Tom Prescott - President and CEO
Ken Arola - VP, CFO
Shirley Stacy - Senior Director, IR
Tao Levy - Deutsche Bank
Jonathan Block - SunTrust Robinson Humphrey
Taylor Harris - JPMorgan Chase
Matt Dolan - Roth Capital
Jose Haresco - Brean Murray
Align Technology Inc. (ALGN) Q4 2009 Earnings Call January 27, 2009 4:30 PM ET
Greetings ladies and gentlemen, thank you for standing by and welcome to the Align Technology fourth quarter and fiscal year 2009 financial results. 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.
Thank you. Good afternoon everyone. I'm Shirley Stacy, Senior Director of Investor Relations. Joining me today is Tom Prescott, President and CEO and Ken Arola, our Vice President and CFO.
Before we begin, let me cover some housekeeping items. We issued a press release today via GlobeNewswire and FirstCall detailing Align's fourth quarter fiscal 2009 financial results. The press release is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately 12 months. A telephone replay will be available today by approximately 5:30 p.m. Eastern time through 5:30 p.m. Eastern Time on February 10, 2010.
To access a telephone replay, domestic callers should dial 877-660-6853 with account number 292 followed by #, and conference number 333971 followed by #. International callers should dial 201-612-7415 with the same account number and conference number.
As a reminder, the information that the presenters discuss today will include forward-looking statements including, without limitation, statements of Align's future events, product outlook and expected financial results for the first quarter of fiscal 2010. These forward-looking statements are only predictions and involve risks and uncertainties such that actual results may vary significantly. These and other risks are set forth in more detail in our Form 10-Q for the fiscal quarter ended September 30, 2009. 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 a reconciliation to the comparable GAAP financial measures, where practical, are contained in today's financial results press release, which is also been posted on our website at investor.aligntech.com, under Financial Releases and have been furnished to the SEC on Form 8-K. We encourage listeners to review these items.
We've also posted a set of GAAP and non-GAAP historical financial statements, including the corresponding reconciliation and our fourth quarter conference call slides on our website. Please refer to these files for more detailed information.
With that, I'd like to turn the call over to Align Technology's President and CEO, Tom Prescott. Tom?
Thanks, Shirley. On the call today, I'll cover some highlights from the fourth quarter including key adoption metrics and they I'll provide a briefly update on our strategic initiatives. Ken will follow with some detail on our fourth quarter financials as well as outlook for the first quarter. I'll come back with some closing comments and open the call up to your questions.
The fourth quarter with a strong finished to a good year for Align and I'm pleased to report sequential and year-over-year growth for0020 Invisalign. Our Q4 results reflects strong international growth, increased demand across the GP and Ortho channels in North America. Continued adoption of new products including Invisalign Teen and Assist and continuing diligent expense management.
Our goal to drive adoption in Invisalign worldwide, so let's start with two key adoption metrics, the number of new doctors trained and utilization rates are recall same practice sales of our product. During Q4, we trained approximately 870 new doctors, up slightly from Q3. Of those 460 were North American doctors and 410 were international doctors.
For the year, we trained a total of approximately 4380 new doctors of which 2825 were North American doctors and 1555 were international. Our new doctor training in North America is evolving to identify and focus on practices that are interested in gaining the skills and experience necessary to be successful in Invisalign.
In the past, many doctors complete this training course as a means of learning more about Invisalign or leveraging the marketing benefits of Invisalign, but then only sporadically submitted cases. Building on our experience with the proficiency requirements going forward, doctors are more likely to attend our CE1 training course and are actually ready to begin using in this line their practices right away.
As a result, overtime we are likely to have more focus engaged in committed customer base that maintains the base line of up to date Invisalign product knowledge. In Q4 total utilization increased sequentially and year-over-year to 3.3 cases per quarter, Q4 utilization rates for international doctors increased 8% sequentially and 11% in the same quarter last year, reflecting a strong finish to the year.
The Q4 utilization rates for North American GPs increase approximately 9% sequentially and year-over-year, the largest sequential increase in utilization for GPs ever. It's also the first time GP utilization is growing three quarters in a row. Utilization for North American Ortho was up slightly from Q3, which was a strong chain quarter for Ortho and increased approximately 7% from the same quarter last year.
Over the next year, we expect to see some fluctuation in our utilization rates as practices adjust for proficiency requirements and the average cases for doctor varies throughout the year. In the interim, we will consider additional metrics to share with our investors that may provide more insight to adoption utilization through this period.
In 2009, we generated the highest levels ever of case shipments in revenues despite a difficult economic environment. In Q4 Invisalign case volume reflects sequential and year-over-year growth for international as well for GPs and Orthos in North America. Strong international growth in Q4 was driven record volume across our core markets in Europe the UK, Italy, Germany, France and Spain following their typically seasonally slower summer period in Q3.
Total international volume accounted for 22% of Invisalign cases worldwide. In North America the combination of new products such as Invisalign Teen and Assist along with expand new features across the entire Invisalign product platform is helping give doctors greater confidence and what they can achieve with Invisalign.
