Align Technology, Inc. (ALGN) Q4 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Align Technology Q4 Fiscal Year 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, Shirley Stacy of Align Technology. 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 today is Tom Prescott, President and CEO; and Ken Arola, Vice President and CFO. We issued fourth quarter and fiscal 2012 financial results press release today via Marketwire, which is available on our website at investor.aligntech.com. Today’s conference call is being audio webcast and will be archived on our website for approximately 12 months. A telephone replay will be available today by approximately 5.30 PM Eastern Time through 5.30 PM Eastern Time on February 8, 2013. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 406337 followed by pound. International callers should dial 201-612-7415 with the same conference number. As a reminder, the information that the presenters discuss today will include forward-looking statements, including without limitation statements about Align’s future events, product outlook and the expected financial results for the first quarter of fiscal year 2013. These forward-looking statements are only predictions and involve risks and uncertainties such that actual results may vary significantly. These and other results are set forth in more detail in 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 statements. 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 have posted on our website under financial releases, and have been furnished to the SEC on Form 8-K. We encourage listeners to review these items. We have posted a set of GAAP and non-GAAP historical financial statements, including the corresponding reconciliations and our fourth quarter conference call slides on our website under quarterly results. Please refer to these files for more detailed information. In Ken’s comments today, he will not review the total dollars excluded for non-GAAP gross margin, operating expense and operating margin, instead we refer you to our press release tables. And with that, I’d 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 preliminary fourth quarter results and discuss the performance of our two operating segments Invisalign clear aligners and scanner and CAD/CAM services. Ken will cover Q4 financial results and the outlook for Q1 in more detail and then I’ll come back with a few closing comments and open the call to your questions. I’m very pleased to report solid fourth quarter, which culminated in a record fiscal year with over 70% growth for Invisalign volume reflecting continued adoption and increased utilization. Our continuing focus on Invisalign product evolution, market expansion and share gains are the core of this growth. Q4 revenues were at the high-end of guidance. Even without the positive effects from the release of $4.9 million of previously deferred revenue for Invisalign case refinement which Ken is going to cover more in detail shortly. Better than expected Q4 revenues reflect increased Invisalign ASPs due to lower Advantage rebates driven by lower utilization in Q4 especially among our North American Orthodontists. In addition, we got some lift for international sales from favorable foreign exchange rates. Let’s start with an overview of key highlights for Invisalign. And for Q4, total Invisalign case volume was 90,500, an increase of 10% year-over-year and a decrease of 2% sequentially. The sequential decline primarily reflects lower volume from North American customers. Year-over-year growth was driven primarily by North American Orthodontists and international doctors and compares to an especially strong Q4 a year ago, Q4 of 2011 which increased 30% year-over-year and 4% sequentially over Q3 of 2011. As reported previously, in Q4 we saw continued softness in Invisalign case volume due to broader market conditions as well as disruption of our customers’ practices from super storm Sandy. This major storm affected…

Thanks Tom. Before I begin, I want to provide a brief update on the status of our goodwill impairment for the Scanner and CAD/CAM Services reporting unit. In Q4 2012, we finalized the step two analyses and recorded an additional $11.9 million impairment to goodwill. We had previously recorded a preliminary estimate of $24.7 million of goodwill impairment in quarter three 2012, bringing the total goodwill impairment to $36.6 million. Now let’s review our fourth quarter financial results beginning with revenue. Q4 net revenue was a total of $142.8 million which consisted of Invisalign revenue of $132.8 million and Scanner and CAD/CAM Services revenue of $10 million. This is a sequential increase of 4.6% from $136.5 million in quarter three 2012 and a year-over-year increase of 10.8% from $128.9 million in quarter four 2011. The sequential increase in revenue primarily reflects higher Invisalign ASPs which benefitted from lower than expected Advantage rebates and favorable foreign exchange rates. Q4 2012 Invisalign revenue of $132.8 million, increased 4.8% compared to Q3 revenue of $126.7 million, increased 11.7% compared to Q4 2011 revenue of $118.9 million. Q4 Invisalign revenue includes the release of $4.9 million of previously deferred revenue for Invisalign case refinements. Case refinement gives a doctor the option to additional aligners typically during the final few stages of treatment if further chose movement is needed in order to meet the original treatment goals. Aligned defers revenue for case refinement when an Invisalign case shifts. In Q4 2012, we determined that the actual case refinement usage rate was lower than our estimate and as a result, we released $4.9 million of revenue deferred for the case refinements. Adjusting for this one-time favorable impact of $4.9 million, Invisalign revenue for Q4 was $127.9 million, up slightly from Q3 and an increase of 7.6%…

