Align Technology, Inc. (ALGN) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Align Technology Q1 2013 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Shirley Stacy of Align Technology. Thank you, Ms. Stacy. You may begin.

Thank you, operator. Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining to me today is Tom Prescott, President and CEO; Roger George, Vice President, Corporate and Legal Affairs, General Counsel and Interim CFO; and Karen Silva, Vice President of Finance and Corporate Controller. We issued first quarter fiscal year 2013 financial results press release today via Marketwire, which is available on our website at investor.aligntech.com. These results include a $26.3 million impairment of our long-lived assets and a $40.7 million impairment of goodwill. Today's conference call is being audio webcast and will be archived on our website for approximately 12 months. A telephone replay will be available today by approximately 5:30 p.m. Eastern Time through 5:30 p.m. Eastern Time on April 26, 2013. To access the telephone replay, domestic callers should dial (877)660-6853 with conference number 411500 followed by #. International callers should dial (201)612-7415 with the same conference number. As a reminder, the information that the presenters discuss today will include forward-looking statements, including, without limitation, statements about Align's future events, product outlook and the expected financial results for the second quarter of 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 risks are set forth in more detail in our Form 10-K for the fiscal year ended December 31, 2012. These forward-looking statements reflect beliefs, estimates and predictions as of today, and Align expressly assumes no obligation to update any such forward-looking statements. Please also note that on the conference call today, 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 reconciliation to the comparable GAAP financial measures, where practical, are contained in today's financial results press release, which have been posted on our website at investor.aligntech.com under Financial Releases and have been 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 reconciliations, and our first quarter conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. 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 our first quarter results and discuss the performance of our 2 operating segments, Invisalign clear aligners and scanner and CAD/CAM services. In our release, I'm sure you noticed a charge we took against our scanner business. Roger will cover our Q1 financial results, including the discussion of that charge, as well as our outlook for Q2, and then I'll come back for a few closing comments and some questions. Q1 was a solid quarter across the board. We started the year out with better-than-expected revenue and earnings, driven primarily by record Invisalign case volume. Strong Invisalign case shipments in North America, especially among orthodontists, reflect stable patient traffic in our customers' offices as well as continued sales and marketing activity to encourage doctor engagement. During the quarter, we launched SmartTrack, our next-generation aligner material, which is now the standard for Invisalign clear aligners worldwide. We have received consistently positive feedback from our customers and their patients as they move beyond initial usage. We're excited about the potential for SmartTrack to help build even greater clinical confidence so our doctors who will utilize Invisalign more often and on more complex cases due to the improved control of tooth movements and the added benefit of increased patient comfort. Let's get started with an overview of key highlights for Invisalign. For Q1, total Invisalign case shipments grew across all customer channels to a total of 98,200 cases, an increase of 15.1% year-over-year and an 8.5% increase sequentially. Year-over-year growth was driven by increased Invisalign utilization, especially among North American orthodontists, as well as customer base expansion for North American GPs. The sequential increase in Q1 primarily reflects strong growth among North American orthodontists as well as good growth from…

Thanks, Tom. Before I go through our Q1 operating results, I would like to note that there are several items we exclude from our GAAP results. These include impairment of long-lived assets and goodwill for our scanner and CAD/CAM services business, which are detailed in our Q1 press release. Recent changes in the competitive environment, including announcements in March of new lower-priced scanners, have caused us to reevaluate our outlook for scanner revenue and profitability. Our iTero scanner offering is at a premium price due to its technology, utility and end-to-end connectivity. However, we believe that our customers may respond to lower-priced scanners with less utility offering. As a result, we reduced our volume projections, and this triggered an impairment analysis of long-lived assets and goodwill. From these analyses, we recorded impairment charges for goodwill of $40.7 million and $26.3 million for long-lived assets. Even though we determined that goodwill and the long-lived assets were impaired, this does not deter our belief in the overall long-term benefit of intra-oral scanners or in our plan to offer the best technology and utility at a competitive price. In my comments today, I will not review the total dollars excluded for non-GAAP gross margins, operating expense and operating margin, and instead refer you to our press release tables entitled Reconciliation of GAAP to Non-GAAP Key Financial Metrics and Business Outlook Summary for a complete reconciliation. Let's review our first quarter financial results. Q1 net revenue was a total of $153.6 million, which consisted of Invisalign revenue of $141.6 million and scanner and CAD/CAM services revenue of $12 million. Q1 net revenue increased 7.5% from $142.8 million in Q4 2012 and 13.7% from $135.1 million in Q1 last year. The sequential increase in revenue primarily reflects higher Invisalign case shipments and, as expected, an…

