愛齊科技 (ALGN) 2016 Q4 法說會逐字稿

Greetings and welcome to the Align Technology fourth quarter and fiscal year-end 2016 conference call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Shirley Stacy.

Thank you, Ms. Stacy.

You may begin.

Good afternoon and thank you for joining us.

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

Joining me for today's call is Joe Hogan, President and CEO, and John Morici, CFO.

We issued fourth quarter 2016 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.

The telephone replay will be available today by approximately 5:30 p.m.

Eastern time through 5:30 p.m.

Eastern time on February 14.

To access the telephone replay, domestic callers should dial 877-660-6853, with conference number 13652166, 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 statements about Align's future events, product outlook and the expected financial results for the first quarter of 2017 and full year.

These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more details in our most recent periodic reports filed with the Securities and Exchange Commission.

Actual results may vary significantly and Align expressly assumes no obligation to update any forward-looking statements.

We have posted historical financial statements, including the corresponding reconciliations and our fourth quarter conference call slides, on the 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, Joe Hogan.

Joe?

Thanks, Shirley.

Good afternoon and thanks for joining us.

On our call today I'll provide some highlights from the quarter and briefly discuss the performance of our two operating segments, clear aligners and scanners.

John will provide more detail on our financial results and discuss our outlook for the first quarter and then offer some commentary on how we see 2017 unfolding.

Following that, I will come back and summarize a few key points and then we'll open it up to questions.

Q4 was a strong finish to the year with revenues at the high-end of guidance, up 27.3% year-over-year, resulting from better-than-expected Invisalign and iTero volume, primarily in North America, offset by lowered ASP discounts and FX.

Q4 Invisalign case shipments increased 6.9% sequentially, reflecting an uptick in North America and EMEA, and was up 18.5% from the prior year driven by continued growth across all geographies and customer channels.

Our iTero business also finished strong, with scanner units up 27.7% sequentially and 171% compared to Q4 a year ago.

EPS was $0.59, which was lower than the outlook, primarily due to an $0.08 impact from exchange rates on a strengthening US dollar that John will explain further in his comments.

By all accounts, 2016 was a terrific year for Align.

We exceeded $1 billion in annual revenues for the first time in our history.

We had more than 700,000 adults and teenagers start orthodontic treatment with Invisalign clear aligners, and we more than tripled our shipments of iTero scanners to nearly 4,000 units, all while delivering several new products, expanding our global footprint and operations, establishing a new doctor direct to consumer channel, the SmileDirectClub, and implementing an entirely new ERP system without any major business disruption.

For Q4, North American Invisalign volume was up 5.7% sequentially, driven by expansion of our customer base and increased utilization from both customer channels.

During the quarter, North American order flows gained momentum following our Invisalign Summit in November, and North American GP growth was driven by both Invisalign full and express family of products.

On a year-over-year basis, the shipment growth of 15.2% was driven by continued adoption by North American orthos, as seen in record utilization and solid growth from GPs, especially with Invisalign Express.

We continue to make progress with the dental service organizations, or what we call DSOs, the fastest-growing segment of the dental industry, which represents nearly 20% of the market today.

In Q4, roughly 8% of our North American volume came from DSO practices and they outperformed private practices significantly, both in terms of growth rates and ortho utilization.

Q4 Invisalign volume for international doctors was up 9.1% sequentially, driven by strength in EMEA, coming off Q3 summer seasonality, offset somewhat by seasonally slower period in APAC.

On a year-over-year basis, international Invisalign volume was up 25%, reflecting continued strong performance across both EMEA and APAC.

In EMEA, Q4 volumes were up 20% year-over-year, reflecting continued adoption of Invisalign in core markets led by the UK, Spain, and France, as well as continued rapid growth in our expansion markets of Central Eastern Europe and the Nordics.

We also saw initial momentum with the successful launch of [I Go].

Our Q4 EMEA shipments did not reflect the strong underlying demand, as our reported growth rates were dampened by the imbalance between receipts and shipments that we described in our Q3 earnings call.

As our backlog and factory returned to more normalized levels in Q4, there was a dampening effect on the shipments that cut across all regions, because aligners are fabricated and shipped on a first in, first out basis, without regard to geographical region.

Notwithstanding this, EMEA still had a record quarter.

In Asia-Pacific, Q4 volumes were up 35% year-over-year led by China, Japan, and Southeast Asia.

During the quarter, we held numerous clinical education and training events across the region.

In China, more than 1,000 doctors attended an Invisalign Day at the China Orthodontic Society's annual meeting.

In Japan we held Invisalign Forum, with more than 200 doctors in attendance.

And we participated in a Taiwan association of orthodontists' meeting for the first time.

We also successfully transitioned from indirect coverage in Korea to direct.

The largest beauty cosmetic surgery market in the world is in Korea.

Turning to the teen market, for Q4, the total number of teenagers using Invisalign decreased 7.7% sequentially, as expected, due to the seasonality and was up 19.7% year-over-year, driven by continued adoption worldwide.

Q4 is typically a seasonally slower quarter for teenage case starts.

For the full-year, 169,000 teenagers started treatment with Invisalign, an increase of 19.6% when compared to last year.

The international teen case starts represent about 30% of total case starts and grew 31% in 2016 when compared to last year.

Our results reflect solid execution of our strategic growth drivers, which include international expansion, driving ortho utilization of Invisalign, especially among teens; helping GPs treat and refer more cases; and lastly, ensuring that billions of potential patients that we generate through consumer demand programs are offered Invisalign treatment.

Product and technology innovation are key to all these initiatives, and in 2016 we continue to see increased clinical confidence as a result of innovation in Invisalign treatment for our customers worldwide.

Q4 is a particularly busy quarter, with product releases designed to improve treatment predictability, outcomes, and efficiency.

We launched Invisalign G7 with features that help docs fine-tune certain tooth movements (technical difficulty) key to great outcomes.