Before I move to some closing comments, I want to thank Ken for his service over the past seven years, he’s earned some downtime and as he is really going to enjoy that. Thank you so much. We have a search underway for a new CFO and expect to complete that by the end of Q2. During the interim, Roger George will formally pickup responsibility to the finance team and service interim CFO. Now to wrap up our comments. Q4 was a very solid end to a year of record Invisalign case volume and revenues. Despite slower growth in the back half of the year, our strong first half performance helped drive nearly 17% Invisalign case growth with 16% North America and 23% international. We had many significant accomplishments this past year that contributed to that growth, including entry into new market segments with the launch of Invisalign Express 5 and Invisalign i7, expansion into new emerging country markets, and the unveiling of our next generation aligner material SmartTrack, which began commercial shipments two weeks ago. We are starting off the New Year with several new products and feature enhancements including the new iTero scanner, Invisalign Outcome Simulator, and Invisalign G4 Enhancements which are all commercially available in Q1 of this year. In addition, our customers are reporting improving trends in patient traffic in their offices and for Invisalign case starts. That near term trend, along with our low penetration into the overall orthodontic market, reinforces our long-term view of top line growth of 15% or higher. Ken covered our framework for 2013 and assuming patient traffic continues to improve, we believe this will be another solid year in terms of Invisalign case starts. So to summarize; 2012 was a year of delivering solid results in a tough environment, with very positive progress for our customers and while initiating a set of important organizational changes for the company. 2013 will be another important year for us as we commercialize SmartTrack, integrate the APAC team back into Align, launch new products, and accelerate our marketing programs. We are committed to becoming a market leader in dentistry and will continue to build the team to deliver on that goal. All of these investments in product, programs, and our internal team are focused on one thing, getting us to the day when even our most conservative customers feel confident saying “every case is an Invisalign case.” I really look forward to updating you on our progress as the year unfolds. And with that, operator, let’s get to the questions.

Thank you. (Operator Instructions) Our first question comes from the line of John Kreger with William Blair. Please proceed with your question.

John, are you there? John Kreger – William Blair: I am. Can you hear me?

Yes, now we can. Thanks. John Kreger – William Blair: Great, thanks. Tom, can you give us an update on where you think the broader orthodontic market is trending in terms of case start volumes?

We certainly aren’t the whole market. We’re just a thin slice. Our sense is certainly in the second half of the year it was a tough place. Our orthodontists all reported softer volumes. It was a decent teen year summer, but I think adults kind of slipped away from everybody. So in general, we would target total segment growth in low single digits, us being able to take share has helped us fuel our growth. So we don’t think it’s been healthy. We do, our customers do report increased patient traffic calendar is filling up with consult in a good way, nothing explosive in growth but solid progress. So we think that points us some improvement. In ortho total starts, and we think with that happening we can get more than our fair share. John Kreger – William Blair: Great, thanks very much. I think the one topic maybe you didn’t cover in your prepared remarks. Can you just give us an update on the IT front and then what we can expect out of the ITC trial that I think starts in a week or two?

Better than having me comment, we have Roger George here. Roger, if you can turn your microphone and just to give a brief commentary. Thank you.

Thanks, Tom. Good afternoon everybody. As we’ve disclosed, the ITC trial begins next week in Washington DC. If you know much about that administrative law forum, it works differently than a typical federal court and so called Article III court under the U.S. Constitution. The administrative legal courts at the ITC have their own set of rules, live witness testimony is quite limited. Most testimony is submitted in writing for the court’s consideration. So we’ve all submitted our briefs. Ours was about 600 pages long that staffing submitted its brief and naturally ClearCorrect submitted theirs because it contains what’s called confidential business information; I’m not even allowed to know much of what is in ClearCorrect’s brief, only our outside lawyers get to know. So the trial will happen over the course of about a week and the judge doesn’t rule from the bench. He takes everything under advisement. There will be a period of time afterwards where if particular issues come up at the trial, each side will have a chance to provide some further briefing, but really there is going to be a dark quite period where we’re not going to know anything more from the ITC until about early May. And in early May, we may find out that they rule in our favor which will kick off another round of possibilities for appeal by ClearCorrect and acceleration of the chain to the ITC that’s the commission itself. But that’s what immediately is in front of us concerning that matter.

John that covers the waterfront for you there. John Kreger – William Blair: It does. Thanks very much.

Perfect. Thank you.

Thank you. Our next question comes from the line of Steve Beuchaw with Morgan Stanley. Please proceed with your question. Steve Beuchaw – Morgan Stanley: Hi, good afternoon.

Hi, Steve.