Thanks, Roger. Overall, I'm pleased to see our Q1 results, especially with respect to Invisalign volume. And as indicated by our guidance for Q2, we believe we can build on this good start. These results begin with stable patient traffic in our customers' offices and are driven by good execution of practice-building activities. Heading into Q2, we expect to keep our focus on driving increased activity in offices and better customer engagement, even as GPs, orthos and their patients all kind of heading in different directions with summer approaching. Fewer patients schedule routine dental care around the summer vacation period. As a result, many GP dental offices close for at least a few weeks. Our job and our challenge is to keep those GP offices engaged and their patients interested even through the early part of summer. On the other hand, Q2 also marks the beginning of the busy summer season for our ortho customers and teenager orthodontic case starts, and we would expect to continue to gain what we call share of chair among the North American orthos this year. At the same time, full appointment books for teens during the summer can crowd out adult consultations at the ortho office, so we'll stay actively engaged with our customers and with their potential adult and teen patients as we launch an exciting new consumer campaign in late May. On the international side of the business, we are looking forward to bringing the Asia Pacific team back in-house on May 1. We've now got a strong team in place there and are excited about the growth potential this region offers. And even though the summer is typically a slower season for case starts in Europe, we'll continue building our brand awareness in core European markets. Q2 will be a busy quarter, with numerous important initiatives underway or just launching, but we know that one of the best ways we can engage with our customers around the world and earn their confidence and increased utilization is by delivering product improvements and innovations that help them deliver great treatment results. We believe our new SmartTrack material is the most impactful of these recent innovations, with the right level of constant force, improved tooth control and greater comfort for patients. This will increase the number and complexity of cases doctors treat with Invisalign. I look forward to updating you on our progress as this year continues to unfold. And with that, let's get right to the questions.

[Operator Instructions] Our first question comes from the line of Matt Dolan from Roth Capital Partners.

So you indicated you're off to good start to the year. I just wanted to touch on the volume guidance for the second quarter. If I'm calculating it right, it's 8% or 9% growth year-over-year versus a 15% rate in the first quarter and a high-teens type of number in the last couple of years. So just walk us through maybe what is difficult in terms of the comp relative to those historical numbers that you're expecting in the second quarter.

Sure. Well, there's a couple of different things working. I'd say the biggest part of the challenge is that, as other dental companies go out there and report, I don't think anybody is going to be describing the dental market as easy right now. We believe we're going to do better than most, and the good news is, our customers report what we'll call -- we keep calling stable traffic. Not booming. GPs are still somewhat unwilling to try and upsell a more valuable procedure, and unless traffic improves a bit, we're going to have to keep working hard to make that happen. So that's maybe the back story. We do believe, within all that, there are opportunities to go after the ortho volume and certainly set ourselves up for summer. But I think the -- and then we have plenty of economic issues around the world that keep us from being more bullish. We think we can make good continued progress, and that's kind of how we're calling it.

Okay. But just to clarify, sorry, has the macro environment therefore deteriorated a little bit? Or why the decrease, I guess, is what we're looking for?

I wouldn't say the macro environment -- macro, I don't think it's getting any better. We tend not to overreact in the nearer term to the big macro elements like consumer sentiment, which is back down now, and others. We think the primary secular trend for us is patient traffic. If patient traffic, in general, trends up, we think we can over-perform, especially in the GP side. But I think what you're seeing is the total of all that already in market. No new trend, just the challenges of pushing that uphill a little bit. But again, I think we continue to feel solid about the overall growth story for the year.