Q4 volume was driven by record GP case shipments including assists and the continued adoption Invisalign Teen in the Ortho channel. Our strong sequential growth in Q4 is also likely due in part through our customers to achieve the new proficiency requirements or to qualify for the six-month additional qualification period. These results were significantly better than our expectations over the product of our continued hard work and execution of key strategic initiatives.
Our broader strategy as a series of key element. The first is to continue to accelerate product and technology innovation while at the same extending clinical effectiveness or efficacy. Second, we still have many opportunities to enhance the customer experience for our doctors and for their staff and to eliminate the remaining barriers to adoption that we've identified. Third, while we're doing that we are increasing the effectiveness of our consumer demand creation process and we energize in the Invisalign branded item. And then finally we are continuing to drive European growth while we are opening up addition and new markets around the world.
I'll now move to products starting with the brief update on Invisalign Teen. On a worldwide basis we've now trained over 4750 Orthos on Invisalign Teen we remain please with this continued update. In Q4 total Teen case shipment increased 4% sequentially comprising 13% of worldwide volume. As the anticipated we are less sequential growth in Teen cases because Teenagers orthodontic treatment, but more teenagers orthodontic treatment in the summer.
We try to know pressure in the lack of third party market research, but we believe our sequential growth in Teen reflect share gains in the overall orthodontic markets which is typically flat to down from Q3 to Q4. In Q4 Invisalign Assist volume increased substantially approximately 81% sequentially and nearly 5% of volume compare to 3% in Q3.
Assist is the only Invisalign product that includes built in product support through our treatment and was designed to me general dentist demand for instructive integrated approach to case selection monitoring and finishing. In October we rolled out new and enhance features, which expand to Assist product capabilities treat a wider range of patient. We believe the strong sequential increasing volume in Q4 reflects the positive response to expand features and assist as well as the full quarter's benefit of making assist to focus of our CT1 training course.
And with all this progress with new products total Invisalign case structure still small relative to our total serve market. During 2010 you'll began the year more about our efforts do demonstrate clinical efficacy and work towards a long-term goal are becoming the standard of care for orthodontic treatment. We know we still have lot of work to do accelerate innovation and extend clinical efficacy but we known improvements are needed and we're confident that we can deliver.
On the consumer marketing front we continue to be successful programs are more effectively and efficiently generic demand or pull for Invisalign. In 2009 we became more efficient approach and group overall lead generation awareness on lower total spending. We also ship it our marketing mix from conventional media towards more digital marketing and social networking activity.
On the call last quarter I talked about the evolution of the Invisalign brand strategy and our planes to refresh the Invisalign look and feel including and more modern logo and new brand positioning focused on treatment outcome and practice growth. In January we kicked out the rebranding initiatives by completely updating our consumer website Invisalign.com. You'll begin to see the new brand identity across all of our clinical marketing elements in Trade Show.
Now I'd like to provide an update in the Invisalign proficiency requirement and share our progress to date relative the analysis that we've described in our last few call. So first let's briefly review the program. The proficiency requirements for design to helping sure that every practice that works with Invisalign can achieve great clinical and commercial outcomes and every patient Invisalign treatment gets the wonderful smile they want along with the great treatment experience to match.
Every Invisalign provider in North America is required to start at least 10 cases and complete 10 Invisalign specific CERs each calendar year to maintain active account status. Those you meet the requirements at the added benefits of being recognized as in – line providers for that year. A special designation that helps consumer seeks out doctors.
The first October after seeing a strong effect by a lower volume doctors three engaged in this line. We announce a six months additional qualification period. This one time extra qualification period allows doctors who started at least one case and got CER by the end of 2009, to secure the line status for 2010, provide they reach at least five CERS by June 30th 2010.
Like all other doctors they must subsequently need the full year requirements of 10 and 10 by the end of the year maintain accounts status for 2011. During 2004 our North American customer showed continued progress. In Ortho channel sequential case was relatively consist across high and lower volume doctors, for GP's sequential case given by doctors they are mid way to just under ten cases for year. We also had a significant increase in doctors investing in continuing education are specially which are online clinical education website (Inaudible) At aligntechinstitute.com, where doctors complete of a 29,000 CE courses in Q4 alone.
So how do we do, well has a January we had approximately 22,009 active and Invisalign trained doctors in North America. Of those more than 6,000 doctors method in Invisalign Proficiency Requirements for 2009, and other 16,000 additional six-month qualification period
Of those Proficiency Requirements were 5000 earn per divider by the status these results are consistent with the expectation we describe in the Q2 call that projected the best majority of our customers the 79 group for more cases that are the customer in the border six group can move to ten or more cases and then a number of those below four may eventually choose not to continued in this loan.
After year-end we do approximately 10,000 Invisalign trained doctors who had never submitted a single in Invisalign case. In addition we have limited the account status approximately 13,000 who did to need the proficiency requirement of 10 and 10 additional qualification period one in one in 2009.
These doctors will not be able to submit in Invisalign case, but they can continue to manage any in progress cases they may have from previous years. We are completely committed to helping those doctors finished during progress cases successfully and some surely hope they will consider making Invisalign for their process again in the future.
