Greetings and welcome to Align Q4 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Shirley Stacy. Please go ahead.

Good afternoon and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO and John Morici, CFO. We issued fourth quarter and full year 2017 financial results today via Marketwired, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately 12 months. A telephone replay will be available today by approximately 5:30 PM Eastern Time through 5:30 PM Eastern Time on February 9. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13674959 followed by pound. International callers should dial 201-612-7415 with the same conference number. As a reminder, the information that the presenters discuss today will include forward-looking statements, including statements about Align's future events, product outlook, and the expected financial results for the first quarter and full year outlook for 2018. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary significantly and Align expressly assumes no obligation to update any forward-looking statements. We've posted 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. With that, I'll turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Thanks, Shirley. Good afternoon and thanks for joining us. On our call today, I'll provide some highlights from the quarter and then briefly discuss the performance of our two operating segments, clear aligners and oral scanners. John will provide more detail on our financial results and discuss our outlook for the first quarter and how we see 2018 unfolding. Following that, I’ll come back and summarize a few key points and then open up the call to questions. Overall, the fourth quarter was a strong finish to another outstanding year for Align with better than expected revenues, volumes and operating income. Record Q4 revenues were up 43.7% year-over-year, driven by increased Invisalign volumes across all geographies and customer channels as well as by record iTero scanner revenue. Q4 Invisalign volume was up 34.2% year-over-year, reflecting strong international growth from increased utilization and expansion of our customer base, which included over 4000 new customers for the third consecutive quarter. Notwithstanding the strong performance, our Q4 results were impacted by the new US Tax Cut and Jobs Act, which reduced our reported net income and EPS. However, Q4 operating income was a record $109.6 million or 26%. John will discuss this in more detail in his section in a few minutes. For the full year, revenue of 1.5 billion increased 36.4% year-over-year, driven by both record Invisalign revenue, which surpassed the 1 billion mark for the first time ever and record iTero scanner revenues. These results reflect continued progress in execution of our force strategic growth drivers, which focus on driving international expansion, increasing orthodontist’s utilization of Invisalign, especially with teenagers, enabling GP dentists to treat and refer more Invisalign cases and generating consumer demand from millions of people worldwide and connecting them with Invisalign Doctor. Turning to the specifics around our…

Thanks, Joe. Now for our Q4 financial results. Total company revenue for the fourth quarter was a record $421.3 million, up 9.4% from the prior quarter and up 43.7% from the corresponding quarter a year ago. Clear aligner revenue of $364.2 million was up 6.6% sequentially on higher than expected volume. Year-over-year clear aligner revenue growth of 44.8% reflected strong Invisalign shipment growth across all customer channels and geographies and increased Invisalign prices. Q4 Invisalign ASPs were down sequentially approximately $5 from Q3 to $1305, reflecting higher deferrals related to additional aligners and higher promotional discounts, partially offset by international price increases. On a year-over-year basis, Q4 Invisalign ASPs were up approximately $75, reflecting price increases, favorable foreign exchange, product mix as well as the impact of discontinuing distribution and going directly in several regions, partially offset by increased promotional discounts and higher deferrals related to additional aligners. For the fourth quarter, total Invisalign shipments of 255,000 cases were up 8% sequentially, driven by our EMEA and North America customers. Year-over-year Invisalign case volume growth was up 34.2%, driven by growth across all regions. For North American orthodontists, Q4 Invisalign case volume was up 2.3% sequentially and up 30.7% year-over-year. For North American GP dentists, Invisalign case volume was up 9.2% sequentially and up 16.1% year-over-year. For international doctors, Invisalign case volume was up 12.7% sequentially and up 52.3% year-over-year. Our scanner and services revenue for the fourth quarter was $57.1 million, up 30.8% sequentially and up 37% year-over-year, primarily due to continued global investment and go to market activities and sales promotions as well as shipments to key DSO partners and our US distributor, Patterson Dental. Moving on to gross margin, fourth quarter overall gross margin was 75.5%, down 0.4 points sequentially and up 0.4 points year-over-year. Clear aligner…

