Align Technology Inc (ALGN) — Q4 2016 Earnings Call Transcript

Good afternoon and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me from today's call is Joe Hogan, President and CEO; and John Morici, CFO. We issued fourth quarter 2016 financial results today via Marketwired, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately 12 months. A telephone replay will be available today by approximately 5:30 P.M. Eastern Time through 5:30 P.M. Eastern Time on February 14. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13652166 followed by pound. International callers should dial 201-612-7415 with the same conference number. As a reminder, the information that the presenters discuss today will include forward-looking statements, including statements about Align's future events, product outlooks and the expected financial results for the first quarter of 2017 and full year. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statements. We have posted historical financial statements, including the corresponding reconciliations and our fourth quarter conference call slides on the website under Quarterly Results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology's President and CEO, Joe Hogan.

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today I'll provide some highlights from the quarter and briefly discuss the performance of our two operating segments, care aligners and scanners. John will provide more detail on our financial results and discuss our outlook for the first quarter and I'll offer some commentary on how we see 2017 unfolding. Following that I will come back and summarize a few key points and then we'll open up to questions. Q4 was a strong end to the year with revenues at the high end of guidance, up 27.3% year-over-year resulting from better than expected Invisalign and iTero volume, primarily in North America, offset by lower ASPs, discounts and foreign exchange impact. Q4 Invisalign case shipments increased 6.9% sequentially reflecting an uptick in North America and EMEA, and was up 18.5% from the prior year driven by continued growth across all geographies and customer channels. Our iTero business also finished strong with scanner units up 27.7% sequentially and 171% compared to Q4 a year ago. EPS was $0.59 which was lower than our outlook primarily due to an $0.08 impact from exchange rates on a strengthening U.S. dollar that John will explain further in his comments. By all accounts 2016 was a terrific year for Align. We exceeded $1 billion in annual revenues for the first time in our history. We had more than 700,000 adults and teenagers treated with Invisalign care aligners, and we more than tripled our shipments of iTero scanners to nearly 4,000 units, all while delivering several new products, expanding our global footprint in operations, establishing a new doctor direct-to-consumer channel, the small direct love, and implementing an entirely new ERP system without any major business disruption. For Q4, North American Invisalign volume was up 5.7% sequentially driven by expansion of our customer base and increased utilization from both customer channels. During the quarter, North America Orthos gained momentum following our Invisalign Summit in November. And North American GP growth was driven by both the Invisalign Full and Express family of products. On a year-over-year basis, shipment growth of 15.2% was driven by continued adoption by North American Orthos which has seen record utilization and solid growth from GPs, especially with Invisalign Express. We continue to make progress with the Dental Service Organizations or what we call DSOs, the fastest growing segment of the dental industry which represents nearly 20% of the market today. In Q4, roughly 8% of our North American volume came from DSO practices and they outperformed private practices significantly, both in terms of growth rate and ortho utilization. Q4 Invisalign volume for international doctors was up 9.1% sequentially driven by strength in EMEA coming off Q3 summer seasonality, offset somewhat by a seasonally slower period in APAC. On a year-over-year basis international Invisalign volume was up 25% reflecting continued strong performance for both EMEA and APAC. In EMEA, Q4 volumes were up 20% year-over-year reflecting continued adoption of Invisalign in core markets led by the UK, Spain, and France, as well as continued rapid growth in our expansion markets of Central Eastern Europe and Nordic. We also saw initial momentum from the successful launch of IGo. Our Q4 EMEA shipments do not reflect the strong underlying demand as our reported growth rates were dampened by the imbalance between receipts and shipments that we described in our Q3 earnings call. As our backlog returns to more normalized levels in Q4, there was a dampening effect on the shipments that cut across all regions because the lines were fabricated and shipped on a first-in, first-out basis without regard to geographical regions; notwithstanding this, EMEA still had a record quarter. In Asia Pacific, Q4 volumes were up 35% year-over-year led by China, Japan, and Southeast Asia. During the quarter we held numerous clinical education and training events across the region. In China more than 1,000 doctors attended an Invisalign Day at the China Orthodontic Society's Annual Meeting. In Japan, we held an Invisalign Forum with more than 200 doctors in attendance, and we participated in the Taiwan Association of Orthodontists meeting for the first time. We also successfully transitioned from indirect coverage in Korea to direct; our largest beauty/cosmetic surgery market in the world is in Korea. During the Teen market, or two-fourth of the total number of teenagers using Invisalign decreased 7.7% sequentially as expected due to the seasonality, and was up 19.7% year-over-year driven by continued adoption worldwide. Q4 is typically a seasonally slower quarter for teenage starts. For the full year 169,000 teenagers started treatment with Invisalign, an increase of 19.6% compared to last year. The International teen case starts represent about 30% of total teen starts and grew 31% in 2016 when compared to last year. Our results reflect solid execution of our strategic approach drivers which includes international expansion, driving ortho utilization of Invisalign, especially among teens, helping GPs treat and refer more patients; and lastly, ensuring that billions of potential patients generated through our consumer demand program are offered Invisalign treatment. Product and technology innovation are key to all these initiatives, and in 2016 we continued to see increased clinical confidence as a result of innovation in Invisalign treatment for customers worldwide. Q4 was a particularly busy quarter with product releases designed to improve predictability, outcomes, and efficiency. We launched Invisalign G7 with features that helped us to fine-tune certain tooth movements, and we launched the latest version of ClinCheck Pro for more flexibility in treatment planning. We also announced upgrades to our iTero Element scanner's software, the Invisalign Outcome Simulator chairside app, adding 3D progress tracking to help assess Invisalign treatment progress. Based on recommendations from many of our most experienced doctors and our North American Clinical Advisory Board, we issued a recommendation for weekly aligner wear in Invisalign Teen cases. But we are now recommending one week wear for Invisalign Go. Innovations like our G-series features and smart-track material give doctors confidence that they can achieve the results they want with Invisalign while changing aligners weekly instead of every other week. It's a real improvement in treatment efficiency and a better experience for patients, reducing overall treatment time. Our integrated consumer marketing program places traditional media, search, digital marketing, PR, and social media to engage consumers at every point, driving consumer interest and demand for Invisalign treatment. In 2016 there were over 8 million unique visitors to the Invisalign website; 1.8 million potential parents searched for an Invisalign provider on doctor locator, which is up 38% from 2015. Additionally, the Invisalign social media community grew 50% to 530,000 consumers. In Q4, our scanner business revenues are up 19.3% sequentially and up 157% year-over-year, reflecting a record number of units shipped in the quarter, approximately 27.7% quarter-over-quarter, primarily in North America. The use of iTero scanners in Invisalign case submissions continues to expand and remains a positive catalyst for Invisalign utilization. For Q4, total Invisalign cases submitted with a digital scanner in North America increased to a record 51.3%, up from 48.8% in Q3 and 39.7% in the same quarter last year. While these scanners were predominantly from the iTero scanner, we are also seeing some uptake for other scanners which were previously qualified for Invisalign case submission. Q4 was our first quarter supplying aligners for Smile Direct Club. We continue to work closely with the Smile Direct Club team developing processes around the manufacture of their aligners and ramping our efforts in the referral cases to our network of orthodontists and dentists for in-office Invisalign treatments. The potential of this new market is large. While the business is going to continue to evolve, we remain very excited. I'd like to update you on our plans to expand our operations globally and get closer to our customers in local markets. This past July, we transitioned our order acquisition operations, which is the digital scanning of cemented TBS impressions for the EMEA region, to Amsterdam. We focused initially on moving the order acquisition process because of the huge customer experience benefits, which faced several days for initial ClinCheck turnaround time. Order acquisition has a low labor and training component and is therefore relatively easier to relocate. We also gain immediate net cost savings in COGS, or costs of goods sold, from the lower freight costs. While still early, we're already seeing these benefits from having operations in the region. We're planning to establish order acquisition for the APAC region in Singapore, and expect to begin processing incoming Invisalign cases for that region in early 2018. Our first treatment planning operations outside of Costa Rica and our first aligner fabrication operations outside of Mexico will both be located in the APAC region. We are focusing on Asia Pacific first because of the diverse customer needs in that region, language and translational challenges, and a significant distance in time zone differences that currently results in more time for ClinCheck turnaround. The China market will be our initial focus for treatment planning operations in APAC and be located in Chengdu, China. We expect to begin processing Invisalign cases in Q2 2017. A location for our APAC aligner manufacturing has not been finalized yet; however, we plan to be operational in the first half of 2018. We plan to establish our operations in EMEA in a similar way. We have treatment planning operations in Cologne, Germany starting in Q3 2017, followed by Spain in the first quarter of 2018. We're building a more detailed plan for putting treatment planning into other core markets in EMEA over the next few years. The international expansion of Invisalign's value chain, which includes order acquisitions, treatment planning, and aligner fabrication is underway. I'm excited about the opportunity and the potential of being closer to our customers. Our operations are very flexible and we see many benefits that will allow us to scale with our business and ensure that we offer the best customer support experience. Before I turn the call over to John, I want to update you on our patent litigation. At the conclusion of the International Trade Commission action against ClearCorrect in September 2016, we filed a motion in federal district court in Houston to lift the stay that had been in place since the filing of the ITC action. The court granted our motion, and the matter is now active, and we are proceeding aggressively, relying in part on these prior findings of infringement and validity from the ITC proceedings. Additionally, today we announced that we have filed a new lawsuit against ClearCorrect and Your Smile Direct LTD of Dublin, Ireland, for patent infringement in the Chancery Division of the High Court of Justice of the United Kingdom. We believe that ClearCorrect is now infringing Align's European patents by offering its aligners to consumers through Your Smile Direct and to practitioners through its own distribution throughout the United Kingdom. The ITC already found Align's U.S. patents to be infringed by ClearCorrect, and we will continue to assert and defend our intellectual property rights against infringement, both in the United States and internationally. With that, I'll now turn it over to John Morici.