Our last week we began in sort of the receive provider new marketing materials, including the new Invisalign logo. Also consider our consumer marketing programs including Invisalign.com website to direct potential patients towards the dividers and they make it easy to find practices that are committed to be successful in be in Invisalign. We intend to be more valuable partner's practices and help then grow in force.
Finally, I like to touch on I will continue drive European growth and open up new market outside North America. The international business is increasingly important to Align and accounted for 23% of our worldwide revenues in 2009. We've continued to build our base of employees in total investment in the key countries of Western Europe and have leveraged distributors for smaller country markets in the Asia-Pacific and Latin America region.
Two weeks ago, we announced that we are adding a third international distributor partner one who will focus on smaller country markets in the Europe Middle East and Africa region which is commonly called EMEA. We have been planning to add a distributor in this EMEA region for some time and given the potential of the market and a continued progress of the Invisalign worldwide we are now ready.
Next part of the new distribution EMEA at the end of the first quarter in 2010, Gil Laks, our VP of International will be leave Align to take on a new role as owner and operator of the new distributor. For the remainder of Q1 we will continue to over see the international business and will help to ensure a smooth transaction of his responsibilities. We have initiated a search for a new VP of international and hope we have this position filled as soon as practicable.
In the meantime, Michael Lewis, our VP and General Manager of Europe along with the rest of team will be assisting in the transition. Gil will lead behind a great team who will continue the International growth and progress over the past several years. Please join me in wishing Gil well in next stage of his carrier.
I'll now turn the call over to Ken for more detail on our fourth quarter financials and outlook for Q1 and I'll come back for closing remarks.
Thanks, Tom. Now let's review our fourth quarter financial results beginning with revenue. Record Q4 net revenues of $86.6 million and record case shipments of 61.1,000 increased 9.3% and 8% respectively from quarter three. The sequential increases in revenue reflect higher case volume and ASPs. The increase in Q4 ASPs resulted from the benefit of foreign exchange rate associated with our international shipments and lower levels of discounting.
During quarter four, we also updated the estimated fair value of Invisalign Team replacement aligners. As a result, net revenue includes a one-time benefit of $1.1 million of previously deferred revenues. Q4 revenue by channel consisted of 42% for North American GPs, 29% for North American Othros, 24% for International and 5% for non case revenue which includes the retainer business, training revenues and ancillary offerings.
Before I move on, I'd like to take a moment to identify the items that are included in our GAAP financials that for comparative purposes to previous quarters are excluded from our non-GAAP financials. Ormco royalties include in gross margin were $4.3 million in Q4 of 2009 and $1.9 million in Q3 of 2009. Ormco settlement costs included in operating expenses were $69.7 million in Q3 of 2009.
Restructuring charges included in operating expenses were $4 million in quarter four of 2008. And EPS included a one-time benefit from the release of a tax evaluation allowance of $64.6 million or $0.97 per diluted share in quarter four of 2008.
With that let's move on to the rest of the income statement. Q4 GAAP gross margin was 73.7% compared to 74.4% in quarter three and 72.7% in the same quarter last year. Stock based compensation expense was $400,000 in quarter four compared to $359,000 in quarter three and $455,000 in the same quarter last year.
Excluding Ormco royalties, quarter four non-GAAP gross margin was a record 78.6% compared to 76.8% in quarter three and 72.7% in the same quarter of last year. The sequential increase in non-GAAP gross margin was primarily driven by the favorable impact of higher case volumes and the resulting manufacturing, operating efficiencies, higher ASPs as well as the additional 1.1 million of previously deferred Teen replacement revenue of which 100% goes through to gross margin.
Q4 GAAP operating expenses were $49.2 million compared to $119.2 million in Q3 and $52.6 million in the same quarter last year. Stock based compensation expense was $2.7 million in quarter four, compared to $3.6 million in quarter three and $3.4 million in the same quarter last year.
Excluding Ormco settlement cost and restructuring charges, Q4 non-GAAP operating expenses were $49.2 million compared to $49.5 million in quarter three and $48.5 million in the same quarter last year. Q4 GAAP operating income was a profit of $14.6 million compared to a loss of $60.2 million in quarter three and a profit of $1.3 million in the same quarter last year.
Excluding Ormco royalties and settlement costs and restructuring charges, Q4 non-GAAP operating income was $18.9 million or 21.8% compared to $11.4 million or 14.4% in quarter three and $5.4 million or 7.2% in the same quarter last year.
On a year over year basis a significant improvement in Q4 non-GAAP operating margins reflect higher case volume increased, manufacturing efficiencies as well as our continued focus on expense management. Q4 GAAP earnings per share was $0.15 compared to a loss of $0.72 in quarter three and $0.98 in the same quarter last year. Excluding Ormco Royalties and settlement cost, restructuring charges and a one-time benefit from the release of a tax valuation allowance on specific differed assets, Q4 non-GAAP diluted earnings per share was $0.16 compared to $0.13 in quarter 3 and $0.7 in quarter 4 a last year.
