愛齊科技 (ALGN) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Align Technology fourth-quarter and fiscal year ended 2013 financial results conference.

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Ms. Stacy, you may begin.

Good afternoon and thank you for joining us.

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

Joining me today for the call is Tom Prescott, President and CEO; and David White, CFO.

We issued fourth-quarter and fiscal-year 2013 financial results today via Marketwired, which is available on our website at investor.aligntech.com.

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

A telephone replay will be available today by approximately 5:30 PM Eastern Time through 5:30 PM Eastern Time on February 7. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13573937 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 and fiscal year of 2014.

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 Form 10-K for the fiscal year ended December 31, 2012.

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

During today's conference call we will provide listeners with several financial metrics determined on a non-GAAP basis to aid comparisons between our current and historical financial results.

These items, together with the corresponding GAAP numbers and the reconciliations to the comparable GAAP financial measures, 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 have 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.

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

Tom?

Thanks, Shirley.

Good afternoon, everyone, and thank you all for joining us.

On the call today I will provide some highlights from our fourth quarter and briefly discuss the performance of our two operating segments, Invisalign clear aligners, or our aligner segment; and iTero scanner and CAD/CAM services, our scanner segment; including some color on our orthodontist and GP dentist customers as well as our geographies around the world.

David will then share more detail on our fourth-quarter and full-year financials and discuss our outlook for the first quarter in broader view into how we see 2014 shaping up.

I will then come back and summarize a few key points and open the call to your questions.

The fourth quarter was a solid finish to the year for Align, and we are pleased to have delivered better-than-expected revenue, operating margins, and earnings, driven by strong Invisalign growth from our international doctors in Europe and Asia-Pacific.

North America Invisalign case shipments were sequentially flat.

However, Invisalign case receipts were softer than expected in December, as many orthodontist and GP dentist practices had fewer days in office due to the timing of the four major holidays between Thanksgiving and New Year's Day.

However, January receipts are improving, and it appears that doctors and their patients are getting back to business.

Overall, 2013 was a very good year, and our strong performance reflects continued progress in execution of our strategic growth drivers.

Broadly stated, they are market expansion, doctor preference, and brand strength.

I will touch on each of these very briefly.

First, market expansion.

Over the past year we have continued expanding in our existing markets through targeted investments as well as opening up new geographies in markets.

For example, in North America, in Europe, in China and Japan, where we have had an existing direct coverage model, we have continued to invest in sales coverage and professional marketing and education programs, along with consumer marketing in selected country markets.

This past May, we brought our former Asia-Pacific distributor in-house and are making investments across that region into a new pan-Asia team, and to very good effect.

Second, doctor preference, which is aimed at creating greater doctor preference for Invisalign, with roots both in product development and innovation so our doctors have the confidence and motivation to lead with Invisalign for every patient that walks into their practice.

In addition, we have great opportunities to improve the customer experience so it becomes easier to integrate Invisalign into their practice.

And third, brand strength.

We are building a superior brand through a very integrated consumer marketing platform that includes TV, media, social networking, and event marketing.

Our goals are to make Invisalign a household name worldwide and to motivate consumers to seek Invisalign treatment.

We continued to successfully leverage the campaign we kicked off last May in North America.

In Europe we have increased awareness significantly through our first integrated consumer marketing campaign in all major direct markets.

There are plenty of highlights here, but since we included some details on our consumer activities in our webcast slides, I will skip the details and let you see that for yourself.

Taken together, these three key strategic drivers provide us with a set of fairly predictable levers to build the business, giving us increased confidence in our continued long-term growth.

With these strategic growth drivers in mind, let's talk about how we did in Q4 by sharing some customer and geographic highlights, starting off with North America.

For North American orthodontists, Q4 case volume increased 21% year over year and decreased 3% sequentially.

Strong year-over-year growth reflects continued utilization and adoption growth as orthodontists increasingly show more confidence using Invisalign.

We are also getting growth from actively re-engaging orthodontic practices that were previously trained, some many years ago, but were not submitting cases.

The teenager segment for Invisalign remains the largest growth opportunity, as it is so large existing orthodontic segment globally, and we continue to take share from traditional wires and brackets.

Despite Q4 being a seasonally slower period for teen case starts, the total number of teenagers that began treatment with Invisalign grew 25% year over year to comprise approximately a quarter of our total volume.

For North American GP dentists, our Q4 Invisalign case volume increased 15% year over year and 3% sequentially, primarily reflecting continued expansion of our GP customer base and increased utilization of our Invisalign full product.

GP dentists are one of the keys to driving growth in the adult segment, and this month we launched a new CE 1 training course, now called Invisalign Fundamentals, designed to improve practice integration and increase utilization for newly-trained doctors.

Based on a series of pilots for this new Fundamentals course, we saw 90 days post-training submissions per doctor increase 3X -- over 3X, and the number of doctors submitting cases increase 2x compared to the prior CE 1 training program.

We are implementing this new Invisalign Fundamentals program across North America and will look for opportunities to just our international training programs as we work to help our GP practices worldwide more successfully adopt Invisalign into their practices.

For international doctors, Q4 Invisalign case volume increased 39% year over year and 16% sequentially, with strong growth from both Europe and Asia-Pacific.

Q4 was a record quarter for Europe, with Invisalign case shipments up 32% year over year and 22% sequentially.

We experienced very strong growth across all our markets, led by Spain, France, Germany, and Italy.

We also continue to see signs of recovery in the UK.

We have continued to train new doctors and expand our customer base.

We have increased the number of active submitters nicely, partly as a result of our continuing incremental investments in sales coverage.