Thanks, Joe. I'm very pleased to be here. Let's review our fourth quarter financial results. The total company revenue for the fourth quarter was $293.2 million, marking a 5.2% increase from the prior quarter and a 27.3% increase from the same quarter a year ago. On a constant currency basis, our reported Q4 revenue decreased by approximately $3 million, both sequentially and year-over-year due to foreign exchange rate fluctuations caused by the strength of the U.S. dollar. Fourth quarter revenue from clear aligners was $251.5 million, which now includes both Invisalign and Smile Direct Club aligners. This was a 3.2% sequential increase, driven by growth in Invisalign volume, which was partly countered by lower average selling prices for Invisalign. Our Q4 shipment volume and revenue to Smile Direct Club were not significant for the quarter. Year-over-year, clear aligner revenue grew by 17.5%, reflecting increased Invisalign case volume across various customer channels and regions. The average selling prices for Invisalign in Q4 were down $50 sequentially to around $1,230 due to higher promotional activity and exchange rate effects. Year-over-year, Q4 average selling prices for Invisalign decreased by approximately $20, mainly due to promotional activity and the impact of foreign exchange rates, although this was partially mitigated by price increases. In the fourth quarter, we shipped about 190,000 Invisalign cases, a 6.9% sequential increase primarily from our EMEA and North American customers. Year-over-year, Invisalign case volume grew by 18.5%, driven by growth in all regions. For North American orthodontists, Q4 Invisalign case volume grew by 3.2% sequentially and by 20.2% year-over-year. For North American general practitioners, case volume rose by 9.1% sequentially and 9.5% year-over-year. Internationally, Invisalign case volume increased by 9.1% sequentially and by 25% year-over-year, reflecting ongoing customer base expansion and higher utilization. Worldwide, Invisalign utilization reached a record of 5.2 cases per doctor in Q4, up from 4.9 in Q4 last year. North American orthodontist utilization was a record 11.3, up from 9.9 the previous year. North American general practitioner utilization was 3.2, slightly increasing from 3.1 the prior year. International utilization remained stable at 5.0 compared to Q4 last year as we continued to grow our customer base. In Q4, we added 3,700 new Invisalign doctors globally, including 1,420 in North America and 2,280 internationally. This compares to 2,615 in Q3 and 2,670 total doctors trained in the same quarter last year. It is important to note that the total number of doctors trained in Q4 includes 670 Invisalign Go doctors in EMEA recruited throughout the year. Our scanner and services revenue for the fourth quarter was $41.7 million, representing a 19.3% sequential increase and a 156.8% year-over-year increase. Moving on to gross margin; the overall gross margin for Q4 was 75.1%, remaining flat sequentially and increasing by 0.1 points year-over-year. The clear aligner gross margin for Q4 was 77.5%, down 0.2 points sequentially, primarily due to lower average selling prices for Invisalign, although this decline was partially offset by cost efficiencies from higher volumes. Year-over-year, clear aligner gross margins decreased by 0.4 points, mainly because of more aligners per case as we continue to treat complex cases. The gross margin for our scanner segment reached a record 61% in Q4, up 3.9 points sequentially and 23.2 points year-over-year. Both the sequential and year-over-year increases were largely due to higher average selling prices and lower production costs of our iTero Element scanner compared to our previous model. Our operating expenses for Q4 were $151.9 million, increasing by $4.8 million or 3.2% sequentially, mainly due to higher employee headcount, which was partially offset by lower media costs and foreign exchange impacts. Year-over-year, Q4 operating expenses rose by 33.8%, reflecting increased headcount and ongoing investments in our market activities, which are essential for business growth. The operating margin for Q4 was 23.3%, an increase of one point sequentially and a decrease of two and a half points year-over-year. The sequential increase in operating margin was mainly due to operating expense leverage from higher volumes and revenue. However, the year-over-year decrease in operating margin is primarily a result of higher operating expenses as we've scaled the business. Both sequentially and year-over-year, Q4 operating margin was minimally affected by foreign exchange rates due to a natural hedge between our revenue and operating expenses. Regarding our tax provision for the fourth quarter, our tax rate was 19.8%, which is about 1.4 points higher compared to Q3. This rise is due to benefits in Q3 from corporate structural changes associated with our ERP implementation. Starting in Q4, we also began supplying aligners to Smile Direct Club. Revenue and costs associated with this activity are included in our operating profit and reported results, although they were immaterial to the company. Additionally, our share of Smile Direct Club losses is reported below operating margin in our tax provision as equity in losses of investee, net of tax. This Q4 loss, net of tax, was approximately $1.2 million, or $0.01 per diluted share. Fourth quarter diluted earnings per share were $0.59, compared to $0.63 in Q3 and $0.60 in the same quarter last year. The Q4 EPS was negatively affected by a stronger U.S. dollar, amounting to about $0.08 per share, mainly due to realized foreign exchange losses related to the revaluation of certain balance sheet accounts and unrealized foreign exchange losses included in other income and expense. Following our new international corporate structure implemented in July, we transitioned the currency of our Netherlands entity from euros to U.S. dollars. This approach means that monetary balance sheet accounts are now revalued in U.S. dollars, with any impact charged to the profit and loss statement. Previously, these impacts were managed through the balance sheet. We have adjusted our processes to reduce our exposure to such currency fluctuations, which we believe will minimize their impact on earnings moving forward. Looking at the balance sheet, as of Q4, cash, cash