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Align Technology, Inc. (NASDAQ:ALGN)

Q4 2012 Earnings Conference Call

January 30, 2013 4:30 p.m. ET

Executives

Shirley Stacy – VP, Corporate & Investor Communications

Thomas Prescott – President & CEO

Kenneth Arola – VP & CFO

Roger George – VP, Legal & Corporate Affairs

Analysts

John Kreger – William Blair

Steve Beuchaw – Morgan Stanley

Matt Dolan – Roth Capital Partners

Robert Jones – Goldman Sachs

Glen Santangelo – Credit Suisse

Jeremy Feffer – Cantor Fitzgerald

Brandon Couillard – Jefferies

Spencer Nam – Janney Capital

Jonathan Block – Stifel Nicolaus

Jeff Matthews – Ram Partners

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Align Technology Q4 Fiscal Year 2012 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce, Shirley Stacy of Align Technology. Ms. Stacy, you may begin.

Shirley Stacy

Good afternoon and thank you for joining us. I’m Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me today is Tom Prescott, President and CEO; and Ken Arola, Vice President and CFO.

We issued fourth quarter and fiscal 2012 financial results press release today via Marketwire, which is available on our website at investor.aligntech.com. Today’s conference call is being audio webcast and will be archived on our website for approximately 12 months.

A telephone replay will be available today by approximately 5.30 PM Eastern Time through 5.30 PM Eastern Time on February 8, 2013. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 406337 followed by pound. International callers should dial 201-612-7415 with the same conference number.

As a reminder, the information that the presenters discuss today will include forward-looking statements, including without limitation statements about Align’s future events, product outlook and the expected financial results for the first quarter of fiscal year 2013. These forward-looking statements are only predictions and involve risks and uncertainties such that actual results may vary significantly. These and other results are set forth in more detail in our Form 10-K for the fiscal year ended December 31, 2011. These forward-looking statements reflect beliefs, estimates and predictions as of today and Align expressly assumes no obligation to update any such forward-looking statements.

Please also note that on this conference call, we will provide listeners with several financial metrics determined on a non-GAAP basis for comparisons to previous quarters. Most of these items, together with the corresponding GAAP numbers and the reconciliations to the comparable GAAP financial measures, where practical, are contained in today’s financial results press release, which we have posted on our website under financial releases, and have been furnished to the SEC on Form 8-K. We encourage listeners to review these items. We have posted a set of GAAP and non-GAAP historical financial statements, including the corresponding reconciliations and our fourth quarter conference call slides on our website under quarterly results. Please refer to these files for more detailed information.

In Ken’s comments today, he will not review the total dollars excluded for non-GAAP gross margin, operating expense and operating margin, instead we refer you to our press release tables.

And with that, I’d like to turn the call over to Align Technology’s President and CEO, Tom Prescott. Tom?

Tom Prescott

Thanks Shirley. Good afternoon everyone. On the call today, I’ll provide an overview of preliminary fourth quarter results and discuss the performance of our two operating segments Invisalign clear aligners and scanner and CAD/CAM services. Ken will cover Q4 financial results and the outlook for Q1 in more detail and then I’ll come back with a few closing comments and open the call to your questions.

I’m very pleased to report solid fourth quarter, which culminated in a record fiscal year with over 70% growth for Invisalign volume reflecting continued adoption and increased utilization. Our continuing focus on Invisalign product evolution, market expansion and share gains are the core of this growth.

Q4 revenues were at the high-end of guidance. Even without the positive effects from the release of $4.9 million of previously deferred revenue for Invisalign case refinement which Ken is going to cover more in detail shortly. Better than expected Q4 revenues reflect increased Invisalign ASPs due to lower Advantage rebates driven by lower utilization in Q4 especially among our North American Orthodontists. In addition, we got some lift for international sales from favorable foreign exchange rates.

Let’s start with an overview of key highlights for Invisalign. And for Q4, total Invisalign case volume was 90,500, an increase of 10% year-over-year and a decrease of 2% sequentially. The sequential decline primarily reflects lower volume from North American customers. Year-over-year growth was driven primarily by North American Orthodontists and international doctors and compares to an especially strong Q4 a year ago, Q4 of 2011 which increased 30% year-over-year and 4% sequentially over Q3 of 2011.

As reported previously, in Q4 we saw continued softness in Invisalign case volume due to broader market conditions as well as disruption of our customers’ practices from super storm Sandy. This major storm affected our customers in the Mid-Atlantic and North Eastern region with the greatest impact on the major metropolitan areas in New York and New Jersey.

We saw a change in Invisalign case volume and practice patterns after the storm hit those areas which continued throughout the quarter. While fairly few practices experienced serious damage, most reported delayed or cancelled patient appointments or consultations which impacted their case starts. When we compare the affected area relative to the rest of the U.S., we estimate that we lost approximately 1,000 to 1,500 cases in Q4. Many residents in the area are getting back to normal, but we can’t predict when these perspectives patients will start to seek Invisalign treatment again.

Notwithstanding the impact from Sandy, overall Invisalign case submissions rebounded in December and this trend continued into the first quarter of 2013. Overall, we’ve seen uptick in North American case receipts reflecting increased patient traffic in our customers’ offices as well as traction from customer engagement and practice development activities.

We’ve also seen increased customer interest in Invisalign related to the launch of SmartTrack, our next generation aligner material which is commercially available now.

North American Orthodontists Q4 case volume of 33,500 cases declined 7% sequentially, due primarily to the expected decrease in Invisalign Teen case starts. Year-over-year, over North American Ortho customers increased case volume by 12% driven primarily by Invisalign team reflecting our continued share gains in this very important Teenager Orthodontic segment.

To top it off, we’ve seen strong adoption of Invisalign Express 5, our cost effective treatment for very minor fixes which was launched commercially a year ago and is targeted at our higher volume ortho customers.

During Q4, we ran a promotion, a new promotion which offered doctors $200 of less price for Invisalign Express 5 which was intended to drive higher trial and repeat usage and we’ve seen good uptick on it as a result.

Our North American GP dentists Q4 case volume of 34,600 cases was essentially flat from last quarter and reflects an increase in Invisalign Express offset by a decrease in Invisalign Teen just fairly typical coming off the summer Teen season. On a year-over-year basis, North American GP has increased 5% driven primarily by Invisalign Express. Even admitting industry slow down, our performance in this channel has been solid.

For our customers outside of North America, Invisalign volume of 22,300 increased 2% sequentially reflecting a seasonal rebound in Europe. This growth in Europe was offset primarily by a decrease from our Asia-Pacific distributor which is historically down in Q4. On a year-over-year basis, international volume increased 14% reflecting growth from almost every country as well as increased utilization of all products, especially for Invisalign fall. Growth also reflects positive response to new predictability features of Invisalign like Invisalign G4 introduced over the past year or so.

