愛齊科技 (ALGN) 2015 Q1 法說會逐字稿

Greetings.

Welcome to the Align Technology first-quarter 2015 earnings call.

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

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

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Shirley Stacy, Vice President Corporate Communications and Investor Relations.

Thank you Miss Stacy, you may now begin.

Good afternoon and thank you for joining us.

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

Joining me today for today's call is Tom Prescott, President and CEO, David White, CFO, and Joe Hogan, incoming President and CEO.

We issued first-quarter 2015 financial results today via Marketwire which is available on our website and 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 p.m.

Eastern time through 5:30 p.m.

Eastern time on April 30.

To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13605393, followed by #. 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 2015.

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, 2014.

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

We have 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'll 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.

I'm pleased to have Joe with here with us here on the call today.

He doesn't officially start until June 1, so we won't make him answer any questions about the business, but he'll be happy to take a couple of your questions during Q&A about why he is so excited about joining Align.

Let me turn now to our first-quarter results.

On our call today, I'll provide some financial highlights and then briefly discuss the performance of our two operating segments, Invisalign Clear Aligner and scanner and services.

I'll also include some commentary on our performance with customers as well as progress in our geographies around the world.

David will provide more detail on our financials and discuss our outlook for the second quarter.

Following that, I will come back and summarize a few key points and open the call up to questions.

Our first quarter was a bit stronger than we expected, getting us off to a good start to the year.

This progress was driven by continued strong year-over-year growth from our international team and solid improvement in our North America business as well.

We are pleased to have delivered better-than-expected results with strong revenues, margins and EPS driven primarily by higher Invisalign volume from our North American orthodontists.

Our Q1 results reflect continued execution of our strategic plan, including our three key strategic growth drivers, which are market expansion, product innovation and brand strength.

I'll provide a brief update on each of these before discussing our results further.

Market expansion comprises the many ways we are working to expand the adult orthodontic treatment category with Clear Aligner therapy, increase our share of the teenage orthodontic market and open up new and existing markets and geographies around the world.

In Q1, we brought back the Benelux countries and converted them into direct sales geographies for our EMEA region and in May, we will further expand our directly covered country markets in Asia-Pacific by adding Taiwan.

As with the previous countries added, we will leverage our existing infrastructure from the adjacent country teams to build local sales coverage, drive long-term market penetration and begin to create a much stronger consumer brand for Invisalign.

The very important teen segment which today is still mostly a North America market, represents approximately 3/4 of worldwide orthodontic case starts each year.

Execution of our strategy is enabling us to continue to gain share against other brackets and wires players.

As of Q1, more than 121,000 teenagers started treatment with Invisalign over the past 12 months, up 16.3% from the prior year in an orthodontic market that is growing in the low to mid single digits overall.

With all our progress, we are far from realizing our full potential in teenage segment and are really just getting started in the EMEA and APAC regions where we are implementing focused initiatives to drive awareness and preference for Invisalign for teens.

Q2 marks the start of the busy summer teen orthodontic season, and we have new teen sales programs and an orchestrated marketing effort designed to increase our doctors' confidence in Invisalign while overcoming key barriers which may keep them from recommending Invisalign more often for their teenage patients.

These new programs include case studies detailing how to drive increase practice growth and profit ability by integrating teen Invisalign cases, how to better utilize practice referrals and leverage Invisalign marketing and the teen confidence study.

Product innovation aims to create greater doctor preference for Invisalign by delivering new features and functionality to increase our doctors' confidence in treating patients with Invisalign more often and on more complex cases.

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

During Q1, we began initial commercialization activities for Invisalign G6, our solution for first pre-molar extraction cases, including speaker training and launch workshops.

The initial feedback from targeted Invisalign providers shows excitement about the potential for more effective treatment of these extraction cases.

This is especially true in our Asian markets where extraction cases represent over 70% of the cases presenting to the doctor.

Feedback has also been very positive across Europe where orthodontists see Invisalign G6 as a significant step towards the expansion of Invisalign applicability to a broad range of increasingly complex malocclusions.

While still very early in our launch process, over 220 doctors have already submitted Invisalign G6 cases.

In Q2, we will begin full launch activities for Invisalign G6, including expanded training for Invisalign doctors and our sales and customer support teams.

Over 3,000 customers are expected to attend Invisalign G6 live lab events across the EMEA and APAC region.

During Q1, we also launched ClinCheck Pro in EMEA and APAC.

This significant ClinCheck software evolution has been extremely well received and already nearly half of our customers in EMEA and APAC have now switched to the new platform, attracted by enhancements on 3-D control and efficiency.

And finally, brand strength.

The brand strength of Invisalign remains one of Align's key differentiators for both doctors and their patients.

Align has built 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 insist on Invisalign for getting the healthier, more beautiful smile they've always wanted.

In North America, we saw positive growth in virtually all key consumer demand metrics as a result of cross-channel marketing, efforts across TV, digital, social media and PR channels.

As a result, the numbers of consumers searching for the Invisalign brand grew significantly.

We also had good growth in unique visitors to Invisalign.com as well as a step up in the number of doc locator searches.

Our focus on social media has enabled a substantial increase in followers across Invisalign's social media properties like Facebook, Twitter and more.

As a key element in social media, we continue to see user generated content from patients describing their Invisalign journey as the top-performing content on Invisalign social channels.

And in preparation for the upcoming teen orthodontic season, we will kick off one of our largest efforts of the year targeted to the mom audience promoting Invisalign Teen through our unbraced Teen Confidence campaign which leverages our teen confidence study published last year.

The results of this study highlight the struggles teens have with their self-confidence during the teenage years, and that teens wearing Invisalign aligners had a 2X boost in self-esteem when compared to teens wearing metal braces.