equivalents, and marketable securities, including both short and long-term investments, reached a record $700 million, compared to $678.7 million at the end of 2015, reflecting an increase of about $21.3 million. Of this $700 million, $241 million was held by the U.S. and $459 million by our international entities. The Q4 accounts receivable balance was $247.4 million, an increase of about 1% sequentially. Our overall DSO was 76 days, down two days sequentially but up 14 days year-over-year. The year-over-year increase is attributed to our new ERP system implemented in July 2016 and related systems affecting customer collections timing. As indicated last quarter, we expect our DSOs to remain above historical averages for several quarters while we adjust to these changes. Cash flow from operations for Q4 was $81 million, with free cash flow for the quarter, defined as cash flow from operations minus capital expenditures, amounting to a record $66.8 million. Capital expenditures for Q4 were $14.2 million, primarily for equipment purchases to increase manufacturing capacity and for facility improvements. During Q4, we repurchased about 0.4 million shares of stock for $38 million under the repurchase plan initiated in April 2014. After the year-end, we completed this plan, repurchasing the remaining $3.8 million. We still have $300 million available for repurchase under the plan we announced in April 2016. Before discussing the Q1 outlook, I would like to highlight our full year 2016 results. In 2016, we shipped a record 708,000 Invisalign cases, a 21.5% increase, with 32.4% volume growth from international doctors and 16.4% from North American doctors. Shipments of iTero scanners more than tripled over 2015, nearing 4,000 units. Total revenue reached a record $1.1 billion, up 27.7% year-over-year. The full year operating income stood at $248.9 million, representing 23.1% of revenue, while free cash flow was $177.1 million. For the year, we repurchased 1.1 million shares of Align stock for $96.2 million. The diluted EPS for 2016 was $2.33. Now, let's turn to our business outlook and the factors influencing our perspective. Regarding demand outlook; in our international markets, we anticipate a seasonally slower period for APAC due to the Lunar New Year and for EMEA with winter holidays and vacations. In North America, we expect a seasonal increase in general practitioners and orthodontics. For our scanner business, Q1 capital equipment purchases are usually lower. With this context, we expect the first quarter to unfold as follows: Invisalign case volume is projected to be between 200,000 and 203,000 cases, reflecting a year-over-year increase of approximately 22.2% to 24% due to strong demand across all channels and regions. We expect Q1 net revenues to range from $295 million to $298 million, representing a year-over-year increase of 23.6% to 24.8%, with gross margins projected between 74.2% and 74.5%. We anticipate Q1 operating expenses to be between $162.5 million and $164.5 million, increasing quarter-over-quarter primarily due to higher headcount and marketing expenses. Q1 operating margin should range from 19.1% to 19.3%. With regard to our tax rate; at the start of 2017, we adopted a new accounting standards update aimed at improving employee share-based payment accounting. Under this new standard, excess tax benefits and deficiencies associated with these payments are now recognized directly to income tax expense or benefit in the income statement for the reporting period, rather than as paid-in capital on the balance sheet. Under this new standard, we expect our Q1 effective tax rate to be approximately 1% to 2%, which includes $12 million in extra tax benefits. We estimate that the Q1 impact of the Smile Direct Club transaction will decrease earnings per share by $0.01, with diluted shares outstanding approximately at 81.3 million, not accounting for any share repurchases. Overall, we expect our Q1 diluted earnings per share to be in the range of $0.64 to $0.67, which includes about $0.14 of excess tax benefits. Lastly, it's worth mentioning that our Q1 capital expenditures will be higher than usual as we recently signed a purchase agreement for a new facility in San Jose, California. Therefore, Q1 capital expenditures should be around $70 million to $75 million. Now, turning to our full-year expectations. We anticipate that our 2017 revenue growth will exceed the midpoint of our long-term operating model range of 15% to 25%. We also expect Invisalign revenue and volume growth to meet or exceed that same midpoint. Regarding our scanner business, keep in mind that 2016 revenue and volume growth significantly benefited from the backlog carried over from 2015. While we expect the scanner business to perform well and continue to grow, we do not anticipate the same rate of growth in volume and revenue as seen in 2016. We project operating margins to be flat or slightly higher compared to 2016 levels. These investments will focus on geographic expansion in existing markets, entry into new territories including Latin America and India, and aggressive targeted advertising campaigns aimed at teenagers. Additionally, international expansion of the Invisalign value chain will include order acquisition and treatment planning to get closer to our customers, as previously mentioned by Joe. We will also be commercializing several new products, including advancements for international markets, Invisalign Go for North America, new features and capabilities for the iTero scanner, and implementing the CFM model in North America and APAC, which was previously deployed in EMEA. We believe these investments are crucial for driving customer adoption and accelerating growth. Similar to last year, many of these investments will take time before generating significant returns. We anticipate that the equity loss from our investment in Smile Direct Club will be two to three times the losses recorded in 2016. Our expected tax rate for 2017 is approximately 18%, including $19 million of excess tax benefits. Finally, as is customary, we expect our earnings in the second half of the year to be stronger than in the first half, with second-half operating profit projected to account for approximately 56% to 58% of our full-year results. Now, I'll turn it back over to Joe for final comments.