In our direct European geographies, Q4 sequential growth was driven by a rebound in Italy as well as growth in France and CEU countries of Germany, Switzerland and Austria. We were also up a bit in Spain albeit of a small base despite a very challenging economic environment there. Q4 year-over-year growth was led by the UK, France and CEU countries.

We’ve seen strong acceptance of Invisalign i7 in UK equally across GP and Ortho channels. We expect our i7 offering will also benefit from renewed interest for less complex treatments as we launch it across Europe.

In terms of teenage orthodontics market in Europe, we don’t see the same seasonal pattern in North America experiences and so Invisalign Teen was up sequentially and year-over-year. Our recent product technology innovation is resulting in improved clinical confidence in greater acceptance for Invisalign to treat those teen cases. In addition, we continued to successfully build on our consumer campaign called the right byte in the CEU countries.

We’re also now seeing increased utilization of Invisalign Teen in France which is especially the case among our highest volume customers where now using Invisalign on more of their teen patients.

As you may recall, we hold large scale customer events called Invisalign Summits every other year for our channel ortho, GP in North America and then international and in between those, we hold a serious of smaller venues called Invisalign forums.

In Q4, we held a series of forums in Spain, France and UK with high customer attendance and peer to peer learning focused on sharing of clinical techniques and case studies for more complex malocclusions.

Turning to our direct Asian country markets of Japan and China, we continue to make great progress, both of which had very strong year-over-year growth. Growth in China has been driven by our continued focus on executing our strategy of working with key opinion in Orthodontists in the primary cities which bodes well for the long-term health of our business.

In Q4, we cosponsored a clear aligner therapy meeting with Capital University, a major thought leader in China. More than 80 important orthodontists attend to hear experts present on Invisalign advancements and techniques. We have a strongly engaged customer base that is increasingly recommending Invisalign to their colleagues and their patients.

Overall, 2012 was a great year of progress in China and we are excited about opportunities for continuing to build our business in 2013. In fact, earlier this month, we held an Invisalign key user meeting bringing together the top 15 Invisalign trained orthodontists in China, many of them are now lecturing and teaching their peers about the Invisalign technique.

Shifting to our Invisalign distributors in the APCA, EMEA and Latin America regions, Q4 was down sequentially across all three distributors primarily due to seasonality. Year-over-year volume growth of 30% was driven by continued strength in the APAC region followed by EMEA and the Latin America regions. Our Asia-Pacific distributor region is comprised of wide geography covering 12 countries including larger more advanced markets in Australia and Hong Kong.

As we disclosed last quarter, we are bringing most of this geography back in-house starting May 1. At that time, we will begin to recognize direct sales at our full ASP rather than the significantly discounted ASP under the distribution agreement. In the near-term, operating expense from assuming the direct team there will offset the uplift ASPs, but as volumes ramp we would expect to have a much higher contribution margin on this business.

This means that roughly 3% of worldwide revenue that Asia-Pacific accounts for today become even more meaningful contributor to top line growth beginning in May of this year. While we often talk about the importance of product in clinical innovation to drive adoption utilization growth in North America, the fact remains that it even more important outside North America given the significantly greater complexity of cases treated.

As a result, the set of innovations we’ve introduced over the few years really resonates with international doctors and has been a key to increasing their confidence in Invisalign. We expect this trend to continue with the recent launch of SmartTrack and Invisalign G4 feature enhancements particularly in Europe with its innovations will be the focus of numerous launch events throughout Q1 and Q2.

We continue to focus on expanding our customer base primarily with North American GPs and international doctors as well as increasing utilization among new and existing practices. Year-over-year utilization was essentially flat reflecting continued adoption growth by North America orthos offset a bit by North American GPs and international doctors.

Sequentially, utilization was down a bit consistent with lower volume for North American orthos. Q4 saw lower utilization among our highest volume doctors which also accounts to lower Advantage rebates paid off. In Q4 of 2012, we trained a total of 1,775 new Invisalign doctors by channel we added 75 North American orthodontists, 920 North American GPs, and 780 international doctors.

For the full year, Invisalign growth was driven primarily by the continued expansion of our customer base as we trained a total 6,845 new Invisalign doctors which reflects the addition of 388 North American orthos, 3,305 North American GPs, 3,150 international doctors. For international, around 50% new doctors were in our direct country markets and the other 50% were in our distributor geographies.

Moving on to product innovation, on January 21st, we announced that our next generation liner material SmartTrack is now the standard of liner material for Invisalign clear aligners in North America and it will be commercially available in all the international markets where regulatory approvals been obtained February 4th.

We previously highlighted SmartTrack in the Q3 call and since many of you have reviewed the press release, I’ll touch in a few key points here. SmartTrack is a highly elastic proprietor new aligner material that delivers consistently low force to improve the control tooth movements within Invisalign clear aligner therapy. Orthodontic literature sites consistent lower moderate force as ideal for ensuring predictable tooth movement.

The elasticity in SmartTrack also appears to offer greater patient comfort and easier removal of aligners. In combination with our other innovation such as Invisalign G3 and G4, our customers have told us that SmartTrack is already delivering greater predictability and in turn inspiring greater confidence to use more Invisalign.

A record 5,900 of our customers registered for the SmartTrack Ask the Expert webinar we held on January 18th, the largest number ever registered for one of these webinars. Following the call, we received 3,000 survey responses regarding the impact of SmartTrack and this webinar on their future use of Invisalign.

The survey responded stated that based on the webinar and their knowledge of SmartTrack, 95% sense their confidence in Invisalign was positively improved and 90% said they were likely to recommend Invisalign to their patients more frequently, great feedback. So feedback in this webinar reinforces what we already learned about SmartTrack from our large scale pilot that began last May, announces of over 1,000 patients treated with SmartTrack shows statistically significant improvement in controlled tooth movements especially for the most difficult such as rotations and extrusions.

And to quote Dr. Clark Colville, an orthodontist and a member of our Clinical Advisory Board, he says, “The fit around the teeth from aligner to aligner is better than with any group of patients I’ve previously treated with Invisalign. Without a doubt, SmartTrack is the most exciting change in Invisalign technology among the many that have been introduced in recent years.”

The Align team is committed to extending this continuum of product and technology innovation to improve the performance of clear aligner therapy. We’re pleased with the initial response to SmartTrack and are excited about the potential to help drive continued adoption and utilization growth for Invisalign worldwide.

Overall, 2012 was a year of significant investment to extend and sustain our growth in North America and internationally.

Our go-to-market approach in North America is based on a team of territory managers, and to a lesser extent territory specialist which we deploy to enhance coverage in larger territories especially with the mix of lower volume GPs.

Over the past couple of years, we’ve piloted different coverage and deployment models and found that territory specialists are particularly successful and cost effective in building our base of GP customers. We see this is the right time to invest in incremental coverage in high growth or heavily concentrated areas with a large number of low volume GP customers.

