Align Technology, Inc. (ALGN) Q2 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Align Technology Second Quarter 2012 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce, Ms. Shirley Stacy of Align Technology. Ms. Stacy, you may begin.

Good afternoon and thank you for joining us. I am Shirley Stacy, Vice President of Corporate and Investor Communications. Joining me today is Tom Prescott, President and CEO and Ken Arola, Vice President and CFO. We issued our second quarter fiscal 2012 financial results press release today via Global Newswire which is available on our website at investor.aligntech.com. Today’s conference call is being audio webcast and will be archived on our website for approximately 12 months. A telephone replay will be available today by approximately 5:30 pm Eastern Time through 5:30 pm Eastern Time on July 26, 2012. To access the telephone replay, domestic callers should dial 877-660-6853 with account number 292 followed by pound and conference number 396846 followed by pound. International callers should dial 201-612-7415 with the same account number and 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 third quarter of fiscal 2012. 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 on our Form 10-K for the fiscal year ended December 31, 2011. These forward-looking statements reflect beliefs, estimates and predictions as of today and Align expressly assumes no obligation to update any such forward-looking statement. Please also note that on this conference call we will provide listeners with several financial metrics determined on a non-GAAP basis for comparisons to previous quarters. Most of these items together with the corresponding GAAP numbers and the reconciliations to the comparable GAAP financial measures, where practical, are contained in today’s financial results press release, which we’ve posted on our website under Financial Releases and have furnished to the SEC on Form 8-K. We encourage listeners to review these items. We’ve also posted a set of GAAP and non-GAAP historical financial statements including the corresponding reconciliation and our second quarter conference call slides on our website under quarterly results. Please refer to these files for more detailed information. And with that, I would like to turn the call over to Align Technology’s President and CEO, Tom Prescott. Tom?

Thanks Shirley. Good afternoon everyone. On the call today, I’ll provide an overview of our second quarter results and discuss the performance of our two operating segments Invisalign Clear Aligners and Scanner & CAD/CAM Services. Ken will discuss our Q2 financial results and outlook for Q3 in more detail and then I’ll come back with a few closing comments and open the call up to questions. The second quarter was another great one for Align and I am pleased to report strong results for revenue, operating margin and EPS all better than our outlook. During the quarter, strong Invisalign volume grew across all products, customer channels and geographies, reflecting continued increase in Invisalign utilization. Our Scanner & CAD/CAM Services business in North America also grew nicely this quarter and continues to exceed our expectations, while scanner sales in Europe remain challenging and our disappointing results there continue. For Q2, total Invisalign case volume was 95.3000, an increase of 12% sequentially and 25% year-over-year, driven by growth in all customer channels. From a product view, Invisalign Full and Invisalign Express which includes Invisalign Express 5 launched last quarter drove sequential and year-over-year growth. Invisalign Express 5 are five stage aligner offering for very simple cases, is hitting the right value point in the market in getting some traction with patients who want to correct a little crowding or spacing, but believe current comprehensive orthodontic treatment is just too expensive for minor correction. They are primarily seeing Invisalign Express 5 usage from our more experienced customers both Ortho’s and GPs alike. These docs are pricing this treatment from around $1,200 to $1,800 a case which is helping them treat more patients and expand the market. For North America orthodontists, Q2 case volume of 35.4000, cases increased 10% from Q1 and 24% year-over-year…