Thanks, John. In closing, I'm pleased with our continued progress. Behind all this progress and hard work, what we've really done is build on the original vision and work started 20 years ago this year, which has created a digital way to move teeth predictably, comfortably, and efficiently, and we're doing that. Digital is the future of orthodontics, which means all treatment in the future will be handled digitally throughout. We have good momentum and energy heading into 2017, something we all felt during the kick-off at the year in North America, APAC, and EMEA. We have a lot to be excited about with new products coming to treat younger patients and solutions specifically for general dentists, expanded opportunities through Smile Direct Club, and our new consumer campaign, among much more. I look forward to following up with many of you in the coming weeks at various financial conferences and industry meetings. Before I open the call to questions, I want to take a minute to welcome Lin, who will join Align on February 27 in the newly created position of VP, Americas. This position for the Americas region will allow us to provide greater focus on each region, respond to their different needs more quickly and effectively, and harness the collective power of our largest market in the world. We've never had one leader for the region with our expansion in Brazil and greater Latin America; we thought it was time to bring all these activities in the Americas under one leader, just as we have in EMEA and APAC regions. This is an opportunity for us to add an executive with experience who is going to help us scale and continue to grow. I know that she'll be an excellent addition to our team. Lastly, as we announced in Q3 earnings, David White will officially leave Align in February. I want to thank David for his many contributions to the company over the past three years, and we wish him the best in his retirement. With that, we'll now open for any questions you might have.