In 2013, we will add sales headcount at North America and in Europe with the bulk of those in North America. In direct geographies, it typically takes several quarters to bring new sales reps up to speed and we are comfortable that we’ll get good ROI on our investment in this coverage. In addition, we’ll add approximately 15 reps by bringing the Asia-Pacific team back in the direct sales organization.

Turning to consumer, our integrated consumer marketing platform is traditionally focused on an North American market and combined paid media like print, broadcast and digital along with the mix of PR, event marketing and social media outreach. The goal of this platform is to raise awareness of Invisalign and Invisalign Teen as the best options for healthy beautiful smile among adults especially for moms as well as teens.

In addition, it is important for us to help these potential patients find a great practice that could meet their needs. Growth in activity and greater engagement on our consumer website are good measures of progress in this front as we help educate perspective patients and direct them to get more information to take an interactive smile assessment based on their own goals for treatment and search for Invisalign providers in their own area.

We ended 2012 with more than 5.4 million visitors to Invisalign.com for the year, up 23% from 2011. Website leads were up over 33% year-over-year and find a doctor search were also up nicely from 2011. We continued to see increase in traffic for mobile device users with visitors to the Invisalign.com mobile site making up around a quarter of our total traffic especially when our ads are on TV.

All these metrics tell us that perspective patients remain interested and learning more about Invisalign treatment and connected with providers in their local area.

As of mid-January in North America, we were back on TV with advertising and expect to be consistently on air throughout 2013 with no more than two consecutive weeks off air until December. We also have a new North American consumer campaign in development that we expect to launch around Memorial Day to leverage the summer teen season. And we look forward to sharing more about that strategic initiative when ready.

Within Europe, to build on the consumer marketing front, we are launching an integrated consumer campaign in all five direct European country markets this month. For the first time in Europe, we’ll be sponsoring TV programs in France, Germany, Italy, Spain and UK/Ireland under the campaign theme “Smile and the whole world smiles with you!!”

As part of our TV sponsorships we will also have extensive presence on each of the TV stations web sites. The TV sponsorships will be supported by campaigns across Align’s social media platforms such as Facebook and Twitter, as well as online through display and banners ads and an extensive search engine marketing program.

We’ve partnered with one of the world’s largest publishers of monthly magazines, Hearst, to further spread our message in consumer print and online titles and will continue to engage with local consumer media to ensure our markets are educated about Invisalign.

Moving to our scanner and CAD/CAM Services segment, Q4 revenue was $10 million compared to $9.8 million in Q3 and $10 million in Q4 last year. And yet reflects strong growth of scanner sales in North America offset by lower services revenues.

Q4 North American scanner shipments grew 23% year-over-year and 59% sequentially, reflecting positive impact from sales at the Invisalign Ortho Summit in November as well as a $4,000 year-end promotion that was very successful.

Even with this strong growth in North America, it was not enough to offset the gap in Europe. It’s clear we have the right model in North America where are successfully leveraging Invisalign resources in events and customer relationships. Over time, we will evaluate the best path forward to restage growth in Europe and the rest of the world.

In addition to increase scanner sales in North America, we continued to see increased synergy between our chair-side technology and Invisalign treatments. This increasing trend and a percentage of Invisalign cases submitted with a digital scan rather than a traditional physical impression rose to 17% in Q4 compared to 14% in Q3 and 6% in Q4 a year ago.

We also continued to see an increase in Invisalign utilization among scanner customers, particularly orthodontists and expect this positive trend to continue. The drivers for this growth come from better customer and patient experience along with recent scanner innovations including the new iTero scanner launching next month, which is garnering great early feedback.

In addition, the recently launched Invisalign Outcome Simulator brings a valuable patient education to all chair-side to help doctor show the benefits of Invisalign treatments to perspective patients.

I’ll now turn the call over to Ken for review of our Q4 financial results. Ken.

Ken Arola

Thanks Tom. Before I begin, I want to provide a brief update on the status of our goodwill impairment for the Scanner and CAD/CAM Services reporting unit.

In Q4 2012, we finalized the step two analyses and recorded an additional $11.9 million impairment to goodwill. We had previously recorded a preliminary estimate of $24.7 million of goodwill impairment in quarter three 2012, bringing the total goodwill impairment to $36.6 million.

Now let’s review our fourth quarter financial results beginning with revenue. Q4 net revenue was a total of $142.8 million which consisted of Invisalign revenue of $132.8 million and Scanner and CAD/CAM Services revenue of $10 million. This is a sequential increase of 4.6% from $136.5 million in quarter three 2012 and a year-over-year increase of 10.8% from $128.9 million in quarter four 2011.

The sequential increase in revenue primarily reflects higher Invisalign ASPs which benefitted from lower than expected Advantage rebates and favorable foreign exchange rates.

Q4 2012 Invisalign revenue of $132.8 million, increased 4.8% compared to Q3 revenue of $126.7 million, increased 11.7% compared to Q4 2011 revenue of $118.9 million.

Q4 Invisalign revenue includes the release of $4.9 million of previously deferred revenue for Invisalign case refinements. Case refinement gives a doctor the option to additional aligners typically during the final few stages of treatment if further chose movement is needed in order to meet the original treatment goals.

Aligned defers revenue for case refinement when an Invisalign case shifts. In Q4 2012, we determined that the actual case refinement usage rate was lower than our estimate and as a result, we released $4.9 million of revenue deferred for the case refinements.

Adjusting for this one-time favorable impact of $4.9 million, Invisalign revenue for Q4 was $127.9 million, up slightly from Q3 and an increase of 7.6% year-over-year. As mentioned, Q4 Scanner and CAD/CAM Services was $10 million, this was a sequential increase of 2.1% from $9.8 million in Q3 2012 and was flat year-over-year.

Now moving on to gross margin and operating expenses. Q4 GAAP gross margin was $106.5 million or 74.5%. This compares to $100.4 million or 73.5% in quarter three, and $95.6 million or 74.1% in the same quarter last year.

Q4 GAAP gross margin was Invisalign was 78.8% and Scanner and CAD/CAM Services gross margin was 18.5%. This compares to 77.6% and 20.6% respectively in quarter three.

Non-GAAP gross margin for Q4 was $106.7 million or 74.7%. This compares to $100.7 million or 73.7% in quarter three, and $96.5 million or 74.9% in the same quarter last year.

For Invisalign, there was no difference between GAAP and non-GAAP gross margin for the periods Q4 or Q3 2012 and Q4 2011. The sequential increase in gross margin primarily reflects higher ASPs and lower manufacturing spend.

For Scanner and CAD/CAM services, Q4 non-GAAP gross margin was 20.5% compared to 23.8% last quarter and 30% in Q4 2011. The sequential decrease in non-GAAP gross margin is primarily ASP driven as it reflects the $4,000 promotion for iTero Scanners in quarter four.