In EMEA, while our overall consumer programs are on a smaller scale, we have made good use of digital media to effectively reach our target audience while accelerating social media, experiential events and PR activities.

We continue to drive significant increases in awareness of Invisalign year-over-year.

The Invisalign EU social media community continues to grow with double the number of fans from the same period last year.

Globally as a brand, we recently celebrated the milestone of 3 million Invisalign smiles by inviting our customers, patients, consumers and employees to help spread even more smiles by providing a large donation to Operation Smile.

We did this by asking everyone to do something very simple, to post a picture of their smile with the #3,000,000 smiles.

And for every smile shared in this way, we would donate $1 to Operation Smile up to $1 million over the campaign.

If you're not familiar with this very worthy cause, I'd like you to look into the profound impact they have on children and adults born with cleft lip and cleft palate, especially in countries with little to no access to care.

The amazing things they are doing at Operation Smile need financial support to reach even more children with this life-changing procedure.

You may have seen our full-page ad in the New York Times earlier to kick this effort off.

To date, this has been a very successful way to engage with our community, generating thousands of posts that were seen over 9 million times across the globe.

There are plenty of highlights to share here, but since we included some details on our consumer activities in our webcast slides, I'll skip the details and let you review by yourself.

Taken together, these three key strategic growth drivers -- market expansion, product innovation and brand strength -- provide us with a great set of levers to build the business, giving us confidence in our plans for continued long-term growth.

With these growth drivers in mind, let's talk about how we did in Q1 by sharing a few customer and geographic highlights.

In Q1, the North America business demonstrated continued progress.

During the quarter, our practices reported solid patient traffic and procedure volumes across the board, including for Invisalign.

On a sequential basis, Q1 growth was driven primarily from North American orthodontists with utilization growing to nine cases per doctor for the first time ever.

This utilization increase reflects continued traction from our cycle of product innovations, including Invisalign G5 for deep bite launched early last year.

Additionally, we believe the evolution in our go-to-market strategy as discussed in our Q4 call is creating some positive impact a little earlier than expected.

We are pleased to see some initial traction and expect more meaningful contribution from these changes in the back half of the year and beyond.

Turning to our international business, Q1 Invisalign volume was down slightly on a sequential basis as expected, reflecting a seasonally slower period in the EMEA region mostly offset by higher than expected volume from Asia-Pacific.

This was especially the case in China with continued growth, despite the lunar new year in mid February.

On a year-over-year basis, international growth remains strong driven by continued momentum from product innovation and go-to-market expansion.

Our Q1 results reflect increased adoption from our existing customer base and accelerated adoption from newly trained doctors across all international geographies and channels.

In the EMEA region, Q1 Invisalign case volume increased 25.1% year-over-year, reflecting growth across all country markets, especially in Spain.

We are also very pleased with the improved performance in Italy and the UK.

Our new direct markets in Eastern Europe, Scandinavia and now Benelux are also generating initially high-growth levels, albeit on a small base, as our renewed focus on sales and clinical education are starting to pay off.

In the APAC region, Invisalign case volume increased 37.5% year-over-year, reflecting continued strong growth across all countries.

While China and Japan continue to deliver the fastest growth, we're also seeing solid execution of our growth plans in Southeast Asia and Australia and New Zealand.

Now, turning to our scanner business, in Q1, our scanner and services business revenues were down sequentially as we expected.

The decrease in revenue also reflected reduced pricing offering for the current iTero scanner to bridge commercial availability for the new iTero Element scanner announced last month at the International Dental Show, IDS, in Germany.

The iTero element is engineered to deliver everything that doctors appreciate about an iTero scanner except in a more compact footprint with even greater capabilities.

The element's smaller design with enhanced wand, multitouch display and new image sensor is engineered to enable 20 times faster scan speed with color scanning for more precise clinical evaluation.

We were excited to have the opportunity to preview the new scanner at IDS and we are pleased to be receiving very positive responses from existing iTero users as well as from potential new customers.

Both are very interested in the Element's new and smaller form factor, faster scans and expanded capabilities.

IDS also marked the beginning of our expanding go-to-market resources in the EMEA and APAC regions for the iTero platform.

We do expect initial shipments for the iTero Element intraoral scanner to begin the second half of 2015.

While we are proud to have the best scanner in the market with the greatest utility for our customers, we also believe there's an even greater opportunity for customers to benefit from Align Technology's open systems approach, both for our iTero scanners as well as for the Invisalign system.

We have worked hard to qualify other leading intraoral scanners that have the potential capability to deliver high-quality interoperability with the Invisalign case submission process.

To that end, at IDS last month, we announced interoperability for Invisalign case submission with Sirona's CEREC Omnicam.

This qualification enables Invisalign providers the CEREC Omnicam, a new CEREC Ortho Software 1.1, to submit a digital impression in place of a traditional PBS impression.

We look forward to working with the Sirona team to ensure their customers and patients have a great Invisalign experience.

And with that, I will now turn the call over to David for a review of our Q1 financial results.

David?

Thanks Tom.

Note that this fiscal year, we are consolidating some of the supplementary product and geographic breakdowns that we provide for volumes and revenue as well as combining sales and marketing expense with general and administrative.

We will continue to explain the performance of our products and geographies and include commentary as appropriate.

However, we believe a consolidated view of our quarterly financials is more consistent with disclosures from our respective peer group.

Let's review our first-quarter financial results.

Revenue for the first quarter was $198.1 million, down 0.3% from the prior quarter and up 9.7% from the corresponding quarter a year ago.

First-quarter Clear Aligner revenue of $187 million was up 0.3% sequentially and up 11.2% year-over-year.

