愛齊科技 (ALGN) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Align Technology Q1 2013 earnings call.

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

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

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Thank you, Ms. Stacy, you may begin.

Thank you, operator.

Good afternoon and thank you for joining us.

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

Joining me today, Tom Prescott, President and CEO; Roger George, Vice President Corporate and Legal Affairs, General Counsel and Interim CFO; and Karen Silva, Vice President of Finance and Corporate Controller.

We issued first-quarter fiscal year 2013 financial results press release today via Marketwire, which is available on our website at investor.

Aligntech.com.

These results include a $26.3 million impairment of our long-lived assets, and a $40.7 million impairment of goodwill.

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 p.m.

Eastern time through 5.30 p.m.

Eastern time on April 26, 2013.

To access the telephone replay, domestic callers should dial (877) 660-6853 with conference number 411500, 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 second quarter of fiscal year 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, 2012.

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

Please also note that on the conference call today 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 reconciliation to the comparable GAAP financial measures where practical, are contained in today's financial results press release, which have been posted on our website at investors.

Aligntech.com 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 first quarter conference call slides on 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 provide an overview of our first-quarter results, and discuss the performance of our two operating segments, Invisalign clear aligners, and scanner and CAD/CAM services.

In our release, I am sure you noticed a charge we took against our scanner business.

Roger will cover our Q1 financial results, including discussion of that charge, as well as our outlook for Q2.

Then I'll come back for a few closing comments and some questions.

Q1 was a solid quarter across the board.

We've started the year out with better-than-expected revenue and earnings, driven primarily by record Invisalign case volume.

Strong Invisalign case shipments in North America, especially among orthodontists, reflects stable patient traffic in our customers' offices, as well as continued sales & marketing activity to encourage doctor engagement.

During the quarter we launched SmartTrack, our next-generation aligner material, which is now the standard for Invisalign clear aligners worldwide.

We have received consistently positive feedback from our customers and their patients as they move beyond initial usage.

We're excited about the potential for SmartTrack to help build even greater clinical confidence, so our doctors will utilize Invisalign more often and on more complex cases, due to the improved control of tooth movements and the added benefit of increased patient comfort.

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

For Q1, total Invisalign case shipments grew across all customer channels to a total of 98,200 cases, an increase of 15.1% year-over-year, and an 8.5% increase sequentially.

Year-over-year growth was driven by increased Invisalign utilization, especially among North American orthodontists, as well as customer base expansion for North American GPs.

The sequential increase in Q1 primarily reflects strong growth from North American orthodontists, as well as good growth from both North American GPs and international doctors.

The uptick in North American Invisalign case volume we saw as we entered the year continued throughout Q1, reflecting steady patient traffic in our customers' offices, as well as traction from customer engagement and practice-development activities.

Switching briefly to our performance among the teenage patient segment, we continue to make progress here as more teams our being treated with Invisalign.

This quarter, teenagers treated with Invisalign increased to 23,100, a year-over-year increase of 29%, and a sequential increase of 13%, a positive direction as we head into this year's summer season.

From a product perspective, the Invisalign teen product increased 27% year-over-year and 12% sequentially, primarily driven by North American orthodontists.

From an Invisalign product mix standpoint, growth was primarily driven by utilization of Invisalign Full and Invisalign Express products.

This quarter, we saw positive uptake of Invisalign Express in North America, and to a lesser extent Invisalign i7 in our direct European countries.

These products that treat minor malocclusion grew a combined 47% year-over-year and 19% sequentially.

Adoption of our newest offering, Invisalign Express 5, was driven by both our ortho and GP dentists in North America, as many took advantage of a $200 off promotion we ran during the past quarter to spur increased trial and repeat usage.

For North American orthodontists, Q1 case volume -- Q1 Invisalign case volume of 38,000 cases increased nearly 18% year-over-year, reflecting increased utilization of Invisalign, as well as cases from newly trained doctors.

Sequential growth of 13% was driven by increased usage of Invisalign, especially among higher volume orthos.

We believe the interest in SmartTrack may also have played a role in its improving level of engagement among orthodontists.

For North American GP dentists, Q1 case volume of 36,700 cases increased 11% year-over-year and 6% sequentially, reflecting continued expansion of our GP customer base, and slightly lower utilization due to this larger customer base on a sequential basis.

Q1 Invisalign case shipments outside of North America increased 17% year-over-year, reflecting growth across direct and distributed geographies.

On a sequential basis, Q1 Invisalign case shipments increased 5%, a bit better than expected, with good growth from our direct countries in Europe and Asia, offset somewhat by our distributors.

In Europe, we continue to make good progress in our core direct countries.

Year-over-year growth was led by the Central European countries of Germany, Switzerland and Austria, as well as solid progress in both France and Spain.

On a sequential basis, Spain and Italy were up nicely despite the widespread economic challenges there.

Across Europe, we continue to focus on clinical education programs as a key lever to help expand our customer base and increased utilization of Invisalign.

In Q1 we trained a large number of new customers, and have been working to re-engage doctors who had previously been trained, but had not submitted any cases.

We've also seen good up-tick from the launch of Invisalign i7, our minor tooth movement solution, which is now available in all direct markets in Europe.

Early results from our pilot in the UK suggest that many of our existing customers adopted i7 for minor correction cases instead of using competitive products.

New customers have also reported they are adopting Invisalign into practice, based partly on the potential offered by i7 in their practices to treat those minor malocclusions.

Turning to Asia-Pacific, I'll spend a little more time in this geography than I typically do, given some significant recent developments -- one being the addition of our new Vice President for the region; two, the transition of our Asia-Pacific distributor into a direct-sales region starting May 1; and three, with all that in hand, the formation of a Pan-Asia Pacific organization.

Starting with results for the region during Q1, our direct Asia country markets of Japan and China continue to make great progress, albeit off a small base.

In China, our strategy of leveraging key opinion leaders and focusing on top providers is contributing to continued strong growth in the targeted major cities of Beijing, Shanghai, Shenzhen, and Guangzhou.

