Shirley Stacy – Vice President, Corporate Commutations and Investor Relations Tom Prescott – President and Chief Executive Officer David White – Chief Financial Officer.

Jon Block – Stifel Robert Jones – Goldman Sachs Glen Santangelo – Credit Suisse Jeff Johnson – Robert W. Baird Brandon Couillard – Jefferies Jeffrey Matthews – Ram Partners Steve Beuchaw – Morgan Stanley John Kreger – William Blair.

Greetings, and welcome to the Third Quarter 2014 Earnings Conference 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. I would now like to turn the conference over to your host, Shirley Stacy.

Thank you, you may begin..

Good afternoon, and thank you for joining us. I’m Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today’s call is Tom Prescott, President and CEO; and David White, CFO. We issued third quarter 2014 financial results today via MarketWire, which is available on our website at investor.aligntech.com.

Today’s conference call is being audio webcast and will be archived on our website for approximately 12 months. A telephone replay will be available today by approximately 5:30 PM Eastern Time through 5:30 PM Eastern Time on October 30th.

To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13591983, followed by pound. International callers should dial 201-612-7415 with the same conference number.

As a reminder, the information that the presenters discuss today will include forward-looking statements including without limitations, statements about Align’s future events, product outlook and the expected financial results for the fourth quarter 2014.

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, 2013 and our Form 10-Q for the third quarter of fiscal 2014.

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.

We’ve posted a set of GAAP and non-GAAP historical financial statements including the corresponding reconciliations and our third quarter conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I’ll turn the call over to Align Technology’s President and CEO, Tom Prescott.

Tom?.

Thanks, Shirley. Good afternoon, everyone, and thank you all for joining us. On the call today, I’ll provide some highlights from our third quarter and briefly discuss the performance of our two operating segments; Invisalign clear aligner, and scanner and services.

I’ll also provide some color on our customers as well as progress in our geographies around the world. David will then share more detail on our third quarter financials and discuss our outlook for the fourth quarter. Following that I’ll come back and summarize a few key points and open up the call to your questions.

Q3 revenues have $189.9 million increase, 15.4% year-over-year driven by higher Invisalign volume across all customer channels and geographies with continued strong growth from our international doctors. Scanner and Services revenues of $11.7 million were up over 7.1% year-over-year.

As a result of better than expected gross margin and management of operating expenses, EPS was $0.03 above the high end range of our outlook. Our Q3 results reflects continued execution of our strategic plan including our three key growth drivers which are; market expansion, product innovation, and brand strength.

I’ll provide a brief update on each of these before discussing our results further.

First, market expansion, this strategic growth driver encompasses the many ways we are working to open up new geographies such as the additional countries in the EMEA region or that were recently added to our direct sales coverage area, expanding the adult treatment category for those consumers unwilling to seek orthodontic treatment with brackets and wires, and increasing our share of teenage market, the largest segment of the orthodontic market worldwide.

Our months of June, July, and August are typically a seasonally strong period for Teenage Orthodontic Case Starts in 20.4% year-over-year growth of Invisalign teenage cases in Q2 marked a very good start to the summer.

This continued into Q3 and resulted in a sequential increase of 17.4% for a total of 33.2000 [ph] teenagers starting treatment with Invisalign worldwide. On a year-over-year basis the total number of teenagers in Q3 starting treatment with Invisalign increased 14.8% reflecting slightly less effectiveness of our teen promotions set in the prior year.

On a combined basis, teen volumes for Q2 and Q3 were up 17.3% year-over-year which may suggest there was an earlier start to the teen season than we previously experienced.

Our second growth driver is product innovation, which aims to create greater doctor preference for Invisalign through a focus on innovation, by delivering new features and functionality that increases our doctor’s confidence to treat patients with Invisalign more often and on more complex cases.

Earlier this year, we launched Invisalign G5 for deep bite. We continue to receive positive feedback from our customers, specifically North American orthodontist on their overall awareness of Invisalign G5 and their intentions to increase their use of Invisalign for those types of cases.

We expect this trend to increase overtime as we continue to reach out to train and support our customers, and are confident that Invisalign G5 will help drive further adoption of G5 cases. We also continue to receive positive feedback on ClinCheck Pro with 3D controls which was launched in North America in Q1.