Okay, great. And then second -- my second question has to do with the margin. I know you have some major customer events in the second quarter. But you're still in the high teens in terms of operating margin through the first half of the year. What -- where are you on the goal that you stated on the last call, targeting the low end of your long-term range in the mid-20s in terms of an operating margin by around the end of this year?

Matt, setting onetime charges aside, on a non-GAAP basis, and we describe our model that way, I will continue to say we expect we can approach the low end of our -- we believe we'll be comfortably within our volume and revenue guidance. And I won't mess with every other element other than to say, on an operating margin line, we believe we can approach the lower end of that, around 25%, by year end. And we believe that's important to do so, so we're going to keep working that way.

Our next question comes from line of Robert Jones from Goldman Sachs.

I actually had just a follow-up to the first question. Clearly, the first quarter results, from both a case and revenue perspective, came in above guidance, so it does look like this year got off to a strong start. But if we do think about some of the macro and, more specifically, consumer data points that we've seen most recently in March, certainly things -- it looks like things maybe have fallen off a bit. I was just kind of curious if you'd be willing to share how the quarter itself trended as we try to think about 2Q. I mean, were you out of the gate strong in 1Q, and we saw things kind of level off in March? Or are you coming into 2Q on an upswing?

Let me be thoughtful about how I respond, because we generally don't provide a detailed view of our pipeline. I think, as we described in the call, we -- if we go back to Q4, Bob, the evolution of our business was a pretty strong move towards the end of Q4. And that solid progress continued into Q1. Certainly, by the time we did our call, we were commenting on, in a qualitative way, about volume bouncing back. I would say the quarter generally evolved in a consistent way. Again, not tearing the cover off the ball here, but solid progress. I think SmartTrack and these other elements really helped engage the ortho community, and we're seeing that around the road as well, which is largely an ortho community outside North America for our customer base. Very responsive to anything that helps treat more complex cases, which is their norm. And then on the GP side, as long as we can have steady kind of patient traffic, our GP customers will at least stay involved. It would be helpful if it was more robust, but we can certainly work with what we've got. So again, our -- the business continues to evolve. We're not exactly linear, but I think it looks a little more predictable right now than it was during parts of 2012, notwithstanding what else could happen here. I don't think that answers your question.

No, that does. That's helpful. And then I guess just one within the categories, the Express/Lite category continues to grow impressively, certainly ahead of our expectations. I was just curious if you could comment on more specifically where you see that growth coming from, and I guess what I'm getting at is there's certainly always a fear or concern that, that growth could come at the expense of the Full line. Are you seeing these starts coming from historical cases that might have come from the Full line, or is this really purely you penetrating into a category that wasn't necessarily being fully utilized before?

It's really the latter, Bob. We've actually done a fair amount of work talking to our customers, and in most cases -- and I'll set North America, where we've been dealing with Express 5 a bit longer, aside from the new i7 launch in the U.K. and Europe -- we have seen virtually no cannibalization. In fact, it's actually attracting some people that at least get started with just closing a very small space or reducing a very little bit of crowding. And what doctors are reporting for people that aren't ready to do a full treatment, $4,000, $5,000, $6,000 worth of treatment, they are in many cases getting engaged, finishing this 6 weeks, 8 weeks, 10 weeks of treatment and then saying, "Boy, when I can, I want to come back and do the rest of it, now that I'm really aware." So we think if there's any cannibalization right now, it's too small for us to measure. What it is doing is taking some share away from all the hundreds and thousands of little labs that have been apparently providing some of these very simple cases to both GPs and orthos. Or in some cases, an ortho may be doing a suck-down in their own labs. So for us, we saw this as something we could do better than most everybody else from a precision perspective. And done properly, we ought to be able to move more in 5 stages than anybody else in the world, and more predictably. So we think it's actually positive, and perhaps, it leads to a patient that only does a little bit of correction now but is now becoming much more aware of what they want, thinking about their broader treatment, they come back and do full-on. So I think it's maybe just the reverse over time. U.K. is a little differently with the austerity, and we started with -- in the U.K. for 2 reasons with the i7 pilot. One is we have a broader base of GP dentists there than elsewhere in Europe. And two, we've had, had some more localized competition there. And so we did a pilot, and we got great response for it. There's clearly a price point out there at the patient level, the consumer level, and there's an interest at the doctor level, both orthos and GPs. And so we've rolled that out across our direct geographies in Europe now, and we expect that, that'll take its place as maybe an entry offering for minor malocclusions. So we think it's upside in general. And again, I'll repeat, to the extent there's cannibalization, it's very, very small.