And we launched the latest version of ClinCheck Pro for more flexibility in treatment planning.

We also announced upgrades to our iTero Element scanner software with the Invisalign Outcome Simulator chair-side app, adding 3-D progress tracking to help assess the Invisalign treatment progress.

And finally, with the recommendation of many of our most experienced doctors and our North American clinical advisory board, we issued a recommendation for weekly aligner wear in Invisalign full and teen cases, and we are now recommending one week wear for Invisalign Go.

Innovations like our G series features and SmartTrack material give doctors confidence that they can get the results they want with Invisalign while changing aligners weekly instead of every other week.

It's a real improvement in treatment efficiency and a better experience for patients to reduce overall treatment time.

Our integrated consumer marketing program leverages traditionally a media search and digital marketing, PR, and social media to engage consumers at every point in the consumer purchase journey.

Consumer interest and demand for Invisalign treatment continues to grow.

In 2016, there were over 8 million unique visitors to Invisalign website.

1.8 million potential parents searched an Invisalign provider on Doc Locator, which is up 38% from 2015.

And Invisalign's social media community grew 50% to 530,000 consumers.

In Q4, our scanner business revenues were up 19.3% sequentially and up 157% year-over-year, reflecting a record number of units shipped in the quarter.

Approximately 27.7% quarter over quarter, primarily in North America.

Use of the iTero scanners for Invisalign case submissions in place of EVS impressions continues to expand and remains a positive catalyst for Invisalign utilization.

For Q4, total Invisalign cases submitted with a digital scanner in North America increased to a record 51.3%, up from 48.8% in Q3 and 39.7% in the same quarter last year.

While these scans were predominately from our iTero scanner, we also are seeing some uptick from 3M's True Def and Sirona's Omnicam scanners, which were previously qualified for Invisalign case admissions.

Q4 was our first quarter supplying aligners for SmileDirectClub.

We continue to work closely with SmileDirectClub teams, developing processes around the manufacture of their aligners and continue to ramp our efforts in referral cases to our network of orthodontists and dentists for in-office Invisalign treatment.

The potential of this new -- entirely market -- new market for us is large.

While the business is still in its infancy, we remain very excited.

I'd like to update you on our plans to expand our operations globally and get closer to our customers' local market.

This past July, we transitioned our order acquisition operation, which is the digital scanning of submitted PVS impressions for the EMEA region -- we move into Amsterdam.

We focused initially on moving the order acquisition process because of the huge customer experience benefit, which saves several days for initial ClinCheck turnaround time.

Order acquisition has a low labor and training component and is therefore relatively easy to relocate.

We also get immediate net cost savings for COGS, or cost of goods sold, and a lower freight cost.

While it's still early, we're already seeing these benefits from having operations in the region.

We're planning to establish order acquisitions for the APAC region in Singapore and expect to begin processing incoming Invisalign cases for that region in early 2018.

Our first treatment planning operations outside of Costa Rica and our first aligner fabrication operations outside of Mexico will both be located in the APAC region.

We are focusing on Asia-Pacific first because of the diverse customer needs of that region, language and translational challenges, and the significant distance and time zone differences that currently results in more time for ClinCheck turnaround.

The China market will be our initial focus for treatment planning operations in APAC and be located in Chengdu, China.

We expect to begin processing Invisalign cases in Q2 2017.

A location for our APAC aligner manufacturing has not been finalized yet.

However, we plan to be operational in the first half of 2018.

We plan to establish our operations in EMEA in a similar way.

We have treatment planning operations in Cologne, Germany, starting in Q3 2017, followed by Spain in the first quarter of 2018.

We are building more detailed plans for putting treatment planning in the other core markets in EMEA over the next few years.

International expansion of Invisalign value chain -- which includes order acquisition, treatment planning and aligner fabrication -- is well underway.

I'm excited about the opportunity and the potential to get closer to our customers.

Our operations are very flexible and we see so many benefits that will allow us to scale with our business and ensure that we offer the best customer support and experience.

Before I turn the call over to John, I want to update you on our patent litigation.

At the conclusion of International Trade Commission action against ClearCorrect in September 2016, we filed a motion in Federal District Court in Houston to lift the stay that had been in place since the filing of the ITC action.

The court granted our motion and the matter is now active and we are progressing aggressively, relying in part on those prior findings of infringement and validity from the ITC proceedings.

In addition today, we announced that we have filed a new lawsuit against ClearCorrect and Your Smile Direct LTD of Dublin, Ireland, for patent infringement in the Chancery division of the High Court of Justice in the United Kingdom.

We believe that ClearCorrect is now infringing Align's European patent by offering its aligners to consumers through Your Smile Direct and to practitioners through its own distribution through the United Kingdom.

The ITC already found Align's US patents to be infringed by ClearCorrect and we will continue to assert and defend our intellectual property rights against the infringement both in the United States and internationally.

With that, I will now turn it over to John Morici.

John?

Thanks, Joe.

I'm very pleased to be here.

Let's review our fourth quarter financial results.

The total Company revenue for the fourth quarter was $293.2 million, up 5.2% from the prior quarter and up 27.3% from the corresponding quarter a year ago.

On a constant currency basis, our reported Q4 revenue was reduced by approximately $3 million both sequentially and year-over-year, as a result of foreign exchange rate fluctuation due to the strength of the US dollar.

Fourth quarter clear aligner revenue of $251.5 million, which now includes both Invisalign and SmileDirectClub aligner revenue, was up 3.2% sequentially, reflecting growth of Invisalign volume partially offset by lower Invisalign ASPs.

Our Q4 shipment volumes and revenue to SmileDirectClub were immaterial to the quarter.

Our year-over-year clear aligner revenue growth of 17.5% reflected Invisalign case volume growth across all customer channels and geographies.