We continue to see growth from our most experienced providers, driven by evolution in product and technology, with Invisalign G3, G4, and now SmartTrack, as well as by word of mouth in increasing interest in Invisalign among GPs and orthodontists.

In Japan, Q1 was a strong quarter for Invisalign case shipments, and I'm very pleased to see real progress in this market.

The strength in case growth is driven primarily by mid- to high-volume orthodontists, as well as from the cumulative impact of training more doctors over the past few quarters, and then getting these practices started with Invisalign.

It's good to see this growing interest and a positive response to our continued cycle of innovation, which is essential to treat these more complex cases.

Shifting now to the geographies covered by our Invisalign distributors in the APAC, EMEA, and Latin America regions, Q1 was up nicely year-over-year, and yet down slightly from Q4.

On May 1, our Asia-Pacific distributor will transition back into a direct region for Align.

We are excited about becoming more directly involved and engaged in this tremendous growth opportunity.

We recently announced the hiring and Julie Tay, an experienced global medical device executive from both J&J and Bayer, to run our Asia-Pacific operation.

Julie has already spent time pulling our teams together in the field and is focused on ensuring great execution for all Align products and services in this Pan-Asia Pacific region.

This widespread set of countries one of the best global growth opportunities for Align Technology over the next three to five years.

Now let's turn to utilization and training.

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

For Q1, total Invisalign utilization was 4.3 cases per doctor, an increase from 4.1 in both Q1 of 2012 and Q4 of 2012, driven primarily by North American orthodontists, followed by international doctors and North American GPs.

During Q1 of 2013, we trained a total of 1,660 new Invisalign doctors, adding 65 North American orthos, 690 North American GPs, and 905 international doctors.

Pivoting to the topic of product innovation, on January 21 we announced that our next-generation aligner material, SmartTrack, is now the standard aligner material for Invisalign in North America and most international markets.

The commercialization for SmartTrack was initiated in North America, as it was announced during our Ortho Summit in Las Vegas last November, followed by shortly thereafter by the official launch in January.

Now with SmartTrack in use for almost a full quarter in North America, we continue to receive positive customer feedback from doctors and their patients.

In a recent customer survey 80% of respondents cited SmartTrack product improvements as the reason why satisfaction was up for Invisalign.

When asked what new orthodontic product or trend excites you -- quote unquote, SmartTrack was top for both orthos and GPs.

Based upon detailed data and clinical evidence demonstrating superior performance, doctors report SmartTrack gives them more confidence to use Invisalign more often, and on more difficult cases.

During Q1, SmartTrack was also launched outside of North America, and work are now starting to get some initial feedback from international customers.

In Europe, our doctors welcomed the SmartTrack launch, with over 870 doctors attending high-impact clinical education events across 11 major cities in February alone.

Feedback from our customers confirms the benefits of delivering consistent moderate force and ensuring precise aligner fit.

They also love hearing from their patients about better comfort.

As a result, many customers are considering expanding the range of applicability and trying Invisalign on even more complex cases.

In March, we held an Invisalign SmartTrack clinical seminar in Tokyo, with more than 150 Invisalign providers attending the event.

This is the largest number of Invisalign doctors to ever participate in an Invisalign event in Japan.

Our integrated consumer marketing platform has historically been focused on the North America market, and combines paid media like print, broadcast, and digital, along with the mix of traditional PR and event marketing, all surrounded by social media outreach.

The goals of this platform are to generate awareness of and preference for Invisalign and Invisalign Teen as the best options for a healthy, beautiful smile among women, especially moms and teens.

Increasingly as our business evolves in key markets like Europe, we are utilizing consumer strategies also to help drive growth.

Q1 was a strong start to the year in terms of traditional media outreach.

We secured national broadcast coverage on the Today show, and The Doctors, reaching combined audiences of more than 9 million consumers.

We also kicked off an exciting new program targeting the important adult female market with the Invisalign wedding campaign.

This new campaign will focus on brides-to-be at a time when they are already planning how to look and feel their best on their big day.

In Q2, we will dial up our efforts in traditional media, both TV and radio, along with high-impact satellite media tours, expert spokesperson interviews, and other activities designed to leverage Mother's Day media opportunities.

In addition, we'll continue to reach moms and teens as we look at the prom, graduation, and the busy summer teen season.

Our social media program, including Twitter, Facebook, and our network of influential mom bloggers, continues to be a great way for current and potential patients to learn about our brand and engage with one another.

We will also reach, educate, and influence moms specifically this year through our Straight Talk event series, a program that combines the reach of social media with the impact of a live event.

We've kicked off a multi-tiered live event program with the Straight Talk series in the top ten Invisalign Teen markets that will be taking place in April and May.

One of the ways we know these and other programs are effective and that we're reaching potential patients is by tracking visitors and activity at Invisalign.com.

In Q1, site visits were up almost 30% from Q4, and we've doubled our mobile device traffic from the previous quarter.

Looking ahead, we are excited about the consumer campaign were launching in Q2, with new creative for TV and digital mobile platforms, all focused on the journey of Invisalign treatment.

We're planning to be on TV for most of Q2, to fully leverage our new campaign as we head into the important summer season.

Look to see our new ads on air just after Memorial Day weekend.

Turning to Europe, our smaller but strategically important consumer marketing investments continue to help facilitate market expansion and adoption growth in our direct country markets.

We have seen a significant rise in awareness, with increases in Web traffic and social media activity across our markets, and will continue our investment in consumer awareness campaigns in Q2.

Let's now shift to our scanner and CAD/CAM services segment.

As Shirley said at the beginning of our call, in Q1 we recorded an impairment charge for a portion of our long-lived assets, and all remaining goodwill related to the scanner and CAD/CAM services reporting unit.

These are in addition to the charges recorded in Q3 and Q4 of 2012.