Thanks, John and thanks again for joining us. 2017 was a great year for Align and I'm very pleased with our strong performance across all key regions, customer channels and product lines. This year, not only do we celebrate our 20th year in business, we also achieved several major milestones. We reach our millionth Invisalign team and our 5 millionth Invisalign patient. Invisalign volume in EMEA exceeded 200,000 cases for the first time. We opened our first treatment planning operations in China and Germany. China became our second largest country market, next to the US. Invisalign revenues exceeded 1 billion for the first time ever. As I reflect on these achievements, I want to take a minute to thank more than the 130,000 Invisalign providers around the world who helped us expand the market for orthodontics using the Invisalign system. They’re increasing confidence in using Invisalign clear aligners to treat moderate to complex cases as reflected in our record utilization across all customer channels and we're grateful for their partnership. We're continuing innovating to deliver new technology and solutions that provide Invisalign doctors with the right tools, support and services to keep their practices flourishing. Even with growth rate significantly above the industry, our market opportunity is enormous and getting larger every day. With less than 10% share of the world orthodontic case starts each year, we have a long way to go to make clear aligners a standard of care, but our goal is to do just that. There are more than 300 million people around the world who would or could benefit from straighter teeth. Reaching out to those consumers, helping them understand treatment options and getting them started in treatment will require new approaches and new models. We're committed to doing that in partnership with our customers.…

[Operator Instructions] Our first question is with Robert Jones with Goldman Sachs.

This is Nathan Rich on for Bob this evening. Joe, I just wanted to start with the revenue outlook for growth to be at the high end of the long term range. Obviously, that still implies a healthy level of growth, but down a little bit from what you guys saw in 2017. You’ve spent a lot of time on the call obviously talking about the initiatives that you've put in place and the opportunity that the company still has. So I was just wondering if you can maybe help us understand what the key drivers of the outlook are for this year and what if anything has changed from your point of view.

Well, I think nothing's really changed in that sense. There's some amplitude that we're talking about in the sense of what we're calling right now. But overall, we feel good momentum in the business and what we're trying to convey with you is we stay within the volume ranges that we've talked about before. But, we're just going to look quarter-to-quarter, we continue to look at the same drivers, I mean, continue to look at APAC being strong, Europe will be strong and North America, particularly around teens and our focus there and iTero scanners continue to go off well. So overall, I really feel good about our forecast and will be more and more clear obviously as we come back to you after the first quarter.

And just a follow up on the outlook, does it contemplate any change in the competitive landscape in 2018 and if you were to see a new competitor come to market, how would that impact your view of the year?

I think Nathan, we've been very I think clear over the last year or so that we do expect competition in 2018. In these forecasts, we are reflecting any kind of competition we might see, but there's been nothing out there recently that's changed any position that we've had from a competitor standpoint. So these forecasts do reflect how we see the marketplace and that includes potential competition as we get into longer parts of this year.

Our next question is with Erin Wright with Credit Suisse.

Can you speak to your retail store contact and how you envision that progressing, has there been any sort of surprises thus far with the initiative and how will the smile concierge team be involved, like do you plan to leverage your smile concierge build out in other countries as well to then leverage the retail store concept there or is it too early on that process?

Well, we are translating Erin the small concierge program overseas. We will look at it, we will move it into APAC this year and also move it into EMEA. What’s nice about it is it’s scalable right now. We can take what we've learned in North America and there's a lot of IT involved and a lot of processes in a sense of how you turn a consumer into patients that we’re able to I think plug and play much better now, we have that experience. That's really what that understanding is what led to the Invisalign store, the pilot that we currently have in San Francisco is that just wanted to move this even closer to patients. And remember again, we're not doing any kind of diagnosis or anything like that. We do scans in these shops and we show potential patients or consumers, what their smiles could look like in two different sets of -- two approaches what we call signature and deluxe. I would say what we're doing, we continue to -- it is a pilot and we work through the workflow between us and the doctor and us and the patient and we refined that pretty well over the last 60 days and we're making progress. That should give us the confidence to announce that we're going to move a store in to San Jose and also two on the East Coast this year, but we'll be very clear with you about what we learned, but again, this is all about how you turn a consumer into a patient and this is as much -- this is a doctor model. We're working with our doctors to make this happen. And so how you touch these consumers, how the frictionless way that you move a consumer into a doctor, how fast that information can be received, all that is really important in this customer journey and we're learning more and more about that and how to do it better. So we're optimistic about it and we do this -- have it on our future plans. And obviously, just like the concierge services, we have success here and we have a model we think scalable. We’ll look at where that might fit in different countries around the world.

And can you give us an update on mandibular advancements here, what sort of data has been requested from the FDA and what sort of visibility do you have on timing of the launch. I guess what are the next data points and also how traction for that product I guess hoping to build adoption across the teen market outside of the US. Thanks.