Now let's move on the balance sheet. Cash, cash equivalents and short-term market of our securities were $186.5 million. This is compared to 110.2 million at the end of 2008. In quarter four we generated roughly 34.3 million in cash from operation compared to 10.8 million in quarter three and 8.8 million in the same quarter last year. Quarter four DSOs were 57 days compared to 63 days in quarter 3 and 64 days in the same quarter last year. The decrease in DSOs reflect substantially higher fluctuant in the Europe as doctors are back in their office after the summer holiday season. In addition with the transition of North America credit and collections team to Costa Rica complete the team is up in running and had a solid quarter in collection.
In quarter four deferred revenue on the balance sheet increased by $4.4 million or 15.7% sequentially 232.3 million. This increase primarily represents revenue to (inaudible) associated with new products Invisalign Teen and Assist. Overall I'm pleased with our continued process embedded than expected results. 2009 was a challenging year even the economic environment for which continued focus and execution of that strategic initiative we grow our business and expanded our operating margins substantially.
Now lets turn to our business outlook for quarter one 2010. 2010 is big start. Industry observers are anticipating an increase in dental business and orthodontic case starts are expected to be u which our spend product platform including new products like Teen and Assist and the new futures we rolled out across all products this past October we believe that we will continue to grow and gain share during the year. (Inaudible) there are several factors for us for us to be thoughtful about as we consider the 2010 outlook. First the (inaudible) requirement may result in greater variability among customer activity. Particularly in the second half of the year after the six-month qualification period expires. Second economy has still challenging and we don't see any outlet or economic recovery on the Horizon. And last in the near term we do not see any catalyst from new geographic markets and we will remain focused on continued good execution in North America, and Western Europe.
Now lets go through more detail on the outlook. For Q1 we expect revenues to be in the range of $85 to $88 million and case volume is 60 to 62,000 cases. In assistant with Q4 volume of 61.1 thousand cases and revenue of 86.6 million, which included the one-time benefit of 1.1 million of previously deferred Teen replacement revenue.
During quarter four we saw continued growth from our low volume doctors in North America particularly among doctors who have been a key focus of our proficiency requirements. While we are please with the continued progress it's unclear whether these doctors will maintain the same phase in the near term.
On the international side of the business volumes are historically down in quarter one from a seasonally strong quarter four. We expect Q1 GAAP gross margin to be in a range of 76.3% to 76.8% including approximately $800,000 for Ormco Royalty expense. Q1 non-GAAP gross margin excluding Ormco Royalty expense is expected to be in a range of 77.3 to 77.8%. In quarter one, we expect GAAP operating expenses to be in the range of $51.8 million to $52.8 million.
The sequential increase from quarter four reflects our continued investment in international expansion including sales coverage in consumer advertising in Europe. As well as employee related compensation and benefit.
In Q1 we expect GAAP operating margin to be in range of 15.3 to 16.8% and GAAP EPS to be in a range of $0.11 to $0.13. Excluding the Ormco Royalty cost of approximately $800,000 in cost to sales we expect non-GAAP operating margin to be in a range of 16.3 to 17.8% and non-GAAP earnings per share to be in a range of $0.12 to $0.14.
In quarter one; we expect the effective tax rate to be in range of approximately 32 to 34%. From a cash position we expect to pay minimal cash taxes as we can utilize the net operating losses on our tax returns. We expect diluted shares outstanding for quarter one to be approximately 77 million shares and from a balance sheet perspective cash on hand at the end of quarter one is expected to be approximately 200 to $205 million.
Now lets move on to the full year fiscal 2010. I will provide directional commence and perspective on some elements that we can influence to manage such as operating expenses. From a revenue perspective we believe we will continue to grow and gain share of our served market. We believe we can maintain our gross margin levels comparable to Q4 2009 and with that said keep in mind that the impact from volumes given our relatively fixed manufacturing cost structure and exchange rates can move margins up or down in any particular quarter.
Additionally the levels of promotional discounts and several other factors can impact average selling prices and that's revenues and gross margins. Moving on to operating expenses. We've been clear about our strategic initiatives and we'll continue to invest to need areas to drive long terms growth and increased profitability through continued diligent expense management. For the year we expect Q1 non-GAAP operating expenses to be the base level of quarterly spending. During the year there will be fluctuations from this base level spending given the timing of media spend significant tradeshows and industry event and continued international expansion. Stock based compensation expense for fiscal 2010 as expected to be approximately $20 million. Shares outstanding for fiscal 2010 are expected to be approximately $78 million.
Now I'll turn the call back to Tom for some closing comments.
Thanks Ken, overall our goal in 2010 is to continue to accelerate our progress from 2009, the last two weeks we've held our international in our North American sales meetings and I've had a chance to spend time with our sales forces our marketing teams and other key leaders. Our team is focused on our goal for this year committed to our long term strategy and confident that would continued hard work we can held more practices to treat a greater number of patient successfully with Invisalign. I look forward to updating you on our continued progress in the next earnings call. And now lets go back to the operator for some questions.
(Operator Instructions) Our first question comes from the line of Tao Levy with Deutsche Bank.
Tao Levy - Deutsche Bank
Few questions, first on the pricing front Ken that you mentioned on the call, is that the extra million in change that would impact just the US Ortho's primarily and with see that reflected in kind of the ASP that were racking out of it?