The slight sequential revenue growth reflected higher volume from our North American Ortho doctors, offset slightly by lower volume from our international doctors as well as lower worldwide ASPs.

Q1 ASPs were down sequentially $35, of which approximately $32 or $4.2 million in aggregate was related to foreign exchange rates.

Our year-over-year revenue growth reflected Invisalign case volume growth across all customer channels, partially offset by lower ASPs primarily related to foreign exchange rates.

For the first quarter, total Invisalign shipments of 130,800 cases were up 3.1% sequentially, reflecting growth from our North American orthodontists and to a lesser extent North American GP customers.

Year-over-year case volume growth was 16.6%, reflecting continued strength in international as well as strong demand from our North American orthodontists.

For North American orthodontists, Q1 Invisalign case volume was up 7.9% sequentially and up 17% year-over-year.

For North American GP dentists, case volume was up 1.6% sequentially and 6.5% year-over-year.

For international doctors, Invisalign case volume was seasonally down 0.9% sequentially and up 29% year-over-year.

Q1 marks the sixth consecutive quarter of greater than 25% growth for our international region.

Worldwide Invisalign utilization in Q1 was 4.5 cases per doctor, up slightly from 4.3 in Q1 last year.

North American Ortho utilization of 9.0 was a new record, increasing from 8.1 in the prior year.

North America GP utilization of 2.9 was flat compared with the prior year.

And international doctor utilization of 4.4 was up slightly from 4.3 in the prior year.

In Q1, we added 2,410 new Invisalign doctors worldwide, 870 of which were new North American doctors, and 1,540 of which were new international doctors.

First-quarter revenue for our scanner and services segment was $11.1 million, a decrease of 9.1% sequentially and 10.9% year-over-year.

While unit sales of our scanner were slightly down relative to each period, most of the revenue decline was the result of reduced pricing for the current iTero scanner which Tom previously commented on.

Moving on to gross margin, first-quarter gross margin was 76.3% overall, up sequentially 0.4 points and 0.3 points year-over-year.

Clear Aligner gross margin for the first quarter was 79.1%, up 0.3 points sequentially and flat year-over-year.

The sequential increase was primarily the result of higher volumes and seasonally lower training costs offset by lower ASPs, as mentioned.

Q1 gross margin for the scanner segment was 28.3%, down 1.9 points sequentially and 5.3 points year-over-year, both as a result of lower ASPs, as previously mentioned.

Q1 operating expenses were $102.2 million, up sequentially by $3 million from $99.2 million reported in Q4.

In aggregate, overall operating expenses were up by $9.8 million primarily related to increased employee headcount and compensation expense related to our annual employee performance review process, increased legal fees and investments in OSA product development which were offset in part by a benefit of $6.8 million associated with a medical device excise tax refund for a net sequential increase of $3 million.

You will recall a year ago that we had extensive discussions with the IRS in which they informed us that our Clear Aligners are not subject to this tax.

Accordingly, we stopped accruing and paying this tax in March 2014.

However, a refund of our 2013 payments would require separate application, review and approval.

That approval was received this quarter.

The after-tax benefit of this refund on EPS in the quarter was $0.06.

On a year-over-year basis, Q1 operating expenses were up $6.7 million, which includes the benefit of the medical excise tax refund just mentioned, reflecting increased headcount and continued investment in our go-to-market activities as well as product and technology development as we talked about at length in our Q4 year-end earnings call in January.

Our first-quarter operating margin was 24.7%, down 1.2 points sequentially and up 1.6 points year-over-year.

First-quarter results included the aforementioned medical excise tax refund of $6.8 million, which benefited operating margins by 3.4 points.

Excluding the margin benefit from this refund, operating margins were down both sequentially and year-over-year relating to new investments in our three strategic growth drivers as we previously discussed.

Other income and expense included $1.7 million of charges primarily related to foreign currency losses related to customer payments with the continued weakening of the euro to the US dollar comprising most of that.

All together, the quarter-over-quarter impact from foreign exchange as a result of the stronger US dollar, including the decline on revenues, the benefit on our non-US dollar operating expenses, together with currency exchange losses reported in other income and expense, was $0.03 per share.

While currency has certainly dampened to some extent our business results, we believe continued investment in our strategic growth initiatives will accelerate current-year and long-term growth where the leverage of our business model will ultimately overcome the negative impact of a stronger US dollar.

In tandem with those investments, however, we do intend to begin commencing some of our current -- hedging some of our currency exposures to mitigate some of the intra-quarter volatility we have been experiencing commencing in Q2.

With regards to our first-quarter tax provision, our tax rate was 23.8%, slightly up from our 2014 tax rate due to higher permanent tax differences on certain expenses that are not deductible.

First-quarter diluted earnings per share was $0.44 compared to $0.48 reported in Q4 and $0.39 reported in the same quarter last year.

Moving on to the balance sheet, for the first quarter, our Accounts Receivable balance was $138.2 million, up approximately 6.5% sequentially.

Our overall DSO was 63 days, up five days sequentially and flat over the same period a year ago.

Capital expenditures for the first quarter were $15.6 million, primarily relating to a second facility purchased in Juarez, Mexico for liner fabrication as well as manufacturing, equipment and fittings costs for that facility as we add additional capacity, as well as additional costs capitalized on our enterprise systems project.

Cash flow from operations for the first quarter was $35.6 million.

And free cash flow for the first quarter, defined as cash flow from operations less capital expenditures, amounted to $20 million.

The Company repurchased approximately 31,000 shares of stock for $1.8 million during the quarter on the open market.

This repurchase marked the completion of the first $100 million of the $300 million stock repurchase program we announced a year ago at this time.

We expect to announce our plans for our second $100 million shortly.