ClinCheck Pro provides the doctor with more precise control over the final tooth position helping them better achieve their treatment goals. ClinCheck Pro becomes even more valuable offering even greater utility for our doctors as we further broaden our clinical applicability by delivering new solutions for more complex cases like Invisalign G5.

Our customers also find that ClinCheck Pro serves as an efficient means of communicating their treatment goals for final tooth position. Since launch we have seen strong adoption across North America and expect a similar response from our international doctors when ClinCheck Pro is launched outside the US in Q1 of next year.

And finally brand strength, our third key growth driver. We continue to make progress in building and leveraging the strength of the Invisalign brand, to create consumer demand and drive purchase intent among consumers in more and more countries worldwide.

This is most obvious here in North America, our largest market for consumer marketing, we’ll start there. In Q3 we created more than 850 million consumer impressions through paid media reaching women, moms and teens across the country.

Much of our Q3 traditional media, PR and social media activity focused on reaching teens and moms during the busy son, during the busy teen summer treatment season. Whenever possible, we encourage our customers and their patients to share their personal stories on how their Invisalign treatment helped transform their lives.

As consumers we all benefit from real people sharing their experience, and this summer that included partnering with YouTube personality, Amanda Steel, to share her Invisalign treatment joining with other teens.

Her initial Invisalign post have garnered more than 1.5 million video views and impressive Instagram following as she documents her experience with Invisalign.

In addition, an extensive media tour with popular technology journalist, Jennifer Jolie, reached more than 100 million consumers through 36 media placements, including national placement in Jennifer’s USA J column.

Our transition to back to school messaging for moms helped them cope with their kids being back in the classroom included our first efforts on a new teen confident study we commissioned to examine the impact of braces on teen self-esteem and confidence.

Key takeaways from the study revealed that teens with Invisalign treatment are more confident and teased less often than teens that are in metal braces; point is this really matters to teens and their parents and is one less thing for them to worry about.

Switching to EMEA, our new, more localized consumers initiatives and continued integrated media activities created over 51 million impressions throughout key markets in Europe in Q3.

These targeted social media advertising and media engagement activities have led over 100,000 people to search for Invisalign provider during Q3, and we have seen the European Invisalign social media community continue to grow. We now have a fan base of over 100,000 consumers with highest engagement scores we have seen this year.

Introduction of our real patient campaigns continue to be effective and we have recently partnered with UK Olympian Cyclist, Laura Trott and Jason Kenny, to share their Invisalign journey. This partnership has resulted in over 60 million opportunities for consumers to see the Invisalign message across the UK.

In combination these three key strategic growth drivers; market expansion, product innovation, and brand strength are proving overtime to support growth in our most important country markets or helping us open up new ones. Let’s now touch on the progress we’re making in these regions, starting with North America.

Our Q3 North America Invisalign volume was up a little less than 1% sequentially and 6.6% year-over-year reflecting a softer market environment that we originally expected, especially for North America GPs.

On a sequential basis Q3 reflects growth from North American orthodontists offset by an expected decline among North American GPs who typically have fewer days in office during the summer.

On a year-over-year basis, both customer channels were up and growth was driven primarily by increased utilization of North American orthos, as well as by continued expansion of our GP customer base.

Despite solid progress in North America in a number of areas, Invisalign growth based on some of the initiatives that were expected to accelerated option has not occurred the pace we expected. While we continue to build upon our strong base of GP customers, we are not making enough progress in growing GP utilization.

We will continue to work on overcoming the challenges we see in keeping these practices which provide a wide range of dental services, fully engaged in treating modern orthodontic cases with Invisalign. We have a number of opportunities to improve our effectiveness with these extremely important customers and expect to make progress overtime.

You may recall between our Analyst Day presentation commentary on the GP market, we discussed the emergence of corporate owned multi-office Dental Service Organizations or DSOs and their long term potential as partners.

While we’re still early in our engagement in many of these players, the training and program rollout for this initiative is now in progress. We are working to establish the systems and processes, the best training implement clinical and practice development programs in the DSO environment.

In Q3 part of the significant year-over-year growth in new Invisalign doctors included the number of DSO clinicians we trained. It will take some time to help these organizations ramp their volume given the need to engage doctors and practices across a wide geographic and Invisalign experience range for the systematic approach.

