Align Technology, Inc. (ALGN) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Align Technology Q2 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. Ms. Stacy, you may begin.

Good afternoon. 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; 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 second quarter financial results, fiscal 2013 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 p.m. Eastern Time through 5:30 p.m. Eastern Time on April 20 -- excuse me, August 5th. 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 expected financial results for the third quarter of fiscal 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. During today's 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 reconciliation to the comparable GAAP financial measures where practical, are contained in today's financial results press release, which is 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 statements, including the corresponding reconciliations and our second quarter conference call slides on our website under quarterly results. Please refer to these files for more detailed information. Finally, please note that our prepared remarks today are more concise than prior calls, and we've intentionally limited our commentary to key business metrics and financial highlights. This change in format is in response to direct feedback from a recent survey of our analysts and investors, and we hope that it addresses their request for briefer conference calls. We still include a large amount of information in our corresponding slide presentation, and we've added several new pages to this quarter's slide deck, which is posted on our Investor Relations website at investor.aligntech.com. With that, I'll 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 2 operating segments, Invisalign clear aligners and the Scanner and CAD/CAM services business. We're pleased to report another good quarter with better-than-expected revenues, gross margin and earnings. Strong second quarter results were driven by higher Invisalign volumes and ASPs, with sequential growth across all customer channels. For Q2, total Invisalign case shipments grew across all customer channels to over 100,000 cases worldwide for the first time, with a total of 106,100 cases shipped. The year-over-year growth was driven by continued expansion of our customer base and increased Invisalign utilization. The sequential increase in Q2 reflects strong growth from our international doctors, as well as good growth from both North American GP dentists and orthodontists. Virtually all Invisalign products were up nicely year-over-year and sequentially. The exception was Invisalign Assist, which has been flat for the past few quarters as doctors have shifted to Invisalign Full and Teen cases more frequently. This is a natural progression as newly trained doctors become more experienced users and want to leverage the full offering. Acceleration of our new product development cycle and key feature improvements, such as Invisalign G4 and our new SmartTrack material, are helping drive increased utilization of Invisalign globally, especially among our higher volume customers. We continue to see good adoption and growth of Invisalign worldwide among more experienced customers, driven by increased confidence in the clinical outcomes, especially for more complex treatments, especially including teenagers. Q2 marks the beginning of the busy teen season for orthodontic case starts, as reflected by strong growth in Invisalign case shipments to teenage patients. Total teenagers treated with Invisalign increased to 23,500 cases in Q2, a year-over-year increase of 16%…

Thanks, Tom. In my comments today, I will not review the total dollars excluded for non-GAAP gross margin, 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 second quarter financial results. Q2 net revenue was a total of $163.8 million, which consisted of Invisalign revenue of $153.3 million and Scanner and CAD/CAM services revenue of $10.5 million. Q2 net revenue increased 6.7% from $153.6 million in Q1 of 2013 and 12.5% from $145.6 million in Q2 of 2012. Year-over-year revenue growth reflects increased Invisalign volume and higher ASPs, primarily from the transition of our APAC distributor into a direct sales region. The sequential increase in revenue primarily reflects higher Invisalign case shipments, driven by both North America and international, as well as higher international ASPs. Recall that for Q1 '13, clear aligner revenue includes $4.4 million from consolidating Vivera Retainer product shipments down to 1 per year. In addition, beginning June 15, 2013, we are no longer charging a fee associated with our midcourse correction orders. And as a result, Invisalign clear aligner revenue for Q2 of '13 was decreased by $1.2 million, which reflects the revenue deferred to provide free midcourse correction for open cases shipped between April 1 through June 15, 2013 that are now eligible for the new midcourse correction policy. In Q1 of '13, Invisalign clear aligner revenue was decreased by $2.7 million, which reflected the estimated deferred revenue for open cases as of March 31, 2013, that were expected to be eligible for the new policy. Q2 Invisalign revenue of $153.3 million increased 8.3% compared to Q1 revenue of $141.6 million, and increased 14.7% compared to Q2 2012 revenue of…