Thanks, Joe, and welcome John. So I guess looking at the results, despite what appears to be somewhat of a softening overall dental end market, you guys were able to post and forecast strong case growth. So I guess Joe, big picture question, how important is the overall foot traffic, in particular in the GP office, relative to how you think about referrals and growth of Invisalign?

You know, I believe it's crucial to recognize the significance of store traffic. We experienced a decline in the third quarter, particularly in the GP market segment. However, GP has somewhat rebounded seasonally, which we anticipated in our forecast. We're also seeing a substantial increase in ortho utilization. These two factors together are significant; a 20% drop in ortho traffic will impact us, but we're projecting a continuation of trends from 2016 into 2017. This is why we remain optimistic about our outlook for 2017.

Got it. And I guess just a quick follow-up, you know, you guys called out higher promotional activity as driving the decline in the ASPs and I know you guys run promotions often. But I don't remember it being this big of a drag on ASPs. Can you maybe just give a little bit more detail on the promotions you ran and should we expect this level of promotional activity to continue as we think about '17?

Yes, I think you know, Robert, we have some promotional activity but obviously nothing that would have been outlined as what we've done in the past in the fourth quarters. Except there was one $75 bonus that we gave to the orthodontic community that came through in Las Vegas, and we saw a pretty big uptick from that. So that hit us a little bit from an ASP standpoint but held volume; but then we had some FX and some mix in here also. So it was a good balance in that regard.

Thanks, good afternoon. Joe, in terms of your '17 outlook, first on the top line, can you give us a sense of what you're embedding for FX impact to the top line as well as the ASP trends for the year? And then when you look in the middle of the P&L, you outlined a number of initiatives; can you help us size or put some numbers to the relative sizes of each of those initiatives, each of the cost buckets in terms of the incremental commercial spend?

I will address the foreign exchange impact and average selling prices. Our plan for 2017 is based on the current foreign exchange rates, which we have taken into account in our guidance. Regarding average selling prices, we anticipate they will remain stable to slightly increase as we prepare for 2017. We are continuing to invest in our sales and marketing efforts, particularly focusing on marketing directed at consumers and specifically targeting the teen demographic. This investment will carry into 2017. Looking at our business for the coming year, we plan to maintain our approach from previous years, intensifying our hiring of sales personnel to support our international growth. For next year, we will continue those strategies, potentially at an even greater scale due to our increased momentum and higher volumes. The additional costs associated with this will range from $10 million to $14 million, which represents a significant change compared to our usual operational expense growth. This is part of the reason we faced challenges in the first quarter as we balanced these investments to aim for better results in the latter half of the year.

And just curious about you think about the potential risk of a board tax on Mexico imports? And any let's say mitigation efforts that you could take to perhaps offset that? And could you update on the exact mix of how much of the production is coming out of Mexico today? Is it 100% of the volumes?