Although we determined it was appropriate to record the impairment charges related to the scanner and CAD/CAM services unit, our long-term view of this business remains positive, and we will continue to execute plans to be a leader in this business.

In addition, we continue to see leverage in the Invisalign business from scanner technology, and maintain our belief in the long-term benefits of the scanner and CAD/CAM services business.

Invisalign utilization among scanner customers -- particularly orthos -- continues to grow, and we expect this positive trend to continue.

The drivers for this growth come from better customer and patient experience, driven by recent scanner innovations, including the new iTero scanner.

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

Moving towards operating results for this business, North America continue to perform solidly on the top line.

Among our core Invisalign customers, we our leveraging our direct sales force, and also taking full advantage of our scheduled customer events like summits, forums, or study clubs to help drive sales of iTero scanners.

This purchase is especially attractive for our ortho customers who are looking to differentiate or streamline their practices by integrating intraoral scanners to completely replace the cost, mess, and unpleasant patient experience associated with taking PBS impressions.

We continue to see an increase in Invisalign case submissions from a digital impression instead of a PBS impressions.

The percentage of Invisalign cases submitted with a digital scan rather than a traditional physical impression rose to 19% in Q1, compared to 17% in Q4, and 9% in Q1 of a year ago.

This trend is positive for both Align and our customers, as most of them reported faster ClinCheck turnarounds to case shipment with less hassle to patients.

All reports to date indicate better aligner fits.

Looking ahead, we continue to believe there are potentially a few other high-quality intraoral scanners that over time can be made to support interoperability with Invisalign.

Before we move ahead with this, Align will need to ensure the quality of the scan as well as the customer experience is up to our high standards.

Just like we do with other R&D initiatives, we do not discuss futures.

When there's any meaningful news to report we will do so.

Until then, iTero is the only scanner with Invisalign interoperability.

I will now turn the call over to Roger for a review of our Q1 financial results.

Roger?

Thanks, Tom.

Before I go through our Q1 operating results, I would like to note that there are several items we exclude from our GAAP results.

These include impairment of long-lived assets and goodwill for our scanner and CAD/CAM services business, which are detailed in our Q1 press release.

Recent changes in the competitive environment, including announcements in March of new lower-price scanners, have caused us to re-evaluate our outlook for scanner revenue and profitability.

Our iTero scanner offering is at a premium price due to its technology, utility, and end-to-end connectivity.

However, we believe that our customers may respond to lower-price scanners with less utility offering.

As a result, we reduced our volume projections.

This triggered an impairment analysis of long-lived assets and goodwill.

From these analyses, we recorded impairment charges for goodwill of $40.7 million, and $26.3 million for long-lived assets.

Even though we determined that goodwill and the long-lived assets were impaired, this does not deter our belief in the overall long-term benefit of intraoral scanners, or in our plans to offer the best technology and utility at a competitive price.

In my comments today, I will not review the total dollars excluded for non-GAAP gross margin, operating expense, and operating margin; and instead refer you to our press release tables entitled Reconciliation of GAAP to non-GAAP Key Financial Metrics, and Business Outlook Summary for a complete reconciliation.

Let's review our first-quarter financial results.

Q1 net revenue was a total of $153.6 million, which consisted of Invisalign revenue of $141.6 million, and scanner and CAD/CAM services revenue of $12 million.

Q1 net revenue increased 7.5%, from $142.8 million in Q4 2012 and 13.7% from $135.1 million in Q1 last year.

The sequential increase in revenue primarily reflects higher Invisalign case shipments, and as expected, an increase in Vivera Retainer revenue from consolidating shipments down to one shipment per year.

This shipment change for Vivera retainer's was based on feedback from our customers indicating it would make there practices more efficient.

Given our commitment to improving the Invisalign customer experience and helping doctors achieve the best results for their patients and their practices, this was an easy decision to make.

We seek to continually evaluate and improve our products, our customer support processes, and policies to support these goals.

As a result, we are making an additional change based on customer feedback that also impacted Q1 Invisalign revenue.

Beginning on June 15 of this year, we will no longer charge a fee associated with our mid-course correction offers -- orders.

Mid-course correction provides our customers with the option of requesting a treatment correction during the active treatment if the case is not tracking to the original plan or goal.

As of June 15, we will include up to three mid-course correction orders per case free of charge in our list prices for Invisalign Full and Invisalign Teen.

As a result, Invisalign clear aligner revenues for Q1 of this year were decreased by $2.7 million, representing the revenue deferred to provide free mid-course corrections for open cases that we expect to be eligible when this new policy takes effect on June 15.

Q1 Invisalign revenue of $141.6 million increased 6.6% compared to Q4 revenue of $132.8 million, and increased 14.8% compared to Q1 of last year of $123.3 million.

The sequential increase in Q1 revenue reflects increased North American ortho case volume, followed by North American GPs, with international being relatively flat from Q4.

Revenues were impacted by lower ASPs due to higher promotions and rebates, as well as product mix shift to lower-priced products.

On a year-over-year basis, Q1 Invisalign revenue growth was driven primarily by higher volumes across all customer channels.

Q1 2013 scanner and CAD/CAM services revenue was $12 million.

This is a sequential increase of 20.3% from $10 million in Q4 of last year, and a year-over-year increase of 2.2% from Q1 of last year.

Q1 '13 scanner and CAD/CAM services revenue includes $1.4 million that was reserved in Q3 and Q4 2012 for the new iTero scanner upgrade program which was launched in Q1.

This upgrade program was successfully implemented, and the full reserve was not utilized.

As expected, Q1 scanner shipments were down from Q4, which is typically the strongest quarter for dentists, oral surgeons, or orthodontists to purchase capital equipment.

Q1 CAD/CAM services revenues were up slightly from Q4, but down 16% year-over-year, primarily due to discontinuing the OrthoCAD IQ bracket template placement product last quarter.

Moving on to gross margin and operating expenses.

Q1 GAAP gross margin was $112.8 million, or 73.5%.