Thanks, Roger. Overall, Q2 was another strong quarter and we're pleased with our continued progress. We have delivered solid execution on the important strategic initiatives currently underway. The economy continues to be a challenge in many geographies, but patient traffic through the dental industry remains steady, notwithstanding the summer seasonality we expect to see in some of our doctors' offices. The continued growth in Invisalign adoption and utilization worldwide is the result of continued investment in R&D, new product development, improved and expanded sales coverage and in major markets, supported by consumer demand programs. The Invisalign product and customer experience keeps getting better and better, giving doctors confidence to use Invisalign on more patients, with increasing treatment complexity. This can really be seen in our teen patient population. At the same time, we believe we're just beginning to address a real market need with Invisalign Express and i7 for patients who just want to fix minor malocclusions at an affordable price point. We're adding to this positive momentum with 2 new additions to our executive team. Today in a separate release, we announced that David White is joining Align as our new CFO, and John Graham who's joining us as our new VP of marketing and CMO. Both bring tremendous experience and energy to the organization and they are each excited about the opportunities ahead. You'll have the chance to get to know each of them as we update you on progress throughout the rest of the year. Finally, I'd like to thank Roger George, Karen Silva and the rest of the finance team for doing a great job of taking care of business while our CFO search was underway. And with that, let's get right to the questions.

[Operator Instructions] Our first question comes from the line of Robert Jones with Goldman Sachs.

I wanted to start with Teen. Obviously, some high expectations for this category over the summer months. And in fact, it really was the only segment where you didn't substantially beat our expectations. It looks like it grew about 16%. Last quarter year-over-year, you grew 27%. I think for the full year last year, you grew about that as well. So I was just curious how the Teen growth, obviously while strong, how it's been measuring up to your internal expectations?

I will, first of all -- I think we're very comfortable with where we are with Teen and with a little lower sequential, I mean, this is not a completely linear business. We're very comfortable that given that there's 2 elements to that, there's international, there is North American orthos and there are GPs. GP channel fluctuated a bit more. The ortho channel continues to have very, very good year over growth rates. And in general, we're pleased. That positions us pretty well for the summer. I think the way we think about teen is it's a key growth opportunity, but it's going to be a steady climb given that Teens are the base business for orthos and they're going to convert -- continue to convert to Invisalign more cautiously than they will for adult patients. All the initiatives we've got underway, coverage, evolution of the product with G4, SmartTrack and all those things to support that, and we're comfortable that we're going to have a good strong Teen summer.

That's great, Tom. And then I guess, just my follow-up would be more broad, just around the operating margin guidance 19% to 19.8%. Relative to what you did this quarter, it looks like you're also guiding gross margins to decline sequentially into 3Q as well. I guess just maybe if you could spend a little time helping us think about the drop in profitability from this point, and then maybe if you're comfortable commenting on if you're still confident that you'll exit the year near that 25% operating margin level?

Well, I guess the Q3 guidance stands for itself and we're comfortable putting that out there. The fundamental driver in this business is volume. And if you take a look at the quarter we just reported, we did a little better on volume and a little better on pricing and we're getting up in that neighborhood of the low end of our model at 23% plus operating margin. So we expect volume to be down a bit in Q3, that's very typical if you look at every quarter over the last 6, 7, 8 years, it's been the case. And along -- and we're not going to just pull spending back in important strategic areas. So along the way, you're going to see a little less operating margin. But again, with the guidance out there for Q3, with our expectations that we typically build volume into Q4, we fully expect with all these initiatives coming online, that we can approach the low end of that long-term model, around that 25% range.

Our next question comes from the line of John Kreger with William Blair. John Kreger - William Blair & Company L.L.C., Research Division: Tom, could you talk a bit more about what drove the surprisingly good ASP trend? Maybe if you did an apples-to-apples comparison with Asia, if you had that full in your P&L last year, what would the trend have been?

I'm going to ask Karen to take that in just a minute, and I know that we didn't -- we're not modeling it for disclosure, we've modeled it internally. It was a contributor -- I'll start by saying the APAC revenue for 2/3 of the quarter, May, June, was a contributor. And probably the bigger contributor was net ASP in North America, where we had larger participation with some lower volume customers re-engaging with Orthos and some GPs and didn't participate as heavily on the Advantage side. That was a big factor. If we take that, plus some smaller factors, a little positive FX and then Asia Pacific, you've got them together. And I'll ask Karen Silva, our VP of Finance, to maybe comment a little more.