In Q4 growth was largely driven by orthodontist customers, reflecting increased confidence in Invisalign, significantly a result of continued product evolutions, such as Invisalign G4 and SmartTrack.

We also saw a good growth in the minor malocclusion segment with Invisalign i7 in some country markets, underlying the growing importance of this more price-sensitive consumer segment in Europe.

Even as we demonstrate continued progress in Europe, today we're announcing plans to further expand our directly covered geography in the EMEA region.

Our EMEA distribution partner has been covering 88 country markets, from Scandinavia to Africa, and from Eastern Europe to the Middle East, and continues to make good progress in building the base of Invisalign-trained doctors in those regions.

Given the significant long-term potential this geography represents and the leverage we can provide by utilizing our direct coverage model, beginning in February of 2014 we will convert 11 countries in the direct sales regions.

This expansion in direct coverage geographies in EMEA is very different than bolting on a more sizable established business, like we did last year with our Asia-Pacific distributor.

In this case, we expect to leverage our existing infrastructure and resources in existing country markets to bring sales coverage and customer support to these new countries.

In fact, most of these new country markets are adjacent to our current directly covered European countries.

As a result, most of the new country markets will be managed from our existing sales in country management structure, while customer support functions will be based in Amsterdam.

This move is very important to support our long-term strategy.

And over time, as these markets begin to mature, it will directly contribute towards our growth objectives.

There was a small volume of business currently represented by our EMEA distributor in these country markets; we don't anticipate this will have a material effect on our financial results for some time.

Moving to Asia-Pacific, in Q4 our Asia-Pacific Invisalign case volume increased 53% year over year and 8% sequentially, reflecting strong organic growth across our direct country markets amid a very active quarter for our Asia-Pacific team.

I will share a few highlights of that activity.

In Japan we hosted an Invisalign clinical seminar with over 100 key doctors, as well as a top providers roundtable.

A smile awareness event focused on young female consumers was held in Osaka in November.

This meeting was like the Straight Talk programs we hold in North America, which are designed to help consumers interested in treatment understand how to get a healthy, beautiful smile and connect directly with Invisalign providers.

In China we launched our new SmartTrack material with a series of events, including partnering with Beijing Capital Medical Hospital, as well as the China Orthodontics Forum, held in Suzhou, which was attended by the top orthodontic key opinion leaders in China.

Finally, in Australia/New Zealand, we ran marketing campaigns in conjunction with the sold-out concert tour by teen band sensation One Direction, helping to create greater consumer awareness among teenagers and their parents.

I will move now to discuss one of the key drivers behind our continued growth, which is our accelerating impact from continued product innovation as we aim to create even greater doctor preference for Invisalign.

A key factor in delivering greater predictability involves our ongoing efforts to project Invisalign treatment into more complex cases, effectively expanding clinical applicability.

Deep-bite cases are a good and an important example of this dynamic, as almost half of the orthodontic case starts in North America and Europe, and almost a third of malocclusions that present to doctors in Asia, involve deep bite.

As the science, technology, and clinical capability behind Invisalign evolves and expands, our ability to gain incremental share of orthodontic starts expands with it.

In December we announced Invisalign G5, which includes comprehensive features to enable deep bite treatment with Invisalign, making it far easier for our customers to treat this large segment of the market.

And today we announced the upcoming release of ClinCheck Pro, the next-generation Invisalign treatment software tool designed to provide more precise control over final tooth position and help Invisalign providers achieve their treatment goals.

This new release will give doctors more precise control over the final tooth position and will help them more easily achieve their treatment goals.

In effect, our customers will now be able to show us, rather than just telling us, where they want that final tooth position.

Moving away from the Invisalign franchise for just a moment, in dental imaging equipment we also continue to build a great digital footprint through a growing installed base of iTero scanners despite a very competitive market.

In Q4 our scanner segment revenues grew 21% year over year and 10% sequentially, and continues to benefit from leveraging our compliance sales and marketing resources while taking full advantage of Invisalign and industry events.

We generated a lot of interest and sold a bunch of iTero scanners at the American Dental Association meeting in New Orleans in October as well as at the Greater New York Dental Show at the end of November.

Our customers have recognized that having a iTero scanner chairside is a great way to improve practice effectiveness for Invisalign, underscoring the reason we continue to see substantial growth in utilization among customers with an iTero scanner.

Intraoral scanning in general, with iTero in particular, is a key future trend in dentistry.

As I mentioned a moment ago, we continue to see Invisalign case submissions from digitally scanned impressions increase steadily.

As of Q4 the percentage of Invisalign cases submitted with a digital scanner in North America rose to 26.7% compared to 25.3% in Q3 and 17.3% in Q4 a year ago.

Doctors, their staff members, and especially patients are all happy about this trend, as they see faster cycle times, better aligner fit, and a far better customer experience.

To help accelerate that positive trend, a few weeks ago we announced that we qualified the 3M True Definition scanner for use with Invisalign case submissions.

This qualification will now enable Invisalign providers with a True Definition scanner to submit a digital impression in place of a traditional PVS impression as part of the Invisalign case submission process.

3M True Definition scanner is currently the only third-party scanner that has been qualified for use with Invisalign treatment.

We continue to believe in an open systems approach to digital impressions and remain committed to working with other intraoral scanning companies interested in developing interoperability for use with Invisalign treatment.

Our ultimate goal is to build the Invisalign franchise.

And while we're pleased to have one of the best scanners on the market with the most utility for our customers, we will continue to do everything we can to create additional leverage for our world-class Invisalign business.

And with that, I will now turn the call over it to David for a review of our Q4 financial results.

David?

Thanks, Tom.