Erin, this is really, it’s actually simple. Sounds like a drug or anything like that. They just need more data at the FDA and they just want to have more comfort with the safety and the efficacy of the product line, so we're supplying that data. We expect hopefully we’ll be through that by the second half of this year and then we'll move on. I mean, I talked about the 5,000 cases that we did last year with 2500 of those being in the fourth quarter alone. Honestly, the feedback that we get from our patients overseas is tremendous. I mean when we look at the device that we've replaced through this, it's amazing like a twin block device. Let’s normally use that there. When you can actually move this jaw forward as comfortably as we do with math, but also straighten teen’s teeth at the same time. It's really an amazing invention. So I think that's part of the way the FDA wants more and more information because they really haven't seen a device like this before, but we feel very confident we'll be able to supply their informational needs and as we move in to the second half of this year, we'll give you more clarity on exactly where that stands.

Our next question is with Richard Newitter with Leerink Partners.

Hi. This is Jamie on for Rich Newitter. A quick question that I have I guess is on the teen segment. Of course, you guys posted nice performance this quarter, so I'm kind of thinking about when you guys think this market could be potentially reaching an inflection point and how we should be thinking about the additional investments in your direct-to-consumer campaigns and really seeing the payoff there and how it translates into further growth in 2018?

It’s Joe again. Look I would say we've done one in a row on teens and we have more work to do on this, but we have to put a lot of money into the system in the sense of educating moms and teens, peer to peer training for doctors, all these things. And so I'd say, the whole idea, enthusiasm around the tipping point, we're not there yet. We have to continue to see this market and push this market in order to get it going. We're confident in our ability to do that based on what we experienced in the last five quarters, but not necessarily ready to claim victory and that this has its own momentum at this point in time.

And then just one other quick question on scanners, I guess you were saying for you, if I heard you correctly, for the full year 2018, you're not expecting the same sort of growth for the scanner business. So just kind of on that front, what sorts of expectations or assumptions do you have baked in for 2018 for growth in this market.

This is John. We would expect scanner growth to be approximately equal to Invisalign.

Our next question is with Jon Block with Stifel.

Joe, maybe for you, in 2018, another great year of revenue growth expectations and another year of sort of healthy spend expectations as well. So maybe if you can talk to where that spend is being allocated. Clearly, there's a return, but what is it -- is it more reps, is it additional DTC, is it both and then how do we think about that spend maybe throughout the year in terms of reaching sort of the critical mass on the rep front and then I’ve got a follow-up.

Jon, what we're doing is we’re basically magnifying the investments that we’ve made in 2017, so you'll see again investment in teen, broader advertisements, so we now help to drive GP volume growth, particularly in United States too. Investments in our concierge service, but behind that too is what you alluded to also is more field people on the ground calling on customers to actually drive the business. So there's a direct correlation -- when you look at the correlation between our investment in these particular areas to drive demand and the demand we're able to drive and we can see that we realize through that, we're continuing on the same plane that we have before, Jon. I think I'm behind you, I know your question is leverage. As actually when that leverage does occur, I mean that's – I’m voiding that -- it's just -- I don't this thing is not self-sustaining yet. We have to invest in to drive demand in this business and to educate consumers and particularly and to train doctors. And so I don't see that going away in 2018, Jon.

To shift gears, I know it's early, but I do want to sort of follow-up with the store front initiative. Clearly, the model, it gets the volume into the doc’s offices and you've been very vocal about that and it's unlike that of SDC, nut what are you hearing from your customers, maybe even if it's only specific to San Francisco, are there any that are sort of unsettled by called the fixed economics for Express type cases and they shouldn’t be saying, hey, I'm getting 500 bucks instead of 50 for doing an SDC markup, but have they come around and what are you hearing in the early days from that customer base?

Jon, from a San Francisco store standpoint, when you ask the doctors around San Francisco about the store, there's enthusiastic support for it, because they're close to it and they see what we're doing. But if you go around the country, there is anxiety with doctors in the sense of what is Align trying to do with these stores and how to go about it. So we continue to try to communicate that this is a doctor's model and we're trying to drive that demand as much as we can through the orthodontics, and also the GP. To your specific question about the signature product and our cost forward, I mean that hasn't been a favorite of our doctors that we set that price, but obviously there is a market price for around that, but that kind of -- and I call it anterior teeth movement which is basically just a smile kind of improvement that we know that patients really want and we feel that we have to deliver. There are some docs that readily support it and they are happy with it. There's other ones that aren't happy with it too and we continue to let them make that selection, whether they want to participate in that or not. We also have our deluxe cases as we haven't set a priceline that the orthodontists have been very happy with in a sense. So, we do have a significant number of patients that offer the Deluxe too when they understand potential bite changes and what that might do for the long term dentition.

Our next question is with Steve Beuchaw with Morgan Stanley.

This is actually Zach Wachter on for Steve. Thanks for the questions. Joe, I wondered if you saw the 3Shape and 3M release out today on the collaboration and any early thoughts on that.