This compares to $106.5 million, or 74.5% in Q4; and $100.8 million, or 74.6% in the same quarter last year.

Q1 GAAP gross margin for Invisalign was 77.2%, and scanner and CAD/CAM services gross margin was 29.3%.

This compares to 78.8% and 18.5%, respectively, in Q4.

There is no difference between Q1 '13 GAAP and non-GAAP gross margin this quarter, but compares to non-GAAP gross margin of $106.5 million, or 74.5% in Q4, and $101.2 million, or 74.9% in the same quarter last year.

For Invisalign, there is no difference between GAAP and non-GAAP gross margin for Q1 or Q4 2012, and Q1 2013.

The sequential decrease in gross margin primarily reflects a $1.1 million reserve of the older aligner material as we transition to SmartTrack material, which we described on last quarter's conference call.

For scanner and CAD/CAM services, there is no difference between GAAP and non-GAAP gross margin for Q1, but compares to non-GAAP gross margin of 18.5% last quarter, and 32.4% in Q1 of 2012.

The sequential decrease reflects lower volumes and higher warranty costs.

Q1 GAAP operating expense was $150.9 million, compared to Q4 '12 operating expense of $89.4 million, and Q1 of '12 operating expense of $72.8 million.

Q1 '13 GAAP operating expense includes long-lived assets and goodwill impairment charges of $67 million.

Q4 '12 GAAP operating expense includes goodwill impairment charges of $11.9 million.

Q1 non-GAAP operating expense was $83.9 million.

This compares to $77.5 million in Q4, and $72 million in the same quarter last year.

The increase in Q1 non-GAAP operating expense is primarily due to the inclusion of the medical device excise taxes which went into effect in January.

Higher consumer demand spending, including development of the new consumer campaign that will launch on TV in May, as well as upcoming major customer events in North America, such as the AAO meeting in Philadelphia and our European Summit in Rome.

Q1 GAAP operating loss was $38.1 million, or 24.8%.

This compares to $17.1 million, or 12%, in Q4; and $28 million, or 20.7%, in the same quarter last year.

Q1 non-GAAP operating income was $28.9 million, or 18.8%.

This compares to $29 million, or 20.3%, in Q4; and, $29.2 million, or 21.6%, in the same quarter last year.

Q1 GAAP diluted earnings loss per share was $0.52, compared to EPS of $0.12 in Q4, and $0.26 in the same quarter last year.

Q1 non-GAAP diluted EPS was $0.26, compared to $0.26 in Q4, and $0.26 in Q1 of last year.

Moving on to the balance sheet.

Cash, cash equivalents, and marketable securities including long-term investments were $377.4 million.

This is compared to $356.1 million at the end of 2012.

In Q1, we generated roughly $10.4 million in cash from operations, compared to $50.8 million in Q4 and $7.4 million in the same quarter last year.

During Q1, we purchased approximately 75,000 shares of our common stock at an average price of $32.47 per share, for a total of approximately $2.4 million.

There remains approximately $92.7 million available under the Company's existing stock repurchase authorization.

Q1 day sales outstanding were 64 days, compared to 62 days in Q4 and 63 days in the same quarter last year.

Now let's turn to our business outlook for Q2 and the factors that inform our view.

2013 is off to a good start.

Our North American customers report stable patient traffic in their offices.

We expect our North American orthos to benefit from increased teenage orthodontic case starts as the summer season kicks off, and anticipate Q2 Invisalign case volume to be up nicely from Q1.

We expect Q2 Invisalign case volume for North American GPs to be flat to slightly up from Q1.

For international doctors, we would expect Q2 case volume to be up from a seasonally slower Q1.

As doctors increased their utilization, we are anticipating higher advantage rebate participation.

We also anticipate continued product mix shift in Europe to lower ASP products like Invisalign i7 in Q2.

As a result of our new mid-course correction policy which takes effect June 15, we will have an additional deferral in Q2 for the cases shipped between April 1 through June 15 that are expected to be eligible for the new policy.

The usage rate for mid-course correction orders is expected to approximate the revenue deferrals, and will therefore offset each other.

In addition, as a result of no longer charging and billing customers for mid-course correction orders, we anticipate a reduction of approximately $700,000 per quarter -- a small price for improving the Invisalign customer experience and helping doctors achieve great treatment outcomes for their patients.

For scanner and CAD/CAM services, as discussed earlier due to recent changes in the competitive environment for intraoral scanners, including announcements in March of new lower-priced intraoral scanners targeted at North American orthodontists and GP dentists, we have lowered our outlook and expect Q2 scanner and CAD/CAM services to decrease sequentially from Q1.

With that as a backdrop, Q2 Invisalign case volume is anticipated to be in the range of 102,200 to 104,700 cases, reflecting 7.2% to 9.8% year-over-year growth.

We expect Q2 total revenues to be in the range of $153.6 million to $157.4 million.

We expect Q2 gross margin to be in a range of 74.5% to 75%.

In Q2, we expect operating expense to be in a range of $85.7 million to $87.1 million.

The expected sequential increase in operating expense relates primarily to higher TV media and advertising spending, and includes expenses for our Asia-Pacific operations as of May 1. We expect Q2 operating margin to be in a range of 18.7% to 19.7%, and EPS to be in a range of $0.26 to $0.28.

In Q2, we expect the effective tax rate to be approximately 24%, diluted shares outstanding to be approximately $83.9 million, and cash on hand to be in a range of $405 million to $415 million, excluding any stock repurchases.

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

Thanks, Roger.

Overall, I am pleased to see our Q1 results, especially with respect to Invisalign volume.

As indicated by our guidance for Q2, we believe we can build on this good start.

These results begin with stable patient traffic in our customers' offices, and are driven by good execution of practice-building activities.

Heading into Q2, we expect to keep our focus on driving increased activity in offices and better customer engagement, even as GPs, orthos, and their patients all kind of head in different directions with summer approaching.

Fewer patients schedule routine dental care around the summer vacation period.