Before I get into the details, I'd like to note that unless stated otherwise, all of the financial information I will discuss will be presented on a GAAP basis.

With that, let's review our fourth-quarter and 2013 financial results.

As Tom mentioned, our revenue for the fourth quarter was a record $178.3 million, up 24.8% from the corresponding quarter a year ago, and up 8.4% from the prior quarter.

Fourth-quarter clear aligner revenue was $166.2 million, was up 25.1% year over year, and was up 8.3% sequentially.

Our year-over-year growth reflected higher Invisalign volumes from our orthodontists and GP dentists as well as higher international ASPs.

Sequential revenue growth was primarily driven by higher case volume from our international geographies, which also had the effect of increasing our overall ASPs as a result of higher pricing internationally.

We also had $1.3 million benefit from foreign exchange rates.

For the fourth quarter, total Invisalign shipments increased to 111.1 thousand cases.

Year-over-year growth of 22.8% was driven by both customer base expansion as well as increased utilization.

We continued to expand our base of Invisalign providers through clinical education and training, and in Q4 we added 105 new North American orthodontists; 1,355 new North America GP dentists; and 1,060 new international doctors, for a total of 2,520 new Invisalign doctors.

Total Invisalign utilization for Q4 was 4.4 cases per doctor, a year over year increase from 4.1 cases per doctor, and up slightly from 4.3 cases in Q3.

Improvements in product and technology over the past few years, including G4 and SmartTrack aligner material, continues to strengthen our doctors' clinical confidence in the use of Invisalign, such that they now utilize Invisalign more often and on more complex cases.

Fourth quarter revenue for our scanner segment increased to $12.1 million.

This represented a 20.9% increase year over year and a 10.1% sequential increase over the third quarter, reflecting continued penetration and market share gains.

Moving on to gross margin, fourth-quarter overall gross margin was 76.5%, up 2 points year over year and up sequentially 0.5 point.

Clear aligner gross margin for the fourth quarter was 79.8%.

This was up one point year over year and flat sequentially.

The year-over-year increase was primarily the result of higher ASPs and improved manufacturing absorption from higher case shipment volumes.

Fourth-quarter gross margins benefited from one-time items, of which warranty costs were one, and amounted to approximately $2.6 million or 1.5 points.

Q4 gross margin for our scanner segment was 31.1%.

This was up 12.6 points year over year and up 8.9 points sequentially.

Both the year-over-year and sequential increases were primarily the result of higher manufacturing absorption on higher volumes as well as higher ASPs due to less promotional activity.

Q4 operating expenses were $83.6 million.

This was up $6.1 million year over year when compared to our non-GAAP operating expenses incidental to the growth of our business, as well as the impact of the medical device excise tax levied on our US revenues.

On a sequential basis, operating expenses were essentially flat.

Fourth-quarter spending, however, benefited from $2.5 million of previous stock compensation expense which was reversed as a result of previously-announced executive departures.

Our fourth-quarter operating margin was 29.7%, up 9.4 points when compared to our non-GAAP operating margin reported last year, and up 4.5 points sequentially, directly related to our higher volumes and gross margins, as I just described.

With regards to our fourth-quarter tax provision, our tax rate was 19.5%.

Fourth-quarter diluted earnings per share was $0.51 compared to non-GAAP diluted EPS of $0.26 reported in the same quarter last year and compared to $0.42 reported in Q3.

Moving onto the balance sheet, our 2013 year-end accounts receivable balance was $113.3 million, up approximately 3.8% sequentially.

Our overall DSO was 57 days, a five-day improvement over the same period a year ago and a three-day improvement sequentially.

Capital expenditures for the full year were $19.4 million and were $4.2 million for the fourth quarter.

Cash flow from operations for the full year was $186 million and was $67.2 million for the fourth quarter.

And free cash flow for the full year, defined as cash flow from operations less capital expenditures, amounted to $166.6 million and $62.9 million for the fourth quarter.

Cash, cash equivalents, and marketable securities, including both short- and long-term investments, at year-end amounted to $472 million.

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

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

Revenue was a record $660.2 million, up 17.9% year over year.

In 2013 we shipped 422.3 thousand Invisalign cases, up 16.2%.

North America volumes were up 13.4%, and international volumes up 25% year over year.

Full-year GAAP operating income was $94.2 million or 14.3% of revenue.

Non-GAAP operating income was $161.2 million or 24.4%.

2013 GAAP diluted EPS was $0.78 and non-GAAP diluted EPS was $1.54.

Let's now turn to our business outlook for the first quarter and the factors that inform our view.

As Tom said earlier, Invisalign case receipts for North American orthodontists and GP dentists were softer than expected in December.

While we are seeing improving trends, our outlook for Q1 reflects a slower start to the quarter.

Therefore, we expect North American Invisalign volume to be flat to slightly up sequentially.

Our first quarter has historically been a slower period for our international doctors, with fewer days in the office due to winter holidays in Europe and the Lunar New Year in Asia-Pacific.

As such, we expect our international Invisalign volume to be slightly down from the fourth quarter.

Q1 has historically been a slower period for equipment sales, and we expect our scanner segment to be flat in Q1.

Gross margin is expected to be down sequentially in Q1 as a result of the one-time benefits in Q4 that I described earlier, which are not expected to recur.

Operating expenses will increase quarter over quarter based on several factors.

First of all, as I stated earlier, Q4 benefited from a one-time stock-based compensation reversal.

Secondly, we expect employee compensation-related costs to increase, given we operate on annual cycle for all employee compensation reviews, including salary increases and promotions as well as annual stock grants.

Those increases are effective in the first quarter.