Yeah. Zach, the one thing I was kind of stunned with was that basically 3M admitted that their scanner doesn't function properly for digital marketplace. I mean that surprised me more than anything. With that, it doesn't surprise me that they would go to 3Shape because 3Shape does have a good Confocal imaging scanner as we know, partially supported by our technology, but that's just to be expected in that sense. But -- the real part that surprised me was really that the def scanner that 3M currently has apparently will be retired in some way. So as far as what does that mean from a competitive standpoint, it doesn't change anything at all. It just means that 3M felt that they needed a different front end from a digital standpoint in their system than what they currently manufacture.

And as far as the 3Shape transition on the scan submissions, how are you doing in terms of back filling those volumes and what do you think about the overall impact there?

That’s like we didn't call our forecast any impact. We have customers upset at us because we had to make that move and wanted to make that move. But we're working through that, through offers of iTero that help offset this and also through subsidizing some submissions we did have in a fundamental way than the analog way in order to do impressions. So right now, we're not calling any kind of a downside based on that. We emphasize with customers have been effective from a workflow standpoint, we're doing everything we can to mitigate that and make it as easy as possible.

And there have been a couple of questions on store front, I wonder on the -- specifically on the consumer finance program, separate from the store, if there have been any early learnings there that you can share and any incremental volume left to speak to.

These are good questions. We’ll tell Steve how good you are. John's going to answer that question for you.

Look, we're doing a pilot now in some key markets and learning a lot and working through to make sure that we have the best possible patient and customer experience through this. So we're learning, making sure that it gets rolled out in the right way and you'll see a larger rollout coming in the future.

Our next question is with John Kreger with William Blair.

Joe, given the very strong growth that you just finished up in ’17, how do you feel about the manufacturing infrastructure’s ability to handle it? If you had similar growth in ’18 as you just put up, would there be any strains on the system and whereas in particular and do you have to put some more capital work there to stay ahead of that?

John, yes, we do. And we do that almost systematically. We make sure that we have enough SLA equipment and capability and whereas, obviously, we're going to have extra capacity now coming on in China that will help take some pressure off that facility too. We also could have a bottleneck on the patient and -- when you look at Costa Rica and what we do overall from the case assessment, case prescriptions standpoint, but we tend of stay up at that and we had a big challenge last year because we had a lot of volume come out as pretty quickly and we were able to recover and get it done. So I think the job right now I feel good about our operations team, our ability to anticipate that, to have the kind of capacity available upfront to get this done. So we don't look at that as being an issue in 2018.

And then just one follow-up, can talk a bit about key new innovations. So you gave us a nice update on mandibular advancement, as we think about ’18, is there anything out on the horizon that you would maybe care to preview.

Well, I think we've talked a lot about rapid palatal expansion, I mean we talked about that about 18 months ago. We’ve given updates on that, that technology continues to progress. We're enthusiastic about it. That's rapid palatal expansion, John. You put in, in this case a device, it replaces a device where you use actually a wrench today to turn it, it's very crude in the sense of how you expand the palatal, that this would be a digital way with plastic and being able to expand the palatal on a regular basis. We also have a product called dental expansion, which will expand your upper arch also Invisalign with Invisalign aligners also. So those are the big products that we're moving toward. When you think about the teen marketplace, and we call tweens and teens and 30% of that marketplace is basically rapid palatal expansion and math, mandibular phase 1 kind of things. And so that technology is really aimed at making us more -- have a more substantial footprint and capability in that teen segment.

Our next question is with Jeff Johnson with Baird.

John I think as you mentioned on SDC, maybe revenue is coming down a little bit in the forward quarters here after a couple of quarters in a row, near 10 million as they continue to ramp their aligner manufacturing. I guess my question just why do they keep investing in manufacturing capacity. Obviously, they have a good partner in you guys, you guys have plenty of manufacturing, I know, maybe some strain on it and whereas as we were just discussing, but why the investments there still and why not just continue to use you guys for most of their aligner needs?

Jeff, I think it looks at separate company. They're looking at this as how they want to run their company and decisions that they make to invest and produce their own product. We take anything that comes externally that they don't want to manufacture and it varies. As you've seen kind of quarter by quarter, based on what they produce versus what they go outside with, but it's an internal decision that they make.

And then when I try to triangulate, I take 1Q guide kind of your 1.8 versus 2.8 EBIT guide and think about kind of what's going on in the business right now, help me out just understand what looks like it could be a down margin in the first quarter and I know John is going to give you a pass on that, but let me just push a little bit on it. How much of that is just your opening, Cologne recently opening in China in the treatment planning, China manufacturing costs or manufacturing facility being built out, it just seems like you are doing quite a bit right now, a couple of new storefronts, all that stuff. Is that really the driver of just some elevated expenses here in the near term or should we be thinking anything ASP driven or anything else kind of core fundamental to the business just versus some investments that need to be made right now.