That's correct, that will show predominantly in the Ortho ASP those are the doctors are predominantly using the team product in the practice and what happen during the quarter is an normal process and what happened during the quarter is an un normal process that year end we go soon evaluate that and due to analysis on fair value of that we've been doing with the team product itself asset turns out doctors are taking the replacement liners originally we're anticipating to take on individual basis one by one as the patients for the teams what they're doing as taking a few liners at a time as replacement so actually with reducing our freight cost we ship the aligners that the adjustment that we made.
Tao Levy - Deutsche Bank
If I do the quick math, you get to 1266 as an ASP on the Ortho is that kind of a number we should be thinking about going forward or we should ratchet that down a little bit, because of a (inaudible)?
The variables (inaudible) as far as ASPs are concerning going forward to be a historically there was that fluctuation in our case requirement as we go quarter-by-quarter so that can fluctuate going forward. Given piece of it is depending on levels of participation discount programs whether it's the volume (inaudible) program or and Teen rebates themselves that have an impact on that as well.
Tao Levy - Deutsche Bank
Okay. I can't ignore the sort of the strong healthy guidance that you are providing here for the first quarter so obviously the trend that you are seeing very strong anything in particular you see that's standing out that giving you the confidence or that kind of across the board you are seeing these rates hold steady?
As we said on the call that both Orthos and GPs certainly been driving to meet the proficiency requirements are getting to the qualification periods the first six months of the year, we saw that in the third quarter we saw that continue in the fourth quarter and now doctors are trying to get five in the first half of the year and as we look at the quarter and providing our guidance we think that that has a possibility of continuing although there is some variability there because (inaudible) getting into the qualification for all the 10, 10 by year end here its little bit unfair whether they are going to continue with the phase that they have been going at but we certainly took into consideration including our guidance.
If you go up stream of that timing issue are on proficiency in the behavior the final strength we've been trying to build the business is based on product evolutions, new products, and improvement in the products we got along with better to improve marketing and I think with great coverage all of those things going to together and its not an easy marketplace by this one we are getting little bit attraction.
Tao Levy - Deutsche Bank
You are certainly making it same easy, thanks a lot.
I don't know about that, nothing easy about it.
Thank you, our next question comes from the line of Jonathan Block with SunTrust Robinson Humphrey; please proceed with your question.
Jonathan Block - SunTrust Robinson Humphrey
Thanks and hey guys. May be two quick questions first just on the leverage was obviously just tremendous with non-GAAP known to 21% I know Ken you are guiding to I guess mid teens in the in the first quarter may be we can just some comments walk us through which changes with the spend and why we go back down the mid teens and then what we think about 2010 any reason why we want to get to the fourth quarter at least the back half of next year why those (inaudible) margins can get back to you 20% plus.
So couple of things for that comment, first on the quarterly guidance here on operating margin take into account of couple of things John, one is in previous calls mentioned that we had a $1.1 million adjustment for (inaudible) placement of aligners that's all margin that that driven quarter for margin that are driven quarter for that one not repeating quarter one, has little bit downward pressure on gross margins in the first quarter then from an operating spend plan view we are continuing to invest internationally as I said sales (inaudible) as well as the media advertising in the European areas and coming with a last year with tough economy which we make some choices last year we are going through and looking at our infrastructure and not only with restructuring as we did but also we made some choices last year to differ salary and (inaudible) for employees at the company given the tough year that we are heading into as we come to this year and do have some nice results here for the quarter and for the year as we look at it we thought it was a profit come back and put couple of benefits back in place for the employee base of the company.
One of them was real estates made salary increases for the employees and the other one is putting in place which we had not ever had at the company prior to this is matching on a (Inaudible) plan for the employees so that they are couple of compensation that we are doing in quarter one. And that was be in base as spending obviously (inaudible) remainder of the year.
Question on, the other question you had was on the second half of the year on the margins and currently 20% and why not getting back to 17, 18% down getting may the back 20% on a quarter-by-quarter basis I think we will see some fluctuations as we go through the year on operating margin depending on significant customer advances I mentioned in the way we paid some media spending as we go through the year and the other factors here is what happens with the revenues has been moved through the years. So you saw this quarter with a nice up tick in volumes, we saw that leverage through the gross margin line all the way through the P&L and so with our fixed factory cost, you will see it to get some leverage on that as volumes increased in the near term. We think we'll be able to like I said maintain our base level of spending with some fluctuations as I indicated, but there is going to be some dependency also on revenue growth over the year.
Jonathan Block - SunTrust Robinson Humphrey
Okay, great. And then maybe just on the sort of the proficiency program, I mean you mention the 6000 or over 6000 doctors preferred, I guess two questions, one would you share with us what percent of volume those guys constituted in the fourth quarter and then just a way to understand preferred going forward, I think you said in the slide that it's going to be on a rolling basis, so will you update that, I guess going forward in 1Q and 2Q of 2010.