Hi, Steve. Steve Beuchaw – Morgan Stanley: Okay, thanks for taking the questions everyone. Well, Ken, since you started the ball rolling down the 2013 path, I thought we should pickup the ball, because while you made a comment about case start growth and your confidence there. I think we can interpret your comment about the growth outlook for couple of different ways. I wonder I don’t know if this is for Ken or for Tom, but given the comment that you think you get back to your normal growth trend. Just given what you’re guiding for excluding that $4 million acceleration in the first quarter around Vivera. Is it just incredibly obvious statement to say you’re guiding for pretty material acceleration over the balance of the year and is this another pretty strong double-digit year in the top line as you’re thinking about it?

I think, Steve, I guess we’ve said what we’ve said along with the framework that Ken provided broad strokes, the Q1 guidance and more specific strokes. We felt that necessary to comment on our long-term financial model which both Ken and I did comment on in different ways. I think that stands for itself. We think this business can grow at that kind of level if this is a softer year for us in 2012 and we grew at 16% or so. I think most people would love the other problem. Ken, I’ll let you pickup the rest of that question.

Yes, I think again its dependent partly on the fact that want to make sure that patient flow is still there entirely in the office. So one of the things we made a comment on is, when we predicated on that that we see softness in the industry that that growth may not be that which we saw in the fourth quarter until we started exiting in here. So we’re very confident. We have the right strategic levers that we’re working on and have in place. We’re going to be adding the sales force to drive additional growth in the business and upgrading our advertising campaigns again being on air mode to drive more patient interest. So we’re doing a lot of things to push consumers into the doctor’s offices this year as well as get after getting increased sales in Invisalign with a broader sales force and as long as patient flow is there, we think we’ll continue to grow the business. Steve Beuchaw – Morgan Stanley: Okay, that’s very helpful. I will follow up, so. And Tom asked you, as you think about the way that the business trends over the course of the year. And we understand that around the end of 2012, it probably the real big issue that was pressuring patient starts was the macro uncertainty around the U.S., some of that might have been, let’s say the fiscal-cliff, some of that might have been the election. What do you think are the two or three important levers that you’re going to follow over the course of 2013 as you try to get a sense for what the patient flow looks like? Thanks so much guys.

Sure Steve. We’ll leave the high-end macroeconomic forecasting to folks like you. That’s hard enough to do. We try to see what’s going on at a trend level and then try to understand how our customers are feeling in the office. And we know if we can keep our orthodontists customers in North America and Europe kind of an offense, with the right new products and interested and engaged and ensure they can get great results. And if we can keep and if the patient traffic is sufficient that GP offices that are more moderate users can feel comfortable to lead with the product like Invisalign then we know we can get more than our fair share. Those are the more secular trends we track closely, Steve. Steve Beuchaw – Morgan Stanley: I appreciate that very much. Ken, all the best to you. It’s been great working with you.

Okay, thank you.

Thank you. Our next question comes from the line of Matt Dolan with Roth Capital Partners. Please proceed with your question. Matt Dolan – Roth Capital Partners: Hey guys, good afternoon and Ken congrats on the tenure there.

Thank you. Matt Dolan – Roth Capital Partners: So I wanted to continue on your longer term commentary about shift over to the operating margin. You’re guiding to 16% or 14% op margin in the first quarter, which is lower than what we’ve seen in many recent quarters, (inaudible) growth dynamic that you might have touched in the previous question. Or is there some spend in the first quarter that isn’t sustainable throughout year. Maybe just walk us through how that progression might take place.

Sure, I guess I first make a comment on, if you think back to 2011 or 2012 even this year, we came in typically with the first quarter we have to step up and spending every year. So we start out the year usually in that kind of high teen range in operating margins and we’ve been able to grow at each quarter as we move to the year this year and be able to exit the year at 23% operating margins for the year, kind of approaching that low-end of the range on an annual basis. We are entering this year a little over base year as far as operating margin is concerned with the step up in spending that I was referring to. And that spending is going to be there for the year that might go up and down a little bit based on timing of activities and those types of things. We’re really looking at driving top line revenue here and in getting the gross back into the top line with Invisalign sales getting leverage off of expanded sales force as well as lot of the chair-side apps like the Outcome Stimulator with the iTero scanner in driving more Invisalign volume. So we’re really focused on driving top line volume and maintaining on gross margins in that low to mid range of our long-term guidance and growing into the OpEx here.