Q4 Invisalign ASPs were down sequentially $50 from Q3 to about $1,230, reflecting higher promotional activity and the impact of foreign exchange rates.

On a year-over-year basis, Q4 Invisalign ASPs were down approximately $20, primarily due to promotional activity and again the impact of foreign exchange rates, which was partially offset by price increases.

For the fourth quarter, total Invisalign shipments of about 190,000 cases were up 6.9% sequentially, reflecting growth primarily from our EMEA and North American customers.

Year-over-year Invisalign case volume growth was 18.5%, driven by growth across all regions.

For North American orthodontists, Q4 Invisalign case volume was up 3.2% sequentially and up 20.2% year-over-year.

For North American GP dentists, case volume was up 9.1% sequentially and up 9.5% year-over-year.

For international doctors, Invisalign case volume was up 9.1% sequentially and up 25% year-over-year, reflecting continued expansion of our customer base as well as increased utilization.

Worldwide Invisalign utilization in Q4 with a record 5.2 cases per doctor, up from 4.9 in Q4 last year.

North America ortho utilization was a record 11.3, up from 9.9 in the prior year.

North America GP utilization was 3.2, slightly up from 3.1 in the prior year.

And international utilization was 5.0, flat from Q4 last year as we continue to expand our customer base.

In Q4, we added 3,700 new Invisalign doctors worldwide, of which 1,420 were new North American doctors and 2,280 of which were new international doctors.

This compared to 2,615 in Q3 and 2,670 total doctors trained in the same quarter last year.

Note that the total number of doctors trained in Q4 includes 670 Invisalign Go doctors in EMEA that were recruited over the course of the year.

Our scanner and services revenue for the fourth quarter was $41.7 million, up 19.3% sequentially and up 156.8% year-over-year.

Moving on to gross margin.

Fourth quarter overall gross margin was 75.1%, flat sequentially and up 0.1 point year-over-year.

Clear aligner gross margin for the fourth quarter was 77.5%, down 0.2 points sequentially, primarily due to lower Invisalign ASPs, partially offset by cost leverage from higher volume.

Clear aligner gross margins were down 0.4 points year-over-year, primarily due to increased aligners per case as we continue to treat more complex cases.

Q4 gross margins for our segment -- our scanner segment was a record 61%, up 3.9 points sequentially and 23.2 points year-over-year.

Both the sequential and year-over-year increases were primarily a result of higher ASPs and lower manufacturing costs of our iTero Element scanner relative to our previous scanner.

Q4 operating expenses were $151.9 million, up sequentially by $4.8 million or 3.2%, primarily related to increased employee headcount which was partially offset by lower media costs and foreign exchange rate impacts.

On a year-over-year basis, Q4 operating expenses were up 33.8%, reflecting increased headcount and continued investment in our go-to-market activities, each critical to the growth of the business.

Our fourth quarter operating margin was 23.3%, up 1 point sequentially and down 2.5 points year-over-year.

This sequential increase in operating margin relates primarily to OpEx leverage from higher volumes and revenue.

On a year-over-year basis, decreased operating margin primarily reflects higher OpEx as we've grown the business.

On a sequential and year-over-year basis, Q4 operating margin was minimally impacted by foreign exchange rate, as we have a natural hedge between our revenue and operating expenses.

With regards to our fourth quarter tax provision, our tax rate was 19.8%, up by approximately 1.4 points compared to Q3 of 2016.

Recall that Q3 was benefited by a change in our corporate structure as part of our ERP implementation.

Commencing in the fourth quarter, we also began supplying aligners to SmileDirectClub.

Revenue and costs for this activity are included in our operating profit and reported results, although they were immaterial to the Company.

Additionally, we also report our share of SmileDirectClub's losses below operating margin and our tax provision, and is entitled equity and losses of investee, net of tax.

This Q4 loss, net of tax, was approximately $1.2 million or $0.01 per diluted share.

Fourth quarter diluted earnings per share was $0.59 compared to $0.63 reported in Q3 and $0.60 reported in the same quarter last year.

Fourth quarter EPS was unfavorably impacted by a stronger US dollar, which amounted to approximately $0.08 per share, primarily due to the net realized foreign exchange losses related to the revaluation of certain balance sheet accounts.

Addressing unrealized foreign exchange losses included in other income and expense in conjunction with the implementation of our new international corporate structure in July, we changed the functional currency of our Netherlands entity from euro to US dollar.

As a result, monetary balance sheet accounts are revalued into US dollars and any impact from that is charged to the P&L.

Prior to this change, these impacts were charged to the balance sheet.

We have now changed our processes to limit our exposure and the impact of these kinds of currency movements, which we believe should not have nearly as large of an impact on earnings going forward.

Moving on to the balance sheet.

As of the fourth quarter, cash, cash equivalents and marketable securities, including both short and long-term investments, were a record $700 million.

This compared to $678.7 million at the end of 2015, an increase of approximately $21.3 million.

Of our $700 million of cash, cash equivalents and marketable securities, $241 million was held by the US and $459 million was held by our international entities.

Q4 accounts receivable balance was $247.4 million, up approximately 1% sequentially.

Our overall DSO was 76 days, down two days sequentially and up 14 days year-over-year.

The year-over-year increase is a result of our new ERP system implemented in July 2016 and other related systems that impacted the timing of our customer collections.

As we indicated last quarter, we anticipate that our DSOs will remain above our historical average for several quarters as we work through these changes.

Cash flow from operations for the fourth quarter was $81 million and free cash flow for the quarter -- defined as cash flow from operations, less capital expenditures -- amounted to a record $66.8 million.

Capital expenditures for the fourth quarter were $14.2 million, primarily relating to equipment purchases for additional manufacturing capacity as well as building improvements.

During the fourth quarter we repurchased approximately 0.4 million shares of stock for $38 million under the April 2014 repurchase plan.

Subsequent to year-end we completed this plan, repurchasing the remaining $3.8 million.