Thanks, Tom. Before I get started, I would like to remind everyone that there are several items that we exclude from our GAAP results when we report non-GAAP results. These include acquisition and integration related costs, amortization of intangible assets and severance and benefit cost for the New Jersey consolidation. In my comments today, I will not review the total dollars excluded for non-GAAP gross margin, operating expense and operating margin and instead we refer you to the press release table of reconciliation of GAAP to non-GAAP key financial metrics and the business outlook summary for a complete reconciliation. Now let's turn to the second quarter financial results beginning with revenue. In Q2, net revenue was a total of $145.6 million which consisted of Invisalign revenue of a $133.7 million and scanner and CAD/CAM services revenue of $11.9 million. This is a sequential increase of 7.8% from $135.1 million in Q1 2012, and a year-over-year increase of 21.3% from $120.1 million in Q2 2011. Q2 Invisalign revenue of $133.7 million increased 8.4% compared to Q1 revenue of $123.3 million and increased 17.6% compared to Q2 2011 revenue of $113.6 million. A sequential increase in Q2 revenue was driven by Invisalign volume growth in all channels and products. This was partially offset by lower Invisalign ASPs resulting from advantage rebate, promotional activity, product mix and to a lesser extend foreign exchange rates. On year-over-year basis, Q2 Invisalign revenue growth was driven by volume increases in all channels and products. Q2 scanner and CAD/CAM services revenue of $11.9 million increased from $11.8 million in Q1 and was driven by North America scanner sales. Q2 2011 revenue of $6.4 million included two months of scanner and CAD/CAM services revenue as we posed the acquisition of Cadent Holdings Inc. on April 29, 2011. Now…

Thanks, Ken. Overall Q2 was another outstanding quarter for Align. As you can see from our results there are a lot of good things going on in our business with visible progress in virtually every area of the company. Our doctors' offices remain busy and while we are anticipating the combination of a slower summer period and some promotional activity lowering Q3 revenue a bit, our outlook for Invisalign volume growth of 20% plus year over year is even higher than reported in Q3 last year and demonstrates our continued growth and adoption and utilization worldwide. We continue to be content about the future due to our low market penetration, outstanding offerings and solid execution of a winning strategy. We are committed to tracking towards our long-term financial model with the right combination of revenue and earnings growth. I look forward to sharing this continued progress with you at the end of Q3. And with that I will open the call to questions. Operator?

Thank you. (Operator Instructions). Our first question is from the line of Matt Dolan with Roth Capital Partners. Please go ahead.

So the first question is looking at the Q3 guidance. You know I think you mentioned a survey on the last call; clearly the teenage segment is building here into the summer season. Last year we didn't see as much seasonality as you're implying with your guidance. So maybe you can talk through what's new on the international side and the GP side that would make this year unique?

Yeah, I guess. I will start with Matt is if you think back a year ago, coming off of quarter two particularly in International, we typically see some nice growth Q1 to Q2. Growth was a lot less in quarter two last year which growing off that base into the summer months, we actually had an increase in revenues during that summer month with international business. Its different this year in the fact that we had what I would call more of normal Q2 for us, as far as the volume was there from the doctors. All quarter long, we saw some long good strength in Europe this last quarter and now rolling into the summer, we are looking at going back to what we would normally see or typically see which is doctors being at the office on holidays and not seeing that same growth we saw last year. So that was the main part of it.

Okay and then domestically?

Domestically GPs, depending on the summer they have been up and they have been down. Last year was some nominal growth in GPs on a quarter-over-quarter basis and this year we are again expecting it to be kind of the same.

The second question is on China. We get this a lot, so wanted to relay it on to you on this call. It seems like you know International is healthy, can you quantify or give us any type of direction to how much is coming you know beyond Europe?

You know I think Matt I will take that. Qualitatively first, China is a very small part of our – its small today in revenue. It's large in terms of opportunity and so this idea of going very, very slowly to build the right base, so we can go faster later is still a very important theme. It's still a very small contributor to top line that will change say over a five-year period substantially. You know I am just trying to find a right way we describe this. In general those smaller geographies outside the US are growing more rapidly than International in general which is growing more rapidly than North America. If I would stack it up that way, is that good to answer your question?

Yeah, sure and we will follow up later. And then the last one on your duplicative costs with this transition in New Jersey, are those stripped out of your non-GAAP results, are those, would those be a further cost reduction, I think about down the road and if so maybe you can help us understand how much those might be on a go forward basis?