Sure, Tom. Thanks. So for the quarter, we experienced several million dollars from an uptick from the Asia Pacific. They came on, we plot them as of May 1. So we have 2 months under our belt, and so we expect that will move forward in the future quarters. And offsetting that, of course, will be additional sales and marketing spend, which we took on the majority of their sales team and that continue as well. John Kreger - William Blair & Company L.L.C., Research Division: Just a quick follow-up to that. Do you still view the longer term trend in ASP to be down due to mix or is your thinking about that changing?

So, I think, over time, we would expect, as the low-end offerings grow for minor malocclusions, we expect mix to be -- to bring ASP down total. I think the team put together a couple of new slides based on a lot of questions like this, and we try to break out the elements there. I think if you look into that, you can see that stable to up. You'll be able to separate mix-driven change from what we'll call real price. But the biggest factor driving it down, in general, is going to be mix. The second factor would be probably Advantage among high-volume customers, but you can intuit that from the breakout we're giving you now. John Kreger - William Blair & Company L.L.C., Research Division: And then one last one. After the favorable ruling that you got during the quarter, from the ITC, have you seen that have any impact on volumes or market share? Would you expect in the second half of the year or is that more of a longer term opportunity in your view?

From our perspective, if there's any volume, it's very small and I think this is really more about asserting the right IP so we continue to build the business for our customers and shareholders over the longer term.

Our next question comes from line of Jon Block with Stifel. Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division: Real solid quarter, so I guess I had to be picky, if you would. But North American ortho, I mean, maybe that was the only area that didn't blowout our numbers. So can you speak to what's going on with SmartTrack and how it's being received there, what it's doing to utilization? And then also, Tom, just as a function of that, are you hearing from the field that it's helping the guys shorten treatment time? We've done some work there, and if so, how is that being received from the doctors?

Let me start there, John. We've got no sound clinical data at a level that we could claim it. There's a lot of experimentation going on with treatment cycles and adjunctive therapy. But, from our perspective, we're not anywhere near where we'd want to posit a change in treatment times. So I'll start there. We're very comfortable with where we are in ortho, and one of the dynamics this last quarter is that we're engaging with some really good practices that have not been customers of Invisalign for quite a long time. And they are reengaging with us, seeing what can be done and they're just sort of not really Advantage customers. They are now getting trial and usage, and some of them throw in 5 or 10 cases where we haven't seen anything before. So what you see is a tail growing on the ortho side. That actually was a contributor to less Advantage, a higher ASP. The specific answer to your question on innovations like SmartTrack and the big release or two we do a year, right, the G4, SmartTrack, et cetera, is that our core base of orthos and GPs and international doctors will get experience with that quickly, given the volume, and they will immediately start changing behavior. Doing more complex cases, doing more teens, for example, and then that steadies out over time. What's going on now is what I just spoke about the moment ago, where the less frequent ortho submitters, the doctors that are using us less, are actually trying it more, becoming more comfortable, actually seeing a change in the product. They're just not as frequent users and so they're not getting as rapid a feedback, but we're getting very good traction there. So what I'd say is that this is a…

Well, there's a whole set of reasons why an orthodontist or a dentist, that wasn't doing Invisalign, comes to Invisalign, and it starts with their patient interest. Patients are asking doctor, why don't you do this? It comes due to the fact that they have got good clinical reasons for not doing it. They have a busy restorative practice, yet they're influenced by friends. It fits well into a good restorative cosmetic dental practice. On the ortho side, the docs that really weren't our customers -- I'll stay on GP for a moment and come back to ortho. We did train over 1,000, and we see strong interest out there, in adding Invisalign to practice. It is one of the best practice building vehicles, today, in general dentistry for sure. On the ortho side, I think the biggest vector there is the evolution of product and the customer experience. The product just is getting better and, along with that, they're more comfortable, they don't have to make compromises on the finishes they can promise to mom and dad for a teenager or to the patients themself. But that is a journey, but we are in the process of reengaging there. We trained up almost 120 orthos, that's a big number for us, plus the number is coming out of universities which are small classes. But I'll call that a good step in the right direction.