In this regard, I'd like to make mention of the fact that, when we file our first-quarter 10-Q, that our cash flow statement will indicate cash outlays of $14.6 million for payment of employee taxes.

This figure relates to the Company's practice of issuing vested employees restricted stock, or RSUs, on a net basis, which we recently adopted for all employee stock awards.

This means that instead of employees having to sell some of their vested shares to pay their payroll related taxes, the Company issues the net amount of the shares to employees and pays the payroll taxes on their behalf.

So in an indirect manner, this $14.6 million should be viewed as additional stock repurchases by the Company offsetting to some extent the dilution that would otherwise have resulted from the issuance of these shares.

Cash, cash equivalents and marketable securities, including both short and long-term investments, were $613 million.

This compared to $602.6 million at the end of 2014, an increase of approximately $10.4 million.

With that, let's now turn to our business outlook for the second quarter and the factors that inform our view.

Starting with the demand outlook, the second quarter has typically been a seasonally stronger period for our North American doctors and we've seen the strength of our first-quarter volume trends continuing early into the second quarter.

In aggregate, we expect Invisalign volume for North America to be up sequentially in Q2.

Q2 is seasonally a busier quarter for our international doctors and we anticipate Invisalign case shipments to increase sequentially from Q1.

With the recent announcement of the new iTero Element scanner which will be available in the second half of the year and the reduced pricing we have implemented on our current scanner, we anticipate some of our customers may delay purchase decisions as they evaluate choices.

Therefore, we expect Q2 scanner and services revenues to be down sequentially from Q1.

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

Invisalign case volume is anticipated to be in the range of 139,500 to 142,000 cases, up approximately 18% over the same period a year ago at the midpoint of the range and above our three-year average.

We expect net revenues to be in the range of $206.6 million to $210.4 million, a sequential increase from Q1 primarily driven by the higher volumes just mentioned and a small price increase in North America effective April 1, each of which are partially offset again by lower ASPs, assuming a weaker euro.

We expect gross margin to be in the range of 75% to 75.7%, down slightly quarter-over-quarter, primarily a result of lower ASPs and a higher number of new doctor training events.

We expect operating expenses to be in the range of $117.3 million to $118.3 million, a sequential increase compared to Q1, largely as a result of the benefit we recognized in Q1 for the medical excise tax refund as well as higher expenses associated with our strategic investments.

Our operating margin should be in the range of 18.3% to 19.5%.

Our effective tax rate should be approximately 24%.

And diluted shares outstanding should be approximately $82 million, excluding any stock repurchases as mentioned earlier.

Taken together, we expect diluted EPS to be in the range of $0.35 to $0.38.

On a constant currency basis, our Q1 average -- using Q1 average exchange rates, the Q2 outlook would've been approximately $0.02 higher.

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

Thanks David.

We are extremely pleased to have seen strong performance in all regions getting us off to a good start to the year.

In every direction we look, our strategy is working well in market expansion, as our continued investments and go-to-market initiatives deliver volume growth from better coverage and support, in product innovation as adoption growth continues to be driven by our innovation cycles for both InvisAlign and our scanner technology, and in brand strength as we reach more and more consumers, helping them connect with the right practice, ensuring they get a great InvisAlign treatment experience.

The significant growth initiatives we discussed during our year-end call include our expectations for most of the impacts showing up in our second-half results.

While we are pleased to see some of that positive impact early in the new year, we do expect to see continued progress throughout 2015 as more of Align's key initiative begin to create leverage in the business.

There's never an ideal time for a company to have a change in the CEO role, but there are better times to make this important transition in new leadership.

As we sit here today, there's clear evidence of our solid execution of Align's winning strategy, demonstrating continued and sustainable progress for the business.

We have a strong leadership team and great talent across the Align organization.

The Company has outstanding prospects for continued growth in revenue and earnings and expects to be a market leader for the long term.

So while there's never an ideal time, this is certainly not a bad time to make this change.

After 13 years of leading this company and following a well-executed succession plan, this is a good time for me to step aside effective June 1. I'm extremely pleased to welcome Joe Hogan as the new President and CEO of Align Technology.

Joe is a rare leader with a talent for building great teams and winning the race with a passion for customers and their patients, with the intellectual curiosity to challenge and accelerate our pace of innovation and the leadership experience to ensure this company is a market leader for the long-term.

We are lucky to land him as our new CEO and he is even more excited about the opportunity to roll up his sleeves and get to work at this unique business.

As for me, I'm very pleased to remain on Align's board where I will do my best to help Align flourish for many years to come.

I thank you for your commitment to the Company's shareholders and for your own sense of vision about what this once struggling Silicon Valley startup could become.

I have enjoyed getting to know many of you and have done my best in leading our team as we build substantial shareholder value.

On that happy note, while I'll be signing off as your CEO in a month or so, before you let me out of here, I would guess you have a few questions for David and me on the quarter, and for Joe as to what he saw to attract them here to Align.

Let's get that started.

Operator?

(Operator Instructions).

John Kreger, William Blair.

Thanks very much.

Joe, thanks for making time to be on the call.

Could you maybe give us, as Tom suggested, a little bit of what drove your decision to join this company?

It's obviously a pretty different profile from where you've been.

And if you've formed them, perhaps what your first-year priorities might be?

I appreciate the question.

Look.

I'm really happy to be here.

Align is a great company with a great history and good leadership and team here.

I think to your question too, I know it's smaller than what I've done in the last maybe 10 years or 12 years of my career, but honestly what I've always loved is being close to customers.

I love technology.

Growth in markets and customers have always been terrific for me too.

And so I look at this as a chance from a career standpoint to join a winning team, a company that has a lot of growth, and also to do more of the things I really enjoy, which is the technology piece and the customer piece too.

So I'm really looking forward to joining the Company.