Q4 GAAP operating expense was $89.4 million compared to Q3 operating expense of $95.8 million. Operating expense for the same quarter last year was $69.1 million. GAAP operating expense includes a goodwill impairment charges of $11.9 million in Q4 2012 and $24.7 million in Q3 2012.

Q4 non-GAAP operating expense was $76.6 million. This compares to $70 million in Q3 and $56.9 million in the same quarter last year.

The increase in Q4 non-GAAP operating expense is primarily due to severance cost, legal fees and a greater number of industry meetings including the ADA and Greater New York Dental Show. In addition, we hold a number of major customer events in Q4 including our North America Ortho Summit and a series of Invisalign forums in Europe.

Q4 operating income was $17.1 million or 12%, this compares to $5.4 million or 3.3% in quarter three and $26.4 million or 20.5% in the same quarter a year ago. Q4 non-GAAP operating income was $30 million or 21% and this compares to $30.6 million or 22.4% in Q3 and $29.7 million or 23% in the same quarter last year.

Q4 GAAP diluted earnings per share was $0.12 compared to $0.00 in Q3 and $0.25 in the same quarter last year. And Q4 non-GAAP diluted earnings per share, was $0.27 compared to $0.28 in quarter three and $0.28 in Q4 of last year.

Moving onto the balance sheet. Cash, cash equivalents and marketable securities including long-term investments were $356.1 million. This is compared to $248.1 million at the end of 2011. In Q4, we generated roughly $50.8 million in cash from operations compared to $40.3 million in quarter three and $42 million in the same quarter last year.

During quarter four, we purchased approximately 1.4 million shares of our common stock at an average of $26.41 a share for a total approximately $37 million. There remains approximately $95.5 million available under the company’s existing stock repurchase authorization.

Q4 DSOs were 62 days compared to 70 days in quarter three and 64 days in the same quarter last year.

Before I move on to the Q1 outlook, I’d like to make a few comments on the full year results.

Revenue was a record $560 million, up 16.7% compared to $479.7 million in 2011. Adjusting for the one-time impact of $4.9 million release of previously deferred revenue for Invisalign case refinement, revenue for the year was $555.1 million, up 15.7% year-over-year reflecting solid growth in all channels, especially North America Orthos and International doctors.

In 2012, we shifted 363,500 Invisalign cases, up 17.5% compared to 309,300 cases in 2011. From a geographic standpoint, North America volumes increased 16% and international volumes increased 22.7% year-over-year.

GAAP operating income for the year was $85.6 million or 15.3% compared to $90.4 million or 18.8% in 2011. Non-GAAP operating income for the year was $128.6 million or 23% compared to $104.7 million or 21.8% in 2011.

GAAP diluted earnings per share was $0.71 for 2012 compared to $0.83 in 2011 and non-GAAP earnings per share was $1.17 compared to $0.97 in 2011. For the full year, we generated $133.8 million in cash from operations compared to $130.5 million in 2011 and we bought back 1.7 million shares of Align stock for total of $47.2 million.

Now let’s turn to our business outlook for Q1 2013 and the factors that inform our view.

2013 is off to a good start. Our customers report patient traffic flow in their office has picked up towards the end of the fourth quarter and has continued into 2013. We expect our North America business to benefit from the increased activity and volume trends we are seeing, as well as the price increase for clear aligners and iTero scanners.

At the same time, as doctors increase their utilization we are anticipating higher Advantage rebate participation and we’re expecting some product mix shift to lower ASP products like Invisalign Express 5.

In North America, we anticipate Invisalign case volume for the GP channel to be flat to slightly up in quarter one and North America Ortho channel to be up nicely from a seasonally softer quarter four. In International, we would expect Q1 case volume to be flat to down as doctors have more days out of the office in Q1 for winter holidays.

In Q1, we will begin to consolidate Vivera Retainer product shipments down to one shipment per year, compared to the current process of four shipments per year. Consolidating the shipments is something our customers have asked for as it will make it more efficient for their practice. As a result, our Q1 outlook reflects a higher amount of Vivera revenue than in the past as we will be recognizing the full Vivera case revenue upon shipment instead of recognizing it ratably over four quarters.

The net impact will be a $4 million benefit to Q1 revenue. In addition, we will also begin to realize reduced freight costs as we make this change.

For Scanner and CAD/CAM Services, Q4 is typically the strongest quarter for dentists and specialist to purchase capital equipment. As such, we would expect Q1 sales to be down sequentially from Q4.

So with that as a backdrop, Q1 Invisalign case volume is anticipated to be in a range of 95,000 to 97,500 cases reflecting 11.4% to 14.3% year-over-year growth. We expect Q1 total revenues to be in a range of $146 million to $150.5 million. We expect gross margins to be in a range of 72.4% to 73.1%. The sequential decrease in gross margin primarily reflects a slightly higher material cost for the SmartTrack material as well as a planned inventory reserve for current safety stock of our previous clear aligner materials.

In Q4, we expect operating expenses to be in a range of $82.8 million to $84.4 million. The sequential increase in operating expense relates to higher annual compensation and employee benefits, consumer programs including the development of the new consumer advertising campaign Tom mentioned and incremental sales headcount. Also beginning in Q1, operating expense will include the new medical revised excised tax.

We expect Q1 operating margin to be in a range of 15.8% to 17.1% and earnings per share to be in a range of $0.21 to $0.23. In Q1, we expect the effective tax rate to be approximately 24%, diluted shares outstanding to be approximately 83 million and cash on hand to be in a range of $365 million to $375 million excluding any stock repurchases.

Now I’d like to provide some directional comments on full year 2013.

From a revenue perspective, we believe we are focused on the right strategic levers and with our expanded product platform, we believe we will continue to grow and gain share during the year. The ASP impact from the price increase for Invisalign in North America that was effective as of January 1st, will be offset somewhat by the expected increase in Advantage rebates as we’re anticipating doctors will continue to increase utilization of Invisalign, as well as increased volume from lower price products including Express 5 and Invisalign i7.

We believe we can maintain our gross margins in the lower end of the long-term model of 73% to 78%. Factors that can impact our gross margin structure, either positive or negative, are significant shifts in case volume quarter-to-quarter, movements in foreign exchange rates, particularly the Euro, and levels of Advantage rebates and promotional discounts attained by our customers.

2013 will be a year of investment in areas around sales coverage in North America and Europe, bringing the Asia Pacific channel back in-house with approximately 50 employees; the development of a new consumer campaign and being on air more consistently in 2013, and our continued focus on product technology and innovation.

To believe, there will be some quarterly fluctuations from Q1 levels during the year due to timing and amounts of spend relative to consumer marketing, sales force expansion, and significant trade show and industry events.

Given the rebound in case receipts in December, which have continued into Q1 and assuming patient traffic continues to improve, we’re confident about our top line growth resuming and expect operating margins to approach the low end of our operating margin targets as we exit the year.