Yeah, so costs in relation to duplicative costs of employees and those types of things. Those are in our non-GAAP numbers. The only thing we pull up from a GAAP to non-GAAP are severance associated costs and the like. As far as the consolidation is concerned itself, New Jersey consolidation. We talked a while back about being able to enjoy about a $1 million cost savings per quarter, about $4 million a year as we complete that transition. It looks like we are right on track with that as far as the cost reduction with the move itself. What we will see coming into play here is the fact that in the scanner business as it's been growing in particular in North America very nicely, we've had to add more trainers in to do the installs of the units in doctors' offices and that's going to be an offset a bit to the cost savings we've seen with the New Jersey consolidation. And then with the more recent issues we've been dealing with the Ichiro system and doctors in the marketplace with a customer service point of view, we've actually had to layer in some additional resources to get after that from a customer care and a technical support point of view and that will be also some offset to the savings that we are (inaudible) enjoy.

Thank you. Our next question is from the line of John Kreger from William Blair. Please go ahead.

Can you just review what's driving the lower ASPs both in your second quarter results and what seems to be implied in Q3 guidance?

That was one of the, there is a couple of drivers here in Q2 and will continue into Q3. It has to do with our Advantage rebate program and also the Teen/Vivera promotion more specifically and then in Q3 there's also the impact of foreign exchange rates more heavily on the business. That we can't do a lot about obviously. I will come back to the other two. So the Advantage program is a program we've been having, we've been in place for a number of years now and it really rewards the highest point in doctors and it’s a good ROI for us because doctors submit more cases to us, but they enjoy a little bit of rebate associated with that but in all reality we don't put a lot of effort into supporting those particular doctors as we do a low volume doctor who needs a lot of customer care support and technical support in getting to the case. So from an ROI perspective, it's a very positive program for us and it returns a nice profitability in relation to even doctors who are not getting any rebates. More specifically sometimes we run programs like the Teen/Vivera promotion to drive volume and get doctors moving up in their number of cases there has been. We again as we said on our call, very successful last year and running the Teen/Vivera promotion and we are running it again this year. We started it a month earlier, that's very specific to the summer months here and as the doctor turns the case into us, a Teen case into us they will get to use a Vivera case between now and the end of March next year. There are some associated revenue deferrals with that because we are offering a Vivera case to the doctor along with the Teen part, so there's a bundling effect and we differ a portion of that revenue and we will get that revenue back as the doctor takes the Vivera case.

Hey John, if I can pile in for just a second. In general pricing is very stable for us globally, with the exception of that Baxter moment; most of the changes that are happening in ASP are because we are pulling on certain levers. Ken laid out a few of them. Overtime we will expect ASP to go down a bit more as mix evolves and with product like Express, and i7 and Express 5, those are incremental cases we probably wouldn’t have gotten. They come with the roughly equivalent gross margins, but our market is expanding for us and will, so the visible ASP may go down. We are going to help you unpack that overtime. So you realize, it’s not us necessarily losing price, it’s an evolution of business.

Question flipping over to the scanner and CAD/CAM services business, can you just update us on what’s driving the declining gross margin and as you complete the integration, can we expect that to start trending up again?

Yeah John, so Q1 to Q2 gross margin decline had to with a couple of specific items. First of all, we revised our standards on the scanners. In fact at the end of quarter four and we had units shipping in quarter four that we actually didn’t recognize revenue, till quarter one they had lower standard costs associated with them and that’s because we do the install with the doctor and that’s the point in time we recognize revenue. With the revised standards, we have actually increased a little bit. We had an additional manufacturing resources would increase the standards a bit. We see that coming through and shipments we made for the remainder of quarter one and into quarter two now that scanners are getting installed at just a little higher costs. The other piece of it is, we have been adding resources and trainers over the past few quarters and you see the impact of that and that has to do with making sure we can support the number of scanners we’re placing in North America and getting the doctors trained on that system. So those two things are some of the bigger drivers.

And then finally, can you just comment on the macro environment in Europe and how it might be impacting your business. It seems like the core Invisalign business continues to do surprisingly low, but Cadent faltering a little bit; either those really being impacted by the tougher backdrop?