Further, employer-paid payroll taxes, such as Social Security payments in the US, reset with the start of a new calendar year.

And finally, we continue to invest in our long-term growth drivers, as Tom discussed earlier.

With this as a backdrop, we expect the first quarter to shape up as follows.

Invisalign case volume is anticipated to be in the range of 110.1 thousand to 113.1 thousand cases.

We expect net revenues to be in the range of $175.2 million to $179.6 million, reflecting year-over-year growth of 14% to 17%.

We expect gross margin to be in the range of 73.9% to 74.5%.

We expect operating expenses to be in the range of $94.5 million to $96.9 million.

Our operating margin should be approximately 20.5%.

Our effective tax rate should be approximately 22.5%, and diluted shares outstanding to be approximately 82.8 million.

Taken together, we expect diluted EPS to be in the range of $0.32 to $0.34.

Now I would like to provide some directional comments for 2014.

We're excited about 2014 and believe we can deliver a great year.

As Tom highlighted in his comments, we have a lot of opportunity still ahead of us to expand our market penetration and share.

Those opportunities, such as expanding our sales coverage and product offerings, including Invisalign G5 for deep bite, involve multi-year investments.

We intend to continue these successful investments.

For example, while we may have recently announced our deep bite product, we are far from being done with investing into the Invisalign product or for going after new indications.

Follow-on, go-to-market investments and commercialization efforts will be important to us to fully realize the deep bite opportunity.

We believe investments like these will lay the foundation for long-term, sustainable growth that will far outpace industry growth rates and perpetuate our success in gaining share.

While we haven't had a practice of providing full-year guidance, we have established a pattern of delivering results consistent with our long-term financial model in the areas of top-line growth and gross margins.

As for 2014, we believe in general that we can deliver top-line growth in gross margins consistent with that model.

While in the second half of 2013 delivering operating margins within our model, we haven't delivered full-year results within that model as yet.

As we have previously stated, our goal is to be within that long-term operating model margin target of 25% to 30% and operate within that model for a full year.

Given our slower start in 2014 in North America, and the follow-on investments I just referred to, we feel an operating margin for the full year that is close to our consistent with 2013 actual results is more likely, and something we would feel proud of, given the seeds we're planning for the future.

With that, I will now turn the time back over to Tom for closing comments.

Thanks, David.

As we have described, 2013 was a terrific year for Invisalign customers, their patients, our shareholders, and the entire Align technology team.

We believe sustained focus on the right value drivers will continue these positive trends and can move us closer to our long-term goal of having clear aligner therapy someday become the standard of care in orthodontics.

On the scanner side of the business, we continue to build a strong installed base and are increasingly leveraging that customer base to the benefit of Invisalign treatment and better restorative dentistry.

Through the right investments we expect to continue our strong growth rates multiples above market growth rates in virtually every geography.

Even as we managed through the many attractive ROI investment choices across the business, we will continue to seek operating leverage in the business.

While December and early January receipts were slower than expected in North America, we fully expect to revert to the type of growth expected and in the direction of what we're seeing in our other regions around the world.

The fact remains we have tremendous headroom for growth in every market area, which reinforces why we keep investing in the right value drivers.

Over the past few weeks we kicked off our 2014 fiscal year around the world with sales meetings in North America, in Asia, and in Europe.

At every meeting we reinforced our vision for long-term market leadership, ensured that each team was aligned with our 2014 and long-term goals, and shared our collective passion for innovation, which drives this Company to be different than everyone else in our industry.

I am very excited about what I believe will be a terrific year and look forward to spend time with you at industry events like Chicago Midwinter in February, along with other investor conferences, so we can discuss our plans and progress further.

And with that, let's go back to the operator for some questions.

Operator?

(Operator Instructions) Jeremy Feffer, Cantor Fitzgerald.

Wanted to start first on pricing.

Obviously, you guys had a tremendous trend or performance in O-US, but just want to get some more color on what was going on in the US, particularly with the GP dentists.

David, do you want to take that one?

GP dentist pricing?

I guess in general we saw lower activity with GPs in general; didn't get quite the growth we would have expected.

Concurrently, we saw better growth out of orthos.

Maybe saying it differently, less of a downturn than normal.

So that GP volume, much of that was among, I would say, lower- to middle-volume users; and more of them paid full price versus advantage-based.

That is pretty simple.

The second part is probably more of a migration towards Invisalign Express 10 from 5 and more full cases.

All those things played together for that higher ASP in North America.

And then sticking with the GP dentists, you had, I think, the highest number of shipments to dentists, and you trained the most number of dentists.

What are you seeing going forward as patient visits start to stabilize and improve a little bit?

Getting their utilization numbers up -- are you seeing, maybe from the new 3M scanner and from of these other initiatives -- do you see their utilization starting to pick up going forward?

No, I think, Jeremy, that this is one of the puzzles we've got to solve over time.

In my comments I talked about the new Invisalign Fundamentals training program.

We're hopeful that that is going to help.

Fitting Invisalign or orthodontic practice into a busy general dentist office is very different from most of their other procedures.

And so we want them to choose the right case and treat those cases really, really well.

And sometimes, for an adult, include some restorative with that.

Oftentimes adults need some of that.

So it can be a great fit.

It is not for every practice.

And orthodontics is complex.

With all that said, the Invisalign Fundamentals -- out of three pilots we put on, we're very pleased to see, kind of post-90 days, much better than what we would see in the past with our own CE 1. So with that, going forward we would be hopefully better able to engage the right practices, get share of mind, and have them get great success for their patients and their practice.

But this is a long-term journey.

And we have to balance this.