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

I actually had just a couple of housekeeping items. And I don't know if this is for Tom, perhaps, or for Karen or for Roger. But on the Vivera item that we had here in this quarter, $4.4 million as expected. Is it right that we'll have no impact from that phenomena in 2Q, or do we maybe get another potentially small impact?

We'll have Karen Silva, our VP of Finance, take this one. She's the expert.

Steve. This is Karen. So the Vivera release of $4.4 million was folded in Q1. And going forward, we don't expect additional pops in revenue related to the Vivera consolidation.

Okay. So that's an -- we won't see anything about that in the next quarter's release? Okay. And then...I'm sorry?

I said no, that's correct.

And then same question on the fourth quarter item, the return reserve release. No more impact from that as well?

Yes, you're talking about the 2.9 release, is that what you're talking about?

In the fourth quarter, right.

Yes. So in the Q1, we had a small release related to -- it was $1.4 million related to the 2.9 iTero program that we launched in the beginning of this quarter, and we do not foresee to run that program again, and we'll not have any additional onetime hits with that as well.

Okay, great. And then just one for you, Tom. And I'm sorry, I saved the hard one for you. It's -- we're in a bit of an air pocket here between now and the time that we hear from the ITC. I appreciate it's a tough topic, but I wonder if there's anything you could say to help us and the investment community broadly just dimension what the commentary from the ITC means, how we should think about the process over the next couple of months and then over the longer term.

Well, certainly, we can't predict the future, but our team is extremely prepared for any scenario. We are -- we certainly expect that we will prevail based on all of our insight and everything we've done. We believe the law is on our side and the facts are on our side. So with that said, we're prepared for the best case scenario, something in between and the worst case scenario. And this, we have a lot more -- if the worst case scenario were to happen, it's not our expectation, we have a lot of things we can go do, including putting our activity back in Texas back on. I guess maybe to pile on a little bit, I've Roger sitting right here, he actually is still a lawyer besides acting as our CFO. And maybe Roger, do you want to put some dimension to that?

Steve, one simple thing to remind everybody of is that the remedy that is available at the ITC as a forum is exclusion from the domestic market. So the judge's determination that we will get on May 6 will tell us whether he thinks, based on the case, that ClearCorrect infringes our patent and because of that, should be excluded from the domestic market. That's what we're waiting to hear. Now that's what the judge thinks. There is a period of time after the judge's decision is published where the side that loses has the opportunity to appeal to the entire commission, the ITC itself. And the time for all of those appeals processes to run doesn't end until September. So as Tom said, we're prepared for any situation that might start with the judge's ruling. We remain cautiously optimistic that the ruling will be in our favor and that ClearCorrect will be excluded from the domestic market.

Our next question comes from the line of Jonathan Block from Stifel, Nicolaus. Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division: Maybe the first, and maybe I can squeeze in 3. But if we can just talk on the revenue recognition or what you talked about on the course correction. So you reported $0.26 non-GAAP. You took a $2.7 million deduction, if you would. Is it fair to say -- I mean, relative to where we were and where you guided, that is $0.28 to $0.29, if you go ahead and add that back? That's part one of the question. So can we start there, and you can answer that?

The answer is yes. Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division: Okay. So then can you talk about 2Q, where I just want to be clear, because there was a lot of comments, but I don't think it was clear -- going forward, 2Q will be a $700,000 hit. And if that's the case, why is it $700,000 and not the $2.7 million that you experienced in 1Q?

So the $700,000 is the amount of revenue that we will not book because we're not going to be charging for midcourse correction. For the $700k is just that, lost revenue. The revenue guidance that we've given you, of course, has the deferral for future pre-midcourse corrections built into it. Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division: Okay. I guess, maybe we can take this offline. But my last one, just to clarify, is why was the hit $2.7 million in 1Q and yet I believe you're saying your hit in Q2 will be $700k?

