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Executives

Shirley Stacy - Senior Director of IR

Tom Prescott - President and CEO

Ken Arola - VP and CFO

Analysts

Tao Levy - Deutsche Bank

Matt Dolan - Roth Capital

Taylor Harris - JP Morgan

Spencer Nam - Summer Street Research Partners

Anthony Ostrea - GMP Securities

Isaac Ro- Leerink Swann

Josh Jennings

Align Technology Inc. (ALGN) Q4 2007 Earnings Call January 29, 2008 6:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Align Technology's Q4 and 2007 Fiscal Year end Financial Results 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

Thank you. Good afternoon and thank you for joining us everyone. I'm Shirley Stacy, Senior Director of Investor Relations. Joining me today is Tom Prescott, President and CEO; and Ken Arola, Vice President and CFO.

Before we begin, let me cover some housekeeping items. We issued a press release today via PRNewswire in FirstCall ,detailing our Q4 and fiscal 2007 financial results. This 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 pm Eastern time through 8:30 pm Pacific time on February 12, 2008. To access the telephone replay, domestic callers should dial 877-660-6853 with account number 292 followed by pound, and conference number 268148 followed by pound. 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 about Align's future events, product outlook and expected financial results for the Q1 and full fiscal year 2008. These forward-looking statements are only predictions and involve risks and uncertainties such that actual results may vary significantly.

These and other risks are set forth in more detail in our Form 10-K for the fiscal year ended December 31, 2006 and our Form 10-Q for the quarter ended September 30, 2007. 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 of 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 furnished to the SEC on Form 8-K.

In addition, we have posted a corresponding slide presentation on our website. We encourage listeners to review these items carefully. Additionally, we have posted a 12 quarter GAAP and non-GAAP revenue model and supplemental financial slides on our website at investor.aligntech.com under Historical Financial Data. Please refer to these files in more detail.

Finally, I would like to address a temporary halt in after-hours trading in Align's stock that occurred in conjunction with the release of our Q4 results at 1 pm Pacific Time today. As part of our disclosure process, we provided NASDAQ MarketWatch an advance copy of our release, which includes our fiscal 2008 outlook.

In comparing our fiscal 2008 outlook with the wide range of analyst expectations for 2008, NASDAQ decided it would temporarily halt trading for 20 minutes and allow the Q4 press release to be fully disseminated. There is no other reason for the temporary halt in trading. Prior to the start of this call, NASDAQ confirmed that Align stock can fully resume trading in the after hours.

With that, I'd like to turn the call over to Align Technology's President and CEO, Tom Prescott.

Tom Prescott

Good afternoon, everyone. Thanks for joining us today to discuss our Q4 results and our outlook for 2008. Let's begin with the highlights from Q4. Q4 was another good quarter for Align, led by strong growth internationally.

Net revenues of $72.5 million and GAAP EPS of $0.08 were at the higher end of our outlook. Higher average selling prices, or ASP's, resulted in a better than expected gross margin of 73.6%. GAAP operating income of $5.7 million or 7.9% represents the fourth consecutive quarter profitability, a significant improvement from the prior year.

From a customer perspective, Q4 revenue mix consisted of 29.5% US Orthos, 46.2% US GPs and 19.6% international. Q4 revenues for US Orthos and GPs decreased about 4% from Q3, but grew substantially from the same quarter a year ago up 23% and 37% respectively. International performance continues to be outstanding, particularly in Europe, as demonstrated by international revenue growth of 22% sequentially and 48% year-over-year.

Q4 case shipments of 50.8000 decreased slightly from Q3 and went inline with our outlook. The sequential decrease in case shipment is related to a shortfall in new case receipt during the last several weeks of September, described in detail during our Q3 earnings call.

Utilization rates continued to be an important metric in assessing adoption growth for Invisalign. In Q4 year-over-year utilization grew 14% for US Orthos, 4% for US GPs and 10% for international.

We are pleased with our progress. As we look at the enormous opportunity in front of us, there are three critical levers that will help to drive our business and long-term growth. The first and most important lever is product innovation. The second is how we grow adoption. The third lever is implementing cost effective consumer demand creation to deliver the right patients properly motivated to start treatment into a doctors' practices.

Let me first talk about innovation and our recent new product announcements. On January 9th, we previewed three new Invisalign products that we believe will increase utilization and overcome barriers to greater adoption. Vivera Retainers, Invisalign Teen and Invisalign ClinAssist. Let's recap the three products we previewed.

First Vivera Retainers, design for both Invisalign and non-Invisalign patients, is our subscription base program, prescribed by Invisalign doctors and shipped directly to the treating doctor or directly to the patient four times a year. Vivera provides us with an opportunity to offer product expansion to our doctors, as well as incremental revenue streams. It also gives us the very unique opportunity to the relationship with the patient and the doctor they can resist well after the normal lines of treatment.

It's too early to comment on Vivera up tick given us reason for launch, but feedback from doctors has been positive and we will provide an update on its performance in the coming quarters.

Moving on now to Invisalign Teen and the potential access to the mainstream volume at Ortho's offices. Teen patients are a very big part of our orthodontic practices and make up the majority their case starts. In fact, based on the recent survey by the AAO, 78% of new case starts in 2006 were patients under 19 years of age.

To date, Invisalign is only being used for teens that have their permanent teeth and mature dentition in place, which translates to roughly 15% of our current patient base. Given that we have less than 7% total penetration among the 2.3 million orthodontic case starts per year, Invisalign Teen has a potential to ultimately increase the size of our served market.

Teen will do despite delivering a set of technologies, while making Invisalign much more applicable for teen treatment. This product is currently entering pilot testing and we will update you as we get closer to launch.

And our third product, Invisalign ClinAssist, is essentially the first phase of our GP specific product platform, and is designed as a turnkey consultative approach to Invisalign treatment for doctors who want a highly efficient treatment process with built-in monitoring tools and progress checks. ClinAssist, which is in pilot testing now, is intended to make the process of starting and managing Invisalign cases more streamlined and less labor-intensive for doctors.

These new and upcoming product offerings will all leverage the best aspects of the Invisalign system. Our expectation for incremental growth of the new products is minimal in 2008, but the addition of these and other new products in the pipeline enables us to grow up to a larger share of the market and builds on our foundation for long-term growth.

Ken will go through this in more detail when he describes our assumptions for new product revenue contribution and the increased deferred revenue that comes along with that in a moment.