We still have $300 million available for repurchase under the 2016 repurchase plan which we announced last April.

Before we move to Q1 outlook, I would like to make a few comments on the full-year 2016 results.

In 2016 we shipped a record 708,000 Invisalign cases, up 21.5%.

This reflects 32.4% volume growth from our international doctors and 16.4% volume growth from our North American doctors.

Shipments of our iTero scanner were up more than three times over 2015 to nearly 4,000 units.

Total revenue was a record $1.1 billion, up 27.7% year-over-year.

Full-year operating income of $248.9 million, or 23.1% of revenue.

Free cash flow was $177.1 million.

For the year, we repurchased 1.1 million shares of Align stock for $96.2 million.

In 2016 diluted EPS was $2.33.

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

Starting with demand outlook, for our international market expect seasonally slower period for APAC with the Lunar New Year and for EMEA with winter holiday and vacation.

For North America seasonally up GP and orthos.

For our scanner business, Q1 capital equipment purchases are seasonally slower.

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

Invisalign case volume is anticipated to be in the range of 200,000 to 203,000 cases, up approximately 22.2% to 24% over the same period a year ago, reflecting continued strong demand across all channels and regions.

We expect Q1 net revenues to be in the range of $295 million to $298 million, an increase of 23.6% to 24.8% year-over-year, with gross margins in the range of 74.2% to 74.5%.

We expect Q1 operating expenses to be in a range of $162.5 million to $164.5 million, up quarter over quarter primarily due to the increased headcount and increased marketing expenses.

Q1 operating margin should be in the range of 19.1% to 19.3%.

Regarding our tax rate, at the start of 2017 we adopted accounting standards update entitled improvements to employee share-based payment accounting.

Under this new standard, excess tax benefits and deficiencies associated with employee share-based payments are no longer recognized as paid in capital on the balance sheet, but instead recognized directly to income tax expense or benefit in the income statement for the reporting period in which they occur.

Under this new standard, we expect our Q1 effective tax rate to be approximately 1% to 2%, which includes $12 million in excess tax benefit.

We estimate the Q1 impact of the SmileDirectClub transaction will reduce earnings per share by $0.01 per diluted share, and diluted shares outstanding should be approximately 81.3 million, exclusive of any share repurchases.

Taken together, we expect our Q1 diluted earnings per share to be in the range of $0.64 to $0.67, which includes approximately $0.14 of excess tax benefit.

Finally, it should be noted that our Q1 CapEx will be larger than normal as we recently entered into a purchase agreement for a new facility in San Jose, California.

Accordingly, Q1 CapEx should be approximately $70 million to $75 million.

Now let me turn our view to the full year.

We anticipate 2017 revenue growth to be above the midpoint of our long-term operating model range of 15% to 25%.

We also expect Invisalign revenue and volume growth to be at or above midpoint of that model.

As for our scanner business, recall that 2016 revenue and volume growth significantly benefited from the unfilled backlog carried over from 2015.

And while we expect the scanner business to do well and continue to grow, we would not expect the same rate of growth of volume and revenue as we saw in 2016.

We expect operating margins to be flat to slightly up over our 2016 results.

Those investments will include geographic expansion, both in countries and markets we already serve as well as expansion into new territories, including Latin America and India; an aggressive direct to consumer advertising campaign targeted directly at teens; international expansion of the Invisalign value chain, including order acquisition and treatment planning to get closer to our customers, as Joe mentioned; commercialization of several new products, including Teen Class II Mandibular Advancement Feature for international markets; Invisalign Go for North America; and new iTero scanner features and functionality; and implementation of the CFM model in North America and APAC, which was previously rolled out in EMEA.

We believe these investments are key to the continued customer adoption and acceleration of our growth.

Similar to last year, many of these investments will take time before they realize meaningful return.

We expect the equity loss from our investment in SmileDirectClub to be 2 to 3 times the 2016 losses we recorded.

We expect our tax rate for 2017 to be approximately 18%, which includes $19 million of excess tax benefits.

Finally, as typical, we expect our earnings power in the second half of the year to be stronger than in the first half, with second half operating profits to account for somewhere in the range of 56% to 58% of our full-year results.

With that, I'll turn it back over to Joe for final comments.

Joe?

Thanks, John.

In closing, I'm pleased with our continued progress, but behind all this progress and hard work, what we've really done is to build on the original vision of work started 20 years ago this year, and that is to create a digital way to move teeth with plastic -- predictably, comfortably, and aesthetically.

And we're doing that.

Digital is the future of orthodontics, which means all teeth in the future will be moved digitally through plastic.

We have good momentum and energy heading into 2017, something we all felt at the sales meeting that kicked off the year in North America, APAC and EMEA.

We have a lot to be excited about, with new products coming to treat younger patients and solutions specifically for general dentists, expanded opportunities through SmileDirectClub, and our new consumer campaigns and much more.

I look forward to following up with many of you in the coming weeks at various financial conferences and industrial meetings.

Before I open the call to questions, I want to take a minute to welcome Lynn Pendergrass, who will join Align on February 27 in the newly created position of VP, Americas.

This newly created position for the Americas region will allow us to provide greater focus on each region, respond to their different needs more quickly and effectively, and harness the collective power of our largest market in the world.

We've never had one leader for the region, and with our expansion into Brazil and greater Latin America, we felt it was time to bring all these activities in the Americas under one leader, just as we have in EMEA and APAC regions.

This is an opportunity for us to add an executive with Lynn's experience.

Lynn is going to help us scale and continue to grow.

I know that she will be an excellent addition to our team.

Lastly, as we announced in Q3 earnings, David White will officially leave Align in February.

I want to thank David for his many contributions to the Company over the past three years and wish him the best in his retirement.

With that, we'll now open for any questions you might have.

Operator?

(Operator Instructions) Robert Jones, Goldman Sachs.