I think the last part of your question too is, look, I see terrific trajectory here and a strong team.

I don't see any reason to change that, and so I'll come on board and I'll take over the plane here and work diligently with the team to keep the momentum that Align has had over the last couple of years.

Great, thanks.

And then Tom, maybe coming back to you, now that you've got the Sirona interoperability deal in place, can you give us a sense about what does your sales force -- what are they able to do now that they've got that?

Can they work collaboratively with Sirona or Patterson?

Can they be knocking on the doors of existing CEREC users?

How much might their approach change now that that deal is in place?

Great question.

I think the right touchstone is to remember that the Omnicam is starting with a pretty darn small install base to begin with, and mostly all GP dentists, and most of which do not do Invisalign today.

So it does give us an opportunity to recruit great attractive practices, or if they are small Invisalign customers, you need to grow them.

But we are talking a small number of thousands of units, not the bigger part of the Sirona installed base.

Longer-term, Sirona is a terrific company.

They've done a great job.

And I think their intentions are to turn their installed base over to Omnicam's more, and that will make that opportunity bigger.

But let's just say start small and do the same things we've done with the 3M True Definition, ensure the customer has the best utility possible and we can make sure we deliver a great Invisalign experience, help the practice grow, help the patients benefit.

So same approach, we'll just keep moving forward.

Great, thanks.

Robert Jones, Goldman Sachs.

Thanks for the questions and welcome, Joe.

I look forward to working with you.

Tom, I guess, on the strong growth in cases in the quarter, clearly really strong in both the GPs and Orthos in North America.

I think third and fourth quarters have accelerating growth consecutively respectively.

Can you maybe just share with us how much of that in your mind is the improving underlying market versus you said some early traction in the go-to-market strategy changes?

I would say yes.

I don't mean to be flip, but I wish we could be very clear about exactly what the quantitative drivers were.

We know that when practice flow is steady and perhaps growing a little bit and procedures, procedure mix is positive for higher value procedures, we do better than most.

And we certainly had I would say steady to improving conditions as we exited 2014 and went into 2015.

Secondly, and I'll reach back to our call at the end of the year, we were already in motion on most of these initiatives, both on the consumer side, on the product side and on the go-to-market side.

So while we think of this model generally as more back-end loaded for impact and leverage, we were already seeing some positive feedback from customers in Q3 and Q4 as we've started making these changes.

Better coverage, more effective coverage, better support for the practices generally means good things happen.

And so it's early and it's way too early to call victory here, but we think our improving capabilities and better coverage alongside a solid market is good news.

We still project continued impact throughout the year as we normally see.

All right.

So it sounds like a combination of improving markets and some of your efforts then.

I think that's fair.

And then I guess just sticking with North America but moving over to pricing, ASPs were down a little more than we had expected at least.

I'm just curious how much leeway are you giving out there to the reps in the marketplace to drive some volume through pricing or through promotions?

Let me put this clearly.

I'll let David come back to the ASP specifics.

We have a series of programs.

The reps have no latitude at deals or anything else.

We have a very organized system of promotions we put in place usually a quarter or two in advance, and those are fairly consistent.

And we have the Advantage program, which is the way we basically manage price.

So there's no kind of field-based management of this per se.

I'll let David maybe talk about some mix and a few other issues that contributed to some of that ASP, none of which in our minds is negative.

ASPs on a worldwide basis for the quarter were primarily influenced by foreign exchange.

And so we continue to believe that, as we treat more complex cases, as our international business continues to grow, we believe that our worldwide ASP should trend up, slightly up over the foreseeing future.

Periodically, we are going to see a low volatility in that on a quarter-to-quarter basis, just dependent upon how that mix lands.

This last quarter, our international business was pretty flat quarter-over-quarter seasonally, and so as a result, our lower ASPs that we typically sell under here in North America influenced that worldwide number a little bit more than what they would have otherwise.

Okay, so the North American then was orchestrated through some of the specific targeted promotional activity it sounds like.

I don't believe that we don't normally disclose what the North America ASPs were, so I'm not sure how you are backing into that.

But we didn't do anything fundamentally to change ASPs here in North America during the quarter.

If I can pile on for a second, if you think about that for a minute, we had great expansion in Ortho and some can I say new improving traction with GPs.

When we get more high-volume doctors do more volume through the Advantage program, you're going to see a little of that in ASP.

There was also a little bit of mix on the Express side, Express shift, Express mix stayed steady but a little more on Express 5. But in general nothing unusual going on and all in the direction of good.

Steve Beuchaw, Morgan Stanley.

Good afternoon.

First off, Joe, welcome to the call and thanks for taking the time to join.

Thanks Steve.

And Tom, in case this is my last opportunity, thanks for everything that you have done.

Great, Steve.

It's been a pleasure working with you.

I'm sure I'll see you around.

Hopefully in San Francisco in a few weeks.

Absolutely, at AAO.

I guess I'll start with Tom and a question following up to the question on the Sirona relationship as we think about how that rolls out over the next year or so.

I wonder what you are hearing thus far, whether it's from your planning team or from the field, about how customers might take advantage of the scanner.

We know in the orthodontics channel that people who have iTero, they tend to do more cases.

So how are you thinking about the impact on GP customers who might have an Omnicam but not an iTero?

How could their utilization evolve and how does that play out over time?

It goes right to the point of why we are pursuing this open systems approach with interoperability.

One, the scanner has to be capable, and each of our partners have had to go into investing into software and tuning their systems to work with what's a very prescribed process for Invisalign.

And the Omnicam has met that standard.

And when they roll out their 1.1 software, we'll be able to accept cases.

What we would expect is whether they are low-volume Invisalign user today having to do impressions, PBS impressions to send it in, that ought to be a positive.