The second lever to driving our long-term growth, both domestically and around the world, is increased adoption, which includes base expansion and utilization growth. The way we grow our base, is by training new doctors, and the way we increase utilization, in addition to leverage from new products, is by having the right sales coverage and clinical education programs.

In 2007, we significantly expanded our customer base and increased our sales force in North America and Europe. Additionally, we continued to evolve our clinical education programs to help Invisalign provide ensured treatment success and improved our practices, clinically and financially.

Just last week, we launched aligntechinstitute.com, an interactive website with a suite of scalable on-demand educational resources for a range of prospective newly certified and advanced Invisalign providers. If you haven't checked it out yet, you really should.

Finally, given the enormous untapped market potential for Invisalign, marketing the consumer and creating demand is the third level for driving our long-term success. During Q4, which is typically a tougher quarter for effective media impact, we implemented a plan shift in media mix in approach. We increased our focus on online regeneration activity and reduce the level of TV Ads spending, which is typically less effective during the holidays given all their advertising noise.

Despite reduction in traditional media and advertising in Q4, qualified leads were up over 15% sequentially and up over 200% year-over-year. Using Q4 as a model, we also tested other new demand creation approaches, anticipating a more expensive and crowded advertising environment created by both the upcoming Olympics and the Presidential Election Campaigns in 2008.

We evaluated alternative media and programming options that will help us maintain high awareness and demand for Invisalign. This includes more digital media, and a launch of a new consumer website in Q1. Our new Ad campaign, what we call “a smile changes everything”, also kicks off later this quarter and builds on the success of the previous balloon campaign.

Now, while you won't see us on a Super Bowl next weekend, you should see new TV Ads beginning February 25. While we are pleased to see a continued high level of interest in Invisalign from consumers, we are also mindful of increased economic uncertainty. We know the doctors in some economically sensitive regions of the country are seeing few new patients coming in the door, even if their Invisalign business remains steady.

Given this greater uncertainty and the potential for broad recession, we have taken additional steps to get a more detailed understanding of our doctors' purchase intent, as well as likely consumer behavior in the current environment.

Our goal is to build our current insight into doctor and consumer behavior, and get further upstream from our customers to develop stronger leading indicators that could signal trends in our business. For that end, we recently retained a well respected marketing research firm that focuses on consumers and physicians. We asked them to conduct a large scale broad base survey of our target consumers and Invisalign providers to assess their outlook on the US economy, and the potential effect on use or their purchase intent for Invisalign.

The survey was based on a random sample of 800 consumers in our target demographic and 400 Invisalign certified GPs and Orthos that have been active in Invisalign practices. The large size and scope of the survey was critical to ensure confidence and to exchange the result across our large target market and growing base of certified doctors.

The survey process was designed late last year and was conducted in January. The dimensions of the survey instrument include assessment of economic indicators, economic indicators in terms of language similar to those used for the Conference Board Consumer Confidence Index

Results of the survey are extensive. I will just highlight some of the key findings. Number one, our target consumers and Invisalign providers are mixed roughly 50/50 positive versus negative on the outlook for US economy over the next six months.

Two, regardless of the outlook on US economy, our target consumers intentions of obtaining Invisalign are strong. This is true both in the near-term and a long-term. Three, when our target consumers ranked relative importance for appearance improvement procedures, Invisalign ranked high, and above many others such as Laser Eye Surgery, Botox and breast implants.

Four, Invisalign providers are projecting Invisalign case growth in 2008 regardless of their outlook on the US economy. When we mete this out, the survey confirms anecdotal and qualitative information we have been gathering ourselves. It's also in line with smaller scale channel surveys many analysts have conducted and published recently. When you put it all together, it suggests that Invisalign is well positioned in market, and that our penetration is still very small relative to large market opportunity, and we should have confidence in our outlook for a long-term growth.

I would like to touch on a few strategic goals and our performance this year. First, our goals. One, continue driving strong top line growth and expanding profitability. Two, developing and deploying GP-specific and Ortho-specific product platforms to drive adoption. Three, continue to expand our customer base while fine-tuning our demand creation and brand building efforts. And four, evolving our manufacturing platform enterprise systems and core processes to improve efficiencies.

So, what have we done? Well, in the past twelve months we delivered strong top line growth and expanded our profitability. We accelerated international revenue growth primarily through our focused strategy that has led to greater adoption in Europe. We did expand our global reach in coverage through additions and enhancements in our sales forces, while increasing productivity.

We began delivering on our product roadmap with the launch of Vivera, as well as getting multiple new pilots underway. We significantly improved treatment quality, which has led to best practice protocols and treat software evolution, and we continue our focus in scaling our manufacturing platform, which provides support for our long-term growth model.

In addition to these strategic accomplishments, we successfully finished the Patients First Program and completed seven out of eight reexamination proceedings with the US Patent and Trademark Office, which has yielded an overwhelmingly positive reaffirmation of our intellectual property.

So, overall we have made tremendous progress in 2007, both strategically and financially. As we look to 2008 despite positive indicators from our recent survey and other data that suggest a more bullish attitude among our customers and perspective patients. We are mindful of the broader economic environment and a potential for consumer spending slowdown. Given our environment, we are adopting a more conservative view even as we continue to execute towards achieving our strategic initiatives and optimizing our financial results for long-term shareholder value.

And with that I'll turn the call over to Ken.

Ken Arola

Thanks, Tom. Now let's review our Q4 financial result in more detail, beginning with the income statement. Q4 revenues of $72.5 million were slightly above the high end of our outlook of $69.5 million to $72.2 million, and an increase of 31% year-over-year.

For Q4, blended ASPs were $1,360, reflecting the mix of cases between full Invisalign and Express, volume rebates, case refinements and the benefit of exchange rates associated with the higher mix of international cases.

Our Q4 GAAP gross margin is 73.6%, decreased one percentage point from Q3 primarily due to lower volumes across a relatively fixed cost structure, and a greater number of new certification events during the quarter compared to Q3. During the year, gross margin increased 4.8 percentage points, due primarily to the effective improved operating efficiencies.

On a GAAP basis, Q4 operating expense was $48.4 million. This compares to operating expense of $44.9 million in the prior quarter, and $56.1 million in the same quarter a year ago. Note that in Q4, 2006 GAAP operating expense included $14.3 million for the Patients First Program and settlement costs.