Thanks, Joe, and welcome, John.

So, looking at the results, despite what appears to be somewhat of a softening overall dental end market, you guys were able to post and forecast strong case growth.

So I guess, Joe, big picture question, how important is overall foot traffic in particular in the GP office relative to how you think about referrals and growth of Invisalign?

Bob, I think you can never negate foot traffic.

It's important that you have store traffic in that sense, that's going to be there.

Witness what happened to us in the third quarter.

Obviously from a GP market segment we saw that decline.

So I think what you are seeing here is the GPs did come back, and kind of from a seasonal standpoint, we expected that as we had indicated in our forecast.

But also you see this ortho utilization really picking up in a big way also.

So I think it's those combined provide variables.

In specific answer to your question, if foot traffic goes down 20% in orthodontics, it's going to affect us in one way or another.

But a continuation of 2016 into 2017 is what we are projecting when you hear what John forecasted.

And I think that's why we are so bullish in the sense of as we look at 2017.

Got it.

Just a quick follow-up, you guys called out higher promotional activity as driving the decline in the ASPs.

And I know you guys run promotions often, but I don't remember it being this big of a drag on ASPs.

Can you maybe just give a little bit more detail on the promotions you ran?

And should we expect this level of promotional activity to continue as you think about 2017?

Yes, I think you know, when you -- look Bob, we have some promotional activity, but I would say nothing would have been out of line with what we've done in the past and fourth quarters.

Except there was one 75% bonus -- $75 bonus that we gave to the orthodontic community that came to Las Vegas.

And we saw a pretty big uptick from that thing.

And so that hit us a little bit from an ASP standpoint but helped volume.

But then we had some FX and some mix in here also, so it was a good balance in that sense overall.

Got it.

Okay, thanks so much.

Brandon Couillard, Jefferies.

Joe or John, in terms of the 2017 outlook, first on the top line, can you give us a sense of what you are embedding for FX impact to the top line, as well as the ASP trends for the year?

And then as we look in the middle of the P&L you outlined a number of initiatives.

Can you help us size or put some numbers to the relative sizes of each of those initiatives, each of the cost buckets, in terms of the incremental commercial spend?

Yes, I'll take the FX and ASP.

We've set our plan for 2017 based on current FX rates, so we've adjusted to what we are currently seeing, and that's what's in our guidance.

And as far as ASPs, we expect them to be flat to slightly up as we plan for 2017.

From that standpoint.

And then from a spend standpoint, we're continuing to invest in our sales and marketing organization and specifically on the marketing on the direct to consumer and really targeting that teen market.

So it's a continued investment that we're making in 2017.

Brandon, it's Joe.

If you think about this from year-to-year, is -- you know what we've done the last few years in this business, is we really did hit the channels hard in the sense of hiring salespeople, feeding the international growth that we have.

Just look at our business next year.

It's doing exactly the same thing.

We are running the same plays, maybe to a higher degree because we have higher momentum and higher volumes to deal with.

The real added cost is our teen focus piece for next year.

And that will be anywhere between $10 million and $14 million.

But I would say that's the inordinate kind of change from year-to-year that we would've had versus our normal kind of OpEx expansion.

We feel that's why we struggled so much in the first quarter, in the sense of -- because we load all these investments upfront so we could realize those in the second half of the year.

Thanks.

And then curious how you think about the potential risk of a border tax on Mexico imports, and any let's say mitigation efforts that you could take to perhaps offset that?

And could you update us on the exact mix of how much of the production is coming out of Mexico today?

Is it 100% of the Invisalign volumes?

Out of everything, our production right now is solely in Juarez, Mexico, and 60% of that production goes to North America and 40% goes overseas.

Now, you are asking me to comment on Trump's comments.

I don't know which tweet you'd want me to address.

All those tweets have different financial scenarios in them.

Part of this also is going to be a reduction of the corporate tax rate, that looks like it comes together maybe in the 20% range or so.

So it's really hard, Brandon, to wash this in and out right now.

What I want to give investors confidence that we are aware of it, we'll make the needed kind of changes from a flexibility standpoint.

We can be nimble for what needs to be done.

But the last thing I'd say is, our Mexican facility, I don't want it to be looked at as a low-cost facility.

This is an incredibly high-tech, incredibly important asset to us.

And we've invested tons of money over 20 years to bring this as a modern day production facility.

It's the biggest 3-D printing business in the world.

This is a very valuable asset for us and we'll do all we can just to make that asset as productive as possible regardless of what we see out of the current administration.

Fair enough.

Thanks a lot.

Steve Beuchaw, Morgan Stanley.

I wonder if we could reflect just for a minute on the first quarter guidance.

When I think back to the Company's approach to guidance over the years, there's been a -- there have been times where we thought, wow, the guidance could have been a little higher, but the Company has pretty steadfastly stuck to this view of looking at past sequential trends, seasonal trends to say, okay, here is where we think the business is going to grow.

When I look at the first quarter, though, the guidance for the sequential volume growth significant relative to trend, stronger than normal trend.

So I wonder if you could spend just a minute there cluing us in to anything we might be missing about what might be different this time around.

Steve, this is John.

I think what we saw, we saw very good volume in Q4.

And I think that is what led to strong shipments and strong revenue performance in Q4, and we've seen that continue into January and into 2017.

So we feel very good about where we are at from a volume standpoint, and that's why we've given the Q1 guidance and it helps strengthen where we think we are going to be at for 2017.

As you look back at order patterns over the last several months, do you think it might have been in part more of a timing issue, where new orders were delayed out to the latter stages of the year and into January?

I think you've got to look at Q4-Q1 normal lift, too, on this, Steve.

There is some seasonality in this.

That's how we go about things, too.

So I hope we are answering your question, but I know what you are saying is that we are probably a little outside of what kind of guidance we've given in the past.