We're always focused on the specialty of orthodontics, but many adults seek their general dentist out for orthodontic advice and for treatment, so we want to be in both places.

And just going to squeeze one more quickly, and then I will jump back in queue.

Can you comment at all on any possible negotiations going on with other scanner manufacturers?

We only announce R&D and pipeline when it is finished.

And what we had said -- we have tried to be very clear that our intent is to work with appropriate other players with the right kind of scanners that we could qualify.

But it is an extensive process, and it takes time.

When there is news, you'll hear it.

Brandon Couillard, Jefferies.

Tom, would you elaborate on your efforts to target those legacy ortho users that you haven't seen as customers in recent years?

And any chance you could quantify the percentage of the overall orthodontic market that that customer base would comprise?

Well, I think you could back into it with the numbers we provide a little bit.

And each year in North America, for example, we slightly grow the base of orthodontists.

I think we haven't put out final numbers yet -- probably would be in our K or something -- with the number of orthodontists we did business with in North America.

We're still counting all that up.

But that number has grown, not hugely, but nicely each year.

And that is a direct reflection of this re-engagement.

We are really not training that many new orthodontists.

We are maybe retraining them or bringing them back in, sometimes in university settings; other times in other settings.

But in many cases early orthodontists with Invisalign didn't find us ready for prime time.

And I would have to argue they were probably right.

As the product has dramatically evolved, as our capabilities have grown, they are able to feel increasingly that they don't have to make any clinical trade-offs, even treating harder cases.

And as they see their colleagues getting great clinical results and practice success, it tends to draw them back to us.

It is a slow, steady process.

And we are happy to see it just in the right direction.

But there's nothing more quantitative I can provide there.

And then on the ITC case, can you just give us an update on your view of how that is progressing, and the general issues that they have opened up to public comment now, and how significant they might or might not be?

As part of our normal practice, I have actually got Roger George, our General Counsel in here.

So I'd like to ask Roger to take that question, please.

We really don't know much more than what the ITC has done.

They posted on their website exactly what the public has seen and it is what we have seen.

We've had no other communication from them.

We have no sense from anyone internally at the ITC, on the ITC staff, why they have asked for the individual commentary.

And so we're basically waiting to find out ourselves.

Joe Block (sic - Jonathan Block), Stifel.

I just changed my name, I guess.

We will take a call from Jon Block, I think.

I hate to bring everyone here, but I just need some clarity.

So you beat numbers handily for the quarter on the bottom line by whatever it is, $0.08 or $0.09, but you called out a weak December.

And so can you help me with that, Tom or David?

In other words, the way you guys recognize revenue, does your weak December -- in terms of receipts, is that reflected in January sales?

Or was your weak December reflected in your 4Q numbers, if that makes sense?

This is David.

I will see if I can field that.

So it actually depends upon exactly when a doctor approves a ClinCheck treatment plan.

If that happens early enough in the month of December, then we typically can turn that shipment around, and we will take revenue for it in the quarter.

To the extent it happens late in the quarter, it may be difficult for us to turn that around and actually deliver it to the doctor by that time period.

The impact that has, potentially, in terms of a weak December has on our businesses is obviously we see some revenue fall off possibly in December; but it also means a slower amount of -- you might call it backlog of cases that we are starting January with.

And so that, coupled with the fact that January started off a little bit slow as well -- those two informed our guidance as to why we are guiding where we are for Q1.

Understood.

And I don't want to put words in your mouth, but it seems like it's safe to say that the weak December weighed on 1Q guide a little bit, right?

Again, some was in December, but some slipped into January, correct?

Certainly it has some bearing in how we look forward, correct.

And then, more importantly, long term -- and there is a lot that I would love to touch on, but I will just cherry pick -- you have obviously spent a lot of time talking about gross margin and how that might vary by product line, but can you give us a big picture?

With international stepping up the growth rate meaningfully, and I guess some of the investments that you put to work years ago that are clearly starting to pay off, how does the gross margin, big-picture, internationally, compare to that of the US?

So just continuing on, if you look at our gross margins, they are influenced by a number of things.

Certainly manufacturing costs would be one.

The cost of fulfilling a case for a US patient versus the cost of fulfilling a case for a European patient is not significantly different, although their cases tend to be a little bit more complex.

So where you see it primarily is in ASP.

If you look at our pricing in Europe and so forth, it's typically higher than what we experience in terms of how we price here in the US.

And most of the business that they do there is through orthodontics offices.

So they -- as our mix of international business continues to increase, it has the effect of lifting up our gross margins; it also has the effect of increasing our ASPs.

And so that is what we experienced over the last year, and that is what we continue to expect over the years ahead.

If you look, for example, at the amount of international business we did last year versus 2013, it has gone up about 5 points out of our total mix year over year.

And so we think that is going to continue.

Europe and Asia-Pac continue to be our high-growth areas.

And as they grow, we expect to see better gross margins; we expect to see better ASP left.

One more, if I can just slip it in before Shirley cuts me off: Tom, you mentioned also buying back some or calling on some distributors, the remaining EMEAs -- these are markets adjacent to what you have currently got.

How does that weigh on the P&L?

Obviously, the big APac was dilutive for six or nine months and then quickly reversed.

How should we think about near-term dilution, long-term accretion with what you are doing with the remaining countries?

The reason we have positioned it as different was exactly for that reason in many ways.

It is different because it is not a large stream of revenue today.

It is also different because we don't pick up a substantial headcount or costs.

We will incrementally invest, leveraging our country leadership and sales structure in those adjacent countries, putting incremental headcount into the specific new countries.

And then starting to train more doctors.

It is not a large business in any case today.