The sequential increase in Q4 2007 operating expense was primarily due to an increase in field sales headcount, sales compensation, and marketing program cost. On a non-GAAP basis, which excludes stock base compensation of $3.2 million, Q4 operating expense was $45.2 million.

Q4 GAAP EPS of $0.08 was inline with our outlook of $0.06 to $0.09 per share. This compares to $0.13 per share in Q3 and net loss of $0.27 per share in the same quarter last year. Q4 non-GAAP EPS of $0.13 was at the high end of our outlook of $0.11 to $0.13 per share is compares to $0.17 per share in Q3 and loss of penny in the same quarter last year.

Taking a look at the balance sheet, cash, cash equivalents, marketable securities, and restricted cash were $127.9 million compared to $64.1 million at the end of 2006, demonstrating continued positive cash flows. In fiscal 2007, we generated approximately $52 million cash from operations of which $16 million was generated in Q4.

Q4 DSOs were 56 days, reflecting continued healthy Invisalign practices, as compared to 58 days in Q3 and 55 days in the same quarter last year. DSO is one of the leading indicators of healthy economy maybe affecting our customer base and we will continue to watch this metric carefully.

Now, let me turn to the outlook for Q1 and fiscal 2008. This is also in our press release, so I'll only touch on a few highlights. Before I get into the detail, I would like to provide a few general comments about our new products in the boarder economic environment.

As Tom mentioned, we are very excited about our new product pipeline and prospects for expanding our share over the market over the long-term given the relative timing for general availability. We expect minimum revenue contribution from the new product launches in 2008.

With these new products, we will be delivering features such as progress tracking and stage delivery with Invisalign ClinAssist and replacement aligners will be offered with Invisalign Teen. This means that both of these new products will have a significantly higher amount of deferred revenue as a percent of their average selling price compared to our existing full Invisalign product.

As new products increase as a percent of our total net revenue in the latter part of 2008 and beyond, deferred revenue on the balance sheet will increase and this revenue will be recognized in future periods. The results from our new products will be seen on both our income statement and our balance sheet, which I will explain in more detail, as I go through the assumptions for each of the three new products, we have previewed on January 9.

Vivera Retainers were formally launched to our North America sale team two weeks ago, along with full marketing support. This means that Vivera is really just getting off the ground now, and we expect revenues to ramp particularly in the second half of the year. Remember, retainers are the last part of an orthodontic treatment. So, doctors that sell new Invisalign cases now won't actually order Vivera until the end of treatment, which is typically about a year.

It's too early to tell how much traction that their retainers will have with previous Invisalign patients or with those finishing treatment now, but we will continue to update you on progress throughout the year.

The Vivera retainers subscription includes four shipments per year. The full annual subscription cost will be invoiced upon shipment of the initial retainer and deferred to the balance sheet and recognized ratably over the one year subscription period. This means that 25% of the full subscription price will be recognized as revenue with each of the four shipments per year.

Invisalign Teen will begin piloting in February and is expected to launch in late 2008. With a Teen specific product we have the opportunity to move from serving only the very mature teens and adults, to addressing younger teens and gaining a greater share of the overall teen market. Equally important, we believe that a teen specific product will allow Invisalign to become a more main stream part of an Ortho’s practice.

We expect revenue from Invisalign Teen to ramp in late 2008 depending on formal launch and general availability. The teen product will include three free replacement aligners, revenue for this replacement aligners will be deferred based on the fair market value of the three aligners until the case is completed or the replacement aligners are used. We are estimating the fair market value of the three replacement aligners to be approximately $300.

ClinAssist is currently in pilot testing and is expected to launch in late 2008 or early 2009. Since one of the primary targets of ClinAssist is newly certified GPs, you can think about the growth opportunity relative to the number of new GPs that we certify after ClinAssist becomes generally available.

ClinAssist cases will be shipped in stages based on built-in monitoring tools and progress checks. The full ClinAssist case will be invoiced upon the first shipment and revenue will be deferred to the balance sheet and recognized upon shipment of the final stage of aligners.

I want to be clear, so I will say it in another way. Revenue for ClinAssist cases will not be recognized until we complete our obligation to the customer for progress tracking and stage delivery, which will be when the last stage of aligners is shipped.

This is expected to be approximately four to nine months after treatment begins depending on case complexity. You can expect that, given timing of the ClinAssist launch and the typical duration of treatment, it is unlikely that we will recognize ClinAssist revenue in 2008.

Beginning in 2008, our reported revenues will no longer match actual case shipments because of the timing associated with revenue recognition for each product as I just described. The rate at which the shift towards greater levels of deferred revenue will occur depends largely on four factors.

First, timing of the launch for these new products; second, the up-tick of these new products and the resulting ship in product mix; third, the dollar amount of deferred revenue associated with the each new product; and fourth, the revenue displacement of our current existing Invisalign products.

In our guidance, we have provided a range of new product revenue deferrals, because each of these factors will have some impact on our revenue growth and deferred revenue on the balance sheet. We believe that over time as our deferred revenue balance continues to grow a large percentage of our revenue will become more predictable.

Finally, while the consumer and doctor interest and Invisalign remain high, even the recent increase and broader economic uncertainties and the potential impacted consumer spending in 2008. We think is prudent to me more conservative about our outlook for the year.

Let me take these steps into consideration, our look for Q1 in fiscal 2008 is as follows. For Q1, we expect revenues to be in the range of $70.4 million to $73 million. We expect worldwide ASPs to be consistent with prior quarters at approximately $1,350. We expect case shipments to be in a range of 50 to51.5 cases. We expect Q1 GAAP gross margin to be 72.2% to 73.2%.

In Q1, we expect GAAP operating expanses in a range of $50.4 million to $51.9 million. This reflects our investment in continued growth in sales coverage and go-to-market programs in both North America and Europe. As mentioned on our last earnings call, we accelerated the hiring of sales staff into Q4, which means we are entering 2008 with the full complement of our sales force.

In the US, we added 21 people for a total of 152 sales staff, and in Europe we added 2 people for a total of 29 sales staff. In addition to headcount related expenses, we expect continued investment in product development, systems and infrastructure projects and marketing programs.

Q1 operating expense reflects the evolution of our customer programs as well as heavier advertising in media spending in the first half of 2008, as described in Tom's comments earlier.