Our production is currently only in Mexico, with 60% allocated to North America and 40% exported. Regarding comments made by Trump, there are various financial scenarios tied to each tweet. The potential reduction in the corporate tax rate appears to be settling around 20%, which complicates things. I want to assure investors that we are aware of these issues and will adapt as necessary. Our Mexican facility shouldn’t be seen simply as a low-cost option; it is a critical part of our operations, and we've invested heavily over the past 20 years to modernize it. It's the largest 3D printing operation in the world, and it represents a significant asset for us. We will strive to maximize its productivity regardless of external factors.

Great. Thanks a lot.

Hi, good afternoon, and thank you all for taking the questions. I would like to take a moment to discuss the first quarter guidance in light of the company's historical approach to guidance. There have been instances where we believed the guidance could have been slightly higher; however, the company has consistently relied on past sequential and seasonal trends to forecast growth. Looking at the first quarter, though, the guidance for sequential volume growth appears substantial compared to normal trends. Could you share any insights on what might be different this time?

Steve, this is John. We experienced strong volume in Q4, which contributed to robust shipments and revenue performance during that period. This positive trend has continued into January and into 2017. We feel optimistic about our volume situation, which is why we have provided guidance for Q1, and it has bolstered our outlook for 2017.

As you look back at order patterns over the last several months, do you think it might have been in part more of a timing issue where new orders were delayed to the latter stages of the year and into January?

I think you got to look at Q4, Q1, there is some seasonality in a sense of how we go about things too. So I hope we're answering your question, but I know what you're saying is we're probably a little outside of what kind of guidance we've given in the past. I'd just take John's comments in this specific momentum, but also your understanding of the seasonality that says the Q4 to Q1 are the two main variables and why we're predicting that Q1 to be what it is.

Well, don't give me too much credit, Shirley.

This was actually Steve. I think you mentioned this during the last earnings call when you asked if this would extend into Q1, and that's possibly what you're observing.

One last for me. I wonder if you could give us any early reflections on the traction you're getting with the one-week change out; how broadly are you seeing that adopted if it's something you can pick up from your friends in the channel? And what are the early feedback or clinicians thinking about this as in any way changing the way they go about using Invisalign? Thank you.

I believe we've received positive feedback from doctors regarding our product. The data we shared, including clinical evidence from smart track and smart force, supports this. Some doctors are actively pursuing our offerings, particularly those who are significantly investing in this area, which is promising. Others are taking a more cautious approach, which is typical in this industry. Additionally, it's crucial for us to communicate with patients about the availability of these options. As patients inquire about these opportunities during their GP treatments, we anticipate increased enthusiasm and adoption.

Hi, thanks very much. Joe, I believe in your prepared remarks you talked about the design order backlog, and generally coming back to normal. Can you just expand on that? Is there any imbalance in the backlog that still persists in the first quarter? Are you totally back to normal there?

We're back to normal, John.

Great, great. And then John, the '17 outlook commentary that you gave, which was very helpful; can you give us a sense about what the Smile Direct Club contribution would likely be based upon your expectations for either revenue or volumes?

Yes, sure John. It's very minimal, we're definitely ramping up and growing with the Smile Direct Club, but in our numbers it's very, very minimal.

Great, thanks. And just one last one, Joe, you mentioned that DSOs are becoming a much bigger part. Are you seeing that globally or really just in the U.S. and how do you think about that from a mix impact on your business either in terms of ASP or margins? Thanks.

John, it's a good question. First of all, this is more of a U.S. kind of phenomenon; that's not to say that other heavy GP markets like the UK or whatever won't go through this dollar consolidation effect. Obviously, there are some large DSOs out there from a deal standpoint, we obviously incentivize to drive volume, but right now we're not looking at any kind of material effect in the sense of ASP because of the mixture of patients and the things that we offer. So as we go forward, we will be continuing to report on how we work with DSOs and how the things are going, but did you prepare like a model John for 2017, I wouldn't think that you want to handicap it for DSO pricing.

Okay, great. Thank you.

Hi, good afternoon. This is actually Ravi in for Rich. One question on the gross margin, it's a little bit concerning that came in guidance for a little bit later than we had thought. Your base volume guidance is a little bit higher, I'm just wondering if you could plan to take around that.

Yes, from a gross margin perspective, we are anticipating some foreign exchange pressure. We expect average selling prices in the first quarter to be slightly better than in the previous quarter due to the absence of certain promotional activities that occurred in the fourth quarter. Regarding our pricing strategy for 2017, we haven't yet planned any price increases, which is something we may consider later on.

Great, thanks. And then one on this forced into your revenue mix, the scanner business you have this new launch sort of hitting the little drive last year, growing pretty impressively, you know it seems that we shouldn't be expecting that this year in '17. Should we still think of the scanner business as growing faster than the clear aligner business? What commentary can you provide for another backlog?