And so, number one, you won't see any significant revenue lift, like we did in Asia-Pacific.

Number two, there isn't a concomitant OpEx offset to go, either.

So both of those are the reason why we said it wouldn't be material in the near term.

Chris Lewis, ROTH Capital Partners.

First, I just wanted to start on pricing -- obviously, a pretty nice bump there -- and international ASPs.

I was hoping you could just talk a bit more on what led to that increase there sequentially?

And how should we expect international ASPs to trend, looking out into 2014?

Chris, I will see if I can expand on what I just stated with Jon's question.

If you look at quarter over quarter, our international business was up very nicely, whereas North America was not so.

And as I indicated in the prior question, our ASPs in Europe and international and Asia-Pac region tend to be higher, more than 10% higher than what our pricing here is in the US.

So as their business continues to grow and outpace, you might say, the growth we continue to see in North America, they become a larger piece of our total overall mix.

And as that mix increases, we tend to get ASP uplift from that.

And we would expect that to continue as long as they continue to grow at rates faster than what we see in North America.

And then just on the guidance, you have guided to 20.5% operating margin the first quarter.

That is after nearly putting up a 30% operating margin this quarter.

I do understand there is some one-time benefits here, and December softness impacts that a bit, but first-quarter implied revenues are basically flat sequentially.

So can you just walk me through the reasons for that expected dip in operating margins in the first quarter from these Q4 levels and possibly expand on some of those follow-on investments that you mentioned?

You bet.

So first of all, I think you have to look at Q4 and you have to recognize that there were a couple of nonrecurring items in there, both of which I spoke to a few minutes ago in our pre-rehearsed script.

One of those is the fact we had about $2.5 million of one-time items in our cost of sales that we don't expect to recur.

They contributed about 1.5 points of gross margin in the quarter.

We also had about $2.5 million of stock-based compensation that reversed.

So there is a $5 million part of the bridge, you might say from Q4 to, let's say, the midpoint of our Q1 guidance.

The rest of it is primarily in operating expenses, and it comes from the standpoint that, as I mentioned, our entire Company runs on what we call a focal process review, where employees' compensation plans -- and that includes stock awards and so forth -- are reviewed annually in the first quarter and are granted in the first quarter.

And so our operating expenses are going to be up roughly -- if you take out the nonrecurring SBC, I think everything else is up about $10 million.

Merit increases are going to be something on the order of about -- well, merit increases, something on the order of about $3.5 million or so.

We have new grants of stock awards; that is like another couple of million dollars.

We have payroll taxes, that is like another $1 million.

We have a number of investments that we're making in both consumer marketing as well as market expansion, particularly internationally.

And that pretty much makes up the balance.

And so that is what informs the guidance we gave for Q1.

When you look at that going forward, I think the best thing I can point you to is the comments I made as it relates to our business model and how we see 2014 shaping up against that.

We think we delivered great results in 2013.

We would be very proud to put up the same numbers in 2014.

And that is where we are seeing things at at this point.

Chris, I will pile on for just a second.

This is Tom.

The specifics beyond the kind of -- I will call them more seasonal, the lumpy spending around beginning the new year and all those things that were just described is we are accelerating some investments in geographies.

We have seen good results from that so far, and that shows up in the top line and drops through.

We are accelerating certain investments -- not huge, but they add up to be meaningful in consumer marketing.

And we are expanding areas in the world where we're doing some consumer marketing, and with greater effect.

We just rolled out G5 deep bite, in effect.

We also said we just finally launched in November SmartTrack in China, based on regulatories.

So you ought to think of each of these releases as having a first blast and then a series of echoes in terms of the whole commercialization cycle.

There are still doctors we are reaching that are slower adopters that we are still pushing through to get them to try and recognize the differences in SmartTrack.

So the kind of office-by-office process that we keep putting our shoulder behind that -- that goes on all around the world.

So a new release, in this case deep bite, will go on for a year or more.

And then finally, in terms of R&D, we accelerate some of our investments in terms of expanding new indications, so we can take on even more complex cases and close the gap with brackets and wires.

So I think where this spending shows up, especially, is in the Q1; and the operating margin shows up a bit more this quarter, given it is a little softer start to the year.

It is just as simple as that.

Steve Beuchaw, Morgan Stanley.

I wondered, David, if you could maybe give us a retrospective on what has happened over the course of the year in the international business?

I ask because if I look at what has happened, the growth sequentially over the course of the year is really extraordinary.

And so I wonder if you could just put some numbers to it.

Like, how much of that in total would you say is ASP?

How much of that would you say is new users?

How much of that is currency?

Could you help us walk through that?

I don't think I can quantify how much of those are new users, you might say, or new doctors.

Our growth has been attributable to existing doctors as well as bringing new doctors online, and nurturing those doctors through their training, and bringing them up -- down the learning curve to incorporate the product into their practice.

Clearly, we are seeing greater growth in Asia-Pac than what we're seeing in Europe or North America.

If you look at the growth rates in both of those two countries, on a case volume basis they are far outstripping what we see elsewhere in the world.

We are continuing to make investments in them over the course of 2014, and we expect them to continue growing at the rates that we've seen historically.

I'm not sure I can break it down, really, for you much finer than that.

Hopefully that suffices.

I appreciate it, David.

I have a question for Tom, as well, and I will not ask for quantification on this one.

I wonder, Tom, if you could help us think about the other side of the coin when it comes to alliances with other players in the industry on scanners.

Clearly there is an important clinical and engineering question there: is it the right scanner?

Does it do what you needed to do?

But there is also the business side of it.

What are the right things to think about in terms of the economics, the arrangements that we should consider as we think about the longer term, when some of these alliances might be a more significant part of the business?