All right. Go ahead, Karen.

Jonathan, so the $2.7 million is related to open cases. We're grandfathering in all those cases that are open to allow for midcourse correction. Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division: There you go, that's the answer. The changes, the goodwill impairments for 3 quarters in a row unfortunately just make people not focus on the fundamentals of the story, which has actually been very solid. But that's the frustration. And then the second one, Tom, is on the interoperability or possibility of one with other scanners, that was the first time I've actually heard you float that it's possible. So can you maybe elaborate a bit? You've written down all the goodwill. What are you seeing with the guys that have a scanner, and are they doing more Invisalign? And does that make you much more receptive to possibly entering into an agreement with another scanner company?

Well, given your less than wonderful setup about the goodwill, we have to separate, and we're responsible for good accounting. I'm going to pull apart, as we think about the business going forward, our ability to create economic value, which very much still exists as we think about the benefits over time aside from the reality of dealing with a softening outlook in the near to midterm, which we've got do to deal with in terms of our accounting processes. So I understand it's not what we'd like to be able to report, but we're going to deal with that reality. Moving forward, we know that scanning at the front end of the process is going to be a very valuable part of Invisalign going forward. You can see from roughly a 200 basis point per quarter increase on our iTero scanners alone what's going on with our own base. And all of the effects are positive there. So as we see the ability to move high-value applications like the outcome stimulator out to those kinds of platforms, we've known for a long time that if other potential scanner platforms could be made to work what we believe is the most demanding application in dentistry today, it's not a quadrant or individual tooth, even for surgical cases, this is full-arch, interproximal space, gingival margins, everything in detail, all having to be very accurate put together. That's been a very hard job for anybody else's scanner, which is one of the things that led us to Cadent in the first place. At the time, they were only scanner that even had a shot. So with that said, I would say from a strategic perspective, we're open-minded about considering some other scanners. But I'm not going to talk in more detail about what that path might look like or what the implications might be because it is an R&D project to consider, evaluate and ]qualify such a thing, and again, when there's news to report, we will do so. Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division: And last question, if I could just slip it in. Is there any reason why you guys were light on the share repo this quarter? Is it something where you're aggressive in the high 20s but you sort of take your foot off the gas in the low 30s?

Well, I guess we have a policy of, as a company, of open-window periods. And during this open-window period, the company was evaluating impairment, and we felt it constrained us from acting on any share repurchases. The same is exactly for board buybacks or sales. So I'll just say it that way. We've been consistent in the way we look at that policy.

Our next question comes from line of John Kreger from William Blair. John Kreger - William Blair & Company L.L.C., Research Division: Just to dig in a little bit to the ASP trend. This quarter, you were down a bit year-over-year. In the fourth quarter. You were up a bit from a longer term perspective, what is your current about how the ASP will trend? I assume it's down, but could you maybe size that for us?

We've actually been doing some internal modeling, John, to answer that same question. I guess we're not ready to put it out there yet. But if I could, I would expect that it's probably going to go down a bit over time. And I don't want to put tighter dimensions than that because separating everything else aside, we expect mix to play a bigger role over time with the large base of GP customers in North America and price sensitivity around the world for simple cases. So that'll -- but in our view, that's a positive reason for average ASP to go down. We certainly have FX that gives and takes on a quarterly basis, but we usually speak to FX at a high level, so you can kind of back into what that might be. We're playing around the idea of putting out like a net adjusted ASP because there's puts and takes. We've added some new complexities, certainly, with midcourse correction pricing and those kinds of policy changes, change -- have some movement on ASP over time. But in general, because of mix and because of advantage, widening advantage programs, which we look at as a positive, and to a lesser extent promotions, we think pricing will be stable but will probably drift down a bit over time. Separate aside from onetime events where we might change policies like warranty or something like that. John Kreger - William Blair & Company L.L.C., Research Division: And just a quick follow-up. The advantage rebate in particular, have you adjusted any of the terms of that, or do you expect to as you go through the year?