Matt, if I can pile up for just a second. Nothing has changed in terms of our ability to kind of toggle spending, absolute spending up and down although in a given quarter it acts more fixed in general. We believe over the span of year with things improve, we can dial up things come and done a little bit, we can dial back as we proven in the past. Some of the investments we’re making around coverage and all that, we don’t do those all the time and they’re always a little lumpy when we lay a man. We’re in the mode right now of bringing more reps online in North America and that started actually in Q4. So for us we’ve gone through the cycle of analysis and believe that’s both strategically and tactically a good choice and especially with our Q1 step typically step up in spending, it shows up a bit more. But again, just as we’re pretty comfortable and in general we can live with our long-term model and the top line or even through the investments we’ve been making. We’re pretty comfortable as we at least exit the year; we can get back towards at least the low end of our long-term operating margin model as well. Matt Dolan – Roth Capital Partners: Okay. That’s helpful. And then the second question is more on the utilization side, it flattened out in the fourth quarter if anything and I know you’d spoken about the summer being a little slow for adults on the ortho side. So can you give us some specifics on what’s given you confidence that the volume growth you’re expecting to see which is low double-digits in Q1 and then it sounds like improving through the year, which one of those utilization variables are specifically driving that trend? Thank you.

I guess maybe the clearest read is into the ortho practice. And ortho practices are a bit busier than they were. It was, they had very quite late summer, early fall, literally September October some orthodontists remarking that it was the softest they’d seen since the melt down of 2008. And they got to work and we got to work whether its – one customer asked me if it was tied to the election, because shortly after the election, traffic picked up in their office. And I’ve seen, too hard to understand as I’ve told the earlier caller, we don’t – we read the macroeconomic forecasting, but we don’t make it. We really watch patient traffic doctor behavior closely and on the ortho side, they’re engaged. They’re more encouraged with Invisalign as a product and more comfortable they’re getting better results with it. It’s easier to use and that bodes well for whatever that’ll be. On the GP side, it is obviously more difficult to forecast. We have thousands of GP customers that do one or none cases on a given quarter and calling that as a forecast is probably our continuing biggest challenge, but with that said, we do multiple top down, bottom up, practice by practice forecast during each quarter and we’re getting better visibility in what they’re doing. If we have the traffic in the offices and we have our customers on offense we’re going to get case starts. Matt Dolan – Roth Capital Partners: Thank you.

Thanks, Matt. Next question please.

Thank you. Our next question comes from the line Robert Jones of Goldman Sachs. Please proceed with your question. Robert Jones – Goldman Sachs: Thanks for the questions. Yeah, I was just hoping you can guys help me reconcile a few items from a high level. Obviously it looks like you’re calling for some very healthy case growth in 1Q and clearly ASPs were much better than what were looking for across the portfolio that is in 4Q. So I guess, just, what’s driving if you could summarize for us, what’s driving the lack of EPS growth in 1Q? Just trying to get better understanding of what’s going on in the spending side and how we should be thinking about that throughout 2013?

Yeah, this is Ken, Rob. I kind of refer you back to some of the comments that we just made on the call. So we have typically a step up in spending in Q1 sequentially related to compensation and benefit programs at the company here. That happens every year. This year, we’ve also had the, in the first quarter we’ve started recognizing expenses related to the medical device excise tax. And then we have the investments going on which we’ve been talking about on the sales force expansion on the consumer platform etc. So we’re going to see spending step up from about $76 million, $77 million in quarter four to about $83-ish million in quarter one. And those are the items that are driving the spending. When we get the headcount on board, and like Tom said, it takes about several quarters to get a sales person really at this speed in their new territories. So we’ll start getting leverage out of those sales people as we move through the year. And as well as being on air more, with our consumer programs, we did a nice uptick in traffic to our website. When we’re on air, we see that pretty consistently and hopefully those turn into cases as well ultimately. That’s what driving the OpEx increase and like I said we think that’s going to be relatively at that level if we take a little for the year. Given timing as a big events like AAO or ADA that occur in different quarters or maybe some of our own summits we put on for our doctors ourselves. As far as gross margin, we think that’s going to be pretty consistent. Here we’ve got some little bit of headwind with some of the material cost coming in, but we think we can overcome that with the volumes in the business here. And from a manufacturing point of view, we actually should get less breakage on the line and better yield out of the line of material until it’s a little bit softer. So really gets back to top line growth and making sure we manage these expenses appropriately here. But we’re investing for some strategic purposes and adding in those types of resources as we mentioned. Robert Jones – Goldman Sachs: That’s helpful. And then just if I could dig in on the team line and the pace of uptick there. Does seem like in the quarter the year-over-year growth seemed little bit light even after factoring in the 4Q seasonality and you talked positively about the express line and the expectations there. Can you maybe guys just could you share with us how the trended team has been relative to your internal expectations and how are you thinking about that penetration as we move forward?