I am not going to hide behind the economy for a minute, let’s talk Invisalign for just a moment. What we focused on Europe over the last year, year and a half is execution that we could control and if you remember, a year plus ago, we were struggling in the UK and in some other geographies, we’ve in some cases reconstituted the sales team or the leadership of that country, re-looked at programs, in some cases like i7 have rolled out new products and we’re growing again very nicely. UK led the international team this year in terms of individual country markets in Europe, and it’s great to see. The UK economic environment hasn’t gotten better in the last year. So I would say that we have the benefit of better execution using that as an example and still a really low penetration. We saw lots of headroom for growth. And you know the example of Spain; we’re growing very nicely in Spain and these are -- we’re all watching the news everyday. So I think accepting the calamitous kind of financial outcome there, I believe in general we can continue to motor through this and find opportunities for growth with good execution. Doesn’t mean things can't change. On the scanner side, on the scanner side it’s real hard to move the rock uphill because principally there is a piece of capital equipment that practitioners’ don’t need to buy today. They’re doing physical impression, PBS and other impression materials today and this is about productivity and in a period of time when there is great uncertainty, the easier default is not to invest in this kind of new capital. So I think that is a factor, but in addition, we’re not where we want to be and we’re working very hard with our partner on that and I believe overtime we’re going to be able to make that better; but I think there is also different from the Invisalign business, there is execution that hasn’t turned it around yet.

Thank you. Our next question is from the line of Glen Santangelo from Credit Suisse. Please go ahead.

I just want to follow up for a minute on John’s ASP question; you know because it’s clear that you have laid out a whole bunch of issues whether it be the FX issue, the rebate issue or the promotional opportunity; I was wondering Ken would you feel comfortable just kind of maybe isolating this FX issue to give us a sense for big it is so we can think about maybe what’s within your control and not within your control as we model ASP up in the next couple quarters?

Sure; if you think about FX, the impact to us this last quarter, if you look at the international business it was probably in that you know $5,00,000 to $600,000 range, so pretty small overall to the revenue base. But going forward looking at FX rates in particular for the year I am talking about that had been running around low 130’s over the past several quarters and now bouncing around on the low 120’s it will have a more pronounced impact on us from Q2 to Q3.

Okay, can you care to quantify that at all or….?

Well, we haven’t given you specifics on our revenues for international, so I don’t want to make a comment specifically on that.

Okay, can I may be assume that based on the guidance you’ve kind of given us today you kind of assume that the year remains in the low 120s?

You know I think that’s a fair call; what we look at is where the rates have been running as we come into the quarter just before earnings and we are looking at our guidance for the quarter and we make the best call we can, so I would say that's probably a fair range to be in.

Hey Tom, could you maybe talk a little bit more about the scanner business, you mentioned that you are starting to see some of the benefits of integrating the sales teams here in North America, you know could you quantify that or are you starting to -- could you elaborate a little bit more and the leverage you are seeing as a result of combination of the effort of those two sales forces?

Sure, I mean, we've got, we're headed tremendous 200 total people touching customers in North America and we are 30,000 plus customers in North America that we have good credible relationships with and it provides an opportunity to do some qualification and assessment of opportunity and then we really rather than dragging a scanner around individual offices, we use these events when we get them all together, study clubs, workshops, CE1s, CE2s, forums, summits and obviously trade shows where all the other vendors are in the room. We've done a very good job of cross selling and working and the first job I think all of our owners said is don't take your eye of the Invisalign ball, so I think we've demonstrated, we didn't do that; but in addition we've got attention from our Invisalign customer base and quite a few of them are either having discussions or have already bought a scanner. So that's our best opportunity. As we build the scanner sales force, we have roughly one scanner rep per region in the country and in large areas like LA or New York kind of two-ish or so; two or three. So they are very much a part of the daily rhythm with the Invisalign teams and a lot of open communication, a great amount of partnering. So with kind of very little cultural effort the two teams have grown very close together and we are pretty efficient about finding opportunities and then using these environments where we've got a group of customers together that demo and close sales. We expect that to continue and I think if you look at the good start we had off for selling scanners last year we just expect overtime that’s going to continue. On the opposite side, the Invisalign side,…

