slowly and ensuring we have the support of the most respected clinical leaders in the country, which is what we are about.

Thank you.

Next question, please?

Jonathan Block, Stifel Nicolaus.

Thanks for fitting me in.

Maybe one long question and one short one.

The first one, I will apologize in advance for the bluntness.

You pre-announce at the low end of your 4Q, and you actually end up doing the high end even exing out the deferred.

When I look at your 1Q guidance, guys, and the commentary around GPs being flat, international being flat to down slightly, what it implies is about 20% sequential growth on case volumes in the ortho channel.

If I go back over the past four years, you only got to that metric one time and it was right after the launch of G3.

So, if you can talk to your conviction, or how comfortable you are with that 1Q guide.

I know it was in response to Matt Dolan's question a little bit earlier, but what are you seeing in the ortho channel to give you such a high level of conviction that you can see that type of sequential move in that particular channel?

Thanks.

Sure.

And I -- no apologies needed for a blunt question.

As we've commented in general about our standing guidance on December 5, with the wake of a few executive departures, we felt it was important if we saw that softness to comment on it -- no more, no less.

Literally, the month of December turned on its head, literally, shortly after that call.

We were very busy, very busy, along with the offices, the remainder of the month.

So, again, it goes back to forecasting.

I don't know what that is.

We are happy it came.

We are happy the tide came in a bit.

What gives us confidence?

We see a pretty good visibility into all of our high-volume practices -- the intentions to build their practice; some unhappiness on their part, they maybe didn't get to the level they expected in the advantage program; detailed plans in place to market their practice; build on Invisalign; a lot of excitement about SmartTrack.

Then, we feather that in with we think we can drive a little progress in GP -- again, a harder channel to move quickly.

Then, what we will call normal international, where they take -- in our eyes at least -- extended holiday breaks, and you are driven really by number of days worked.

With all that said, again, we are still being thoughtful about the broader economic environment.

We feel reasonably comfortable that we can continue to build on the volume we saw that jumped, really, in Iike the second week in December.

So, that's how we are calling it -- no more, no less.

Very fair, I appreciate it.

I guess, it just seems a little less conservative than over the past couple of years.

On the second question, when I look at -- and I hate to burn a question on Cadent.

When I look at Cadent and I look at the service revenues, not the scanner but the service, that's come down sequentially four quarters in a row.

So, I guess the scanner sales are somewhat hanging in there, especially considering Europe.

The service is about using the machine once it's in there, the recurring revenue should grow with the growing install base, and we are seeing the exact opposite.

So, can you speak to -- are these things being used?

Are they being used effectively?

Or, why is that number coming down sequentially?

Thank you.

I'm deeply hurt that you are saying you burned a question on Cadent, Jon.

We're glad you asked a question about Cadent.

The fact is North America is working very well.

We predicted, internally, that services would go down, principally because we decided to get out of the bracket-positioning business they had, called IQ.

There were several hundred high-volume, mostly orthos, that use that service a lot.

We just didn't feel we could scale it, as we thought about the pieces of that business, moving it to Juarez, we would've had to significantly reinvest in it.

We had a very thoughtful discussion with, again, hundreds of customers that really liked it and have a glide ramp down.

They are turning off the usage of that product that's directly related to that service stream.

If we then compare the other side, if you looked at Invisalign case submission, and the other things they are using in 4, both on GPs, you would see services growing very nicely.

That isn't visible at the level we disclose at this point, but the principal issue driving that service volume -- or service revenue down is because of a concentrated base of customers with a product we are no longer supporting.

That started, really, in the summertime and ended, I would say, early Q3.

That trend, you probably wouldn't have seen it as early as we did, but now the debt's really showing up.

Over time, that will get fixed.

The second part of the question is, we are kicking butt in North America, in terms of placing scanners.

Customers are thrilled with them.

The new scanner is coming out.

It is exciting -- it's faster, it's better, all the stuff.

We are actually winning in North America, notwithstanding gross margins, which we have plans to fix very significantly.

In Europe, we're not trying because we don't have a better plan right now.

And, I guess stepping back, if you just do year over year flat, that really obscures the progress we've made in North America.

And the progress and making sure this business is profitable in its own right.

So, with that said, we're actually pretty excited about this business and its longer-term prospects.

But, I will grant you the visible part you've got doesn't look as good as it should.

Thanks, guys.

Operator, we will take one last question, please.

Jeffrey Matthews, Ram Partners.

Ken, good luck, congratulations.

Thank you.

Two questions.

One is, does the change in the recognition of the deferred revenue, does that have anything to do with better outcomes that the orthos are seeing?

A change in the pattern of usage, or is it simply outdated reserving methodology?

And number two, you sound like you really have a lot of marketing pushes coming, and I'm wondering if that's just seasonal or if that's a reflection of your new team?

Thanks.

I'll take your first question on the case refinement, and Tom can comment on the marketing.

Really what it is, is just looking at a more detailed analysis and more in depth at the actual usage that we've seen over the past several years of case refinement, and looking at the estimates we were using in relation to accruing for that case refinement.

In going back and updating -- very simply, we were estimating too high on the usage of case refinement.

With that said, I will say case refinement usage has been going up over the past several years.

But we think also with the new technology in G3 and G4 -- and we haven't probably had enough experience in the field yet, because if you think a doctor has to get the patients, has to complete the case, it might take a 1 year, 1.5 years, and they have up to 6 months to use case refinements beyond that.

So, as we get out 1 or 2 years, I think you probably start seeing some benefit of that in relation to case refinements.

We probably haven't seen it in a material way to date.

Thanks.

Jeff, I'll take the other part of it.

Maybe the first framework is, we aren't spending dramatically more money.

Maybe I should not say dramatically at all in the sentence, it's just we are spending incrementally more.

We're doing better in a more integrated way.

For us, we felt it was a time for good investment in a new consumer platform that is going to give us an opportunity to build on that bolt with traditional media, TV, radio, as well as a lot of other sites.

So, in addition, we are working in a much more organized way, now, that we have what I'll call maturing channel coverage in at least five countries in Europe and, to a much smaller scale -- won't be doing 30- or 60-second spots, it will be, I will call them bump ads or whatever, little small elements.

But it's all toward raising the awareness of Invisalign, especially in markets where orthodontic treatment is not as broadly used among kids, adults, et cetera.

So, again, reasonably small dollars in Europe, but what I would say, concomitant dollars with the investments we've made in building out the business, in improving the product, and then making sure the distribution team is in place to take advantage of that demand creation.

North America, all in, we are going to spend a bit more, but we are going to do it more effectively.

Okay.

And you are obviously seeing a great potential for return on this?

We actually measure in many, many different ways.

We also survey our customers.

One of the things they say consistently is, we are one of the best practice-building partners in dentistry orthodontics, and patients come in asking for Invisalign by name.

That has an outsize impact on -- if the patient comes in and asks for Invisalign by name and the doctor is confident they can deliver the results they need, we have very good shot at getting that case start, and that's our game plan.

Thank you very much.

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