Our next question comes from line of Jeff Johnson with Robert W. Baird. Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division: Roger, I was hoping I could start with you, just one more question on third quarter guidance, if I could. The OpEx commentary on sales force was helpful on why that might be dragging margin down a little bit more next quarter. And, obviously, Tom's comments on volumes make sense from a fixed cost leverage standpoint. But why gross margin? Why would gross margin be down a bit next quarter with the higher ASPs from Asia Pac if you had gross margin up year-over-year this quarter? Why would gross margin go what down year-over-year next quarter? Just trying to understand that better.

Jeff, thanks for the question. I'm going to ask Karen to pull the numbers out to give you the quantitative answer. So give us a second would you? Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division: Yes. And maybe, Tom, before that, I'll just ask you 2 quick questions to finish mine off. Just, Realine, out of the 2,500 docs that you said have visited the Realine site so far. Any idea how many of those are new docs who have never done an Invisalign case before versus maybe past Invisalign users? Just trying to -- I don't think there's going to be much cannibalization there, but obviously, that would be a good crosscheck on that. And then on the DTC said, with you ramping that back up in May pretty aggressively, and going to continue it through the summer. Is there a lagging impact on that? Do the May and June increased DTC influence 2Q yet or are those benefits probably more of a third quarter type event?

Let me take this in reverse order. I'll start with the last one. There's 2 elements of any consumer demand. There's brand building and awareness over the long term. And I'll call it excitement and energy. And, again, if you think about the integrated nature of our platform, we've got both the traditional media, with a lot of digital vehicles, social, very tied-in with PR, gaming and a whole bunch of other areas. With that, you activate interest in a whole bunch of ways. So it can start a search for a doctor, it can start a background information and all that. At the end of the day, I'd call the launch, which was timed to kind of start with the beginning of the teen season, create a lot of excitement in offices and energy and all that. But the value is really 1 quarter, 2 or 3, 4 quarters ahead and then taking that to the next level. So this is just -- we view this as more strategic than tactical, and I'd say we're in the early innings there, still, of what's possible. So that's one. Remind me, sorry, your second question. I think that was... Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division: Just, Realine, on the 2,500 doctors.

On the Realine question, the 80,000 plus customer list that Schein has, by definition, none of them are certified Invisalign customers. We've actually been asked by a few doctors, hey, could I try one, Schein calls on me occasionally. We said there's no reason why you couldn't, but it won't have quite the same features that say an Express 5 would. It wouldn't have a ClinCheck they could adjust. It will have a ClinCheck type setup they will approve, but it won't give them the flexibility to customize the treatment as much. And so we have a few doctors that said they'd be interested out of curiosity. But, by definition, we expect this to be a greenfield of doctors that are -- some of them, many of them, are already buying clear aligner offerings from a local lab or a big lab. And our view is, we ought to be able to do that better than anybody else in the world and just as cost effectively for them, brought to them by a trusted partner, Henry Schein. So that's the theory of that case. With that, I'll kick you back to Roger and Karen, and see if they're ready to talk about the elements there in gross margin.

Sure, Jeff, this is Karen. So a couple of things going on with the gross margin. Some of this is related to ASPs down, being down for sure. And then we also have a slightly higher cost per case of the Invisalign side, as we are expecting a number of aligners per case to be just slightly up. Now there's a few other little small pieces to it, but we also expect a little bit more depreciation as we have some fixed assets that we'll be putting into production here in this quarter. Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division: Okay. And just trying to understand the ASPs being down. If they were up a little this quarter and you get a full 3 months of the Asia Pac distributor changeover in the third quarter, ASPs naturally just swinging down in the third quarter for what reason?

We have a number of factors. Certainly, one, we have a planned FX, we did a little better than that last year. There were a number of contributors before, on price. We would plan an Advantage, a participation with our big ortho customers and maybe plan on a little lower ASP, higher Advantage participation, which we view as a positive thing, of course. And then, finally, we're running a bit of a promo. I think there was something in the webcast slide. We're running a bit of a promotional, a little different one at some of these reengaged orthos that have not been big Invisalign customers, to get them to trust us to help them work on teen patients through the summer. And that'll have some impact on price, but we think that'll be a very valuable way to get them to get a really good experience in a shorter period of time. Get that trial, repeat usage and then hopefully sustainable adoption. So as we project that, if we're successful with it, we'll be very happy. That would have a little bit of a negative impact on ASP, but we would view that as a very good investment.