And that’s helpful, Tom if I can just ask you one last question then I’ll hop off. I just want to quickly touch on the competitive landscape, as you guys kind of moved down the market a little bit towards i7 or the Express line, you start to get a little bit more in direct competition with where maybe [donor] or dentist like clear correct those guys are. Are you worried at all about the competitive landscape and the impact of that on pricing? Just what are you seeing in the market place?

Well, first of all, Andy Grove said it best in "Only the Paranoids Survive" a great little book but if there is a combination of being confident and paranoid at the same time, maybe that definitely its schizophrenia, that’s where we are. The great thing is why would anybody given a choice add a certain value point in the market settle for anything less than a best aligner product in the world. For any five stage or seven stage product, we should be able to move more efficiently to create the greatest and most predictable amount of movement for any inclusion you’re trying to fix and so our view is we’re not pricing our value products any different than what the market already has and (inaudible) told our variable cost per unit is probably lowest in the world. So we have a great deal of flexibility, the margins in those products are sound. These are market expanding and I think it’s a good thing if other manufacturers are moving in this area, growing its just going to make it more acceptable for people to use clear liners, skills and we think that’s market over time when. So, obviously we’re paranoid about much bigger and better equipped players but the same talking we're completing through innovation and cycle time and speed and all that.

Thank you. Our next question is from Spencer Nam from ThinkEquity. Please go ahead.

Just a couple questions here. On the pricing, in the pricing side, I can understand why US pricing is coming down because of promotions and all that. But I also see your pricing coming down on the international market. It’s been coming down fairly steady over the last couple of years and I was just wondering what's driving that?

I have a couple of things driving, Spencer. First of all, foreign exchange rates. If you go back a year ago, the year was running in the low 140 to 144 to the dollar. Today it's running in the low 120s, 122, 123. That has a big impact on the year-over-year basis on the international side of the business. The couple of components, ROE introduced new products this last quarter called Invisalign I7 into the European market. So as volume there grows instead of lower price point. So we will have some mix going on and also our distributors have been growing very nicely as we pointed to over the last several years and overall, the pricing point there is basically have the half list price in essence because they’re selling a distributor pricing and they’re taking care of all the customer issues. As a mix of the distributors grow internationally and that some of the lower price products grow over time, you we’ll see more of an impact to ASP for a mix.

Hey, Spencer, on a kind of a net profitability perspective, our international partners even with the discounts for that. You know we don’t have the offsetting support cost. So that falls through nicely as volume and then the second thing is that margins are comparable on these lower end offerings to our full teen and those other products. So those are, other than FX which you would call a negative effect, everything else fits into our P&L nicely and the one expectation would be say, promotion in North America, or Europe were we run it which we would look at payback from that but in a period it might look like that’s negative.

And then on the promotions going on in the US, I think you guys are mindful of your competitive landscape but I was also wondering whether you guys, the part of the promotion was related to the competitive aspects that you know that you are trying to ensure their high volume, Invisalign physicians, dentists remain within Invisalign instead of jumping over to competitive so on and so forth. Is that calculated in your strategy of aggressively pushing the rebate program?