For Q1, we expect GAAP EPS to be between $0.01 and $0.03. For fiscal year 2008, we expect revenue to be in the range of approximately $320 million to $330 million. We expect deferred revenue to increase in the range of $9 million to $18 million, as a result of the introduction of new products. This revenue will be reflected on the balance sheet and will be recognized in future periods beyond 2008. As a result, total deferred revenue on the balance sheet is expected to be in a range of approximately $20 million to $30 million by the end of 2008.

We expect case shipments for fiscal 2008 to be in a range of approximately 227,000 to 237,000 cases. We expect that GAAP gross margin for fiscal 2008 to be in a range of 74.2% to 75.1%. We expect fiscal 2008 GAAP operating expense to be in a range of approximately $211 million to $219 million. This reflects our investment in product development, go-to-market initiatives, such as our new advertising campaign, increased sales coverage and continued build out of our infrastructure.

We expect fiscal 2008 GAAP EPS to be between $0.40 and $0.45. We expect stock-based compensation expense in quarter one to be approximately $3.7 million and full year stock-based compensation expense to be approximately $18 million, compared to $12.2 million for the full year 2007. We expect diluted shares outstanding in quarter one to be approximately 71.2 million shares and for the full year 2008 to be approximately 73.2 million shares.

From the balance sheet standpoint, we expect to continue to generate positive cash flows and expect to end 2008 with $160 million to $170 million in the bank. Lastly, I want to update you on our tax planning strategy in future effective tax rate. Our current tax rate is approximately 3%, as dated previously we are currently evolving a worldwide tax strategy taking into account the potential benefit from our international operations to allow us to minimize our overall effective tax rate. We expect this strategy will be in placed by 2009.

Additionally during 2008, we will continue to evaluate our tax position and may determine that we will be able to utilize the future tax benefits from our deferred tax assets. At that time we would release at the valuation allowance. Once spoke to worldwide tax strategies in place and the valuation allowance has been released, we expect to have a GAAP effective tax-rate of 32% to 37%.

Total US net operating losses are approximately $218 million and will be used to offset US net profit. As a result our tax payments will be minimized to statutory taxes over the next couple of years.

Now, let's go back to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions).

Our first question comes from line of Tao Levy with Deutsche Bank. Please proceed with your question.

Tao Levy - Deutsche Bank

Good afternoon.

Tom Prescott

Good afternoon Tao, how are you?

Tao Levy - Deutsche Bank

I’m okay. A few questions, first Tom maybe you can give us a sense of what you are seeing when you hear from the doctors and sales reps out in the field? The impact from the economy. Obviously, Q4 was a little bit challenging and then during the last call you’ve mentioned that things were improving and now given your guidance about Q1, it seems like maybe things will kind of slow down again. So, any insight there would be help. Thanks.

Tom Prescott

Sure Tao. The first is I think, as both Ken and I described, we are being a bit more thoughtful and conservative in general, and that informs our overall due. And we’re talking that pasture even when somewhere at odds with some of the anecdotal and quantitative data we’ve got. I just think it’s prudent for us to think about this in a complete way given the amount of news out there, given the likely stress in the economy. And we just don’t want to find ourselves in a situation where we get ahead of ourselves.

The second part of your question is: what are we hearing? We had a kickoff in Europe two and half weeks ago, about a week or so ago in the U.S., and across the board the team is confident that they’re going to grow their business substantially this year. They’re excited that we got some new products coming up and an opportunity to pull those into some of these practices, along with evolution of some of the clinical training capabilities.

So, and then when we compare that with both the qualitative and quantitative research we’ve done, we see doctors even in some of the areas that more impacted saying that their practices may broadly be down there, Invisalign business is up. It tells us they are actually using Invisalign to be a differentiator. And so, all that said, our goal is, no matter what the economy throws at us and what the broader boundary conditions are, we are going to seek to optimize, [to bend] this result and we feel reasonably comfortable we can drive meaningful growth this year.

Tao Levy - Deutsche Bank

Got you. And: what's your just general thought process on, with the slowing economy, obviously you want to invest on new products, eventually where you will, if the economy doesn’t slow down you are in a good position. But: does it make a lot of sense to really start to continue to increase advertising, adding sales reps? Again, given this backdrop: rather then focusing a little bit more on improving profitability?

Tom Prescott

That’s a great question in a complete way. I think if you look at the potential range of outcomes for the year with what Ken framed, with the range of deferred revenue scenario is based on product timing and the mix, you could work your way to a scenario and say, we did demonstrate counting all that in, we did demonstrate a meaningful improvement in profitability this year. That may not show up in GAAP numbers, given the nature of deferred revenue.

The second part of that is, I think it is a really fair question to ask, whether in a time of broader economic stress, is it the right time to push forward on strategic initiatives? We do believe we understand what our payback is specifically for key strategic programs like consumer demand, and we have made investments over the last couple of years to be more and more productive with that. So, we believe we do know what returns we get. And when we look at the mix of program spending, that continues to rank up near the top of our choices. So, until that calculus changes, we're going to continue to make thoughtful investments in broad consumer demand.

I think your underlying question is how are you running the business? Based on what evolves during the year, we have a mix of headcount and program spending that we can evolve during the year to fit within a framework of a reasonable P&L. And we're going to be good stewards of that, and be watchful and mindful about what the economy brings but, it's a fair question.

Tao Levy - Deutsche Bank

Okay. And just a couple of clarification points, on the revenue guidance that you are providing for the full year the numbers that are going to show up on the P&L, when you get to Q3, Q4 we should be looking at your guidance numbers excluding the deferred. Is that the right way Ken?

eryone. I

The numbers that I referred to for guidance is $320 million to $330 million.

Tao Levy - Deutsche Bank

Exactly.

Ken Arola

That's netting out the deferred revenue.

Tao Levy - Deutsche Bank

Okay, so that kind of --

Tom Prescott

It will be GAAP revenue which also net out deferred, correct.

Tao Levy - Deutsche Bank

Got it, okay. So, the number or the business that you actually expect to bring in is that plus the deferred.

Ken Arola

That's exactly.

Tao Levy - Deutsche Bank

Alright, that makes me feel a little bit better. And then just on -- if I look at your Q1 EPS guidance your GAAP guidance and then your full year, it looks like you are looking for big step up, not only on the top line, but also the bottom line as well, aside from new products anything else Tom that is driving? I guess the backend loaded part of the year.