Sure.

Certainly won't be quantifying this.

The simple fact is that we have followed what the Cadent business, the iTero business -- what their ethos was, which was to be very open.

The iTero scanner is the most open scanner in the dental industry.

They work with any lab, any supplier, any partner, and the goal is to have maximum utility for the customer and make the best customer experience for the patient.

We have to be a little more discriminating than that when it comes to the Invisalign process, because we have a very, very finely-tuned mass customization process running at large-scale.

So we tend to treat this first as, in effect, a release of new manufacturing technology -- validate, qualify, and then very carefully bring online.

The last question you raised here is about who would we want to work with or not.

I think we start by not asking it that way.

We say: what is best for customers?

And how do we help them -- if they already have another scanner, and there are a significant number of those out there, and they would like to do Invisalign, we would not want them to have to go buy another scanner, whether it is an iTero or somebody else's.

So we are trying to follow what is best for the customer here.

And there is a handful of good companies and great scanners out there that, over time, perhaps will also have interoperability.

I hate to say it is that simple, but it kind of is.

It's a difficult process, and we are very careful and thoughtful about the way we go through qualifying this.

Understood.

We will look forward to that.

Robert Jones, Goldman Sachs.

This is Nathan Rich on for Bob.

First is -- maybe take a step back: could you talk about what you are seeing from a competitive perspective?

Given the strength that you have seen in ASPs and your ability to take market share, both from the US and internationally, can you maybe help us think about where you see opportunities to take further market share going forward?

First of all, there is nothing different, nothing unusual.

There is kind of no change from a quarter ago or two quarters ago.

In general what I would say is that our biggest competitor remains traditional practice in wires, or self-ligating brackets -- but the brackets and wires manufacturers.

And their game is very good.

They are fighting very hard not to yield share to clear aligner treatment.

And we have to go office by office and earn our stripes, which really goes to product evolution, making ourselves easier to do business with, and all the like.

To our knowledge, there really aren't any new, per se, clear aligner players popping up.

I'd say there is more knock-offs around the world outside the US.

But really, it is the same competitive dynamic.

And our biggest challenge is two-fold: one, taking share from those brackets and wires starts, which -- they have been doing that for 100 years, and it is very ingrained behavior for the clinician and in many communities.

Secondly, in parallel with that, we believe we can grow the market, which is also what is going on, especially among adults.

And we offer a fundamentally different value proposition.

Those two things, at least to this point, certainly blunt whatever noise there is around the competitive side for us.

And then if I could just go back to the strength in ASPs for a second, I think that previously you had expected ASPs to decline in 2014.

But now that -- you know, given the strength you've seen internationally, could we think of this as a change in trend, where we might be able to see ASPs higher year on year in 2014?

Nathan, I will see if I can add a little bit to what I said previously.

If you look at our Express product, which is primarily designed and targeted at adults and others who have minor malocclusion treatment needs, we have historically taken the position and the belief that that market is perhaps the most untapped market for us because the untreated adult population is so large.

And if you look at our performance over the last year, that product has done very well.

From a revenue standpoint -- well, from a volume standpoint, it is up over 20 points year over year.

It is consistent with the rest of the Company -- actually, a little bit outgrowing the pace of the Company.

And actually, as you look at our total product mix, it has actually picked up 2 points in total product mix across the Company.

And so as that continues, one would think that our ASPs would trend downward as that product becomes a larger component of our total product portfolio.

On the other side of that equation, however, though, is that our international business is growing at an even faster rate.

And as I mentioned a few minutes ago, it picked up 5 points of mix out of our total business.

And as a result, that tends to be -- at least at the present time tends to be over-weighting the downward ASP trend you might see as a result of the simpler cases.

And so as long as our international business continues to grow at the rates that we're seeing and at multiples or percentages greater than what we are seeing in the adult segment, then our ASPs are going to -- it is going to mitigate, you might say, that downward trend.

Thanks a lot.

I appreciate the color.

Chuck (sic - Jeff) Johnson, Robert W. Baird.

David, was wondering if I could maybe follow up on that last point you were making there.

I think one of the things I have been getting wrong the last quarter or two as I model you guys is case starts are growing x, and your revenue is growing a couple of points above that.

And that is the same thing that you guys are guiding to for the first quarter.

Obviously, ASP is playing in there.

Your non-case revenue -- up, I think, 45%, 46% this year.

That is helping as well.

How do I think of that conceptually going forward?

I know you are talking about ASPs potentially being helped here in the international markets.

As you lap the Asia-Pac distributor take-out from last year, does that trend continue?

And can those non-case revenues continue to grow at such big numbers going forward?

Well, the Asia-Pac impact, certainly, you might say, helped to some extent on the revenue growth that we saw year over year.

Because that revenue got converted from distribution pricing to our normal pricing to doctors.

But perhaps the best proxy for how that growth has done in Asia-Pac is just simply looking at the case volume growth.

And that case volume growth has been north of 20 points, which is faster than what -- certainly faster than what we are seeing in the North American and Europe base.

In fact, it has been a lot more than 20 points.

So that is one piece of it right there.

As it relates to the non-case revenue, I think that is primarily -- would for the most part follow the trend line for the Company, and shouldn't -- I don't think there is anything fundamental that would cause non-case revenues to grow at rates different than the rest of the Company.

The follow-up to that would just be: as I think about my modeling and as the Street thinks about modeling you guys out over the next year or two, would you expect revenue growth and case start growth to somewhat track closer together than it has been the last couple of quarters?

Or should revenue growth continue to outpace the case start growth?

You know, I wish we were that good.