Yes, definitely we had a great backlog coming out of 2015 into 2016 for iTero, and that contributed to the significant growth. The backlog is much more normalized now for an equipment business for iTero. So for 2017, we expect consistent growth to maybe a little bit better than Invisalign, but certainly nothing like we saw in 2016 because of the backlog.

That's it for me. Thanks.

Thanks, Ravi. Operator, next question?

Great, thanks and good afternoon everyone. Joe, you provided guidance for 2017, and now I would like to ask about 2018 and beyond. It looks like you have a stronger top line for 2017 but also increased spending, so it seems you're reaching a similar operating income, or your absolute dollar amount is close to where we were, albeit through a different approach. Regarding the 23% operating margin, if we take a step back and consider the current state of the business from an investment perspective, when can we expect to see that elusive leverage? You have impressive topline growth, which is significant, but you still fall a couple of hundred basis points short of the lower end of your 25% to 30% EBIT target. Can you discuss how you plan to restore the leverage to the business beyond 2017?

When we talk about restoring leverage, everyone here aims to reach that 25% to 30% target. John, we're consistently presented with significant short-term investment opportunities that can greatly expand this business, and these operating expenses usually result in immediate gains within that year. As we become more established in these markets and spread internationally, we can't just hire salespeople; we need to establish infrastructure and legal support, which requires putting many elements in place to organize the company. While I can't predict 2018, 2019, or future years, I want to emphasize that we have a highly profitable business that generates substantial cash annually. Currently, we are at 23%, which means we're close to the 25% range. If we decided to reduce some investments and accept slower growth, we could reach 27% immediately. However, we believe that continuing to invest is the right path for the business. I would note that these accretive investments typically have a payback period of less than a year to 18 months, and this is reflected in our results and growth. I am very confident that we will achieve the 25% to 30% range; we will keep investing to enhance our utilization rate where it aligns with our business strategy.

Got it, very helpful and fair enough. I guess the second one, unless I miss the EMEA commentary, it seemed like it suggested that trends picked up throughout the quarter, so sort of Q4 orders were higher than shipments. And arguably, that sets up well for Q1 '17 shipments. I believe IGo was launched in the quarter in the UK and Germany, sort of during that fourth quarter. So any thoughts on the early traction or findings from IGo in EMEA? And when do you expect IGo to be released here in North America? Thanks.

We have seen strong uptake of IGo in the UK and are currently working through Germany, where the adoption has been slower than in other countries. We are also expanding into Australia and other parts of the APAC region, and we are beginning to introduce it in certain areas of the United States. We are excited about this product and recognize the need for a simple solution for GPs that allows for quick integration into their workflow. We will actively promote this product globally, especially in North America, as we progress through 2017.

Thank you. Good afternoon. Joe, I'd like to follow up on John's questions about margins. You might not have liked John's question, and you might like mine even less. I'm trying to understand why operating margin has decreased by a couple of hundred basis points this quarter. It appears you're projecting a decline of about 250 basis points for the next quarter, yet your guidance remains flat for the year. I really appreciate the investments you're making; I believe they are the right decisions for the business in 2017 and beyond. I'm just trying to reconcile how, after seeing declines in the last couple of quarters—specifically Q4 and Q1—we can maintain a flat outlook for all of 2017 given these ongoing investments.

Jeff, I've been through several first quarters here, and I understand that this quarter typically experiences more pressure on operating profit and expenses. We make investments for the remainder of the year, which creates this situation. Comparing Q4 to Q1 is always challenging in terms of operational performance. Regarding John's question, it's one we've considered regularly, and I want to assure you that it doesn't unsettle us. It's a valid question that we grapple with annually. As we look ahead to next year, we are maintaining our projections for operating profit, which are largely in line with our current expectations. This year's forecast appears solid and aligns well with our strategy. I would emphasize that while we aim for operational profit to reach around 18% next year, we are focused on maintaining strong margins and cash flow for the business. We are keen to seize every opportunity available to us and hope that our efforts are communicating our intentions effectively.

That's helpful. And for my last question, could you remind me, John, does the recent acceleration in peso weakness contribute positively to our margin? I believe it does, but I would appreciate your confirmation on that. Additionally, regarding average selling prices, I know this has been brought up a few times, Joe, but I'd like to revisit it; they have been declining over the past few years, and while the promotional activity and utilization rates indicate that targets are being met, which is positive, you mentioned that DSO is flat for the year. This represents a shift in the trend compared to the past few years, so I would like to understand what factors are contributing to the stabilization of those average selling prices after a couple of years of decline.

Just to answer your question on the peso; yes, the dollar strengthening against the peso is favorable for us as of the cost there. On your DSO question, I'd say don't misinterpret my answer on the DSO. The DSOs, they have some pretty good targets in a sense that they could grow; they will get a commensurate kind of discount from Invisalign standpoint. What I'm saying is in the whole mix of products that we have in North America, don't overweight that falling down the overall total. But you will see the DSOs grow aggressively, they will be rewarded for it, and so we'll continue to grow from there. From an ASP standpoint, I think you have to remember we got prices last year too, and that helps us. FX didn't help us in the fourth quarter and that way also, so we're playing in a bandwidth here, you know, price increases, FX of $20 or so.