Tom Prescott

So, there are couple of things, there is some seasonal spending for us that come in trade shows and kickoff meetings with sales forces and big insurance, there are some things that structurally occur for us in the first quarter. Other than that the only other significant departure for us is given the frame this year of consumer demand and the fact that we pulled in the development of our new consumer campaign, which really wasn’t going to get originally be ready until mid-year, we pull it into earlier -- into Q1, so we can get impact before advertising rates got up there and the noise from the Olympics and the election got great. So, we can create the impact we wanted, that’s more frontloaded in the first half of the year. And that is a higher run rate, but we should be able to get impact out of that later in the year and into early '09.

Tao Levy - Deutsche Bank

Okay, great. Thanks.

Tom Prescott

Sure Tao.

Operator

Our next question is from the line of Matt Dolan with Roth Capital. Please proceed with your question.

Matt Dolan - Roth Capital

Hi, guys, good afternoon.

Tom Prescott

Good afternoon, Matt, how are you?

Matt Dolan - Roth Capital

Just a follow on or two on that prior question relating to case demand as you see it today Tom, given that were in the Q1 and you have the most visibility to-date, into this current question: have you seen any impact of the consumer question to-date? And the second part of that question is: considering that Q4 was a little softer than you originally expected, as the summer started, is there anything here that you could help us clarify in terms of the seasonality with Q4 being flatter than Q1? Thanks.

Tom Prescott

Sure, Matt. The first thing is, maybe going back to our discussion at the end of Q3, the Q4 impact, we had a solid ramp through Q4. The timing of Christmas and New Year was a little different this year, but there is always some impact there. The Q4 issues were really caused by the later part of September, and kind of failure to have a normal ramp coming out post Labor Day. And we’ve talked about that a lot and I won't go back there.

Other than the [net weight] of solid ramp through Q4, I want to maybe comeback to a typical Q1, international has been growing, there growth has been outpacing the U.S. and Q1 is not the strongest growth quarter for international specifically Europe, there is much more holiday for them in the first quarter, with a shorter month in February, there are shorter number of days worked in office in general. And so, the way we look at European run rates takes that into account.

So, typically Q1 is not the biggest lift we get from international. So, it's maybe a secondary, more subtle factor in there. But we are just trying to be thoughtful about the beginning of the year and layout a framework that allows us to continue on from Q4 and have reasonable expectations about how the year is going to evolve.

Matt Dolan - Roth Capital

Okay. Fair enough. And then, in terms of the guidance for '08, if I look at the numbers, I think it looks like high single-digit operating margin, I think in the past we have talked about getting into the low double-digits, it's more of a normalized rate today. Can you help us understand how that tracks throughout the year? And: should we still expect that or are there one time events this year, etcetera?

Tom Prescott

Well, the kind of the big one time event from a broader perspective is the implication of increases of deferred revenues starting to wash through our P&L, which will become visible on the balance sheet. Certainly that’s over the longer term with these new products, in the mix they kind of earn in or the share of our mix they get, that buildup of deferred revue probably will serve to make our business more predictable and more linear overtime. And you will see that before it's ultimately recognized in subsequent quarters.

But that’s the biggest single change that we have that we are investing a lot of strategic initiatives continuing on those, on all three of the levers I talked about, product innovation, base expansion and as well as consumer demand., And we don’t necessarily -- we aren’t getting the impact to drop down the operating margin of that revenue that we would get, as its going into deferred revenue.

The second thing is: there are some “timings”. We are frontloading in the first half of the year, some of the investments for demand creation to get greatest impact, given the Olympics and the election. That's a practical matter. And we're choosing to make those strategic investments, because we believe it's the right thing to do over the longer term. But, that said we continue to be very, very certain that over the longer term we will continue to evolve the model and create leverage and we believe our long term objectives of being a high growth business and having the kind of operating margins we’ve discussed are still very much there to be had.

Matt Dolan - Roth Capital

Okay. And just to clarify, so it's more of an operating issue at this point as opposed to just simply relating to your conservatives on the guidance with respect to discretionary expanding and so forth?

Tom Prescott

I would step back and say we have been more conservative in a complete way about our framework to the business this year. But the second part is we are pushing ahead on strategic initiatives, even though there is some near term apparent P&L impact on a GAAP basis, while there is deferred revenue build up in our balance sheet that's not washing to our GAAP P&L.

Matt Dolan - Roth Capital

Very good, okay thanks guys.

Tom Prescott

Thanks Matt.

Operator

Our next question is from the line of Taylor Harris, with JP Morgan. Please proceed with your question.

Taylor Harris - JP Morgan

Thank you. So I want to rehash some of the deferred revenue issues first and then move on. So, just to clear, the deferred revenue is increasing on the order of $9 million to $18 million or is it increasing from $9 million to $18 million?

Ken Arola

It’s increasing on order of magnitude from $9 million to $18 million Taylor, our current balance is that we have for deferred revenue around $10 million, $11 million on the balance sheet, and this will be incremental to that.

Taylor Harris - JP Morgan

Okay. So, can we really translate that as: if you weren’t launching these new products your revenue guidance would be close to $10 million to $20 million higher than it is? Or: is some of that truly incremental product revenue that just going to get pushed out?

Ken Arola

So, I would describe it: “well, yes” we did not have revenue associated with these products and we had a revenue recognition model comparable to our Invisalign full, you could look that as incremental revenue above our guidance.

Taylor Harris - JP Morgan

Okay. the case growth number or the case guidance that you gave represents case growth of 11% to 17% or so. Are there deferred cases at all or is it really just revenue associated with cases?

Ken Arola

No, Taylor those are all cases that will be shipping in deferred cases and that goes to my comment about the fact that tracking revenue to the actual case shipments is going to be a little trickier this year and we’ll giving you information on deferred revenue as well as shipment volumes.

Taylor Harris - JP Morgan

Okay. And shifting to the earnings impact of the deferred revenue: can you give us an estimate of that?

Tom Prescott

Well, that’s a little trickier, we obviously are reporting GAAP guidance here Taylor. It depends greatly on the mix, different new products that are assumed into this have different element of deferred revenues. And so, there are two different pieces moving, there is the range we provided for the full business and there is the range we provided for the new product implication is [9 to18], that have a number of moving parts. Three new products that have different kinds of deferral [schemes] with them. So, I think to just give you a -- I wish it was that simple, but to give you a pad answer, we’ve tried to revive those as two separate ranges, and maybe I will have Ken build on that.