Before I turn the call over to Tom, I’d like to make one other brief comment. Right now you probably seen the announcement that I will be stepping down as CFO of Align. Over the next month, I will continue in my current capacity to ensure that we complete all year-end activities and including the filing of our 10-K.

Beyond that, I will transition my responsibilities and an employee through June. I have truly enjoyed being a part of great team to bring the company to where it is today and wish continued success for Align. It was also been a pleasure to have the opportunity to meet and get to know many of you over the past several years and I wish you all the best as well.

Now I’ll turn the call back to Tom for some closing comments.

Tom Prescott

Before I move to some closing comments, I want to thank Ken for his service over the past seven years, he’s earned some downtime and as he is really going to enjoy that. Thank you so much. We have a search underway for a new CFO and expect to complete that by the end of Q2. During the interim, Roger George will formally pickup responsibility to the finance team and service interim CFO.

Now to wrap up our comments. Q4 was a very solid end to a year of record Invisalign case volume and revenues. Despite slower growth in the back half of the year, our strong first half performance helped drive nearly 17% Invisalign case growth with 16% North America and 23% international.

We had many significant accomplishments this past year that contributed to that growth, including entry into new market segments with the launch of Invisalign Express 5 and Invisalign i7, expansion into new emerging country markets, and the unveiling of our next generation aligner material SmartTrack, which began commercial shipments two weeks ago.

We are starting off the New Year with several new products and feature enhancements including the new iTero scanner, Invisalign Outcome Simulator, and Invisalign G4 Enhancements which are all commercially available in Q1 of this year.

In addition, our customers are reporting improving trends in patient traffic in their offices and for Invisalign case starts. That near term trend, along with our low penetration into the overall orthodontic market, reinforces our long-term view of top line growth of 15% or higher.

Ken covered our framework for 2013 and assuming patient traffic continues to improve, we believe this will be another solid year in terms of Invisalign case starts.

So to summarize; 2012 was a year of delivering solid results in a tough environment, with very positive progress for our customers and while initiating a set of important organizational changes for the company. 2013 will be another important year for us as we commercialize SmartTrack, integrate the APAC team back into Align, launch new products, and accelerate our marketing programs. We are committed to becoming a market leader in dentistry and will continue to build the team to deliver on that goal.

All of these investments in product, programs, and our internal team are focused on one thing, getting us to the day when even our most conservative customers feel confident saying “every case is an Invisalign case.”

I really look forward to updating you on our progress as the year unfolds. And with that, operator, let’s get to the questions.

Question-and-Answer Session

Operator

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

Shirley Stacy

John, are you there?

John Kreger – William Blair

I am. Can you hear me?

Tom Prescott

Yes, now we can. Thanks.

John Kreger – William Blair

Great, thanks. Tom, can you give us an update on where you think the broader orthodontic market is trending in terms of case start volumes?

Tom Prescott

We certainly aren’t the whole market. We’re just a thin slice. Our sense is certainly in the second half of the year it was a tough place. Our orthodontists all reported softer volumes. It was a decent teen year summer, but I think adults kind of slipped away from everybody. So in general, we would target total segment growth in low single digits, us being able to take share has helped us fuel our growth.

So we don’t think it’s been healthy. We do, our customers do report increased patient traffic calendar is filling up with consult in a good way, nothing explosive in growth but solid progress. So we think that points us some improvement. In ortho total starts, and we think with that happening we can get more than our fair share.

John Kreger – William Blair

Great, thanks very much. I think the one topic maybe you didn’t cover in your prepared remarks. Can you just give us an update on the IT front and then what we can expect out of the ITC trial that I think starts in a week or two?

Tom Prescott

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

Roger George

Thanks, Tom. Good afternoon everybody. As we’ve disclosed, the ITC trial begins next week in Washington DC. If you know much about that administrative law forum, it works differently than a typical federal court and so called Article III court under the U.S. Constitution. The administrative legal courts at the ITC have their own set of rules, live witness testimony is quite limited. Most testimony is submitted in writing for the court’s consideration. So we’ve all submitted our briefs. Ours was about 600 pages long that staffing submitted its brief and naturally ClearCorrect submitted theirs because it contains what’s called confidential business information; I’m not even allowed to know much of what is in ClearCorrect’s brief, only our outside lawyers get to know.

So the trial will happen over the course of about a week and the judge doesn’t rule from the bench. He takes everything under advisement. There will be a period of time afterwards where if particular issues come up at the trial, each side will have a chance to provide some further briefing, but really there is going to be a dark quite period where we’re not going to know anything more from the ITC until about early May. And in early May, we may find out that they rule in our favor which will kick off another round of possibilities for appeal by ClearCorrect and acceleration of the chain to the ITC that’s the commission itself. But that’s what immediately is in front of us concerning that matter.

Tom Prescott

John that covers the waterfront for you there.

John Kreger – William Blair

It does. Thanks very much.

Tom Prescott

Perfect. Thank you.

Operator

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

Steve Beuchaw – Morgan Stanley

Hi, good afternoon.

Tom Prescott

Hi, Steve.

Ken Arola

Hi, Steve.

Steve Beuchaw – Morgan Stanley

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

Tom Prescott

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

Ken Arola

Yes, I think again its dependent partly on the fact that want to make sure that patient flow is still there entirely in the office. So one of the things we made a comment on is, when we predicated on that that we see softness in the industry that that growth may not be that which we saw in the fourth quarter until we started exiting in here. So we’re very confident. We have the right strategic levers that we’re working on and have in place. We’re going to be adding the sales force to drive additional growth in the business and upgrading our advertising campaigns again being on air mode to drive more patient interest. So we’re doing a lot of things to push consumers into the doctor’s offices this year as well as get after getting increased sales in Invisalign with a broader sales force and as long as patient flow is there, we think we’ll continue to grow the business.

Steve Beuchaw – Morgan Stanley

Okay, that’s very helpful. I will follow up, so. And Tom asked you, as you think about the way that the business trends over the course of the year. And we understand that around the end of 2012, it probably the real big issue that was pressuring patient starts was the macro uncertainty around the U.S., some of that might have been, let’s say the fiscal-cliff, some of that might have been the election. What do you think are the two or three important levers that you’re going to follow over the course of 2013 as you try to get a sense for what the patient flow looks like? Thanks so much guys.

Tom Prescott

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

Steve Beuchaw – Morgan Stanley

I appreciate that very much. Ken, all the best to you. It’s been great working with you.

Ken Arola

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Matt Dolan with Roth Capital Partners. Please proceed with your question.

Matt Dolan – Roth Capital Partners

Hey guys, good afternoon and Ken congrats on the tenure there.

Ken Arola

Thank you.