As a result, many GP dental offices close for at least a few weeks.

Our job and our challenge is to keep those GP offices engaged and their patients interested even through the early part of summer.

On the other hand, Q2 also marks the beginning of the busy summer season for our ortho customers and teenage orthodontic case starts.

I would expect to continue to gain what we call share of chair among the North American orthos this year.

At the same time, full appointment books for teens during the summer can crowd out adult consultations at the ortho office, so we'll stay actively engaged with our customers and with their potential adult and teen patients as we launch an exciting new consumer campaign in late May.

On the international side of the business, we are looking forward to bringing the Asia-Pacific team back in house on May 1. We've now got a strong team in place there, and are excited about the growth potential this region offers.

Even though the summer is typically a slower season for case starts in Europe, we'll continue building our brand awareness in core European markets.

Q2 will be a busy quarter, with numerous important initiatives under way or just launching.

But we know that one of the best ways we can engage with our customers around the world and earn their confidence and increased utilization is by delivering product improvements and innovations that help them deliver great treatment results.

We believe our new SmartTrack material is the most impactful of these recent innovations, with the right level of constant force, improved tooth control, and greater comfort for patients.

This will increase the number and complexity of cases doctors treat with Invisalign.

I look forward to updating you on our progress as this year continues to unfold.

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

Thank you.

Ladies and gentlemen, we will be conducting a question-and-answer session at this time.

(Operator Instructions)

Matt Dolan, Roth Capital Partners.

You indicated you're off to a good start to the year.

I just wanted to touch on the volume guidance for the second quarter.

If I'm calculating right it's 8% or 9% growth year over year, versus a 15% rate in the first quarter and a high-teens type of number in the last couple of years.

Just walk us through what is difficult in terms of the comp relative to those historical numbers that you're expecting in the second quarter?

Sure.

Well, there's a couple different things working.

I'd say the biggest part of the challenge is that as other dental companies go out there and report, I don't think anybody is going to be describing the dental market as easy right now.

We believe we're going to do better than most.

The good news is our customers report what we'll call -- we keep stalling stable traffic, not booming.

GPs are still somewhat unwilling to try and up-sell a more valuable procedure, and unless traffic improves a bit we're going to have to keep working hard to make that happen.

That's maybe the back story.

We do believe within all that there are opportunities to go after the ortho volume, and certainly set ourselves up for summer.

I think -- and then we have plenty of plenty of economic issues around the world that keep us from being more bullish.

We think we can make good continued progress, and that's kind of how we're calling it.

Okay, but just to clarify, so has the macro environment therefore deteriorated a little bit?

Or why the decrease, I guess, is what were looking for?

I wouldn't say the macro environment -- I don't think it's getting any better.

We tend not to over-react in the near term to the big macro elements like consumer sentiment, which is back down now, and others.

We think the primary secular trend for us is patient traffic.

If patient traffic in general trends up, we think we can over-perform, especially on the GP side.

But I think what you're seeing is the total of all that already in market -- no new trends, just the challenges of pushing that up hill a little bit.

But again, I think we continue to feel solid about the overall growth story for the year.

Okay, great.

Second, my second question has to do with the margin.

I know you have some major customer events in the second quarter, but you're still in the high teens, in terms of operating margin through the first half of the year.

Where are you on the goal that you stated on the last call targeting the low end of your long-term range in the mid-20%s, in terms of an operating margin by around the end of this year?

Matt, setting one-time charges aside on a non-GAAP basis -- we describe our model that way -- I will continue to say we expect we can approach the low end of our -- we believe we'll be comfortably within our volume and revenue guidance.

I won't mess with every other element, other than to say on an operating margin line we believe we can approach the lower end of that, around 25%, by year end.

We believe that's important to do so, so we're going to keep working that way.

All right, that's great.

Thank you.

Thanks, Matt.

Next question please?

Robert Jones, Goldman Sachs.

Thanks for the questions.

Actually, just a follow-up to the first question.

Clearly, the first-quarter results from both a case and revenue perspective came in above guidance, so it does look like this year got off to a strong start.

But if we do think about some of the macro -- and more specifically, consumer data points that we've seen most recently in March, it certainly looks like things may have fallen off a bit.

I was just curious if you would be willing to share how the quarter itself trended, as we try to think about Q2.

Were you out of the gate strong in 1Q, and we saw things level off in March, or are you coming into Q2 on an upswing?

Let me be thoughtful about how I respond, because we generally don't provide a detailed view of our pipeline.

I think as we describe on the call, if we go back to Q4, Bob, the evolution in our Business was a pretty strong move towards the end of Q4.

That solid progress continued into Q1.

Certainly by the time we did our call we were commenting on, in a qualitative way, about volume bouncing back.

I would say the quarter generally evolved in a consistent way.

Again, not tearing the cover off the ball here, but solid progress.

I think SmartTrack and these other elements really have helped engage the ortho community, and we're seeing that around the world, as well, which is largely an ortho community outside North America for our customer base.

Very responsive to anything that helps treat more complex cases, which is their norm.

On the GP side, if as long as we can have steady patient traffic, our GP customers will at least stay involved.

It would be helpful if it was more robust, but we can certainly work with what we've got.

Again, the business continues to evolve.

We're not exactly linear, but I think it looks a little more predictable right now than it was during parts of 2012, notwithstanding what else could happen here.

I hope that answered your question.

No that does, that's helpful.

Just one within the category, the Express light category continues to grow impressively, certainly ahead of our expectations.

I was just curious if you could comment on more specifically where you see that growth coming from?

I guess what I'm getting at is, there's certainly always a fear or concern that growth could come at the expense of the full line.

Are you seeing these starts coming from historical cases that might have come from the full line, or is this really purely you penetrating into a category that wasn't necessarily being fully utilized before?

It's really the latter, Bob.

We've actually done a fair amount of work talking to our customers, and in most cases -- and I'll set North America where we been dealing with Express 5 a bit longer aside from the new i7 launch in UK and Europe -- we have seen virtually no cannibalization.