I guess I’ll jump in here, Bob. The general direction for us on teen has been very, very successful. We continue to see progress quarter-over-quarter and year-over-year and I think that if there is some market growth in the ortho segment, we get even more growth. If there is less or say even negative growth in ortho segment, we get – that’s a bit of a moderating effect. But if you look, for example at our webcast slides, you see that spike in Q3 it’s a very consistent profile year-over-year, quarter-over-quarter with that same kind of pattern except to the amplitude it’s greater. So the second thing that’s going on inside that that gives us confidence that we continue this direction is the types of cases we’re getting that are teen cases. In the earliest days, three years ago, four years ago, we’ve got just the simplest cases because mom and dad weren’t willing to kind of say, well, I’ll do Invisalign if it’s good enough. They’re going to get braces or Invisalign or whatever getting their teen straightened and they want perfect. So the more our doctors believe they can deliver perfect to the team, to mom and dad, the more they’re going to use our product. And so with G3, G4, SmartTrack with that we can actually score the complexity of an incoming case, we actually look at the complexity of incoming cases on teens, and that is the hardest share for us to take from traditional bracket through wires and yet we see that we’re getting harder and harder cases in. So that pertains well for our continued progress. Again doesn’t happen overnight, but our goal is very gene sees and do better and better and get more and more than our fair share. So, again, good steady progress, even though the total amplitude I think was down, because I think that’s kind of a dampening effect to the broader economy. Robert Jones – Goldman Sachs: I appreciate all the comments.

Thanks very much.

Thank you. Our next question comes from the line of Glen Santangelo with Credit Suisse. Please proceed with your question. Glen Santangelo – Credit Suisse: Yeah. Thanks for taking my question. Tom, just two quick ones. I want to follow-up on the comments regarding gross margin in Q1. It kind of sounds like there are some type of inventory reserves that’s going to be taken. Could you maybe elaborate a little bit on that? And then secondly, I wanted to also talk about the mix issue. If I look at sort of the Invisalign for this quarter, the case volumes grew only 4% which I think is a slowest quarter on record and it seems like the mix is clearly shifting towards the express categories and obviously teen grows, but teen also slowed as well. So I’m kind of curious if I look at your guidance for 1Q, it kind of seems like you’re guiding ASPs continuing to go down and I’m wondering if that explained by the mix and is that see anything about the long-term trend or how we should be modeling margins over the longer term?

I’ll tell you what we’ll divide and conquer here, Glen. I’ll take the broader kind of market mix directional question and I’ll ask Ken to come in and talk about the reserve on as we transition materials. You pointed to two or different things at once and I’ll see if I can then back them. First, we are trying to accelerate in a value-based area for Express 5, for i7, i14 in the UK and the few other countries in Europe and that’s purposeful because we found small labs etc doing very simple cases and it was an opportunity for us to bring value at the basically the same price they were selling it for in far better results for our customers. So you should expect that to continue. The reason why it appeared to accelerate on a mixed basis had two drivers. One was that we are trying to push greater usage of say, Express 5 in North America with a promotion which did get some trial and repeat usage. At the same time, the denominator got smaller because it was a softer overall quarter on full on adult and everything else. So if we were maybe to adjust for the softness you can see a little bit of mix shift, but it wouldn’t be as pronounced as maybe shows up here again, more of a softer market dynamic. The second thing is, that as we talked about it, a lot of volume came in late in the quarter that didn’t necessarily we’re commenting on it because it’s important and it sets up the Q1 discussion. We generally don’t comment in detail or quantitatively about receipts only to the extended points to our business flow and what I’d say is that the business generally came back and as we look at Q1 there is a more normal balance, we would expect a more normal balance of adult starts and all that versus a very, very soft first half of Q4 meaning that mixed shift for express and those kinds of things were more pronounced. I’ll stop there for a second on the mixed story and let Ken pickup on the inventory reserve for SmartTrack.

Yeah, hi Glen. First of all, with a big transition like this going from one material to another are at the significant move for the company here. And as we anticipated that we’ve been planned for it, we wanted to make sure we had enough safety stock around of the current material that we have been using all to date. We plan to have 100% cut over to the new material when we turned it on, which is exactly what we did and we wanted to make sure that we’re recovering ourselves to make sure we had enough of the older material or current material around. In case we had a glitch for some reason, at the end of the day, the good thing is that everything has gone very, very smoothly, the transition of new material has gone really from a manufacturing perspective. So we knew we would have some inventory around. We weren’t sure exactly how much depending on what happens, but essentially we’re not going to use that old material. It has a shelf life of just a very short of period time about a quarter’s three to time. So we’ll actually be writing that inventory off as we go through the quarter here.