Sure, I'll take that (inaudible) take the second part first, the answer is yes, we want to give them every incentive to reach for that level and each quarter we will be refreshing that and they will have the opportunity to cherish that and get more marketing exposure pull. The first (inaudible) we provided some detail overtime about the segmentation in our models. As we get through and finish with implementing proficiency and that becomes a long-term element in our relationship with our customers. And other side, we probably will come back and give some view of the evolution in that channel, but I think we provide enough framework with the historical look back ward for you guys to put all the pieces together here. So we're not going to shine more like than we've done to this one.
Jonathan Block - SunTrust Robinson Humphrey
Okay. And last one if I could just little bit (inaudible) question considering the results, but we've done some checks and I think you might run into maybe some deferrals in the fourth quarter for people to count it in the first quarter of 2010 against proficiency, do you think you saw any of that, in another words any sort of balls that might spill into 1Q, so people will have them in the back pocket for proficiency?
We do channel checks all the time, we have brought some opportunities and talk to our customers, our sales reps, our customer support and clinical people and they are probably on the margins some doctors may try to do that late in the year. But I think in this economy if a patient decided they wanted to do treatment and they have got a timing in mind, most practices are reluctant to try to manage that if I can use that term loosely and for the reason that people are shopping around more, they are afraid while you got a patient ready to go, if they try to keep the patient to mid January for some reason of the own, they are afraid their patient may go start with somebody else. So I think in this environment what we've seen is practices be a cutely aware of once they have got enough patient commitment, the patient wants to get going. So there maybe of stronger behavior we didn't see much out there, but again I think it's at a proxy level, so hard for these guys to deal in this environment.
Our next question comes from the line of Taylor Harris with JPMorgan Chase.
Taylor Harris - JPMorgan Chase
Thanks a lot. So you guys have obviously had a great positive impact from the proficiency program. So far it sounds like you may have be in a little bit surprise at the reaction from some of these lower volume doctors. But to follow up on that last question, help us to think through what happened starting in the third quarter when the 16,000 providers who had that your requirements you had when they either in or out. So can you give us any framework for thinking about how many of them are really on the bubble or anyway to think about what's going to happen in the third quarter?
So, as we've been trying to frame for you from the very beginning we took a very careful look at where each of our practices were in the term lines and developed the segmentation model and gain plans to engage each of those groups of customers in many different things. If you say we were surprised, we were pleased maybe is a way to say, because as we went through Q3, we saw a greater response than we had expected or projected these networks from the lower volume customers, those one to four that we after working this we projected a certain percentage of them, hard to pick which one, but a certain percent of them would commit to and elevate their practices to make us an important part to get at least our (inaudible).
We saw great response in Q3 partly was significantly will lead to our in October, additional qualification period for six months. So what we expect as for that effort to continue if they wont going to continue there is no benefit for them just to squeeze up six more months and it's a bit binary there. So we would expect them to continue to work and to continue to see these and continue and engage our reps and our team to do in practice marketing and to make it more important for their practice focus. Those activities result in greater case start its not like we just go and sit in their office and wake them to do that. So when we see a practice responding in its way doing the in practice marketing getting card up on CE starting to talk to all their patients coming to you for routine care about the value of better smile then we know that's going to lead to a great in (inaudible) a month later, two months later whatever.
We would expect that activity and continue to help as to what happens in July 1st and we've said overtime we'll have a smaller total customer base and I just little bit ago we and activated a group to hand the measures ten times normal so never done a single case and simply no reason for us to we setting our time they announce us on now, so right there's one compression overtime those practices that choose to and we hope they all do we're going to a bigger for their practice and investing in their practice as their investing in a separate again we're going to talk in more detail after July talking about what it looks like and how we can do evolve not just after July but beyond and then how we can be a better partner for them and really helping sure they get biggest success in practice. I hope think it's the first part of your question.
Taylor Harris - JPMorgan Chase
Yeah I think so and maybe just follow up you do commit to revenues continuing to grow through out the years, so at this point is all that we should assume that is that a quarter-by-quarter statements and other words in the third quarter 2007 do you think revenues are going to grow we just don't know by how much?
What I start with this we believe there will be a opportunities for us to grow this year and we based on a variety of data we don't we're the right party determine what market growth is for the dance, we're not the leader has the industry, but if you look at quarter number of leaders and others are saying around dental business and share of all the increasing again we're started a procedures starting to go up again and we believe there will be opportunities for the Doxycycline drug and we believe in general whatever that growth rate as we can a bit faster, so that said we haven't provided a framework what we've said is the proficiency activity and looking how we will get through Q2, Q3, Q4 nature of bit (inaudible) their opportunity because we don't have certainly about other for evolve to the end of Q2 and Q3 so I don't want to say weather we're growing sequentially every quarter or we believe there are opportunities first of the top line and continues drug improvement in the business across the year.
Taylor Harris - JPMorgan Chase
Okay Ken couple of questions for you. Gross margin to make sure understood what you've said, you said comparable in to what we did in the fourth quarter of '09 and is that on adjusted in the fourth quarter and other words the one that benefiting from 41.1 million of over revenue or foreign adjusted number.
That's based on adjusted number taking at the 1.1 million
Taylor Harris - JPMorgan Chase
I mean that comment we'd lead us believe if you think volumes are at least you're not going to take a leg down and volumes.