I'd just take John's comments in the sense of momentum but also your understanding of the seasonality of this business Q4 to Q1 is the two main variables of why we're predicting Q1 to be what it is.

Yes.

Just to pile on, Steve, just because I'm -- you might recall if you -- the order imbalance that we referenced on the Q3 call that -- keep in mind, right, that strength carried over.

Receipt -- restraint, which is receipt strength, obviously carried over as the inventory and backlog evened out in Q4.

And that strength obviously has carried over into Q1.

Got it.

Last one from me is actually (multiple speakers)

This was actually -- Steve, I think you even said something about this on the last earnings call.

You asked whether this would carry over into Q1, and that's potentially what you are seeing.

Well, don't give me too much credit, Shirley.

(multiple speakers) We won't give you credit for the strength, but --

Last one for me.

I wonder if you could give us in the early reflections on the traction you're getting with the one-week change out.

How broadly are you seeing that adopted if it's something you can pick up from your friends in the channel?

And what is the early feedback?

Are clinicians thinking about this as in any way changing the way they go about using Invisalign?

Thank you.

Yes.

I think we've had good reception from a doctor standpoint of it, Steve.

And the data that we presented, the clinical evidence as far as why this works -- you know, SmartTrack, SmartForce; the innate aspects of our product line that allows us to have it.

I honestly feel some of the doctors are aggressively pursuing this, and the ones who are really investing in Invisalign in a big way has a significant share of share.

Other ones are more cautious, I think, in the sense of how they start up, and that's just part of the tendency of this industry.

The last thing I would say is it's going to be really important for us as part of our communications to patients is the availability of this kind of opportunity.

I think as patients ask for that as they move into orthodontists or the GP for treatment, that just see more and more enthusiasm and uptake of that all.

Got it.

Really appreciate the help.

John Kreger, William Blair.

Joe, I believe in your prepared remarks you talked about the Invisalign order backlog generally coming back to normal.

Can you just expand upon that?

Is there any imbalance in the backlog that still persists in the first quarter or are you totally back to normal there?

We are back to normal, John.

Great, great.

And then John, the 2017 outlook commentary that you gave, which was very helpful, can you give a sense about what the SmileDirectClub contribution would likely be, based upon your expectations to either revenue or volumes?

Yes sure, John.

It's very minimal.

We are definitely ramping up and growing with SmileDirectClub, but in our numbers it's very, very minimal.

Great, thanks.

Just one last one.

Joe, you mentioned that DSOs are becoming a much bigger part.

Are you seeing that globally or really just in the US?

And how do you think about that from a mix impact on your business either in terms of ASP or margins?

Thanks.

John, that's a good question.

First of all, this is more of a US kind of phenomenon.

That's not to say that other heavy GP markets, like the UK or whatever, won't go through this consolidation effect.

Obviously there is some -- just a large DSOs out there that, from a deal standpoint, we obviously incentivize to drive volume.

But right now we are not looking at any kind of I'd say material effect in the sense of ASP.

Because we -- balances on other full cases and things that we offer.

So, as we go forward we'll be continuing to report as to how we are working with DSOs and how things are going.

But as you prepare like a model, John, for 2017 I wouldn't think that you want to handicap it for DSO price [mix].

Okay?

Great, great.

Thank you.

Rich Newitter, Leerink Partners.

This is actually Ravi in for Rich.

One question on the gross margin.

Just a little bit curious.

It came in -- guidance for 1Q was a little bit lighter than we had thought, given that your case volume guidance was a little bit higher.

I'm just wondering if you could explain the puts and takes around that (technical difficulty).

I had a follow-up.

From a gross margin standpoint we are going to continue to see some FX pressure.

ASP is what we expect in the first quarter to be a little bit better than the first quarter due to some of the promotional activity that won't continue from Q4 into Q1.

And I think it's -- we haven't -- from a standpoint of planning our pricing for 2017, in the past we've taken is price increases in the past couple of years.

We haven't planned that for 2017 yet, so that might be something that is further down.

Great, thanks.

Then one on just maybe the portion of your revenue mix.

The scanner business, you had the new launch sort of hitting its [full] stride last year.

It's growing pretty impressively.

It seems that we should be expecting that this year.

In 2017 should we still think of the scanner business as growing faster than the clear aligner business?

What commentary can you provide on the backlog?

Thanks.

Yes, definitely we had a great backlog come in out of 2015 into 2016 for iTero, and that's contributed to the significant growth.

The backlog is much more normalized for an equipment business now for iTero.

So for 2017, we expect consistent growth to maybe a little bit better than Invisalign, but certainly nothing like we saw in 2016 because of the backlog.

(multiple speakers) That was it for me, thanks.

Operator, next question.

Jon Block, Stifel.

Joe, you gave 2017 guidance, so maybe now I could ask about 2018 and beyond.

But a better top line for 2017 but also higher spend, so it looks like you are getting to a similar operating income.

Or absolute dollars not far off from where we were, but just a different formula getting there, and in and around that 23% op margin.

Just taking a step back, when you look out where the business is today from an investment standpoint, where do we start to see that elusive leverage?

You've got tremendous top line, and it really is huge, but you are still sort good couple hundred basis points below the low-end of that 25% to 30% EBIT goal.

So maybe can you speak to -- when you look out beyond 2017, how you bring the leverage back to the business?

When you say bring leverage back, Jon, I hope that we've been leveraging.

We just haven't been to the point of the 25% or 30% that everyone here wants to get to and what you guys look for.

I'd say, Jon, what we are constantly faced here with are actually really great short-term investments for us to expand this business significantly and an operating expense that's almost immediately accretive within that year.

And so, I think at some point in time, as we become more and more penetrated or over-utilization of these markets, more spread internationally in a sense -- when we go internationally, you just don't higher salespeople.

You have to put infrastructure in place.

You have legal functions.

There's a lot of things you have to put in place to put this organization together.