In fact, it's actually attracting some people that at least get started with just closing a very small space or reducing a very little bit of crowding.

What doctors are reporting for people that aren't ready to do a full treatment, $4,000, $5000, $6000 worth of treatment, they are in many cases getting engaged, finishing this six weeks, eight weeks, ten weeks of treatment, and then saying, boy, when I can I'm going to come back and do the rest of it, now that I am really aware.

We think if there is any cannibalization right now, it's too small for us to measure.

What it is doing is taking some share away from all the hundreds and thousands of little labs that have been apparently providing some of these very simple cases to both GPs and orthos, or in some cases an ortho may be doing a suck-down in their own lab.

For us, we saw this as something we could do better than most everybody else from a precision perspective.

Done properly, we ought to be able to move more in five stages than anybody else in the world, and more predictably.

We think it's actually positive, and perhaps it leads to a patient that only does a little bit of correction now, but now becoming much more aware of what they want, thinking about their broader treatment they come back and do full-on.

I think it's maybe just the reverse over time.

The UK's a little differently with the austerity.

We started in the UK for two reasons with the i7 pilot.

One is, we have a broader base of GP dentists there than elsewhere in Europe; and two, we have had some more localized competition there.

So we did a pilot and we got great response for it.

There's clearly a price point out there at the patient level, the consumer level, and there is an interest at the doctor level, both orthos and GPs.

We've rolled that out across our direct geographies in Europe now, and we expect that will take its place as an entry offering for minor malocclusions.

We think its upside in general.

And again, I'll repeat.

To the extent there's cannibalization, it's very small.

Got it.

Appreciate all the comments.

Thanks, Bob.

Next question please?

Steve Beuchaw, Morgan Stanley.

Guys, thanks for taking the questions.

I actually had just a couple of housekeeping items; and I don't know if this is for Tom, for Karen, or for Roger, but on the Vivera item that we had here in this quarter, $4.4 million as expected, is it right that we'll have no impact from that phenomenon in 2Q, or do we maybe get another potentially smaller impact?

We'll have Karen Silva our VP of Finance take this one.

She's the expert.

Hi, Steve this is Karen.

The Vivera release, the $4.4 million, was pulled into Q1.

Going forward, we don't expect additional pop in revenue related to the Vivera consolidation.

Okay, so we won't see anything about that in the next quarter's release?

Okay.

No.

And then -- I'm sorry?

I said no, that's correct.

Same question on the fourth-quarter item, the return reserve release -- no more impact from that, as well?

Oh, yes, you're talking about a $2.9-million release.

Is that what you're talking about?

In the fourth quarter, right.

Yes, in the Q1 we had a small release related -- it was $1.4 million related to the $2.9-million iTero program that we launched in the beginning of this quarter.

We do not foresee to run that program again, and will not have any additional one-time hits with that, as well.

Okay, great.

And just one for you, Tom.

I'm sorry, I saved the hard one for you.

We're in a bit of an air pocket here between now and the time we hear from the ITC.

I appreciate it's a tough topic, but I wonder if there's anything you can say to help us in the investment community broadly just to mention what the commentary from the ITC means -- how we should think about the process over the next couple of months, and then over the longer term?

Thanks.

Well, certainly we can't predict the future, but our team is extremely prepared for any scenario.

We are -- we certainly expect that we will prevail based on all of our insight and everything we've done.

We believe the law is on our side and the facts are on our side.

With that said, we're prepared for the best-case scenario, something in between, and the worst-case scenario.

This -- we have a lot more -- if the worst-case scenario were to happen, it's not our expectation, we have a lot of things we can go do, including putting our activity back in Texas back on.

I guess maybe to pile on a little bit, I've got Roger sitting right here.

He actually is still a lawyer besides acting as our CFO.

Maybe Roger, you want to put your dimension into that?

Steve, one simple thing to remind everybody of is that the remedy that is available at the ITC as a forum is exclusion from the domestic market.

So the judge's determination that we will get on May 6 will tell us whether he thinks, based on the case, that ClearCorrect infringes our patent, and because of that should be excluded from the domestic market.

That's what we're waiting to hear.

Now, that's what the judge thinks.

There is a period of time after the judge's decision is published where the side that loses has the opportunity to appeal to the entire commission, the ITC itself, and the times for all of those appeals processes to run doesn't end until September.

As Tom said, we're prepared for any situation that might start with the judge's ruling.

We remain cautiously optimistic that the ruling will be in our favor, and that ClearCorrect will be excluded from the domestic market.

Great, very helpful.

Thanks everyone.

Next question, operator?

Jonathan Block, Stifel Nicolas.

Great, guys.

Thanks and good afternoon.

Maybe the first, and maybe I can squeeze in three, but if we can just talk on the revenue recognition, or what you talked about on the course correction?

So, you reported $0.26 non-GAAP.

You took a $2.7-million deduction, if you would.

Is it fair to say relative to where we were and where you guided, that it's $0.28 to $0.29, if you go ahead and add that back?

That's part one of the question, so can we start there and you can answer that?

The answer's yes.

Okay, so then can you talk about 2Q?

Where I just want to be clear -- because there was a lot of comments but I don't think it was clear -- going forward, 2Q will be $700,000 hit?

If that's the case, why is it $700,000 and not the $2.7 million you experienced in 1Q?

The $700,000 is the amount of revenue that we will not book because we're not going to be charging for mid-course correction.

The $700,000 is just that, lost revenue.

The revenue guidance that we've given you, of course, has the deferral for future free mid-course corrections built into it.

Okay.

I guess maybe we could take this off line, but my last one just to clarify is, why was the hit $2.7 million in 1Q and I believe you're saying the hit in 2Q will be $700,000.

All right.

Go ahead, Karen.

Hi, John, it's Karen.

The $2.7 million is related to open cases.

We are grandfathering in all those cases that are open to allow for mid-course correction.