Every program, every promotion has its own rational and we look at what we trying to accomplish with it. In the Teen/Vivera promotion it was not so much for competitive reasons, it was to expand the value and accomplish two objectives. The first I think I mentioned two minutes ago was if we can --- teen is the hardest share to gain because no orthodontist or dentists treating teens wants to do anything other than perfect for outcomes. They don’t want to sacrifice any clinical advantage or leverage. So as we evolve Teen and the teen product in G3 G4 etcetera, we are cracking that more complex case now and helping that doctor deliver perfect their definition of perfect with mom or dad. The goal of anything we do to accelerate teen usage usually is a persistent effect office by office where they take advantage. So if we can get a good ROI on a program like Teen/Vivera program and they do incrementally more teen cases during that busy season when they have got the highest patient flow for those teen starts, that utilization level remains and they move up from there. So when we look back a year ago, this is a persistent effect and therefore it is very virtuous, the payback is very positive. We get revenue deferral from that which we pick up couple of quarters later. The second thing that's really positive is we are trying to widen the base of repeat the very usage and so many of these orthodontists that bought Teen/Vivera promotion or bought teen get Vivera, they hadn't used much of Vivera as they start getting really good feedback from patients they start ordering more Vivera. So the Vivera usage is also persistent and our goal is to widen the base of Vivera users which is happening so that program had two objectives both are being met and it was targeted right at the busy summer season, less so a competitive kind of dynamic.

Thank you. Our next question comes from the line of Steve Beuchaw with Morgan Stanley.

Tom, I wanted to drill down a bit more and a number of users in the quarter and the growth of the user base. We've talked about this before. This growth rate is very high and as you've commented before this is clearly borne out. You guys are doing a terrific job training not just more users but getting to people that are really going to fair very well with this system. How do you at this point to mention the sustainability of the growth of that user base, how long can that hold up and is there an upper bound in the US and in terms of the right base of users?

Let's break this into two pieces, Steve. The first is Orthos. We are, we think there's 9,000 to 10,000 practicing Orthos in North America and we are not, we are now just have 5,000 number in front of the submitters on an annual basis you know, it's taken us 13 years to get there. So we've got half of the active orthodontists in North America, we are not doing any business with and some of those practices are very desirable practices with you know high end, big volume and all that so that represents a long-term opportunity that where going to crack through continue to evolve the product in delivering great results, what we call predictability and all that. And that's just a long journey towards acceptance and adoption. Our view is standard of care some day. That's our hope. So we can train them, but the tougher journey there is not a training dynamic, it's acceptance and acceptance of clear line of therapy, the standard and then secondly us getting that chair. The second one I think, may be where your question was specifically targeted around GP customers and with a 130,000 to 140,000 GPs, we've just trained a slice of them and we have this long journey with them going on, where it usually takes two or three years to, with some exceptions, it takes two or three years to get them to where this is starting to become routinized. Even with the practice that's interested and engaged. So you know from seeing our utilization, we have this long tail of lower volume practices that are slowly percolating along you know doing their thing. So for practical purposes we could probably, you know we have done some segmentation in the GP base. There's probably a practical number, but even if we wanted to say maybe half of the GPs wouldn't be appropriate for Invisalign in the next five years. That still leaves us with more than double the install base we've got of users today. And so from our purposes, as we recruit for new doctors, we are really trying to qualify that they really want to bring something different into practice and put effort into it. So could we step on the gas and train 10,000 a year? Sure, I am not sure we get to a better place, but the head room is there to do that.

And then one on your, what you are hearing from the sales force now that we have another quarter under our belts here. Specifically what are you hearing from the sales channel in terms of broader orthodontic patient flow in the US, I mean given your results and what we heard from one of the big diversified players this morning, it sounds like ortho in the quarter very solid, would you take any issue with that, was it solid throughout the quarter and what are you assuming in the third quarter in terms of the sustainability of that strength? Thanks so much.

Well sure I mean Danaher Ormco, we think is part of the share leader in North America and worldwide in terms of case starts. So they are probably defining what we probably call the market dynamics in a complete way. I think you have to look, you have to unpack that a bit and success or not success, I guess is probably defined more by products and what’s being used. So from our perspective, Q2 was a great quarter for us without those. In fact Q2 was a great quarter in virtually every area, we channel every product. So Q3 is typically a strong quarter, but again we are up against these really good competitors like Danaher and Dentsply and 3M and their divisions and they are doing everything they can with their offerings and products to hold traditional or even more modern bracket offerings. We believe we will continue to be able to wrestle share away from them overtime and we would expect that we will have I think as Ken described in his outlook, we will have a lot of contribution from orthodontists especially in North America in Q3, that’s pretty typical. So I think the offices are pretty active, the summer rush is on, moms and dads are taking kids in when they are out of school and it’s a shopping season for the orthodontic industry at least in North America. So I think all that portends, we have got to go get more than our fair share in Q3 and see what it looks like when we talk in a quarter.