We're going to project the best that we can see, and a variety of factors impact what goes on here.

If in a given quarter we have more -- relatively more volume coming from Advantage in the North America or in Europe, they pay, relatively speaking, a lower ASP.

If in a given quarter there is more Express 10 growth among GPs or orthodontists, the ASP would go down a little bit.

So that is going to move around a little bit.

What I would say is from our purposes, we are a little less -- well, we are lot less concerned on the absolute ASP as in the health of each product line in terms of contribution margin, and that it is doing the job for us.

And so we start out a year, we start out a quarter with a plan by geography and by type of customer and for our product.

And we have never been exactly right yet.

So I think as long as it is going up and to the right and the adoption continues -- I will tell you, in general, with all the investments we have made around product, and with greater efficacy with that product, and being able to go after new indications, a lot of the core adoption growth has been for the full product or for the teen product, with orthodontists and dentists doing more complex cases.

That is a factor that people, I think, lose track of.

Our average treatment is getting longer.

The case complexity is getting greater.

So that all plays away from a minor malocclusion treatment a little bit towards full treatment.

And then the second part is -- it's a little less obvious -- almost by definition, the cases that get treated in Europe and Asia are more complex than the average case in North America.

And so as we accelerate growth there, by definition they are full, they are complex cases.

And when you add generally a bit of a pricing premium, that is all virtuous.

I was going to pile on a little bit there.

I will stop there and see if that wrestled it down.

Yes, that helps a lot, Tom.

Thank you.

And then my last question, just on -- you say December was a little slower.

I'm still unclear on whether January started off slow, or just -- when did you start to see the pickup?

Can you help me titrate that a little bit, number one?

And two, does the weather, the cold, the snow, everything we have seen, especially in the Midwest and the East Coast, is that having any impact that this point?

Does the Olympics?

I know in the past that has affected your marketing timing.

Any impact from any of those non-operational factors?

You have thrown everything but the kitchen sink in there, and I am not going to hide behind it.

I will start with the basics.

In our view, in talking to all of our customers, first, in December the primary effect in our minds was the time compression -- the same thing that impacts some retailers, with the late timing of Thanksgiving and some compression.

And secondly, where the holidays were positioned kind of mid-week, that activities slowed down a little bit in offices.

And we saw less of that go down.

And it wound up being fewer office days worked.

I'm certain somewhere along the line weather kicks into that, and as you can see, in January -- the pattern was there's a normal slowdown for us as we get towards the holidays.

It's fairly predictable.

It happened a bit earlier, and it was a bit more persistent through December.

That persisted into January.

As we said, traffic has rebounded nicely and improving.

But that, I think as an earlier question pointed out, in general December receipts are January shipments and revenue; and then January receipts are February shipments and revenue.

So our guidance assumes slightly lower shipments both for January and some of February, given the January turn.

So with all that said, that is included in our guidance.

We feel great about the business.

There's a lot of good things going on.

And we think we're going to have a terrific year.

Operator, we have got one more call, please.

John Kreger, William Blair.

Tom, based upon the feedback you are getting from your reps and your customers, do you have any updated views on the market, the orthodontic market, and the unit volumes that orthodontists are seeing at this point?

I think we're still putting that together.

We typically are almost a quarter trailing to really put all of our, I call it, external third-party and our own work together.

But I think in general was there was a little more pronounced slowdown than we expected in December.

And I think in general the market was okay for orthodontics -- in our mind, okay for North America.

I think it was spottier in Europe.

In some markets it was good; in others it was not good.

And in Asia it is very spotty, depending on which country you are talking about.

But there are countries like Japan, which are growing again, and China, which are growing rapidly for orthodontics.

So in general, I don't think orthodontics is an easy market.

It is certainly better than some other parts of dentistry.

And for us, we've got this headroom I spoke about.

And we see room for growth in every direction we look.

That isn't necessarily the story for every player, but I think in general, patient traffic has been stable.

Offices have been okay.

Our customers every motivated to be back in the office right now, is what they are telling us.

And then one last one: if you think about G5 and where it will fit into your offering, are there any parts of your business in particular that you think will benefit more -- the orthodontist versus the GPs, or perhaps teen versus adult?

I think the first place to start -- and we start -- with all of our new evolutions, a really important part of our businesses with the specialist, the orthodontist.

That is both true in North America, where we have a very significant GP set of customers.

And then if you get outside the US, most orthodontics is treated by orthodontic specialists.

So G5 will immediately in North America and Europe legitimately give us access up to half of the flow of incoming patients, both teens and adults.

They may present -- they likely present with more malocclusion diagnosis than just deep bite, but deep bite is often an important part of that treatment.

So where a strong advocate of Invisalign may have been comfortable using Invisalign to treat a deep bite, it was sometimes challenging to create those set of movements.

With the features that we've got, with the ability to both extrude and intrude at the same time in a predictable way, we get the opportunity to -- with all of the other things they have got to do, maybe treat a cross bite -- to do all that in, I say, a predictable way.

So deep bite will help us for adults and teens.

It will help us with the specialists, for sure, around the world.

And then, ultimately, there's a fair number of GPs that use fixed appliances as well and treat orthodontics as well as other dental specialties.

So I think as doctors get to try Deep Bite, and to see it is a kit -- it is a whole solution -- they are going to find it is just a lot easier to use it.

And over time, again, office by office, we're going to earn the opportunity to get that next case switched from brackets to Invisalign.

And it just takes time.

As I said, it is office by office.

Well, thanks, everyone, for joining us today.

This concludes our conference call.

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

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

Thanks.

Thank you.

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

You may disconnect your lines at this time and thank you for your participation.