Matt Dolan – Roth Capital Partners

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

Ken Arola

Sure, I guess I first make a comment on, if you think back to 2011 or 2012 even this year, we came in typically with the first quarter we have to step up and spending every year. So we start out the year usually in that kind of high teen range in operating margins and we’ve been able to grow at each quarter as we move to the year this year and be able to exit the year at 23% operating margins for the year, kind of approaching that low-end of the range on an annual basis.

We are entering this year a little over base year as far as operating margin is concerned with the step up in spending that I was referring to. And that spending is going to be there for the year that might go up and down a little bit based on timing of activities and those types of things. We’re really looking at driving top line revenue here and in getting the gross back into the top line with Invisalign sales getting leverage off of expanded sales force as well as lot of the chair-side apps like the Outcome Stimulator with the iTero scanner in driving more Invisalign volume.

So we’re really focused on driving top line volume and maintaining on gross margins in that low to mid range of our long-term guidance and growing into the OpEx here.

Tom Prescott

Matt, if I can pile up for just a second. Nothing has changed in terms of our ability to kind of toggle spending, absolute spending up and down although in a given quarter it acts more fixed in general. We believe over the span of year with things improve, we can dial up things come and done a little bit, we can dial back as we proven in the past.

Some of the investments we’re making around coverage and all that, we don’t do those all the time and they’re always a little lumpy when we lay a man. We’re in the mode right now of bringing more reps online in North America and that started actually in Q4. So for us we’ve gone through the cycle of analysis and believe that’s both strategically and tactically a good choice and especially with our Q1 step typically step up in spending, it shows up a bit more. But again, just as we’re pretty comfortable and in general we can live with our long-term model and the top line or even through the investments we’ve been making. We’re pretty comfortable as we at least exit the year; we can get back towards at least the low end of our long-term operating margin model as well.

Matt Dolan – Roth Capital Partners

Okay. That’s helpful. And then the second question is more on the utilization side, it flattened out in the fourth quarter if anything and I know you’d spoken about the summer being a little slow for adults on the ortho side. So can you give us some specifics on what’s given you confidence that the volume growth you’re expecting to see which is low double-digits in Q1 and then it sounds like improving through the year, which one of those utilization variables are specifically driving that trend? Thank you.

Tom Prescott

I guess maybe the clearest read is into the ortho practice. And ortho practices are a bit busier than they were. It was, they had very quite late summer, early fall, literally September October some orthodontists remarking that it was the softest they’d seen since the melt down of 2008. And they got to work and we got to work whether its – one customer asked me if it was tied to the election, because shortly after the election, traffic picked up in their office. And I’ve seen, too hard to understand as I’ve told the earlier caller, we don’t – we read the macroeconomic forecasting, but we don’t make it.

We really watch patient traffic doctor behavior closely and on the ortho side, they’re engaged. They’re more encouraged with Invisalign as a product and more comfortable they’re getting better results with it. It’s easier to use and that bodes well for whatever that’ll be.

On the GP side, it is obviously more difficult to forecast. We have thousands of GP customers that do one or none cases on a given quarter and calling that as a forecast is probably our continuing biggest challenge, but with that said, we do multiple top down, bottom up, practice by practice forecast during each quarter and we’re getting better visibility in what they’re doing. If we have the traffic in the offices and we have our customers on offense we’re going to get case starts.

Matt Dolan – Roth Capital Partners

Thank you.

Shirley Stacy

Thanks, Matt. Next question please.

Operator

Thank you. Our next question comes from the line Robert Jones of Goldman Sachs. Please proceed with your question.

Robert Jones – Goldman Sachs

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

Ken Arola

Yeah, this is Ken, Rob. I kind of refer you back to some of the comments that we just made on the call. So we have typically a step up in spending in Q1 sequentially related to compensation and benefit programs at the company here. That happens every year. This year, we’ve also had the, in the first quarter we’ve started recognizing expenses related to the medical device excise tax. And then we have the investments going on which we’ve been talking about on the sales force expansion on the consumer platform etc.

So we’re going to see spending step up from about $76 million, $77 million in quarter four to about $83-ish million in quarter one. And those are the items that are driving the spending. When we get the headcount on board, and like Tom said, it takes about several quarters to get a sales person really at this speed in their new territories. So we’ll start getting leverage out of those sales people as we move through the year. And as well as being on air more, with our consumer programs, we did a nice uptick in traffic to our website. When we’re on air, we see that pretty consistently and hopefully those turn into cases as well ultimately.

That’s what driving the OpEx increase and like I said we think that’s going to be relatively at that level if we take a little for the year. Given timing as a big events like AAO or ADA that occur in different quarters or maybe some of our own summits we put on for our doctors ourselves.

As far as gross margin, we think that’s going to be pretty consistent. Here we’ve got some little bit of headwind with some of the material cost coming in, but we think we can overcome that with the volumes in the business here. And from a manufacturing point of view, we actually should get less breakage on the line and better yield out of the line of material until it’s a little bit softer.

So really gets back to top line growth and making sure we manage these expenses appropriately here. But we’re investing for some strategic purposes and adding in those types of resources as we mentioned.

Robert Jones – Goldman Sachs

That’s helpful. And then just if I could dig in on the team line and the pace of uptick there. Does seem like in the quarter the year-over-year growth seemed little bit light even after factoring in the 4Q seasonality and you talked positively about the express line and the expectations there. Can you maybe guys just could you share with us how the trended team has been relative to your internal expectations and how are you thinking about that penetration as we move forward?

Tom Prescott

I guess I’ll jump in here, Bob. The general direction for us on teen has been very, very successful. We continue to see progress quarter-over-quarter and year-over-year and I think that if there is some market growth in the ortho segment, we get even more growth. If there is less or say even negative growth in ortho segment, we get – that’s a bit of a moderating effect.

But if you look, for example at our webcast slides, you see that spike in Q3 it’s a very consistent profile year-over-year, quarter-over-quarter with that same kind of pattern except to the amplitude it’s greater. So the second thing that’s going on inside that that gives us confidence that we continue this direction is the types of cases we’re getting that are teen cases.

In the earliest days, three years ago, four years ago, we’ve got just the simplest cases because mom and dad weren’t willing to kind of say, well, I’ll do Invisalign if it’s good enough. They’re going to get braces or Invisalign or whatever getting their teen straightened and they want perfect. So the more our doctors believe they can deliver perfect to the team, to mom and dad, the more they’re going to use our product. And so with G3, G4, SmartTrack with that we can actually score the complexity of an incoming case, we actually look at the complexity of incoming cases on teens, and that is the hardest share for us to take from traditional bracket through wires and yet we see that we’re getting harder and harder cases in.

So that pertains well for our continued progress. Again doesn’t happen overnight, but our goal is very gene sees and do better and better and get more and more than our fair share. So, again, good steady progress, even though the total amplitude I think was down, because I think that’s kind of a dampening effect to the broader economy.