Very few GPs, and especially a bigger office using a CEREC system for example, isn't doing a huge amount of Invisalign because they've got such a busy practice already.

So we are in addition to their practice.

We are not the main street part of their practice.

This gives us -- this gives them an opportunity to be way more efficient, to lower their costs, and for the patient to be a whole lot happier.

All of those things point to increased utilization.

The result is never as significant as when you have a very high volume Ortho that immediately switches over to scanners where it really removes friction, it's very visible.

So it does give us a great hunting license to go earn a bigger share of their share of mind and share of practice being even more relevant.

And that's the case whether it's iTero or that's the case whether it's 3M's True Definition, and it will be the case for Omnicam.

So I think, over time, our commitment is to work with each of these other players to ensure that we can deliver that great customer experience.

When the patients are happy, doc is happy.

We do that right, we're going to get increased adoption growth in each of these accounts over time.

I appreciate that.

And then one for Joe.

I don't think anyone can expect you to have much in the way of specifics for how you want to operate at Align at this point.

But I wonder if you can reflect on your past experience with regard to building a business, a combination of organic growth and acquisitive growth, and maybe give us a sense for how you at least philosophically think about the balance there.

If you have any preferences or criteria that you use to think about for capital allocation by M&A and how you think about share buybacks for a company like Align that is such a strong generator of cash.

Thanks.

I can read through your question.

I've done a lot of M&A in my life and I'm sometimes labeled as an M&A person.

But I can tell you that I've only done that in the sense of looking at what organic growth is in different businesses I've been in.

And 10 to 1, I'd rather grow organically than look at acquisitions.

But every role that I've been in, whether was running business within GE or most recently ABB, I don't really come in with a playbook.

I come in and just see what the company does well and where it might need help, assess the team and understand the team and the strength of that team and then look to figure out how to grow and how to operate well.

So I don't really have a playbook in that sense.

I think that if you go back through my history, and I know several people out there have contacted so my friends and different people, which I appreciate, you get idea of from them rather directly for me but indirectly from them how they felt about working with me or for me.

Hopefully, you will hear that.

So honestly I come in here.

I see a team that has an incredible track record, tremendous leadership by Tom, a business that has incredible potential in a lot of ways, whether it's scale or through additional technology and some of the things that David and Tom just talked about.

And I look to see how we can enhance that.

And obviously as I start and look at the company, I'll get out and see customers, I'll meet as much of the company as I can, and then from there we will figure out what we need to do to grow more and what makes the most sense.

That's really helpful.

Thanks so much.

Chris Lewis, ROTH Capital.

Hey guys.

Thanks for taking the questions.

And Joe, welcome and thanks for taking the time to be on the call today.

I just wanted to start on the gross margins.

And I may have missed it but it looks like it came in about 300 basis points above your outlook.

So can you elaborate on what drove the upside for gross margin during the quarter in the face of FX headwinds?

And then as you look into the second quarter, what are the factors that are leading to your expectation for a sequential decline in gross margin in the second quarter?

One of the phenomena about our business has to do with the training events that go on from period to period.

And in periods when we have more training events than other periods, our margins tend to fluctuate in the down direction or in the up direction depending upon whether those training events are increasing or decreasing.

And so when you look from Q4 to Q1, the training events were down in Q1, and we are anticipating they're going to be back up in Q2.

And that certainly has some influence on it.

When you look at the Q2 guidance, part of it is foreign exchange rates have moved another 5 points on us since the last -- well, since Q1 average.

So that has obviously some bearing on the margin guidance we gave for Q2.

Okay.

Great.

That's helpful.

If I could add, we had increased volumes in the business.

We had good performance in management of direct cost by the team.

So we've seen where we put volume into this business, it shows up in a variety of ways.

Understood.

And then in terms of the high teen volume growth outlook you provided on the last call, 17% year-over-year volume growth this quarter, 18% guided to the midpoint next quarter, can you just talk about how you're feeling you're tracking towards that high teen volume growth outlook at this point, given you're already kind of there in the first and second quarter and you talked about further impact from the North American go-to-market approach in the back half of this year?

David is the one providing the guidance, so I'll turn it over to him.

But I'll start by saying all the elements we've talked about that we tested during fiscal year 2014 and pretty much had in place, we were getting good feedback.

We said it was very early in the year at the end of January to see but we are getting good feedback from customers, that they felt the coverage should improve, our responsiveness was improving.

We were in better position to help them be successful in their practices, I would say maturation of things like deep bite and some of the initiatives we've been working on for a while, all those things kind of started to come together with a great consumer program.

So pleased that our innovation cycle coverage and go-to-market adjustments around the world and now in North America a little more, and consumer programs kind of work together.

And again, I'd say the backdrop is a reasonably healthy market, but we've been reasonably comfortable that we are on the right track.

Again, the tide can go out a little bit, but I think we're going to do better than most.

I'll let David come back and comment specifically on the framework he provided for the year.

Yes, so Chris, when we gave the framework back in January and so forth, we had obviously a lot of lifting to do against the foreign exchange headwinds and so forth.

We had a lot of investments we were making to hopefully drive topline in not only the long-term but certainly in the short-term.

And you may recall in our comments I think we might even have mentioned something to that effect here earlier in the call, that we expect to see more of our growth coming in the second half of the year as some of those investments begin to take hold.

So, as we think about the year in totality, we feel like we've gotten off to a great start.

And here we are sitting in April feeling good about that but we also know we have a lot of work still left ahead of us to deliver the full-year results that we gave you the outlook on just a couple of months ago.

Great.

Tom, just wanted to congratulate you on a great run, and wish you all the best going forward.

Thanks.

Jeff Johnson, Robert W. Baird.