Ken Arola

Yeah. One of the things you can think about Taylor is with these new products as Tom mentioned earlier we’re look at our product portfolio and the return on the products and with any product it has to make certain threshold from a gross margin perspective on a contribution basis. So, these new products fit into our 75% gross margin model, so if you want to apply something like 75% margins against an $9 million to $18 million dollar increase in deferred revenue, I think you can get to a reasonable answer.

Tom Prescott

His answer is better than mine. I was trying to get your back to our GAAP guidelines, outlook.

Taylor Harris - JP Morgan

Okay. I got it. I am just trying to add up the different factors for why earnings are, you are actually expecting earnings to be flat to down versus '07 and looks like you have got, you are missing out on earnings from this deferred revenue as a one, you are investing sales force, product development, even in the phase of poor economic backdrop. And help me if there is anything I am leaving off this list. Stock based comp is going up from $12 million to $18 million or so?

Ken Arola

That's correct.

Taylor Harris - JP Morgan

With your share price where it is: why would stock based comp go up by 50%?

Ken Arola

So, what you are saying at this point, Taylor, is a stacking effect, if you think back a couple of years when we implemented FAS-123R, it was an initial year of stock based comp, since then, every year you add another layer to that, so now we are into the third year of layering, and that’s why you are seeing the increase to $18 million.

Taylor Harris - JP Morgan

Okay. Is that expense? How dependent is it on the stock price?

Ken Arola

It's only dependent to the extent that you value the options when they are issued and that value remains the same.

Taylor Harris - JP Morgan

Okay.

Tom Prescott

That’s based on the issued, the grant.

Ken Arola

Based on when that grant is issued.

Tom Prescott

Right.

Taylor Harris - JP Morgan

Okay. Got it. And then, back to the first quarter, so help us out with the U.S. versus international business, you mentioned that the international business probably wouldn’t be as strong in the first quarter. What are you looking for in terms of growth rates in the U.S. business?

Tom Prescott

Without getting into specifics, Taylor, international will grow less quickly, put it that way. And if we look historically international, typically Q4 to Q1, is less growth, almost every year going back [when it was] international, so it's not so much bad news or down side, its just literally less step up, because fewer days worked.

If you take a look at the U.S. with this view we're trying to be thoughtful about what's going on in the U.S. economy and again we say this, even while we have got some very poor sentiments from our field organizations, from our customers and more recently this consumer and doctor research we did. All that said we are trying to be thoughtful about the year in total and the start of the year in particular.

Taylor Harris - JP Morgan

Okay. I guess as just as I add up your different factors contributing to case growth and you are predicting 11% to 17% case growth, maybe I would think that international business is going to grow faster than that on a full year basis. But then in the U.S. business you're going to be adding new dentists into the fold and then there is the utilization affect. Can you help us out with what are you assuming in terms of percentage increase in dentists, orthodontics? And: what are you assuming in terms of percentage increase in utilization?

Tom Prescott

What we haven't typically provided Taylor is, it’s a great modeling question. We haven't typically provided guidance about utilization, while we look at it very importantly, both as an annual number and inside cohorts of doctors. We typically don't provide that as a guidance or framework. The backdrop is this in the U.S. specifically we do have assumptions about number of doctors we're going to train. We're going to go do that, we hope we can get better at getting them started up, getting them to start their first cases more quickly and get them to ramp faster that's a part of new product leverage. Significant amount of that new product leverage doesn’t come till later in the year, to make it easier, faster, more efficient for them.

The second part is sales force is still pretty new. We are going to come to learning curve for some them. The third part is products like Teen which are really targeted at (inaudible) really don’t come out till little later in the year and then there is going be some trial and used to get going. So, we've sorted it all out. I think at a higher level first of all, again to begin with, we’re being little more conservative. The second thing is we are expecting less growth over in the core ortho space, I won't put an exact number on it. Third we’re expecting a little less growth that we’ve seen on GP. And then fourth we’re expecting a little less growth than we’ve seen for international and that’s how we get to that range.

Taylor Harris - JP Morgan

Okay. I guess just maybe final question would be utilization. It seems as though you have seen positive trends in utilization and yet we’ve had a few quarters in row of sequentially flat case performance. So: is there some dynamic that I am missing there? And: do you think its fair to assume that economic conditions aside you should have utilization increases net year?

Tom Prescott

It is a great question. The average numbers don’t always tell the story, we publish average utilization for ortho, GP and international. When we look what’s more telling is looking at cohorts of doctors, when they were trained and where they are in their experience curve, in their adoption cycle. When we look at experienced doctors in different categories, we see meaningful adoption growth, utilization growth within those. The broad tail of less active doctors continues to skew the average number, that denominator and if you look at Q4 as an example with the slower case receipts in the latter part of Q3 in September, which impacted, who was getting cases shipped to them, that skew utilization both for Orthos and GPs. So we had a large wide base of GPs doing a little bit less each that pulled down the number.

We had our high volume Orthos almost uniformly doing less cases each because it was quite in our offices, come of them as I think we said before said, it was the quietest September they have seen in years. And those short-term effects skew our quarterly number. So, within that, even within the quarter, we have already reported there is meaningful adoption growth in the segments of doctors. We have really tracked closely that showed us still fundamental traction. But again in a given quarter, which is what we think annually it's a more useful number on average to look at annually.

Taylor Harris - JP Morgan

Okay. I will hop back in the queue. Thank you.

Tom Prescott

Thanks, Taylor.

Operator

Our next question is from the line of Spencer Nam with Summer Street Research.

Spencer Nam - Summer Street Research Partners

Good afternoon. Thanks for taking my questions.

Tom Prescott

Thanks, Spencer.

Spencer Nam - Summer Street Research Partners

I just have Tom, few questions, quick clarifications, I guess. I was looking at your presentation packet and when I look at page 39, it shows you the number of doctors receiving cases quarter by quarter. And what I have noticed is that, there was actually a quite a big jump from Q1 to Q2 and then since Q2 of this 2007, it's been somewhere in the neighborhood of 16,200 doctors doing cases, the number seems to be fairly stable.

How should I think about that number growing in 2008? And then related to that: how many more the general dentists as well as orthodontists you guys plan to train in 2008?

Tom Prescott

Let me maybe answer the second question if I may first. We don't see significant training of Orthos in the US other than coming out of university programs. It's not a big number. So, that's pretty well fixed. We do expect to get utilization growth out of 3500, 3000 Orthos in a given year that really do business with us with any level of activity.