Thanks, Steve. Operator we will take one last question please.

Sure. Our next question is from the line of Brandon Couillard with Jefferies. Please go ahead.

Tom, could you speak to the demand trend you experienced intra quarter and may be into early 2013 and I am particularly interested in how June may have fared mostly in the US relative to your expectations? And then secondarily to what degree if at all do you perceive the Invisalign product is less sensitive to say the winds of consumer confidence or discretionary spending?

If I can take that, I will make the first one easy because we typically don't talk about flow of business. What we do talk about is the things that give rise to flow of business and what I would say is activities in office with our team promotions and programs and consumer, all those demand drivers are running well and we expect to whatever is possible to do as best as possible. Again, so I am not going to comment specifically on the details inside a quarter, the shipments and our performance have to kind of speak for itself and we give a lot of detail about that. The second part of your question, I completely lost it. I totally apologize. I was doing pretty well till I got there. I will also try to say blithely, I'm not going to answer your question. Please ask your second part again.

Just to what degree, you think the product may be less sensitive to consumer confidence or discretionary spending relative to history?

Thanks, you are very gracious. We actually test this a fair amount and we still know that cost is one of the primary reason why a consumer says I am not going to do orthodontic treatment right now. They're rated very highly, but they say not right now. $5000, $6000 to $7000. We have got a few examples going on to test that a little bit with low end offerings and interestingly we have doctors that are saying with Express 5 for example, they are treating a patient with Express 5. As a result they believe they are going to get the patient back in two or three years for a full treatment, fixing a little bit of crowding or a little spacing has that patient more excited about making this a priority. And so it's an interesting step one towards comprehensive treatment. The second part of your question is called recession proofing. There is no such thing I think in the real world. I would say that in general, teen and pediatric orthodontics is when it comes time for that; families really try hard to make that fit. We have spoken externally about the size of North America for consumers and we kind of peg that around 23 million to 24 million people in general are interested, available, capable of paying and getting a better smile very high. If we took, if we go back and look at some testing we did in 2008-2009 in the middle of the meltdown, with consumer confidence being shattered, if we lost half of that potential in terms of willing and able, we still are dramatically under penetrated. So A; orthodontic treatment is under penetrated, B; our product with its value proposition which is a more expansive than orthodontic treatment in general is really under penetrated. So the best thing we got going for us right now relative to your second question which I completely forgot a minute ago is that under preparation is a wonderful thing. We have got lots of headroom for growth.

Thanks and then Ken, on the cash flow side, were there any one-time items that may explain the year-over-year decline in the operating cash flow and then if you could explain you know just how D&A was down year-over-year; that would be helpful?

Okay so the cash question. This year, well actually we exited last year and moved into this year, we have actually had some more capital purchases in relation to getting the factory up and running in Juarez and that had some impact to us there and also and things like we benefited related to the tax provisions and stock-based comps, those types of things. So I think that answers most of that question. The other one on DSOs, DSOs have been pretty consistent at around low 60, 62, 63 days. We don't anticipate that changing a whole lot. You know customers are you know paying us pretty routinely here. You know our terms are 60 days with the doctors in North America, so having DSOs hold in there, we feel pretty good about that.

You know I meant depreciation and amortization.

Depreciation and amortization, sorry. So depreciation and amortization will pick up a little bit here. It already has started a little bit and the reason being is we put new equipment into the Juarez facility as bought new facility down in last year, outfitted it and the equipment that we had in and we have been running with for many years is fully depreciated. So you are going to see more depreciation coming from that equipment.

Thank you, operator. That concludes our call. We appreciate your time today. If you have any follow-up questions, you can reach Align Investor Relations. Thanks and have a great day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.