We consider looking at that all the time. We would certainly always reserve the right to do that. But we -- if anything, we're beefing up the value in that program, what it means to be Elite, Super Elite and Premier and making sure that value proposition is even better. We've not adjusted, to date, any of the pricing terms, numbers or anything else. John Kreger - William Blair & Company L.L.C., Research Division: And then finally, very impressive growth in the Express product line. If that continues, what -- does that have a negative impact, margin impact on your operating margin?

No, if we had to stack up kind of in an activity-based cost model for our go-to-market, it's considered kind of gravy. Not a lot of effort go to those cases. These are -- in general, these are customers that have more experience with the product. So for them to go 5-stage case, it's really a scenario for them where a patient is probably declining full treatment and it may be right now for price. And they're saying, well, how about considering just a minor correction for $1,200 or $1,500. And the patient says, great. They were going to walk out and do nothing; instead, they're going to do something. Oftentimes, the conversations we're hearing may very well lead them to full treatment down the road with that doc. So our cost of that setup are roughly the same as any other case would be, and so our margins shouldn't be any worse.

Our next question comes from line of Brandon Couillard from Jefferies. S. Brandon Couillard - Jefferies & Company, Inc., Research Division: Tom, where do we stand in terms of incremental sales force expansion plans that you had for the year? I believe it was a 10% increase or so off the 200 base.

We're right on track with that. Our goal was to make sure they were in and running well before the end of the first half, and I think -- I'm looking at Shirley for a second. I'm not sure if that'll be updated in our Q filing here for our sales force, but it probably will be. So won't give the numbers now, but if you look in the Q in a few weeks, you'll probably see the latest kind of roster numbers. John Kreger - William Blair & Company L.L.C., Research Division: And then just an update on where we stand in terms of the CFO search?

Yes, good question. Well, I will say in the interim, Roger and Karen and other members of our outstanding finance team are doing a great job, and not a surprise to me, but they're doing a great job for us. We are see some real good talent. We're -- and I'm comfortable that process is progressing well.

Our next question comes from line of Glen Santangelo from Crédit Suisse. Glen J. Santangelo - Crédit Suisse AG, Research Division: Tom, I just wanted to follow up with you on some of the comments around ClearCorrect from earlier in the call. I'm just kind of curious, assuming that the court decision ultimately goes in your favor, it seems like a pretty greenfield, pretty sizable greenfield opportunity. Is it your sense that those dentists that are using that competing product, that's all they use? And so presumably, that would be some really easy market opportunity for you to gain relatively quickly? And if you kind of agree with that, I'm also kind of curious on the negative side, I know you're not assuming it, but let's just say, for example, the binary event is somewhat negative. I mean, how do you ultimately react from something like that from a competitive perspective? And does anything really change?

Yes, I want to be careful, a, not to speculate about what happens with customers and market and stuff like that, and b, I'd rather not speculate about either a good or bad outcome. The simple fact is we think roughly a year ago, they were taking a little bit of share. With think a lot of it was driven by Groupon, and they've kind of changed their model a bit where they've gone back more to a lab-based model, and I don't think they have a sales force really in place of much sorts right now. But they're working very hard and doing the best they can to make it, and we think we've retaken the share we believe we had lost. And if you look at Express 5, Express 10, it's hitting a price point where we're -- forget ClearCorrect for a moment. There's a lot of little labs producing 5-, 6-, 7-stage cases for doctors. I think that's the greenfield opportunity, more so than ClearCorrect. Again, I want to be very thoughtful about not thinking too far ahead with that or not thinking about scenarios. But we think the bigger opportunity is to engage the wider slice of dentistry over time for simple cases that are easy to do and are very clear and straightforward about what that patient -- what treatment that patient will end up with. So there's an awful lot out there, and over time, we hope to get at it. Glen J. Santangelo - Crédit Suisse AG, Research Division: And maybe if I could just ask you a follow-up question, then. You obviously talked about taking the Asia Pac team back in-house here in the next couple of weeks. It sounds like you are on target for that. Have you -- could you give us a little bit more details in terms of, do you think that will enhance your ability to accelerate the revenue growth in that market? And what does that -- can you give us some -- a little bit more clarity in terms of what that's going to do to your cost structure?