International mix.

So I think don't anticipate ASPs to stay pretty much constant from year to year. We still think about that but there is a lot of noise in that from the oceans that we do, and things like Shirley mentioned. But we're counting on it being pretty level as we go into 2017.

Fair enough, thanks guys.

Thanks, good afternoon everyone, congrats on the results. So just for us, I guess a couple of quick questions here, just on the litigation news that was in the other press release today. Just first on that patent lawsuit in the UK, we don't have as much background on UK market dynamics; so I guess I'm just wondering if you are able to provide any current approximate market share splits maybe for you and others such as ClearCorrect in that market? And then I have a follow-up after that.

As far as I can't give you any answer, but it's not material in the sense of market share in the UK. You know, there are entities over in the UK, I don't want to be specific when it comes to direct competitors, but it's a model that they're working and trying to keep things together, and we will continue to be aggressive in defending our IP.

Okay, and then as far as the implications of refiling the action in the federal court in Houston, again without having the full historical background at my fingertips; is this still related more to the patents that are set to expire this year in the U.S. or is it more geared towards U.S. patents that go well beyond this year?

The patents that are before the court in the ClearCorrect action are a combination of patents that will expire in the next couple of years and also patents with a longer life span. Sure. I mean once the patent expires, it just means that the art disclosed in the patents can be freely practiced by anybody in the market. It doesn't make up for infringement during the life of the patent for which anybody would be responsible for damages.

Okay, got it. Okay, maybe I'll just follow-up offline with some additional questions on that. Thanks.

Thanks. So I've got one here. EMEA growth continues to be very strong; how much of that growth is attributed to the expansion into non-core markets?

You mean non-core markets, as in other countries? What do you think it is?

Yes, correct.

I'd say it's minimal at first. I mean we look at India; we're moving in from different places, so I wouldn't look at that as material. But I might look at Nordic countries in Europe that we've done that three or four years ago, and that starting to become important. So again, as we talk about moving into new markets, just know we laid out a lot of infrastructure, spending money to put salespeople in place, and then you start to see almost geometric growth in those areas, but that's not what I would say is driving growth in any way from the current forecast we're getting in for 2017 or what we saw in 2016.

Okay. And then also, you guys pointed out low volume doctors in Q3; how did those guys perform in the quarter?

They performed well. After experiencing an issue in the third quarter, they bounced back strongly. You could see the gross profit in the United States move from 3.1 to 3.2 in terms of utilization. While that may seem minor, it's significant when considering more than 150,000 patients.

Operator, we'll take one more question please.

Two things; one, Joe, you mentioned in the script something about being improved evidence of clinical efficacy, and I'm wondering where that came from and what impact that's having because back in the day the pushback from Orthos was all about a lack of clinical proof here, and so that sounds like a trend in the right direction.

I first say you know not to be smartass during these things, but we spent in the course of 20 years a billion dollars in trying to learn and accomplish significant predictable orthodontic movements, and increasingly, as you've seen our G-series, from G3 all the up to G7, we just continue to improve that capability year in and year out. Depending on when you take, when you go back in history, many of the people in the orthodontic community, they have gone way up, and they wanted their competence. What's really critical or in general how you finish, and they have confidence that they can really finish and what more we hear is that they have as much confidence in how this line can finish as they do in larger cases. So I hope I'm answering your question?

No, that's right. No, I appreciate it. And don't worry, you're not being a smartass, I appreciate that. Second thing, you were early on this production shift, moving closer to end markets even before the election result made it a headline issue; but given all of the comments that you made about how much you've invested in the high tech it is, what are you learning about the shifting to other countries now that you're actually in the process of doing it in Asia and Europe? What have you learned? What's the price, if any?

Honestly, Jeff, I have experience in other businesses with relocating products and facilities. What I've learned is that you can’t just transfer production from one unit to another; each location has its own culture that must be considered. For example, in APAC, we might explore different types of automation in our production setup due to varying labor standards compared to Mexico. Our infrastructure poses challenges, particularly with IT, and we need greater flexibility when moving from a single location to a broader area. Our customers’ excitement, especially regarding tools like ClinCheck and our ability to connect more closely with clients in China through Mandarin conversations, is significant. The interactions between Costa Rica, China, and other parts of APAC have generated enthusiasm from our customers to enhance efficiency and bring a regional-cultural dimension to our business. These insights aren't surprising to me, but I am pleased with how well customers have embraced them. We have the flexibility to adapt our manufacturing processes and overall value chain, including OA and clinical IT, to improve for our customer base, which is a positive outcome.

Great, thanks so much.

Thank you everyone. This concludes our conference call. We appreciate you taking the time today. We look forward to seeing you at upcoming conferences including Leerink and ROTH, as well as the Chicago Midwinter Dental Show at the end of February. If you have any follow-up questions, please contact Investor Relations.