You should consider that to be success because that was safety stock, using that inventory reserve that the transition to SmartTrack didn’t go well. Not using it signaling the reserve is going to get charged in Q1 says the transition has gone very well. Glen Santangelo – Credit Suisse: Okay, thank you.

Thank you. Our next question comes from the line of Jeremy Feffer with Cantor Fitzgerald. Please proceed with your question. Jeremy Feffer – Cantor Fitzgerald: Hi, thanks for taking my questions. Most of my things have been answered, just wanted to come back quickly on guidance for 1Q. You mentioned that currency was positive in 4Q, so can we expect or at least as implied in your guidance you don’t really see any future FX headwinds in 1Q?

Well Jeremy I guess it depends where it goes, I mean we have our views of it. As we know today, its running a little bit higher in euro to the dollar than it was a month or two ago. So we take views of that into account as we develop our guidance but we’ll have to see obviously that for the quarter. Jeremy Feffer – Cantor Fitzgerald: Okay. And then just following up on that. So then the conclusion into draw from the expected revenue growth to be slower than the expected volume growth that’s purely case of mix and also an improvement in utilization driving higher Advantage rebate usage? Is that correct or?

So what I would suggest you do as you look at the volume growth from Q4 to Q1, roughly 5% to 7.5% in our guidance. And if you look at the revenue growth and if you exclude the case refinement adjustments that we made in quarter four here and based on the revenue that would get you $137 million, $138 million adjusted and take that against the guidance we gave for revenue that tracks back to about 6% to 9% growth in revenue roughly. Jeremy Feffer – Cantor Fitzgerald: Okay.

And that includes the Vivera as well. Jeremy Feffer – Cantor Fitzgerald: Okay. That’s very helpful. Thank you very much.

Sure. Thank you.

Next question please.

Thank you. Our next question comes from the line of Brandon Couillard with Jefferies. Please proceed with your question. Brandon Couillard – Jefferies: Hey, good afternoon. Thanks for taking the question. Ken, how does the deferred revenue benefit in the fourth quarter breakdown between North America orthos and GPs and then versus international and then any color you can give us by product line would be helpful.

Well it goes across pretty much all of our products based on the volume of products that we’ve been shipping over the past several years here. We actually don’t really disclose that on our product line basis. I can tell you from a geographic perspective the majority of the adjustment for case refinement is related to North America shipments given the volumes we’ve had in North America over the past several years here compared to international. So does that help a little bit? Brandon Couillard – Jefferies: Yeah, yeah. And then could you give us an update on the Cadent facility transition, I believe that should be complete by now. And then do you still expect is this rational, but to assume $4 million of annualized savings at crew in ‘13 from that move?

So, we’ve completed the transition actually last year at the end of the year here. And coming into this year, we have a pretty much all into the new facility down in whereas. As far as the $4 million statements goes, in cost of goods sold, because of the move, yes we have seen the savings there, but I will tell you we’ve also had to deploy other resources against the business which offset that $4 million in savings in relations to the iTero issues we had several quarters that presses forward in technical support. So technically we’ve seen the savings with the move through facilities cost savings as well as overhead and labor costs, but again we’ve deployed some of that against other activities in the company.

We’ve spent it back on other activities, some of it, none of it.

Thanks, Brandon. Do you have another question? Brandon Couillard – Jefferies: Just one more, quick one, is that all right?

Yeah. Brandon Couillard – Jefferies: Any chance you could just quantify exactly how many Invisalign sales reps you ended ‘12 with? And then how many headcounts you expect to add in ‘13 and will these be focused on Invisalign or the scanner side of the business?

We’re going to finalize that. I will take a look at that just before we file here I guess because we get a forecast from the each field as they’re making offers and bringing people and we actually want to make sure they’re on board. I’ll tell you we probably had a dozen or already start with just as the year ended. So I don’t know, Ken did you size it in more detail for North America?

No, we did not.

So I think I’ll pull up short of that but it’s a meaningful addition and then obviously when we feather in the support team and the sales team in APAC as well as some incremental coverage in Europe it’s a Europe significant expansion in our go-to-market site. So we wanted to talk about it in those terms and again I guess by the time file will rustle down absolute numbers in terms of you can see growth over last quarter. Brandon Couillard – Jefferies: All righty, thank you.

Sure.

Question please.

Thank you. Our next question comes from the line of Spencer Nam with Janney Capital. Please proceed with your question. Spencer Nam – Janney Capital: Thanks for taking my questions and Ken we’re going to miss you. Good luck to you going forward. Just quick question on the amortization of intangibles. What kind of impact you will have now that you guys not going to be taking out of the non-GAAP numbers? What’s the estimated impact for 2013 on that?