Thank you.

Good evening, guys, and welcome Joe and Tom.

Hopefully I'll catch you in San Francisco in a couple weeks like some of the others.

I wanted to start, Joe, you made a comment that some of us have been out there checking on you and one of the labels that gets put on you is maybe an M&A focus.

One of the other labels, if I want to phrase it that way, is that you may be a very cost-conscious or cost-focused kind of guy as well.

Maybe that stems obviously from your GE Healthcare days.

But just in general, how do you think about costs?

And you're running obviously a growth company, a West Coast-based growth company.

Any comments you could make on that side of the story?

That's a really good question.

In my career, I've had to understand operations and be part of operations or whatever.

One of the reasons I'm here is because I love growth and I love businesses that have the potential to grow.

And obviously investment in growth is a real important thing.

I think when you listen to Tom and David, I smile because you can see a good input-output ratio in the sense of what investments are being made here and the consequential growth you can get in a relatively shorter period of time.

And so hopefully you can see in the sense of the business that that works.

And I like things that work in a business and what levers you pull and how things work.

Secondly, from a cost standpoint, I'm a guy who wants to understand costs make sure when you do make investments, that they are good investments.

You just don't take that for granted.

And so I also need to be diligent around cost and really understand where it's going.

And often from a portfolio standpoint, you might want to make some -- move something from one part of the business to another part to see if you can actually grow more.

So I don't think it's a liability at all but I understand operations and enjoy operations, but don't look at it in a sense of just from a standpoint of cost, saving cost.

It's just an allocation of capital and resources and where that best goes in a business at any point in time.

I hope that makes sense.

It does.

Very helpful as well, thank you.

David, one question for you and I'll take kind of maybe the opposite side of Bob's question earlier.

On ASPs, the sequential decline of $35 was actually less than we were thinking it was going to be; the decline was less.

So ASPs came in a bit above what we were thinking.

And you said 90% of that was currency.

When I look at the GP number, GP up 6.5% was a decently good number, better than it's been, but stacked comps still got a little slower.

So I guess what I'm trying to figure out is you had a sizable Express 5 promotion in place this quarter.

Has that just not generated the traction yet?

Should we think about kind of the acceleration off that promotion kind of coming more in Q2 and I would assume that would then impact the ASPs a little bit more in 2Q over the 1Q as well?

Specifically regarding the Express promotion, we implemented that in the middle of the quarter.

And then you have to recognize that it's going to take a while before doctors are going to get engaged with that promotion.

It's going to take a while for them to get patients in the seat, to get them through treatment planning, get treatment planning approved, fabricate the aligners, etc., so we only saw a small impact of Express 5 really during Q1.

We are continuing that promotion into Q2, and so to the extent that has some impact on ASPs, we think it will be relatively modest.

And I'd say the other thing is that our objective with the Express 5 promotion is to drive adoption.

And we kind of view the Express 5 promotion as a way to increase the volumes that we would've otherwise done as a company in any event.

So we see the Express 5 promotion really as incremental.

It will have -- to the extent it was wildly successful, which we will certainly hope for, that would have some impact on ASPs but we are not expecting it to be that meaningful.

Understood.

If I may add to that, I'll point you back to what I said earlier.

This is about really getting progress and greater adoption by the core customer group we want, orthos and GPs that have made it a big part of their practice.

And when that happens, they get a little better pricing.

There's a little more our total volume going through Advantage and we would expect a little bit of a move on ASP down.

But that's a really good bet because we are most efficient covering those customers versus bringing a very low volume customer along where there is very low leverage in the go-to-market model.

So we've always been very willing to have that volume impact for a fairly modest ASP decline.

So that's -- in our minds that's progress.

Yes.

I got it.

Not a criticism of the program at all.

Just wanted to check when the impact would come down.

We didn't take it that way, just trying to be clear.

Thank you.

I appreciate it.

Jon Block, Stifel.

Great.

Thanks and good afternoon.

I'll preface this by saying, trying to be clear not that I'm complaining, but when the Company (technical difficulty) when you guys complete those case volumes in conjunction with Tom's retirement, if I remember correctly, that was at the very end of March.

I think like the 25th or the 26th.

And sort of the wording in that release would have implied around 127,000, 128,000 1Q cases.

You did close to 131,000.

I mean the way your revenue model works, the quarter was closed back then.

So I'm just asking, David, I guess this one's for you.

Can you explain that discrepancy?

And then Tom, as a function of that, maybe if you can comment on intra-quarter trends that you saw and more specifically how you exited March and April?

I am going to get in front of David for one reason.

This was not a going away gift for me.

This is the way the business evolved and trying to meet customer needs.

It's really, really simple and the way the volume flowed through the quarter was pretty linear, but it was just to meet our kind of -- our standard requirements, we wanted to get those cases out.

We're not trying to micromanage that.

And again, we had some work to do while we were coming out with his news on me.

I'll let David talk to you.

I think we only really -- I think the press release, I don't know the exact wording in it, Jon, but I think it said we expected to be slightly above the high end of our range.

And I guess you can define what "slightly" means, but the only other alternative would've been to put a number of there, and we just didn't feel that was the right thing to do.

I think we gave you the best guidance we could in terms of the appropriateness of what we put in a press release before we are ready to close out the financials and talk about it a few weeks later.

Fair enough.

And again, not that I'm complaining.

Question two, if I can just have sort of a call it part A and part B. The first one, part A, David, longer-term, that 25% to 30% sort of three- to five-year op margin goal, should we think about that and normalize for FX?

And I know you don't want that sort of a moving target and floating daily to currencies, but that should be down maybe 200 to 300 basis points from when you gave that last year at the analyst day.

So should we think of that more 22% to 27%, or how should we flow that through our model?