Robert Jones – Goldman Sachs

I appreciate all the comments.

Tom Prescott

Thanks very much.

Operator

Thank you. Our next question comes from the line of Glen Santangelo with Credit Suisse. Please proceed with your question.

Glen Santangelo – Credit Suisse

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

Tom Prescott

I’ll tell you what we’ll divide and conquer here, Glen. I’ll take the broader kind of market mix directional question and I’ll ask Ken to come in and talk about the reserve on as we transition materials.

You pointed to two or different things at once and I’ll see if I can then back them. First, we are trying to accelerate in a value-based area for Express 5, for i7, i14 in the UK and the few other countries in Europe and that’s purposeful because we found small labs etc doing very simple cases and it was an opportunity for us to bring value at the basically the same price they were selling it for in far better results for our customers. So you should expect that to continue. The reason why it appeared to accelerate on a mixed basis had two drivers.

One was that we are trying to push greater usage of say, Express 5 in North America with a promotion which did get some trial and repeat usage. At the same time, the denominator got smaller because it was a softer overall quarter on full on adult and everything else. So if we were maybe to adjust for the softness you can see a little bit of mix shift, but it wouldn’t be as pronounced as maybe shows up here again, more of a softer market dynamic.

The second thing is, that as we talked about it, a lot of volume came in late in the quarter that didn’t necessarily we’re commenting on it because it’s important and it sets up the Q1 discussion. We generally don’t comment in detail or quantitatively about receipts only to the extended points to our business flow and what I’d say is that the business generally came back and as we look at Q1 there is a more normal balance, we would expect a more normal balance of adult starts and all that versus a very, very soft first half of Q4 meaning that mixed shift for express and those kinds of things were more pronounced.

I’ll stop there for a second on the mixed story and let Ken pickup on the inventory reserve for SmartTrack.

Ken Arola

Yeah, hi Glen. First of all, with a big transition like this going from one material to another are at the significant move for the company here. And as we anticipated that we’ve been planned for it, we wanted to make sure we had enough safety stock around of the current material that we have been using all to date. We plan to have 100% cut over to the new material when we turned it on, which is exactly what we did and we wanted to make sure that we’re recovering ourselves to make sure we had enough of the older material or current material around. In case we had a glitch for some reason, at the end of the day, the good thing is that everything has gone very, very smoothly, the transition of new material has gone really from a manufacturing perspective.

So we knew we would have some inventory around. We weren’t sure exactly how much depending on what happens, but essentially we’re not going to use that old material. It has a shelf life of just a very short of period time about a quarter’s three to time. So we’ll actually be writing that inventory off as we go through the quarter here.

Tom Prescott

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

Glen Santangelo – Credit Suisse

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Jeremy Feffer with Cantor Fitzgerald. Please proceed with your question.

Jeremy Feffer – Cantor Fitzgerald

Hi, thanks for taking my questions. Most of my things have been answered, just wanted to come back quickly on guidance for 1Q. You mentioned that currency was positive in 4Q, so can we expect or at least as implied in your guidance you don’t really see any future FX headwinds in 1Q?

Tom Prescott

Well Jeremy I guess it depends where it goes, I mean we have our views of it. As we know today, its running a little bit higher in euro to the dollar than it was a month or two ago. So we take views of that into account as we develop our guidance but we’ll have to see obviously that for the quarter.

Jeremy Feffer – Cantor Fitzgerald

Okay. And then just following up on that. So then the conclusion into draw from the expected revenue growth to be slower than the expected volume growth that’s purely case of mix and also an improvement in utilization driving higher Advantage rebate usage? Is that correct or?

Tom Prescott

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

Jeremy Feffer – Cantor Fitzgerald

Okay.

Tom Prescott

And that includes the Vivera as well.

Jeremy Feffer – Cantor Fitzgerald

Okay. That’s very helpful. Thank you very much.

Tom Prescott

Sure. Thank you.

Shirley Stacy

Next question please.

Operator

Thank you. Our next question comes from the line of Brandon Couillard with Jefferies. Please proceed with your question.

Brandon Couillard – Jefferies

Hey, good afternoon. Thanks for taking the question. Ken, how does the deferred revenue benefit in the fourth quarter breakdown between North America orthos and GPs and then versus international and then any color you can give us by product line would be helpful.

Ken Arola

Well it goes across pretty much all of our products based on the volume of products that we’ve been shipping over the past several years here. We actually don’t really disclose that on our product line basis. I can tell you from a geographic perspective the majority of the adjustment for case refinement is related to North America shipments given the volumes we’ve had in North America over the past several years here compared to international. So does that help a little bit?

Brandon Couillard – Jefferies

Yeah, yeah. And then could you give us an update on the Cadent facility transition, I believe that should be complete by now. And then do you still expect is this rational, but to assume $4 million of annualized savings at crew in ‘13 from that move?

Tom Prescott

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

So technically we’ve seen the savings with the move through facilities cost savings as well as overhead and labor costs, but again we’ve deployed some of that against other activities in the company.

Ken Arola

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

Shirley Stacy

Thanks, Brandon. Do you have another question?

Brandon Couillard – Jefferies

Just one more, quick one, is that all right?

Shirley Stacy

Yeah.

Brandon Couillard – Jefferies

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

Tom Prescott

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

Ken Arola

No, we did not.

Tom Prescott

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

Brandon Couillard – Jefferies

All righty, thank you.

Tom Prescott

Sure.

Shirley Stacy

Question please.

Operator

Thank you. Our next question comes from the line of Spencer Nam with Janney Capital. Please proceed with your question.

Spencer Nam – Janney Capital

Thanks for taking my questions and Ken we’re going to miss you. Good luck to you going forward. Just quick question on the amortization of intangibles. What kind of impact you will have now that you guys not going to be taking out of the non-GAAP numbers? What’s the estimated impact for 2013 on that?

Ken Arola

The amortization of intangibles is $1 million a quarter. We’ve been consistently showing that between GAAP and non-GAAP this past year, but given the fact that those charges will continue for 10 to 13 years depending on the intangible, at least thought there was more appropriate to included in the non-GAAP at this point in time, so about $4 million a year.

Spencer Nam – Janney Capital

Okay, great helpful. And then on China, Tom, maybe you could comment on this. So you’re going to start seeing some numbers from China. My understanding was that you guys had been really kind of building the pack of data if you will with samples and thought leaders. I’m curious how those sort of overview work, what kind of results you guys have gotten. How confident you guys are that the experience that you guys have put together so far is going to effect the adoption here?

Tom Prescott

Couple of multipart question, I’ll try and give a simple answer and that answer would be, our goal is then to take the top most respected orthodontists and dentists in China have them get actual experience with the product which is why, it was essential we had G3, G4 and these other innovations in their hands when they started. Have them complete lots of cases and then be able to, with us work on developing training for all their colleagues across China in the major cities and even second tier cities. And that’s happening. We now have with some of the forums I talked about recently, we have these Chinese doctors showing finished cases for very, very complex year-and-a-half, 18 month, 24 month cases, extraction cases and very complex class II and class III even some surgical cases.