The amortization of intangibles is $1 million a quarter. We’ve been consistently showing that between GAAP and non-GAAP this past year, but given the fact that those charges will continue for 10 to 13 years depending on the intangible, at least thought there was more appropriate to included in the non-GAAP at this point in time, so about $4 million a year. Spencer Nam – Janney Capital: Okay, great helpful. And then on China, Tom, maybe you could comment on this. So you’re going to start seeing some numbers from China. My understanding was that you guys had been really kind of building the pack of data if you will with samples and thought leaders. I’m curious how those sort of overview work, what kind of results you guys have gotten. How confident you guys are that the experience that you guys have put together so far is going to effect the adoption here?

Couple of multipart question, I’ll try and give a simple answer and that answer would be, our goal is then to take the top most respected orthodontists and dentists in China have them get actual experience with the product which is why, it was essential we had G3, G4 and these other innovations in their hands when they started. Have them complete lots of cases and then be able to, with us work on developing training for all their colleagues across China in the major cities and even second tier cities. And that’s happening. We now have with some of the forums I talked about recently, we have these Chinese doctors showing finished cases for very, very complex year-and-a-half, 18 month, 24 month cases, extraction cases and very complex class II and class III even some surgical cases. And so with them showing their own results with the Invisalign product it is fairly dramatic statement. Again we’re trying to build the right foundation and moving slowly and still have a pretty small business. I think we identified in our annual report last year it just how small it was in total, but I think it has the potential still to be very large and that’s why we’re going slowly and ensuring we have the support of the most respected clinical leaders in the country which is what we’re about. Spencer Nam – Janney Capital: Thank you.

Thanks Spencer. Question please.

Of course. Our next question comes from the line of Jonathan Block with Stifel Nicolaus. Please proceed with your question. Jonathan Block – Stifel Nicolaus: Thank guys for fitting me in. maybe one long question and one short one. And the first one, I’ll apologize in event of the bluntness, but you preannounce at the low end of your 4Q and you actually end up doing the high-end even exiting out the deferred. And when I look at your 1Q guidance guys and the commentary around GP is being flat, international being flat to down slightly. What it implies is about 20% sequential growth on case volumes in the ortho channel. If I go back over the past four years, you only to that metric one time and it was right after the launch of G3. So if you can talk your conviction or how comfortably you are with that 1Q guidance and I know there was a response in that Tom’s question a little bit earlier, but what are you seeing in the ortho channel to give you such a high level conviction that you can see that type of sequential move in that particular channel? Thanks.

Sure, no apologize needed for a blunt question. As we commented in general about our standing guidance on December 5th with awake of a few executive departures, we felt it was important if we saw that softness to comment on us, no more no less. Literally the month of December turned on its head literally shortly after that call and we were very busy, very busy along with the offices remainder of the month. So again it goes back to forecasting, I don’t know what that is, but we’re happy to Ken, we’re happy that tight came in a bit. So what gives us confidence? We see pretty good visibility into all of our high volume practices, the intentions to build their practice, someone happiness on their part. They maybe didn’t get to the level they expected in the Advantage program. Detailed plans in place to market their practice, build on Invisalign, a lot of excitement about SmartTrack and then we feather that in with think we can drive a little progress in GP and again a harder channel to move quickly. And then what I will call normal internal where they take, in our eyes at least, extended holiday breaks and you’re driven really by number of days worked. So with all that said, again, we’re still being thoughtful about broader economic environment. We feel reasonably comfortable that we can continue to build on the volume we saw that jumped really and like the second week in December. So that’s how we’re calling it. No more, no less. Jonathan Block – Stifel Nicolaus: Yeah. Very fair, I appreciate it. I guess it just seems a little less conservative over the past couple of years. On the second question, when I look at and I hate to burn the question on Cadent, but when I look at Cadent and I look at the sort of the service revenues not the scanner with the service, that’s come down sequentially four quarters in a row. And so I guess the scanner sales are someone hanging in there especially considering Europe, but the services about using the machine once it’s in there, the recurring revenue should grow with the growing installed base and we’re seeing the exact opposite. So can you speak to, are these things being used, or are they being used effectively or why is that number coming down sequentially? Thank you.