There are some elements of or business are less dynamics than others Ken talk everybody as fees and there are something at moving a piece in the near team that things that most to have to gross margin or really volume in a given period against the base I'll get the fixed year so we think we got a regional view of that if we don't see a volumes declining then I think you could make these options that we think we got to analyze to deliver a gross margin.
Our next question comes from the lines of Matt Dolan - Roth Capital.
Matt Dolan - Roth Capital
Just another way to look that that growth outlook here outlook here, and you mentioned that you mentioned you had good start to 2010 and you are guiding to low 20% growth year-over-year in Q1, so your reluctance to provide full year guidance is that relative to the uncertainty in the market and should we assume since you been kind of a relative outperformed here even in the down quarters that if the market stabilizes you should continue to outperform in a way we've seen historically.
Brining on that, I'll start with the last question for outperforming; I think if you look at the past year, there are specific things we'd point to on why we outperform. So if you go back to quarter one when gave guidance coming into the year, we're coming up a really bad quarter for the economy starting to (inaudible) and lot of doctors done GP and Ortho side just going to the sidelines to our surprise as we indicated through the first quarter, Ortho got back in the game decided to learn how to sell to the patients and they surprise us with the volumes for the quarter that they came in with. And then in quarter two that phenomenon just continues for the Orthos.
Coming into quarter three, Teen did a little better than we were anticipating coming into the quarter, it was our first fall summer that we could participate in that Teen space and that we did better than we anticipating in that quarter. So three things there why volumes are a little bit higher and also in the third and fourth quarter, certainly GP and Orthos were doing more business trying to meet the proficiency requirements and all the qualification periods as well. So a few things are going on, I guess the other thing I would point to we're shipping roughly 55 to 60,000 cases a quarter and as we (inaudible) couple of 2 to 3000 cases is about 3% of the overall volumes.
So I look that as pretty reasonable as we see in forecasting given the broad base of individual proprietors that we are dealing with in the doctor's offices. 20,000 a quarter that we are shipping to, so we can be within about two or 3000 cases. I call that success from our point of view to break it down to an individual doctor, I know 2000 case over 20,000 doctors, 0.1 case per doctor accuracy so as we've look at the year now our visible at the quarters there's no different and it has been we've taken into account factors described on the call the economy the fact that more (inaudible) being up on a year-over-year basis and as Tom said going gaining share maybe a little bit faster than the broader market in general, that kind of the way we were calling it.
But if I go back a little bit to how we though about the business this time last year and before we prepared for scenario that was work that we've saw but it working just towards then we saw because of the external environment there were lot of things we did that we're not comfortable we are couple of very large restructurings which in doing that well paying full help to create some leverage stress over the long term we accelerated some product development initiatives and market initiatives and we cut some cost for then I've towards investing in the business so we had room so what I've say is we're very, very please to have the outcome we've got we'll take some lock and if you good balances but its also part of some hard work and the team delivering important new products on time and gaining some head room in a pretty competitive market place so we couldn't have projected the potential upside and all these little areas that we got but we'll take it and it's a great time for us to stay hungry and keep pressing forward to continue to better.
Matt Dolan - Roth Capital
Okay then finally in terms of your investments in the business you've talked about international and some marketing in 2009 and looks like you got better leads on lower cost, what's the strategy for sales and marketing dramatically in 2010 more raps more marketing fractionally what is going on there?
Sorry two different things, may be separate international in North America I think they can describe there is an incremental spending on a pretty small base of consumer demand in the (Inaudible) sense to do that, there is some incremental investment in headcount in four year and there is some incremental spending in countries like China where we were working to a regulatory cycle and moving ourselves towards a view to commercialization. We had a ways to go there, but there is a incremental investments of the book we are doing last year. In North America there is no incremental investment in sales force and we continue to hold the line pretty tightly on total consumer spend seeking additional productivity as we just mix and approach and seek greater conversion rate better efficiency all that. So in general, you have got (inaudible) technology development and product development and lot of other things. But these are incremental changes over the base you saw Q3, Q4 of last year.
Our next question comes from (inaudible).
Thanks for taking my question. I just have couple of questions, quick ones. In your table in Invisalign proficiency requirements, there are 15,800 tenants who have started more than one case but they have falling short of the requirement and they got into June 30. I mean do you have any sense how many of those people could get up to the minimum five cases for half year.
Essentially yes, we do actually project by practice and sales reps and regional managers and area directors all own that allow that marketing team to support it and the clinical education team to support it to help them accomplish their objectives. By definition may said we want to be on board and we're working to do that. So there is a distribution within that of people that are frankly by the end of January almost getting their ten cases in for per year with the opportunity (inaudible) people there that are still trying to elevate their practices. What we gave them is a path with the additional qualification period that with effort especially they are starting in Q3 or something from very low base, if they are making the effort in energy, both on getting up the speed on the evolving product to see courses on line as well as trying to work in their practice increasing focus but generally trying to get going. We're going to support that. And so as we said two minutes ago, more of those practices then we originally projected we're actually making that effort and we wanted to reward that and give them a bit more ramps. So our hope is all of them are expectation is not all of them make it, but our hope is that they all make it and we do have a projection practice by practice about whether all sold out. Our bet with this overall thing is on the other side of this who have a fairly smaller more focused and more engaged customer base that has having a lot more success and Invisalign and that we spent our time helping them get that success in practice. So yes we do have a pretty refined view how we want that to project. We are going to have to wait till the end of Q2 to see how all plays out.