Our next question comes from line of Brandon Couillard with Jefferies. S. Brandon Couillard - Jefferies & Company, Inc., Research Division: Roger, it looks like the scanner and services cost of goods fell to what looks like the lowest level since the deal closed. What drove that improvement? And any chance you could give us an update on where Cadent stands in terms of operating profitability at this point?

Sure. The improvement figure -- well, I'll tell you what, Karen's got the quantitative data in front of her, so I'll let her hit the gross margin question.

Sure. So scanner and services margin increased sequentially, primarily because we had higher production volumes and we also had lower manufacturing spend. We also had lower intangible amortization since we reduced our intangibles last quarter as well.

I'll build on that a little bit. I'll take the next part of it, on where we are with -- I'll just say not just profitability. Part of making this business an even more valuable part of the family here is it's not just profitable, it's strategically valuable. We continue to be convinced the latter. It is strategically valuable. We see leverage on the Invisalign side. But if we have stand-alone profitability at issue, we're behind where we expected to be. The installed base hasn't been growing as fast as we'd like. Pricing certainly has come down with competitive offerings, and it's taken us a little longer to get platform changes. So look, say it as it is. We still think there's great strategic value to be had. We're behind where we expect to be on profitability, but still are very committed to this business. S. Brandon Couillard - Jefferies & Company, Inc., Research Division: The number, in terms of digital case submissions, certainly continues to ramp impressively. How should we be thinking about that business as we get into the third quarter and second half of the year, in terms of sequential revenue trend?

In terms of the scanner business or in terms of the utilization of digital scans? S. Brandon Couillard - Jefferies & Company, Inc., Research Division: The scanner and services revenue.

Again, we had 2 or 3 factors that have made the revenue growth story tougher for us. The first is that, certainly, pricing has come down per unit versus what we though about a couple of years ago. That's a reality, we're dealing with it, and we're making solid progress. The team is working their tail off. Secondly, we've turned off some of the services stream. We're trying to drive more to digital, high-tech manufacturing monoliths, all that, and we're doing a lot of that and why that is where we have better gross margins. We're working closely with lab partners and others. But we've actually turned off what was a pretty significant part of that user base, with iQ, a bracket placement tool. We just didn't feel we could scale it. So if you really look at one of the contributors to the servicer stream coming down, that was one of the biggest factors that we -- really, roughly a year ago, we gave the notice and we've kind of pulled that down. We made the decision not to reinvest, for now, into a completely new suite of tools and software, manufacturing technology. We could go back to that with better profitability in the business over time. But, in general, the restorative business has seasonality just like the orthodontic business. People don't do a lot of restorative work unless it's an emergency over summer time, vacations, holidays, dentists' office are closed for some vacations and all that. There's a little more seasonality for general dentistry in the summer. Certainly, in Europe for sure, we don't have much of a restorative base there. And then we would expect Q4 to be busy, both on the capital equipment spending side and back to the growing services again. So there's probably a bit more pronounced seasonality in restorative dentistry than orthodontics because the teen season in ortho kind of masks that. S. Brandon Couillard - Jefferies & Company, Inc., Research Division: And Roger, real quick. Any chance you could quantify the impact of the medical device tax in the second quarter?

Yes, hold on, we'll pull that number up for you. $2.1 million is the answer.

Our next question comes from the line of Chris Cooley with Stephens.

I was hoping you can maybe just explain a little or give us your views. When you look at Schein agreement longer term, does that help you better penetrate the existing 10% to 15% of the market that are using independent labs or does that really scale the reach for the company over time? And then I have just one quick follow-up.

Sure. I think it does both of those, and then the other -- because there is some usage going on, we've seen it, we've surveyed to it, and from a variety of small, medium and large labs, they're getting clear aligner offerings, which we can do better than and give them that great value proposition, delivering it through a great partner like Schein. The second thing is there are more and more people having conversations with their family dentist, not ready to go see an orthodontic specialist yet, which we could encourage, or to go see another dentist that's doing Invisalign. Many times, dentists don't want to refer them to another dentist that is doing Invisalign, and they're simply not sure yet, if they want to go commit to the effort and practice to integrate a procedure like Invisalign. So this does give them an opportunity to at least to try very simple cases from a company they can trust and a partner they really respect in Schein. So ultimately, it gets at the widest part of the dental industry that we're not touching today, and we really don't have a meaningful way to get at. And then, secondly, I think it can help support longer term category growth for clear aligner therapy.