On the GP side, it's a very different bag and I think through the end of the year, we have trained a total of, give me that number here, well that's 26,000 at the end of Q3. It was roughly 27,000, 28,000 total today's that we train for GPs. There are still a very large number out of the 130,000 GPs in the US without practices that are interested, they wouldn’t be a fit. And so we have a lot a headroom to go before we've reached, where we think a marginal GP provider would be marginal in terms of interest and fit for Invisalign their practice.

If we step outside the US, we have even less penetration in total and we've only trained a fraction of the potential doctors, if you look at the major markets in Europe and Asia and elsewhere. So, we will continue and we have stepped up more recently in Europe to get trained again a new doctors and more in Asia, as we progress in Japan. We will continue this year, training more GPs.

Stepping back to your first part of your question, which was what's going on with the is it a flat number, with total participating that's the mix of changing of doctors to make up that 16,000. The Orthos that play are pretty steady. The international doctors that play are pretty steady. There is not a lot of turnover in who is getting cases shipped.

On the GP side you've got a large number, let's call it half roughly of the 10,000 or so that are getting cases ship in a given quarter. There are smaller volume doctors earlier up in their process, that they might be in for two or three cases in a given quarter and going at a quarter without starting a couple of cases and some other low volume GP still learning is in for a few more.

So that 10,000 GP doctors is moving around a bit about exactly, who are submitting cases. Our goal is to get all of those GPs more routine submitters of cases and our long-term goal, we described in general, which I think are reasonable. But long term goal is a case fore doct, now whether you can do after 10,000 or subset of 10,000 that's our long-term goal. And we do believe that one case start a week for GP means it becomes an important part of their practice. So, hopefully Spencer, that helps answerable both parts of your question.

Spencer Nam - Summer Street Research Partners

Yeah, it does. I guess one quick follow-up question is that, if I look at from 2005, which we appreciate you providing us with the fairly extensive historical data. It seems like every 12 months or so there is a meaningful step up from the, where the number was orbiting in prior year to kind of another level maybe 1,000 to 2,000 additional doctors sending a cases. I was just curious given that trend: could we expect one of the step up in 2008? And, if so: why? If not: why not?

Tom Prescott

The answer is we should. I'll say somewhat guardedly because we continue to train new doctors and we have a pretty good handle on the cycle of getting a doctor qualified than trained. And then becoming a submitter and there is a fairly predictable process to get the first cases started and work through that the learning cycle, as they become somewhat more routine submitters in sharp in this number, which now is 10,040 for GPs in last quarter.

Over time the layering of new cohorts of doctors starts to show up and because we try, there is some seasonality when we train a largest number of doctors. They tend to show up in chunks rather than in a really smooth fashion and you have seen that.

Now also obscuring what I would call linearity here is the effects of a competitive over the last couple of years, where we lost some main doctors and gained them back for factors other than just normal linear training and adoption growth. So, I think you have to remember that when you think about this. I would expect solid steady growth both in number of submitting doctors and utilization rates over time. I wouldn't look for any big step functions. That's part of the best way to model it.

Spencer Nam - Summer Street Research Partners

Great, I appreciate the detail. Tom in related to that, on pricing, I noticed that the average price actually has gone up sequentially, blended ASP has gone up from Q3. I was wondering: what the prospect on that is in 2008? Are you still expecting in the neighborhood of 1,360? You guys seeing higher the number I mean: what is that either going to be slightly down based on just the pricing erosion over time? What are your thoughts?

Ken Arola

I would say that the, this is Ken by the way. I would say that the pricing at overall ASP pricing that we have seen in the recent past is what you are going to expect going forward for the first half of the year. And then as we introduce new products that will have an impact on that potential pricing, as we determine the pricing of the products in the latter half the year, as we get ready to launch those. You may expect to see some of the pricing move a little bit at that point in time. But for the first half of the year I would look at it to be pretty stable to what we have been doing.

Tom Prescott

And Spencer, to build on that a little bit. The reason why there has been some upward lift in that ASP is based on a number of factors. One of those is, that as volumes are little softer, the rebate programs and the volume rebate programs, the advantage plan, doctors got less bag, as they deliver less volume they got, they collectively pay the more higher price incrementally that supported ASP, also currency plays that as well.

Shirley Stacy

Thanks, Spencer. We're going to go to next question and if I can remind folks to limit your questions please. So, we can get through everyone.

Operator

Our next question is from Anthony Ostrea with GMP Securities. Please proceed with your question.

Anthony Ostrea - GMP Securities

Hi, guys. Can you hear me?

Tom Prescott

Yes, we can Anthony.

Anthony Ostrea - GMP Securities

Just a few questions here, first on the new products, Tom can you just maybe walk us again through the timelines on when they kick in? I thought I heard you say: second half for Vivera, but then: late '08 for both the teen and the new GP product?

Tom Prescott

Let me make sure that right. I believe we said was the various outplay launch now, we actually released it late in 2007, but we actually formally launched it to our US organizations, just several weeks ago, we actually guided finished earlier than planned and saw rather than waiting for the full US launch at the national sales meeting. We get it out there and do some learning.

So, Vivera is out there now. It was fully launched in January and I think we've talked about what that is. Teen is later in the year, we haven't put a finer data around that, as well as ClinAssist. Both of those are out there in different stages of pilots. We continue to gather data learned from that test different pricing scenarios and offerings around that, as well as making sure that the whole system is working and with scale.

And what we've said for both ClinAssist and Teen. And ClinAssist primarily been target at GP community, Teen being target at Ortho. Those were a later this year. I think as Ken, described the deferred revenue for example on ClinAssist, we are unlikely to get any deferred revenue impact in this year, which would almost by definition say it’s later in the year.

Anthony Ostrea - GMP Securities

Okay. And just maybe the follow-up on that question, so: are we do assume that the case in deferred revenues is really mostly the Vivera in '08?

Ken Arola

No. Its what we've said, it's going to be all the above and reason for the range $9 million to $18 million is depending on the ultimate timing, the ultimate offerings in pricing, and the mix the each of those new products gains in our total flow of business that's all determine both our total net revenues as we end, as well as our amount of deferred revenue is on the balance sheet.

Anthony Ostrea - GMP Securities

Okay. Maybe I can ask you the question on Teen and ClinAssist offline, but maybe just: can you comment on your operating expenses? Quite a big jump, I realize $6 million of that is: “options expense”: maybe can you walk us through maybe the various line items? And: maybe give us a little more color on where and by what magnitude you are seeing the increases in those guys line item?