And then Tom, the B is I'm sort of trying end our interaction with a difficult question.

On the Sirona deal, which still, in my opinion, came two years too late, but to dig deeper, why not make that exclusive and have something where you have a payment flowing from you guys to Sirona so when you fast-forward three years, they can't sign up a DENTSPLY or a Danaher and lock up that volume on Invisalign's platform.

Thank you guys.

I think that's a four-part question, John.

Let me start first with the whole logic for being an open systems.

Simply stated, it's better for our customers.

No one wants to have to redesign, start over, buy multiple pieces of equipment if they can have greatest utility from a scanner.

By the way, with this open systems, we still sell more standalone scanners than anybody else.

So we are doing pretty well even as we're opening up Invisalign, which would be an advantage for our iTero team to sell our own scanner.

So, we believe what we hear from our customers is they don't want to be forced to buy a system from you for the pleasure of offering Invisalign to their patients and other therapies we may have down the road.

So we feel actually very strongly.

To the point of paying Sirona, this is really about value creation for our customer.

Most buyers of scanners say they want to make sure the scanner can do a therapy like Invisalign.

So if anybody was going to pay, it ought to be the other way around.

As to exclusivity, we think that everybody brings a different story to the market.

Sirona has a great product offering with restorative dentistry.

Patterson carries a lot of products.

They are focused for that.

There's no reason -- we don't really directly compete with them.

There's no reason for us not to act in complementary ways because it's good for the customer.

So in our minds, we don't need to own the channel.

We don't need to have exclusivity.

In fact, we want probably more high-quality scanners that can make it easier to do Invisalign and other chair-side procedures that we have the unique capabilities to fulfill.

So I think I would point you in the opposite direction.

There's more benefit from giving the customer what they want at a lower cost and greater utility over time than anything else.

Fair enough.

David, can I get you to comment on the three- to five-year outlook you guided?

Jon, our operating model that we've been targeting and striving to achieve for some time is certainly influenced by a lot of variables, FX being just one of them.

We've showed and I think we've demonstrated the leverage we get out of our business model in the last year, 2014 being the first year that we actually landed results inside that model.

And so we do get leverage from growth.

And growth is the best strategy for growing out of the headwinds we are getting from FX.

And so while those headwinds may set us back a little bit while we try and readjust our business and so forth, I think the great thing about our business is the fact that it's growing and as we continue to grow, particularly on the international side, we believe we can grow out of those currency headwinds.

And so we don't see any reason to update our model.

I think it's still -- it's a long-term model.

It's still aspirational in some respects.

And we still feel pretty strongly about the potential of the business to grow into it, again, even with the headwinds.

Perfect.

Thanks.

Glen Santangelo, Credit Suisse.

Thanks.

Tom and David, last quarter, we spent a fair amount of time talking about some of the incremental investments that you plan to make around areas of sleep apnea, the new ERP system, some of the North American salespeople.

And at that time, you gave some pretty specific details around that and the potential impacts it might have on margin.

Maybe could you give us a little bit of an update there, maybe give us a sense for maybe how much you might have spent in those areas this quarter and what you're forecasting to spend in the second quarter?

Yes, Glen, I don't know that I really got an update for you.

I think, when we gave the outlook for the year, and as you see our first-quarter results and our guidance for Q2, I think you can see the uplift in our operating expenses.

I think you can assume that all of -- most of that uplift has to do with new investments.

We talked about sleep apnea in Q1.

We talked about the investments in the sales force and go-to-market coverage, etc.

Those investments are all P&L investments.

So I think it's pretty transparent, when you look at our Q1 results and our guidance, that those investments are proceeding as we indicated.

And I think they will continue to proceed throughout the balance of the year as we continue to plant seeds for the future direction and the growth of the business.

Okay.

That's fine.

Maybe if I can just ask Joe a question.

Joe, it kind of sounds like you're excited about a bunch of the opportunities that you see.

But one of the issues that's been on investors' minds is around intellectual property and the expiration of some of the patents in 2017 and 2018.

And so I'm kind of curious.

Could you maybe share with us how much due diligence you did around this IP issue, and how maybe you got comfortable with this issue when considering taking the position?

I think that's a good question.

Honestly, my due diligence was almost with a you to receive from Tom and the rest of the team and looking at what's going on.

If you look at the R&D investment and the number of patents, and you look at the sequential technology capability that Align has really shown through these investments, starting with relatively simple kind of aligners and through the years becoming more and more capable of doing more difficult cases, I think shows that overall the initial expiration of those patents in a few years forward, there's more to this than just a couple of patents coming off in the sense of the success here in what's been done.

So, obviously, in my life, I've been associated with a lot of IP, particularly with GE Medical and GE Healthcare.

I understand the impact of customer preference, also market channeling, skill, all those things as it relates to IP too.

When I look at Align, I see there's much more going on here than just the patents coming off in the next couple of years and the sense of the momentum of what the opportunity is too.

That's not to negate what that might mean from a competitive standpoint, but everyone has competition.

Competition should make you better and companies be able to respond to that too.

And I think Align has shown that they can do that.

As I take over for Tom and we work as a team, we'll continue to focus on customers, we'll continue to invest in R&D, will continue to scale globally, and I think that's going to help that whole equation a lot.

Okay.

Thanks for the comments.

Jeffrey Matthews, Ram Partners.

Hi.

Joe, I just want to say I look forward to meeting you.

My old pal Nat Kingman speaks very highly of you.

And Tom, I don't want to offend any of the sports fans on the call, but I feel like I did when Mariano Rivera retired from the Yankees.

Very sad but very appreciative of his track record.

And I just want to say congratulations and great good luck.

You deserve all good things.

Very nice of you to say, appreciate it.

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