And then just as a quick follow-on. You have an enviable decision of having a very nice cash position on the balance sheet. And now that you've wrapped up the prior repurchase that was authorized, just thoughts on how should we think about the cash build there on the balance sheet, future uses.

Sure. A fair question. I would say this is a continuing topic, an important topic for the Align Board of Directors. And we continue to get input from our owners about their views on capital allocation, how we should think about ensuring value for the shareholders, and we will continue to share those views with our board. But I'd say we've been busy as of last quarter. Let us go back and pile up a little bit more and we're going to continue to run the business as good stewards.

Our next question comes from the line of Spencer Nam with Janney Capital.

Just a couple of questions here. Number one, in terms of your revenue guidance for the third quarter. The last year, there was a little bit of a surprise with the patient volume suddenly dropping off for whatever reason, possibly due to the dentists taking more time off during summer months. How has that -- those possibilities were included in your guidance -- with the current guidance that you provided today?

Sure. I guess maybe asking the question differently to myself. Do we learn anything from last year? In retrospect, and we've known this for some time though, one of the most important trends -- it has some predictive value, is patient traffic in offices in North America. And as we reconstruct Q3 and Q4 of 2012, it is very clear that a significant deceleration in patient visits started, actually, in Q2, and we didn't see it because of just how strong Q4 of 2011, Q1 and Q2 of 2012 were. Other dental players started seeing it in Q2. It surprised us in Q3, and our methods of understanding volume and activity in offices didn't yield that. It was not until, literally, the big players like Schein and Patterson were reporting widespread downturn in patient traffic and procedures, that we were able to go back and look at this. So what have we learned? We've learned to continue to be humble, and we've instituted a series of new surveys and pulses of offices, not just asking customers what their expectations are, but actually trying to determine what their patient traffic procedures volumes are month over month, and understand if there's any foreshadowing for future. So we have the same visibility we've always had in our business. We take this very seriously. This is a challenging business to forecast given the fragmentation. But all of that, to your original question, is loaded into our view of what hopefully looks like, whatever normal might be, a more normal seasonal Q3.

Just a quick follow-up on Asia. Clearly, you guys saw a lot of strength there, including ASP. That actually went up dramatically in my view. I'm curious, how much do we expect in terms of maintaining that sort of strength out there, in terms of -- China sort of hasn't opened up fully. How do you see Asian market unfolding over the next several quarters?

I think, as Karen told you, if you take ASP to start with, as Karen spoke about a moment ago, the big jump, one of the big contributors to company ASP performance was the 50% step-up -- or the 100% step-up, the doubling of effective price for the biggest part of our geography in Asia Pacific through the distributors. May 1, that converted to a more normal global price for our Invisalign ASP versus giving to the distributor -- or selling to distributor at 50%. That will continue, that's persistent. As Karen also talked about, there's an offsetting OpEx step-up with 47 new employees that came in. But we know day one contribution margins are actually net positive on that very first case that came in on May 1, even with a step-up. So the second part of the question I believe you asked is, how confident are we about the longer term growth? We really are just getting started in many of these geographies. Our penetration is an order of magnitude or more or less than in North America or Europe. And in places like China, we're seeing the path towards growth in Japan. We're seeing the path towards growth. And understanding that these cases, most of the cases in Asia, are dramatically more complex than in North America. The evolutions in product technology and easier to do these complex cases makes a very big deal for them. So on balance, this is strategically very important. We believe we continue to grow there and we're in the process of making investments to that.

Our next question comes from the line of Glen Santangelo with Crédit Suisse.

This is actually Jeff Bailin in for Glen. So you had some pretty impressive growth in your international case volume this quarter, up over 20%, and particularly impressive in Europe, given some of the macro challenges we've been hearing about there. Can you talk about what you think is supporting your growth there and maybe how you'd characterize the growth rates in case volumes in Europe relative to how you are growing in Asia Pacific?