Ken Arola

Anthony, what I'd say is that as mentioned we have a most significant increase in spending or heaver spending in the first half of the year and that really revolves around the fact that we've expanded our sales coverage in particularly in North America. And we also had a lot of go-to-market initiatives kicking into the first half of the year including accelerating consumer demand media, etcetera.

The other things that are impacting spending for the year are the continued efforts in product development from an engineering perspective and then we are also working on building out our infrastructure at the company.

Anthony Ostrea - GMP Securities

All of those essentially non-discretionary [IEU], those will be the recurring revenues in '09 and beyond?

Tom Prescott

Hey, Anthony, I'll see if I can answer that. And we probably are going to move to next question.

Anthony Ostrea - GMP Securities

Okay.

Tom Prescott

The way we are approaching the business, from our perspective we have some, what appears to be fixed cost, headcount, etcetera, but we are going to run the business in a way that allows us to increase or decrease spending, while still delivering our strategic initiatives depending on with the marketplace and year evolves like.

So, I don't want you think about this all as fixed costs. Some of this program spending, some of the headcount in place, and some of the spending is projected with headcount to be hired. All that said, I think I said in my comments, we are going to run the business in a way to get a lot of these key strategic initiatives punched out.

The impact in the market this year set us for a significant future growth, while being mindful of the broader economy in managing appropriately. But I think maybe we can have a follow-up discussion, when surely in the gain and tease out the more information there.

Anthony Ostrea - GMP Securities

Great, thank you.

Shirley Stacy

Next question please.

Operator

Our next question is from Isaac Ro with Leerink Swann.

Isaac Ro- Leerink Swann

Hi, guys. Thanks for taking the question. Just following up again on this operating margin and guidance for operating expenses in '08; growing a little faster than revenues in this year. Can we assume that this investment is going to drive the dividends in the business '09? Maybe and concurrently with that I think -- as you can see it: what are you willing to say that you think the 20% operating margins are achievable at some point in the future?

Ken Arola

We absolutely believe that. As said, I believe I tried to say a minute ago, maybe not clearly enough. But we believe the right thing to do is to push through on these key strategic initiatives. We understand, we believe we understand what it takes to accelerate adoption growth. We believe we understand what specific unmet needs for the product exist in a dentist office, in an orthodontist office. And these very big steps are targeted at closing some of those gaps which our doctors, as we've tested them, say will increase your utilization, which is the key to the castle here.

The second thing is we believe it's the right thing to do. And as we push through even in the pressure with a competitive marketplace, with a lot of legal spending, we've dialed back some of that strategic spending or we still push through some of that. So we felt the right to do was to make the right strategic investment in the future because we believe this is a very big, rich market. And we believe the right thing to do for shareholders is to build a kind of company that will access that market.

So, yes, we believe those kind of 20% operating margins are there to be had, and we will create leverage in our model. Yes, we still believe very comfortably that the long-term growth prospects are great.

Unidentified Analyst

Okay. And then, just a follow-up on the deferred revs, one more item here. Could you maybe quantify what you think the EPS drag is for the deferred revenue in '08?

Ken Arola

What I said earlier, I think someone else might have ask this question, is the deferred revenue of $9 million to $18 million for the year, typically our products carry a gross margin of around 75%. So if you apply something along those lines to the revenue deferrals and then you turn them with the EPS impact, you can get to something.

Unidentified Analyst

Okay. And then just last question on G&A, you mentioned, Tom, in the past kind of legal expenses having G&A being a little higher than you would think over a normalized basis long-term. Do you think $15 million or thereabout per quarter is the right level for the long run in this business? Basically what I'm getting at is does that factor in a few million per quarter in potential sort of setting aside some money for potential legal action that you might have to take to protect your franchise?

Tom Prescott

We certainly don't project any kind of other legal activity at this time. There is a normal set of things that occur. We certainly are in the finishing stages of the reexamination process, which has not been easy or inexpensive. But I guess, maybe, there is a good follow-up discussions we have as we were modeling about '08 and beyond with Shirley and Ken and the team.

But I think the practical matters we believe over the longer term, as we evolve the company, as we rethink process in a company, we think SG&A spending in total, we're going to start to create real leverage against. We've shown we can do that. This year there's a little more drag on active and deferred revenue, but that's exactly the right thing to do for our customers and for the long-term growth.

So our job is to explain how that washes through our P&L, how you can see progress in the balance sheet with the build up of that deferred revenues, and how you can think about that business creating, certainly creates some financial leverage with growth in the future. But in our view, we ought to be able to do a lot better at all of these areas over the longer term.

Unidentified Analyst

Okay. Thanks very much.

Shirley Stacy

Thanks. Operator, we're going to take one more question, please. Operator?

Operator

Our next question is from the Josh Jennings.

Josh Jennings

Good afternoon. Thanks for taking my call. The international growth obviously was strong in the fourth quarter. I'm just wondering though: if you've noticed any trend line a little bit too early, but with some of sort of recessionary trends now and trend in the international markets? Have you seen any changes in case starts over there in Europe or other areas internationally?

Tom Prescott

I'll just give you anecdotally data. The feedback we gave about slightly slower growth in Europe specifically in Q1 is a very typically scenario we're seeing in virtually every year. In fact, we forecast for this. It has to do with their “number of days worked”. It has to do with their holiday schedules and the like.

I traded emails earlier today just anecdotally with one of our higher volume docs in Europe, and he has just opened a second practice and very excited about Invisalign. When I asked him about the economy, he said -- I think his words were we're still skimming cream off the cup. And this is core Western Europe.

So what I'd say is our penetration in Europe is even less than our small penetration as in the US. And in most of these places there is really no dental insurance. They are really marketing to wealthier people in general. The short answer is, they have not seen it yet and we haven't seen concerns expressed yet. All that said, we are being thoughtful about our complete forecast for North America as well as the rest of the world, and I think we have reflected that in our outlook for guidance.

Josh Jennings

Okay. Thanks for taking the question.

Tom Prescott

Sure, Josh.

Shirley Stacy

Sorry. Thank you everyone for joining us this afternoon. It concludes our conference call today. We look forward to speaking to you again at upcoming conferences, including the Deutsche Bank Conference on February 14 and the Roth Conference on February 19. Our conference presentations and breakouts are available via audio webcast on our website. If you have any further questions, please contact Align Investor Relations.

Thanks and have a good day.

Operator

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

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