Okay. I appreciate that. So the second question. The limited and (inaudible) if they have to take Clear Essentials or Clear Essentials or Clear Principles, to them to pay, if they do, how much they have to pay?
The answer is yes, and this was described before the end of the year, so they can understand if they want to continue they would have to pay the regular prices which is around $2000 for the CE1 and we're prepared if we go lot of doctors that they want to come back on board to hold as many CE1 costs as we need to. So they would pay they would get started again and they would have the expectation to go ramp up and to get their tenant.
(Operator Instructions) Our next question comes from the line of Jose Haresco - Brean Murray.
Jose Haresco - Brean Murray
Good afternoon folks and congratulations on a good quarter. I have a couple of questions, remember back in the analyst day in early 2008, you show a slide up there, it reminded the numbers (inaudible) but a large percentage of the revenue about maybe 60% was generated by the small number of providers maybe with 25% or so. Do we know that looks like as of the end of 2009 inspection fees been in place, what is that number look like these days?
Yes we do know what it looks like, we're choosing not to provide a lot of visibility into the specifics because we're in transition and I think we're trying to lay out a framework with very detailed data showing you kind of which bucket practices are in. But the second part that is it would be reasonable to assume based on what we want to create is that our average practice would be more engaged with Invisalign and the lowest volume practices will be in (inaudible) and today they might be doing one. And the reason for us to focus on this is as we've tried everything we could imagine to engage them and our team our clinical support group wind up when they do one case a year or one case every six months it feels like the first time they have ever done a case and they struggle and then we have to drop it and help them and relearn all that, and what we are really after is with an evolving product like Invisalign we (inaudible) and it is going to feel like a new product if they do it once a year twice a year, so you should expect that to evolve but we have said explicitly that's our goal for them to evolve and again we'd love everybody to come along but looking to our part two to help each of these practices that want to successful Invisalign gets that, but it's already a smaller base right. As we have described it will be a small base from what we have described as the total in the past but they by definition will be more committed in engaging Invisalign.
Jose Haresco - Brean Murray
Okay. Referring back to these tables where you've got the limited and deactivated is that as of the end of 2009 that you have 9600 accounts deactivated 13400 in limited status is that…
That is correct, that's January 1st.
Jose Haresco - Brean Murray
Should we also make the assumptions that break down within each category is similar to the ratios of Orthos and GPs you typically work with or is that more towards one or the other?
I would say you shouldn't make that assumption, there is a lot of movement and as I said before you had view of this from the Analyst Day a year ago roughly before we introduced this idea and those number are changing. As I said, one dynamic is the larger number of relatively low volume practices, they are really making efforts to try and track and lets say okay lets make this part of what we are doing. That was part of what we had in Q3 and a little bit in Q4 that itself is going to change what that base looks like, so you shouldn't make the assumption that the segmentation we showed by volume back in November of 2008 is the same distribution today.
Jose Haresco - Brean Murray
Okay, fair enough.
Again, I don't want to beat this issue, when we get through this and we have a view post proficiency kind of July 1st and beyond. We will share with you the evolving view of what our customer base looks like but it is not going to be a snapshot we expect it to be part of our business for a long time and so this will continue to evolve over time.
Jose Haresco - Brean Murray
Last question. Something you has mentioned throughout the course of 2009 in the economy was that you GPs in particular, we are just trying to sell, it doesn't matter whether it was at straighter teeth or teeth lightening or rough, just were afraid to sell because of the economy they were in. Have you qualitatively seen a change in that behavior?
Yes. There are things we have seen that we can speak to and then what all conversations I have had with leaders of other business that are in capital equipment or other areas there is; a, a little more money available to borrow for a practice that's in decent shape and; b, less uncertainty about the end of the world scenario that we had roughly a year ago kind of September '08 and through a good part of '09. So what I'd say and there are some geography involved there is more engagement by GPs to try to up sell services and that was a year ago, what I'd say is in general more GPs are more comfortable being reactive to what comes in the door than seeking to choose that line of practice and emphasize it. And there are differences but, let me just say also inside that broad statement we have some customers that are just doing a great job in places like Michigan and Ohio where you would there is ground zero for the economy being on scale so our message to our customers is there are opportunities for you to elevate your practice and we can be part of that solution. But slowly I think there is a bit of a thaw, it will be interesting to hear what some of the dental leaders come out with, they talked about dental visits and starting to grow again and upscale service starting to grow slowly, but I think that's going to come back slowly and I think the specials will always be a little more focused on marketing and those activity.
Thank you everyone for joining us today, this concludes our conference call. We look forward to seeing you at our (Inaudible) events including the Roth conference in March. If you have any further questions please contact investor relations. Bye-bye.
Thank you. Ladies and gentleman this concludes today Align Technology teleconference. You may disconnect your lines at this time. Thank you for your participation.