Yes. Jeff, it's mostly investments. If you think about how 2017 played out, from the investments early on in the year and progressively as we went quarter by quarter, we've got increasing operating leverage. That's the same type of play that we would have for 2018. We're investing, we continue to follow the strategy that we have and you'll see those investments throughout the year and first quarter, it's not as much operating leverage, but to guide something flat on a year-over-year basis, around that 24%, you would expect that some of that increase as we go through the year.

Our next question is with Matt O'Brien with Piper Jaffray.

This is Kevin on for Matt today. I wanted to follow up on a previous question on manufacturing. I know China is -- the facility there is coming on later this year. I was just curious on the primary investments there, are there any updates to new printers or materials and I guess more broadly with the large growing cash balance and possible repatriation of some cash back into the US, how the company thinks about the best use of cash at the moment?

Yeah. I can start with that one. I mean when we think about our China operation, I mean, as kind of been noted, when we talk about investments that we have to make up, to accommodate the manufacturing, we're always investing. So now, we're going to add to that capacity that we need in China. So it's really a shift in some cases from Mexico to China and we'll continue to make those investments as needed from an overall growth standpoint. And when we look at our cash position that we have, as we said on previously, we're going to look at what strategically makes the most sense to bring cash back where we need it, where we can properly use that cash for future investments. But in other cases like China, we’ll leave cash there to be able to grow that operation that we need. So we're going to look at this very strategically as to how we best fund our growth.

And then lastly, I was just -- just looking at the percentage of cases done through the iTero digital scanning process, it goes up nicely every quarter and it was right around 50% in North America this time last year. So large incremental improvement. Ideally, you're looking for 100% there, but is there an internal target that company is looking for in ’18 or the coming years? And secondly, how would you think about any kind of savings from fewer adjustments being sent back or chipping the molds out. Is it more significant than we might assume?

It’s Joe. We don't really -- don't set numbers year to year to think where we're going to be, but you saw a ten point increase last year in North America alone. So I mean we expect that going forward, as scanners are more and more adopted, obviously, fewer impressions are going to be done. So, ideally, you'll get to 100% someday, but getting to 80%, 85% is probably going to be, it’s the top of the area because a lot of, particularly on the GP side, they will be maybe reluctant to invest in the scanner until they know that they have enough Invisalign volume to really support that. But I -- as far as the savings of doing that, we actually obviously don't have -- you have better fitting aligners. We know all those things occur from that, but we don't have any quantification in the sense of the economics or changes in that way that I can share with you that I know.

Our last question is with Brandon Couillard from Jefferies.

Just a couple of housekeeping questions, John. In terms of the 1Q revenue guidance, 400 to 410, pretty rare that we would see a sequential quarter-over-quarter decline if ever. Does that imply -- can you give us some sense of like the actual magnitude of the scanner step down from 4Q into the first quarter and perhaps spike out, whether that largely reflects upfront Patterson shipments that really won’t recur in the first quarter.

Brandon, it’s – yeah, as you pointed out, the revenue is -- the numbers that we guided to is just a pure reflection of what we expect from a scanner standpoint and being the strength of Q4 from a scanner standpoint, it’s a big quarter from a capital standpoint and investment standpoint by our doctors. It doesn't necessarily repeat in Q1. So that's a step down that we see. So it's really what's driving that change and it's been that, it's not unexpected in terms of how we look at Q4 to Q1.

And then secondly in terms of the ’18 outlook, can you give a sense of where you see your percentage of SmileDirect manufacturing volumes shaken out for the year? And then secondly curious if you’ve finalized plans on whether you expect it to take a little, more or less pricing this year.

So, on SmileDirectClub, we would expect about the same volume year-over-year. So what we saw in ’17 should approximate and repeat in 2018 and that would be included in the overall numbers that we gave. And in terms of ASPs, we increased in the past, we haven't announced any increase in 2018. We will let our customers know in advance and then communicate that afterwards, but our past history has been to include.

Thanks, everyone. This concludes our conference call today. We look forward to seeing you at upcoming financial conferences and industry meetings, including the Leerink Healthcare Conference, Morgan Stanley European Healthcare conference and the Chicago Midwinter Meeting. We're also announcing today that we will be hosting an Investor Day in New York City on May 23. Additional information will be available shortly. We hope to see you there. If you have any questions, please contact Investor Relations. Thanks and have a great day.

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