So, I can't tell you that -- I don't want to start forecasting 2018, 2019 or whatever, Jon, but I hope what you see here is an incredibly profitable business that throws out a ton of cash year in and year out.

We are in the 23%.

We are in striking distance of the 25% range.

If we wanted to cut back some of that investment and sacrifice some growth, we could be at 27% tomorrow.

We just feel like it's the right thing for this business to do to keep investing in these -- what I would say accretive types of investments to payback within a year to 18 months.

And you are seeing it in our results, you are seeing it in the growth, and that's our outlook right now.

But as we go forward I'm very confident we are going to reach the 25% to 30% range.

It's just we'll continue to invest to grow and improve that utilization rate where it makes sense for the business.

Got it.

No, very helpful and fair enough.

A second one, unless I missed the EMEA commentary, it seemed like it suggested that trends picked up throughout the quarter.

So 4Q orders were higher than shipments, and arguably that sets up well for 1Q 2017 shipments.

I believe [I Go] was launched in the quarter in the UK and Germany during that fourth quarter.

So any thoughts on the early traction or findings from I-Go in EMEA?

And when do you expect I Go to be released here in North America?

Thanks, guys.

As far as I Go uptake, we saw good uptake in the UK.

We're working through Germany.

Germany usually has a slower infusion rate than most countries in the sense of how they go about things.

We're moving into Australia in that sense and bringing it over to APAC.

And we will introduce it -- we are beginning to introduce it here in certain regions in the United States.

So we'll keep you updated, Jon.

We are excited about that product.

We do need something for that GP segment that's simple, that allows GPs to assimilate this product quickly and see how it integrates into their workflow.

So you'll see us aggressively push that product around the globe and in North America as we move into 2017.

All right, perfect.

Thanks, guys.

Jeff Johnson, Robert W. Baird.

Joe, let me follow up on Jon's margin questions.

And you might not have liked his question.

You'll probably like mine even less, I guess.

But I'm just trying to understand; operating margin has been down a couple hundred basis points this quarter.

It seems like you are guiding down 250 basis points or so next quarter and yet guiding flat for the year.

And I really respect a lot of the investments you are making.

I think they are the right calls for the business in 2017 and beyond.

So just trying to understand if the last couple quarters, or at least 4Q and 1Q are down, how do we get flat for all of 2017 in the face of some of these investments that you are making?

Jeff, I think I've been here long enough to be through a few of these first quarters now.

I think you know that our first quarter a lot of stuff hits; depresses operating margin in the sense of salaries and how we account for things.

We lay in investments for the rest of the year, so it's always our most pressured quarter from an operating profit standpoint.

So, look at that comparison from 4Q to 1Q.

That's always a tough comparison in the sense of how the business operates.

I'll step back.

Jeff, I don't mind Jon's question.

I think it's a question that we always ask ourselves here, so I never want you guys to misinterpret that we would get upset over a question like that.

I think it's legitimate and it's something that we wrestle with here.

As we forecast for next year, you are right.

We are keeping -- our projections for operating profit are pretty much flat with what we were this year.

We see our growth as pretty phenomenal in the sense of what we're forecasting.

We think that's the right focus for this business right now.

Look, I'd just say from a speculative standpoint, if I came and told you we're going to be 18% operating profit for all of next year because we're doing something, I would say that would probably be out of the realm of what you'll see from this team.

But we want to be as close to the edge as we possibly can in making sure we produce good margin and cash for this business and take advantage of all the opportunities we have to [grow with them].

That's a balance that we hope we are communicating to you and that we are executing on.

That's helpful.

And then last question, I guess -- well, two.

One for John.

Can you remind me, John, does the peso weakness that we've seen so much and accelerate here recently, does that help at all from a margin perspective?

I think the answer is yes, but just if you could remind me there.

And then on the ASPs, I know the question has been asked a couple of times, Joe, but just want to circle back there.

They have been declining here over the last couple of years and I know the promotional activity and some of the utilization rates, people are hitting their targets, things like that, so that's all good.

But I think you said DSO is flat on the year and that would definitely be a change in the trend line from the last couple years.

So just want to confirm maybe what's driving the flattening out of those ASPs after a couple of years of having come down a bit.

Jeff, to answer your question on peso, yes, the dollar strengthening against the peso is favorable for us because of the costs there.

On your DSO question, I'd say don't misinterpret my answer on DSO -- the DSOs, we may have some pretty good targets in the sense that they can grow.

They will get a commensurate kind of a discount from an Invisalign standpoint.

What I'm saying is in the whole mix of products that we have in North America, don't over-weigh that thing as pulling down the overall total.

But you'll see if DSOs can grow aggressively, they will be rewarded for it, and I think that we'll continue to go that way.

From an ASP standpoint, I think -- you have to remember we got price last year, too.

And that helps in that sense.

FX didn't help us in the fourth quarter in that way also.

So, we're playing in a bandwidth here of price increases, FX of $20 or so, and I have no idea what -- do you know what that is, Shirley?

(laughter) International mix is growing faster.

Yes.

Oh yes, international mix, which is (multiple speakers)

For full cases, higher ASPs outside the United States, especially APAC.

Yes.

Look, I think David continued to guide ASPs that were pretty much a constant from year-to-year.

We still think about that, but there is a lot of noise in that when you think of FX and promotions that we do and mix, like Shirley mentioned.

But we are counting on it pretty level as we go into 2017.

Fair enough.

Thanks, guys.

Steven Valiquette, Bank of America Merrill Lynch.

Congrats on the results.

Just for us, a couple quick questions here, just on the litigation news that was in the other press release today.

Just first on that patent lawsuit news in the UK, we don't have as much background on UK market dynamics.

I guess I'm just wondering if you're able to provide any current approximate market share splits maybe for you and others, such as ClearCorrect, in that market.

Then I have a follow-up after that.