There you go, that's the answer.

Okay.

Again all the changes, the goodwill impairments for three quarters in a row unfortunately just make people not focus on the fundamentals of the story, which are actually been very solid, but that's the frustration.

The second one, Tom, is on the interoperability or possibility of one with other scanners, that was the first time I've actually heard you float that it's possible.

Can you maybe elaborate a bit?

You've written down all the goodwill.

What are you seeing with the guys that have a scanner and are they doing more Invisalign?

Does that make you much more receptive to possibly entering into an agreement with another scanner company?

Giving your less-than-wonderful set up about the goodwill, we have to separate and we're responsible for good accounting.

I'm going to pull apart as we think about the business going forward our ability to create economic value, which very much still exists as we think about the benefits over time, aside from the reality of dealing with softening outlook in the near to mid term, which we've got to deal with in terms of our accounting processes.

I understand it's not what we would like to be able to report, but we're going to deal with that reality.

Moving forward, we know that scanning as the front-end of the process is going to be a very valuable part of Invisalign going forward.

You can see from roughly a 200-basis-point-per-quarter increase on our iTero scanners alone what's going on with our own base.

All the effects are positive there.

As we see the ability to move high-value applications like the Outcome Simulator out to those kinds of platforms, we've known for a long time that if other potential scanner platforms could be made to work for what we believe is the most demanding application in dentistry today -- it's not a quadrant or individual tooth, even for surgical cases.

This is full-arch inter-proximal space, gingival margins, everything in detail, all having to be very accurate put together.

That's been a very hard job for anybody else's scanner, which is one of the things that led us to Cadent in the first place.

At the time, they were the only scanner that even had a shot.

With that said, I would say from a strategic perspective we are open-minded about considering some other scanners, but I'm not going to talk in more detail about what that path might look like, or what the implications might be, because it is an R&D project to consider, evaluate, and qualify such a thing.

Again, when there is news to report, we will do so.

Last question if I could just slip it in.

Is there any reason why you guys were light on the share repo this quarter?

Is it something where you're aggressive in the high 20%s but you sort of take your foot off the gas in the low 30%s?

Well, I guess we have a policy of as a Company of open-window periods; and during this open-window period the Company was evaluating impairment, and we felt it constrained us from acting on any share repurchases, the same as executive or Board buy-backs or sales.

I'll just say it that way.

We've been consistent the way we look at that policy.

All right.

Thanks for your time.

Thanks, John.

Next question please.

John Kreger, William Blair.

Hi, thanks very much.

Just to dig in a little bit to the ASP trend.

This quarter you were down a bit; year over year in the fourth quarter you are up a bit.

From a longer-term perspective, what is your current thinking about how the ASP will trend?

I assume it's down, but could you maybe size that for us?

We've actually been doing some internal modeling, John, to answer that same question.

I guess we're not ready to put it out there yet, but if I could, I would expect it's probably going to go down a bit over time.

I don't want to put tighter dimensions in that, because separating everything else aside, we expect mix to play a bigger role over time with the large base of GP customers North America, and price sensitivity around the world for simple cases.

So that will -- in our view that's a positive reason for average ASP to go down.

We certainly have FX that gives and takes on a quarterly basis, but we usually speak to FX at a high level, so you can kind back into what that might be.

We're playing around with the idea of putting out like a net adjusted ASP.

Because there's puts and takes, we've added some new complexities, certainly with mid-course correction pricing.

Those kinds of policy change -- have some movement on ASP over time.

But in general, because of mix and because of widening advantage programs, which we look at as a positive, and to a lesser extent promotions, we think pricing will be stable but will probably drift down a bit over time, separate and aside from one-time events where we might change policies, like warranty or something like that.

Great, helpful, thank you.

Just a quick follow-up.

The Advantage rebate in particular, have you adjusted any of the terms of that, or do you expect to as you go through the year?

We consider looking at that all the time.

We would certainly always reserve the right to do that, but if anything we're beefing up the value in that program, what it mean to be elite, super-elite, and premiere, and making sure that value proposition is even better.

We've not adjusted to date any of the pricing terms, numbers, or any thing else.

Okay, great, thanks.

Finally, very impressive growth in the Express product line.

If that continues, what -- does that have a negative impact, margin impact, on your operating margin?

No.

If we had to stack up kind of an activity-based cost model for our go-to-market, it's considered kind of gravy.

Not a lot of effort goes into those cases.

These are -- in general, these are customers that have a bit more experience with the product, so for them to do a five-stage case, it's really a scenario for them where a patient is probably declining full treatment, and it may be right now for price.

They're saying well how about considering just a minor correction for $1,200 or $1,500, and the patient says great.

They were going to walk out and do nothing; instead, they get them to do something.

Often times the conversations we're hearing may very well lead them to full treatment down the road with that doc.

So our costs of that set-up are roughly the same as any other case would be, and so our margins shouldn't be any worse.

Okay, great.

Thank you.

Thanks, John.

Brandon Couillard, Jefferies.

Tom, where do we stand in terms of the incremental sales force expansion plans that you had for the year?

I believe it was a 10% increase or so off the 200 base?

We're right on track with that.

Our goal was to make sure that they were in and running well before the end of the first half.

I think -- I'm looking at Shirley for a second.

I'm not sure if that will be updated in our Q filing here for our sales force, but it probably will be.

I won't give you the numbers now, but if you look in the Q in a few weeks, you'll probably see the latest roster numbers.

Thanks, and just an update on where we stand in terms of the CFO search?

Good question.

I will say in the interim, Roger and Karen and other members of our outstanding finance team are doing a great job, and not a surprise to me, but they are doing a great job for us.

We are seeing some real good talent.

We're -- and I'm comfortable that process is progressing well.

All right, thank you.

Operator, we'll take one more question please.

Glen Santangelo, Credit Suisse.

Tom, I just wanted to follow up with you on some of the comments around ClearCorrect from earlier in the call.