Well, it certainly, we wind up -- as we said, we've kind of been front-running some OpEx as a way to transition this product. It's technically an acquisition, but very, very small. And the reality is we've been bridging -- without having control of the business, we've been bridging some OpEx support so that instead of kind of stepping back away, knowing there was an endpoint, the ownership could continue to build the business. And we've been bridging some of those customer events and those kind of things that were all agreed upon in advance. So we've already had some OpEx pressure and headwind as early as Q4 last year and into Q1, which we spoke about but didn't give dimensions to. We'll pick up that entire cost structure May 1, and over some months, I think, will be very comfortable that the volume will start to cover that. If you go back to our last annual report where we had a diagram, I think, Shirley, the number was 3% for our...

In 2011.

In 2011 for our distributor geographies, just mapping this, that number would now -- doubling the revenue would be, taking out Asia Pacific, would be about 6% of the international. So I think it's going to double that overnight, and we're pretty comfortable that the contribution margins will work themselves out within a couple of months. But I think the bigger thing is we have an opportunity to leverage skills and experience across Asia where, in general, they're treating far more complex cases. And we're pretty excited about the quality of the Pan Asia team with a very small team based in Singapore, right perfectly the middle. So I think that's the opportunity, and I think we can leverage what's going on so well with these distributors with what we've done well and China and Japan direct. And over time, as I think I indicated, this can become a much more significant contributor to our long-term growth.

We do have time for one last question. Our last question comes from the line of Jeffrey Matthews from RAM Partners.

I wanted to follow up quickly on that last question and then switch to Spain and Italy. But have you learned anything about Asia Pacific and the opportunities there that you weren't fully aware of now that you're getting into it, or is it hands-off until May 1?

In terms of -- well, first of all, we've been Asia for 5 years very quietly. Longer than that, 8.5 in Japan and 5 years in China, although we didn't have a -- because we actually set up our -- started setting up our entity in China that long ago, filing IP, et cetera. In terms of our distributor geographies, we've been very, very thoughtful and careful about everything you can imagine. And there's nothing new we've learned, and we've been -- this is as friendly a process as you can imagine, with a lot of contact with the entire -- it's a small team in total, but a lot of contact with the entire team, including all of our regulatory and compliance people, our sales leadership now with a very experienced medical device executive right there ensuring that we go do all the right things in all the right ways. But our -- when I say that a clear learning for us has less to do with the distributor team and more to do with the excitement from the customer base that they're going to be working directly with the company again, that'll just make it easier to get things done. And they are -- again, in Asia, they treat the most complex cases in the world. We have a -- I think we have 1 doctor in Japan treating a 93-stage case, which is headed towards 4 years of treatment. So they are very excited about the evolution of technology, and I think being able to more directly engage with them is going to help us accelerate their adoption. So I think we've got some work to do there. There'll be plenty more to report. But that is going to be -- that's going to be a good journey for all of us.

And then if I could just ask, I'm just intrigued by -- you're doing well in calling out Spain and Italy. What is it? Is it a good sales team? Is it -- what is it about the product or its evolution or the lifetime right now that's making you do well in an area that's so economically depressed?

Well, it sounds like you're actually there trying to keep the economy going, Jeff. If I heard correctly, you're in Italy. So the reality is we have very, very small penetration, and there's still a fairly significant population that cares about aesthetics and about function. We see this in Germany, we see this in the U.K, we see this in Spain and Italy. And even in areas where there's real severe austerity and challenges that you can see, there are people with wealth that want a healthier and more beautiful smile, and we're tapping into that. The more we can, in a cost-effective way, engage directly with a consumer, and there are different rules in every country around medical devices and consumer marketing, the more effective we'll be at creating demand. And we're just starting to scale that now. So I think over time, and goodness, with any improvement at all in the economy in Europe, we should we be able to continue to do well.

Thanks, Jeff. Well thanks, everyone. We appreciate you joining us on the conference call today. We look forward to seeing you at upcoming financial conferences and industry meetings. And if you have any follow-up questions, please contact Investor Relations. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this that this time, and have a wonderful night.