As far as -- I can't give you any real -- but it's not material in the sense of ClearCorrect's market share in the UK.

And this is -- this entity over in the UK, I want to be sure everyone knows, sounds like SmileDirectClub, but it's not.

It's nothing to do with it.

And so, pretty much what ClearCorrect did here was try to continue with a model that they had with SDC and to hook up with someone in the UK that really wants to try to implement a similar model.

And so, obviously our lawsuit is designed exactly with what we did with ClearCorrect, but it extended, as we mentioned, to an international market.

And we'll continue to be aggressive in defending our IP.

Okay.

And then as far as the implications, then, of refiling the action in the federal court in Houston, again without having the full historical background at my fingertips, is this still related more to the patents that are set to expire this year in the US?

Or is it more geared towards US patents that go well beyond this year?

We've got a special guest star here today.

Roger can help me out through this, okay?

Good afternoon, everybody.

The patents that are before the court in the ClearCorrect action are a combination of patents that will expire in the next couple of years and also patents with a longer lifespan.

Okay.

But as far as the (multiple speakers) -- go ahead.

I think we already explained that they are still liable for those patents.

Not after they expire, but (multiple speakers)

Sure.

Once the patent expires it just means that the art disclosed in the patent can be freely practiced by anybody in the market.

It doesn't make up for infringement during the life of the patent, for which anybody would be responsible for damaging.

Okay.

Got it.

Maybe I'll just follow up off-line with some additional questions on that.

Thanks.

Let Marianne or -- and we can set up a call with Roger.

Okay, thanks.

Matt O'Brien, Piper Jaffray.

So I got one here.

EMEA growth continues to be very strong.

How much of that growth is attributed to the expansion into non-core markets?

You mean non-core markets to be other countries, Matt?

What are you thinking there?

Yes, correct.

Yes.

I'd say it's minimal at first.

When we look at India, moving into some different places.

So I wouldn't look at that as material, but I might -- look at the Nordic countries in Europe, that we've done that three or four years ago, that starts to become important.

So again, as we talk about moving into new markets, just think we have -- we laid out a lot of infrastructure, spend money, put salespeople in place.

And then you start to see almost geometric growth in those areas.

But that's not what I would say is the driver in any way right now of the kind of forecast we're giving into 2017 or what we saw in 2016.

Okay.

And then also you guys pointed out low-volume docs in Q3.

How did those guys perform in the quarter?

They were good.

Because we had the issue obviously in third quarter you are referring to.

They came back pretty strong.

You saw that GPs in the United States went from 3.1 to 3.2 from a utilization standpoint.

That might sound small, but that's pretty big when you look at it across more than 150,000 GPs.

Okay, great.

Thanks.

Thanks, Matt.

Operator, we'll take one more question, please.

Jeffrey Matthews, Ram Partners.

Two things.

One, Joe, you mentioned in the script something about seeing improved evidence of clinical -- of efficacy.

And I'm wondering where that came from and what impact it's having.

Because back in the day, the pushback from orthos was all about a lack of clinical proof here, and so that sounds like a trend in the right direction.

Jeff, I'd first say -- not to be a smartass or anything, but we've spent -- in the course of 20 years, $1 billion in trying to learn and accomplish significant, predictable orthodontic movement.

And increasingly, as you see in our G series -- you know, from G3 all the way up to G7 we just announced -- we just improved that capability year in and year out.

So, I think depending on when you take -- when you go back in history, many of the people in the orthodontic community, they have gone way off in their -- one, in their confidence in Invisalign.

And what's really critical to orthodontists in general is how you finish.

And they have confidence that they can really finish.

And more and more we hear that they have as much confidence in how Invisalign can finish as they do with wires and brackets.

So, I hope I'm answering your question, but I (multiple speakers) --.

No, that's right.

No, I appreciate it.

And don't worry, you are not being a smartass.

I appreciate that.

Second thing, you were early on, Joe, in this production shift, moving closer to end markets even before the election results made it sort of a headline issue.

But given the comments that you made about how much you've invested in Juarez and high-tech it is, what are you learning about shifting to other countries, now that you are actually in the process of doing it in Asia and Europe?

What have you learned?

What surprised you, if anything?

Honestly, Jeff, I've done this in other businesses I've been in, is to move production facilities from some location to others.

And I'd say what we're learning here is what I've seen in other areas.

One is, you never can just transfer production unit to unit.

It's going to be different, and it has to reflect the culture of where you are moving to.

So if we look at APAC, we'll probably look at different types of automation and different aspects of that plant.

Because there's just a difference in what you'd have from a labor standpoint in Mexico to do that.

I think we are learning that our infrastructure is really challenged in the sense of the IT piece and how you have to have much more flexibility to be able to handle these things when you get away from a unitary slide and you move to a broader area.

What you also understand from our customers, you see the excitement from our customers, knowing that things like ClinCheck -- we're going to get closer to them in China because we can have many iterations, from Mandarin back to English, that goes between Costa Rica and China or different parts of APAC.

Great excitement from our customer base to really improve that efficiency and to have more of a regional kind of a cultural aspect of the business as it moves closer [to them].

So those three things aren't a surprise to me, but what I really love is how much the customers embrace it and the regions embrace it.

And we have flexibility in the sense of how we manufacture product and how we do things in that whole value chain that we talked about, between OA and clinical IT, and also on the fab piece.

And we've used and disassemble and reassemble those teams around these areas to make it better for our customer base.

And that's a great thing about this business.

Great.

Thanks so much.

Thanks, Jeff.

Well, thank you everyone.

This concludes our conference call.

We appreciate you taking the time today.

We'll look forward to seeing you at upcoming conferences, including Leerink and ROTH, as well as the Chicago Midwinter Dental Show at the end of February.

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

This concludes today's conference.

Thank you for your participation.

You may disconnect your lines at this time and have a wonderful rest of your day.