I'm just kind of curious -- assuming that the court decision ultimately goes in your favor, it seems like a pretty greenfield -- a pretty sizeable greenfield opportunity.

Is it your sense that those dentists that are using that competing product that's all they use, and so presumably that would be some real easy market opportunity for you to gain relatively quickly?

If you agree with that, I'm also curious on the negative side.

I know you're not assuming it, but let's just say for example the binary event is somewhat negative.

How do you ultimately react from something like that from a competitive perspective?

And does anything really change?

I want to be careful A, not to speculate about what happens with customers and market and stuff like that; and B, I'd rather not speculate about either a good or a bad outcome.

The simple fact is we think roughly a year ago they were taking a little bit of share.

We think a lot of that was driven by Groupon.

They've kind of changed their model a bit, where they've gone back more to a lab-based model, and I don't think they have a sales force really in place of much sorts right now.

Look, they're working very hard and doing the best they can to make it, and we think we've retaken the share we believe we had lost.

If you look at Express 5, Express 10, it's hitting a price point where we're -- forget ClearCorrect for a moment -- there's a lot of little labs producing five-, six-, seven-stage cases for doctors.

I think that's the greenfield opportunity, more so than ClearCorrect.

Again, I want to be very thoughtful about not thinking too far ahead with that, or not thinking about scenarios.

But we think the bigger opportunity is to engage the wider slice of dentistry over time for simple cases that are easy to do, and are very clear and straightforward about what treatment that patient will wind up with.

So there's an awful lot out there, and over time we hope to get at it.

Maybe if I just ask you a follow-up question, then.

You obviously talked about taking the Asia-Pac team back in house here in the next couple weeks.

It sounds like you're on target for that.

Have you -- can you give us a little bit more details in terms of, do you think that will enhance your ability to accelerate the revenue growth in the market, and what does that -- can you give us some -- a little bit more clarity, in terms of what that's going to do to your cost structure?

Well, certainly, as we've said we've kind of been front-running some OpEx as a way to transition this product.

It's technically an acquisition, but very small.

The reality is, we've been bridging.

Without having control of the business, we've been bridging some OpEx support, so that instead of stepping back away knowing there was an end point, the ownership could continue to build the business.

We've been bridging some of those customer events and those kinds of things that were all agreed upon in advance.

So we've already had some OpEx pressure and head wind as early as Q4 last year and into Q1, which we spoke about, but didn't give dimensions to.

We'll pick up that entire cost structure May 1, and over some months, I think, we'll be very comfortable that the volume will start to cover that.

If you go back to our last annual report where we had a diagram -- I think, Shirley, the number was 3% for our -- in 2011, for our distributor geographies.

Just mapping this, that number would now -- doubling that revenue would be -- taking out Asia-Pacific -- would be about $6 million of the international.

I think it's going to double that overnight, and we're pretty comfortable that the contribution margins will work themselves out within a couple of months.

But I think the bigger thing is we have an opportunity to leverage skills and experience across Asia, where in general they're treating far more complex cases.

We're pretty excited about pulling together this Pan-Asia team with a very small team based in Singapore right perfectly in the middle.

I think that's the opportunity, and I think we can leverage what's going on so well with these distributors with what we've done well in China and Japan direct.

Over time, as I think I indicated, this can become a much more significant contributor to our long-term growth.

Okay, thanks a lot.

Thanks very much, Glenn.

Jeffrey Matthews, Ram Partners.

Great.

I wanted to follow up quickly on that last question, and then switch to Spain and Italy.

But have you learned anything about Asia-Pacific and the opportunities there that you weren't fully aware of, now that you're getting into it, or is it hands-off until May 1?

In terms of -- well, first of all we've been in Asia for five years very quietly.

Longer than that, eight and a half in Japan and five years in China, although we didn't have -- because we actually set up our search setting up our entity in China that long ago, filing IP, et cetera.

In terms of our distributor geographies, we've been very thoughtful and careful about everything you could imagine.

There's nothing new we've learned and we've been -- this is as friendly a process as you can imagine with a lot of contact with -- it's a small team in total, but a lot of contact with the entire team, including all of our regulatory and compliance people, our sales leadership now with a very experienced medical device executive right there, ensuring that we go do all the right things in all the right ways.

What I'd say a clear learning for us has less to do with the distributor team, and more to do with the excitement from the customer base that they're going to be working directly with the Company again, it'll just make it easier to get things done.

They are -- again in Asia, they treat the most complex cases in the world.

We have a -- I think we have one doctor In Japan treating a 93-stage case, which is headed towards four years of treatment.

They are very excited about the evolution of technology.

I think being able to more directly engage with them is going to help us accelerate their adoption.

I think we've got some work to do there.

There will be plenty more to report, but that is going to be a good journey for all of us.

Got it.

Thanks, that's great.

If I could just ask, I'm just intrigued by you doing well and calling out Spain and Italy.

What is it?

Is it a good sales team?

What is it about the product or its evolution of the lifetime right now that's making you do well in an area so economically depressed?

Well, it sounds like you're actually there trying to keep the economy going, Jeff.

If I heard correctly, you're in Italy.

The reality is we have very small penetration, and there's still a fairly significant population that cares about aesthetics and about function.

We see this in Germany, we see this in the UK, we see this in Spain and Italy.

Even in areas where there is real severe austerity and challenges that you can see, there are people with wealth that want a healthier, more beautiful smile, and we're tapping into that.

The more we can, in a cost-effective way, engage directly with the consumer, and there our different rules in every country around medical devices and consumer marketing, the more effective we'll be at creating demand.

We're just starting to scale that now.

I think over time, and goodness with any improvement at all in the economy in Europe, we should be able to continue to do well.

Got it, thanks.

Thanks, Jeff.

Well, thanks everyone.

We appreciate you joining us on the conference call today, look forward to seeing you at upcoming financial conferences and industry meetings.

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

Have a great day.

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

Thank you for your participation.

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