And so with them showing their own results with the Invisalign product it is fairly dramatic statement. Again we’re trying to build the right foundation and moving slowly and still have a pretty small business. I think we identified in our annual report last year it just how small it was in total, but I think it has the potential still to be very large and that’s why we’re going slowly and ensuring we have the support of the most respected clinical leaders in the country which is what we’re about.

Spencer Nam – Janney Capital

Thank you.

Shirley Stacy

Thanks Spencer. Question please.

Operator

Of course. Our next question comes from the line of Jonathan Block with Stifel Nicolaus. Please proceed with your question.

Jonathan Block – Stifel Nicolaus

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

Tom Prescott

Sure, no apologize needed for a blunt question. As we commented in general about our standing guidance on December 5th with awake of a few executive departures, we felt it was important if we saw that softness to comment on us, no more no less. Literally the month of December turned on its head literally shortly after that call and we were very busy, very busy along with the offices remainder of the month. So again it goes back to forecasting, I don’t know what that is, but we’re happy to Ken, we’re happy that tight came in a bit.

So what gives us confidence? We see pretty good visibility into all of our high volume practices, the intentions to build their practice, someone happiness on their part. They maybe didn’t get to the level they expected in the Advantage program. Detailed plans in place to market their practice, build on Invisalign, a lot of excitement about SmartTrack and then we feather that in with think we can drive a little progress in GP and again a harder channel to move quickly.

And then what I will call normal internal where they take, in our eyes at least, extended holiday breaks and you’re driven really by number of days worked. So with all that said, again, we’re still being thoughtful about broader economic environment. We feel reasonably comfortable that we can continue to build on the volume we saw that jumped really and like the second week in December. So that’s how we’re calling it. No more, no less.

Jonathan Block – Stifel Nicolaus

Yeah. Very fair, I appreciate it. I guess it just seems a little less conservative over the past couple of years. On the second question, when I look at and I hate to burn the question on Cadent, but when I look at Cadent and I look at the sort of the service revenues not the scanner with the service, that’s come down sequentially four quarters in a row. And so I guess the scanner sales are someone hanging in there especially considering Europe, but the services about using the machine once it’s in there, the recurring revenue should grow with the growing installed base and we’re seeing the exact opposite. So can you speak to, are these things being used, or are they being used effectively or why is that number coming down sequentially? Thank you.

Tom Prescott

I’m deeply hurt that you’re saying you burned the question on Cadent here, Jon. So we’re glad you asked a question about Cadent. The fact is North America is working very well. We predicted internally that services would go down principally because we decided to get out of the bracket positioning business they had called IQ and there were several hundred high volume mostly ortho that use that service a lot. We just didn’t feel we can scale it as we thought about the pieces of that business moving into what as, we would had to significantly reinvest in it. So we had a very thoughtful discussion with again hundreds of customers that really liked it and have a glide ramp down. They are turning off the usage of that product that’s directly related to that service stream. If we then compare those side, if you looked at Invisalign case submission and the other things they’re using in for both on GPs, you would see services growing very nicely, that isn’t visible the level we disclosed at this point, but the principle issue driving that service volume or service revenue down is because of a concentrated base of customers with a product we’re no longer supporting and that’s started really in the summer time and I’d say early Q3 that that trend you probably would not have seen as early as we did, but now that that’s what showing up, so over time that’ll get fixed.

The second part of that question is, we’re kicking butt in North America in terms of placing scanners and customers are thrilled with them. The new scanners coming out, it is exciting, it’s faster, its better, all the stuff. So we’re actually winning in North America, notwithstanding gross margins which we have plans to fix very significantly.

In Europe, we’re not trying because we don’t have a better plan right now and I guess stepping back if you just see year-over-year flat, that really obscures the progress we’ve made in North America and the progress that bring that and making sure the business is profitable in its own right. So with that, we’re actually pretty excited about this business and its longer term prospects, but I’ll grant you the visible part you’ve got doesn’t look as good as it should.

Jonathan Block – Stifel Nicolaus

Thanks guys.

Tom Prescott

Sure Jon.

Shirley Stacy

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

Operator

Certainly. Our last question comes from the line of Jeffery Matthews with Ram Partners. Please proceed with your question.

Jeff Matthews – Ram Partners

Hi, great thanks. Can you hear me?

Tom Prescott

Yes, Jeff we can. How are you?

Jeff Matthews – Ram Partners

Great, good how are you?

Tom Prescott

Okay.

Jeff Matthews – Ram Partners

And Ken, good luck, congratulations.

Ken Arola

Great, thank you.

Jeff Matthews – Ram Partners

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

Ken Arola

Okay. I’ll take your first question on the case reserve planning and then Tom can comment on the marketing. Really what it is just looking at a more detailed analysis and more in-depth at the actual usage that we’ve seen over the past several years of case refinement and looking at the estimates we were using in relation to accruing for that case refinement. In going back and updating is very simply we were estimating too high on the usage of case refinement.

With that said, I will say case refinement usage has been going up over the past several years, but we think also with the new technology in G3 and G4 and we haven’t probably had enough experience in the field yet because if you think a doctor has to get the patient as to complete the case, might take year, year-and-a-half and they have up to six months of used case refinements beyond that. So as we get out to year or two I think you’ll probably start seeing some benefit of that in relation to case refinements, we probably haven’t seen any material way to date.

Jeff Matthews – Ram Partners

Got it. Thanks.

Tom Prescott

Great. Jeff, I’ll take the other part of it. And maybe the first framework is, we aren’t spending dramatically more money and I should not say dramatically at all in the sense it just we’re spending incrementally more, we’re doing better in a more integrated way. It was, for us, we felt it was a time for a good investment in a new consumer platform that’s going to give us an opportunity to build on that both with traditional media, GP radio as well as a lot of other sites.

So in addition, we’re working in a much more organized way now that we have what I’ll call maturing channel coverage in at least five countries in Europe. And to a much smaller scale, won’t be doing 30 or 60 seconds spots it’ll be, what I will call, bump ads or whatever, little small elements, but its all about raising the awareness of Invisalign especially in markets where orthodontic treatment is not broadly used for among kids, adults, etc. So again reasonably small dollars in Europe, but what I’d say kind of common dollars with the investments we’ve made in building out the business and improving the product and making sure the distribution team is in place to take advantage of that demand creation. North America, all in we’re going to spend a bit more but we’re going to do it more effectively.

Jeff Matthews – Ram Partners

Okay. And you’re obviously seeing a great potential for return on this.

Tom Prescott

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

Jeff Matthews – Ram Partners

Got it. Thanks very much.

Shirley Stacy

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

Operator

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

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