I’m deeply hurt that you’re saying you burned the question on Cadent here, Jon. So we’re glad you asked a question about Cadent. The fact is North America is working very well. We predicted internally that services would go down principally because we decided to get out of the bracket positioning business they had called IQ and there were several hundred high volume mostly ortho that use that service a lot. We just didn’t feel we can scale it as we thought about the pieces of that business moving into what as, we would had to significantly reinvest in it. So we had a very thoughtful discussion with again hundreds of customers that really liked it and have a glide ramp down. They are turning off the usage of that product that’s directly related to that service stream. If we then compare those side, if you looked at Invisalign case submission and the other things they’re using in for both on GPs, you would see services growing very nicely, that isn’t visible the level we disclosed at this point, but the principle issue driving that service volume or service revenue down is because of a concentrated base of customers with a product we’re no longer supporting and that’s started really in the summer time and I’d say early Q3 that that trend you probably would not have seen as early as we did, but now that that’s what showing up, so over time that’ll get fixed. The second part of that question is, we’re kicking butt in North America in terms of placing scanners and customers are thrilled with them. The new scanners coming out, it is exciting, it’s faster, its better, all the stuff. So we’re actually winning in North America, notwithstanding gross margins which we have plans to fix very significantly. In Europe, we’re not trying because we don’t have a better plan right now and I guess stepping back if you just see year-over-year flat, that really obscures the progress we’ve made in North America and the progress that bring that and making sure the business is profitable in its own right. So with that, we’re actually pretty excited about this business and its longer term prospects, but I’ll grant you the visible part you’ve got doesn’t look as good as it should. Jonathan Block – Stifel Nicolaus: Thanks guys.

Sure Jon.

Thanks Jon. Operator, we’ll take one last question please.

Certainly. Our last question comes from the line of Jeffery Matthews with Ram Partners. Please proceed with your question. Jeff Matthews – Ram Partners: Hi, great thanks. Can you hear me?

Yes, Jeff we can. How are you? Jeff Matthews – Ram Partners: Great, good how are you?

Okay. Jeff Matthews – Ram Partners: And Ken, good luck, congratulations.

Great, thank you. Jeff Matthews – Ram Partners: Two questions, one is, does the change in recognition of the deferred revenue. Does that have anything to do with better outcomes that the authors are seeing a change in the pattern of usage or is it simply outdated reserving methodology? And number two, you sound like you really have a lot of marketing pushes coming and I’m wondering if that’s seasonal or if that’s a reflection of your new teen. Thanks.

Okay. I’ll take your first question on the case reserve planning and then Tom can comment on the marketing. Really what it is just looking at a more detailed analysis and more in-depth at the actual usage that we’ve seen over the past several years of case refinement and looking at the estimates we were using in relation to accruing for that case refinement. In going back and updating is very simply we were estimating too high on the usage of case refinement. With that said, I will say case refinement usage has been going up over the past several years, but we think also with the new technology in G3 and G4 and we haven’t probably had enough experience in the field yet because if you think a doctor has to get the patient as to complete the case, might take year, year-and-a-half and they have up to six months of used case refinements beyond that. So as we get out to year or two I think you’ll probably start seeing some benefit of that in relation to case refinements, we probably haven’t seen any material way to date. Jeff Matthews – Ram Partners: Got it. Thanks.

Great. Jeff, I’ll take the other part of it. And maybe the first framework is, we aren’t spending dramatically more money and I should not say dramatically at all in the sense it just we’re spending incrementally more, we’re doing better in a more integrated way. It was, for us, we felt it was a time for a good investment in a new consumer platform that’s going to give us an opportunity to build on that both with traditional media, GP radio as well as a lot of other sites. So in addition, we’re working in a much more organized way now that we have what I’ll call maturing channel coverage in at least five countries in Europe. And to a much smaller scale, won’t be doing 30 or 60 seconds spots it’ll be, what I will call, bump ads or whatever, little small elements, but its all about raising the awareness of Invisalign especially in markets where orthodontic treatment is not broadly used for among kids, adults, etc. So again reasonably small dollars in Europe, but what I’d say kind of common dollars with the investments we’ve made in building out the business and improving the product and making sure the distribution team is in place to take advantage of that demand creation. North America, all in we’re going to spend a bit more but we’re going to do it more effectively. Jeff Matthews – Ram Partners: Okay. And you’re obviously seeing a great potential for return on this.

We actually measure in many, many different ways and then we also survey our customers in one of the things they say consistently is, we are one of the best practice building partners in dentistry orthodontics and patients come and asking for Invisalign by name that has an outsize impact on, if we, the patients comes in and asks for Invisalign by name, and the doctor has confidence they can deliver the results they need, we’ve got a very good shot at getting that case start and that’s our game plan. Jeff Matthews – Ram Partners: Got it. Thanks very much.

All right. Well thank you every one for joining us today. This concludes our conference call. We look forward to seeing you at our upcoming financial conferences and industry meetings. If you have any further questions please follow up with Investor Relations. Good bye.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.