And I just wanted to clarify, Jeff, you want me to unpack Europe specifically a bit more? Glen J. Santangelo - Crédit Suisse AG, Research Division: Yes, that would great, and just what you think is supporting the growth there.

Perfect. Okay, got it. Well, I think if you may remember, as we talked about early in the year, we didn't give annual guidance but we did signal that our operating margin would have a little more drag early in the year, based on investments in new consumer demand, which we've now rolled out, based on product evolutions which we're in the middle of, and based on coverage expansion, and that happened both in North America and Europe. But if I take Europe specifically, we've changed some country leadership, where we felt it was time for that. That takes a little while to work out, and one of the things, when you struggle a bit in a challenging economy, it helps you find where you can be better. So that's the virtuous part of that challenge. We've invested in some of the geographies we weren't -- our coverage wasn't completed. We've added a number of sales reps in Germany. We've added some management structure in some of these countries where they were getting big enough. We've added coverage in the U.K., in France, incrementally in Spain. And so we've incrementally added resources alongside of this product evolution which has been better and better received by these doctors, mostly orthodontists in general, that treat, in general, harder cases and have very high standards. So as the product has gotten better, we've been more comfortable to make incremental coverage investments. And while there was a bit of a cost lead first and a volume lag second, I think that, plus all of the other initiatives we've got going, start to give us the kind of volumes we can be comfortable with. And we have reasonable confidence that, while we won't be linear, I think we're pretty confident that we can continue to grow faster in Europe and North America, and faster in Asia than Europe and North America. Glen J. Santangelo - Crédit Suisse AG, Research Division: Great. And just one quick follow-up, shifting to the scanner business if they can. In the past, you've discussed potentially being open to partnerships with other scanner vendors, particularly for digital case submission. Is that something you still think could make sense and that the company is open to?

Yes. We signaled that during our Q1 call, because we were going to be right in the middle of customer central, with the AAO and some other big trade shows. We still believe that it's strategically valuable. We also are realistic that we're not going to sell every scanner out there. We believe we've got the best scanner, still, in the market. And if we can qualify a couple of the leading scanners out there and bring that value to their customers, our respective customers, there's potential benefit all around.

Our next question comes from the line of Chris Lewis with Roth Capital Partners.

First, on the Express segment, that came in quite ahead of our volume expectations for the quarter. So I was hoping maybe you could maybe provide some more commentary on that segment and where that growth came from during the quarter. And then longer term, with the growth of some of the lower-priced segments, how does that impact your margins and your ASPs over time?

Yes. I think the short answer for the volume growth in Express 5 is North American GP. We're still getting started in Europe with i7 and i14, but good solid traction for that very cost sensitive patient that has been presented with a comprehensive treatment and says, I'm not ready to spend $5,000 or $6,000 or $4,000 to $5,000, I really want this little space or that little crowding fixed, and this gives the doctor in the practice an opportunity to at least get after that chief complaint. The second part of your question -- so it's North America GP to start with. The second part of the question is around gross margin, I think, and at the end of the day, I think the longer discussion is contribution margin. The gross margin, in the very short term, is a little bit worse but very comparable to say, over the mid to longer term gross margin. As we continue to automate processes we'll probably be as good as or better on the simpler cases than they are on the harder cases. Fewer ClinCheck cycles, refinements, things like that. So very, very comfortable. On the contribution margin, when we net out kind of the direct cost of sales marketing, it might actually be better than that. But, again, it's early days. Our goal is to continue to build at both ends, aim for becoming standard of care someday, which is our long-term goal, which really means we have to earn our way into the specialist office and those GPs do a lot of orthodontic cases as their tool of choice. At the same time, widen the base with things like Realine, Express 5, 10, i7 and 14, hit a niche that isn't really being addressed. People, frankly, that don't want brackets.

Okay, great. And then turning to the international side. I was wondering if you could quantify the incremental revenue impact the direct conversion in Asia Pac had on the quarter.

We're not providing that level of breakout, but I think you can maybe back into it a little, based on historical numbers we've given. But I think, when you see the ASP impact, you know it's meaningful. And the growth rates there to support greater meaning in the future.

Well, thank you, everyone, for joining us today. This concludes our conference call. 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.

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