We see a tremendous potential to provide practice building impact to these groups and are deploying the resources to do so. Q3 was another strong quarter for our international business, especially in the Asia Pacific region.

Total international Invisalign case volume for Q3 was essentially flat sequentially despite the typical slowdown in Europe follow up 27.8% year-over-year. In EMEA, Invisalign case volume increased 20% year-over-year.

Our strong performance was driven by a combination of increased utilization by orthodontists in all countries made a continuous effort to add new Invisalign trained doctors.

For the significant number of training and education events planned for delivery through November, we expect the trend to continue through the year end as doctors continue to increase their confidence in Invisalign treatment outcomes.

In the APAC region Invisalign case volume increased 43.3% year-over-year and all country markets achieved record shipments. China continues to deliver above our high expectations doubling case volumes when compared to the same quarter last year, is now roughly equivalent size to our business in Japan.

We also continue to see strong growth from Japan, Australia and New Zealand, as well as the Southeast Asia countries. This is driven by an expanding customer base coupled with higher utilization which reaffirms the value investing in the right coverage, as well as the importance of product evolution to treat higher complexity cases.

Over 502 first-time submitters from the APAC region in the quarter, an all-time high as our training programs continue to evolve.

Turning now to our scanner business, for Q3 our scanner and services business revenues were down 8.3% sequentially, consistent with our expectations for lower capital equipment sales in the summer, and yet were up 7.1% year-over-year.

As part of our commitment to providing the greatest utility to our restorative dentist customers, in Q3 we expanded the workflow options for our iTero intra-oral scanner with DENTSPLY Implants Atlantis Custom Abutments and Atlantis Custom Abutments.

iTero certified kind of activity for customer implant abutments help simplify the treatment process for clinicians by reducing number of required patient visits, saving valuable time for the practice, and ensuring an improved patient experience.

Intra-oral scanning also helps improve the treatment workflow offering process efficiency for dental laboratory that practices working with. Our scanner business continues to have a positive impact on our Invisalign franchise helping to drive utilization, especially among our North American orthodontist customers.

For Q3 the percentage of Invisalign cases submitted digitally from scanner North America rose to 34% compared to 32.7% in Q2 and 25.3% in Q3 a year ago.

To take advantage of the increasing trend towards digital dentistry we will continue to do everything we can to grow our iTero installed base with a goal of creating additional leverage for the Invisalign business. This improves the working with other intra-oral scanning companies to enable interoperability for use with Invisalign treatment.

This line of interoperability is good for our customers, their patients, and for extending the Invisalign franchise. And with that I’ll now turn the call over to David for review of our Q3 financial results.

David?.

Thanks, Tom. Before I get into the details, I’d like to note that unless stated otherwise, all of the financial information I will discuss will be presented on a GAAP basis. With that lets review our third quarter financial results.

Revenue for the third quarter was $189.9 million, down 1.4% from the prior quarter, consistent with normal Q3 seasonality, and up 15.4% from the corresponding quarter a year ago. Third quarter clear aligner revenue of $178.1 million was down 0.9% sequentially, and up 16.0% year-over-year.

Q3 ASPs were down sequentially $11, primarily due to foreign exchange losses related to the weakening euro which primarily impacts in September. I’ll make further comments about the impact of currency later.

Our year-over-year revenue growth reflected Invisalign case volume growth across all customer channels as well as favorable ASPs from higher mix of Invisalign full products and a higher mix of international business.

For the third quarter, total Invisalign shipments of 119.6000 cases were flat sequentially reflecting increases from North America ortho case volume and Asia Pacific growth offset by expected seasonal decreases from North America GPs and EMEA.

Year-over-year growth of 11.9% reflects continued strong international growth, increased utilization from international doctors, and North American orthos, as well as expansion of our customer base. For North American orthodontists Q3 Invisalign case volume increased 5.6% sequentially and 10.6% year-over-year.

For North American GP Dentists case volume decreased 4.6% sequentially and increased 2.3% year-over-year. For international doctors Invisalign case volume decreased 0.7% sequentially and increased 27.8% year-over-year.

In Q3, we added 1125 new North American doctors and 1400 new international doctors, a year-over-year increase of roughly 42% and 60% respectively. In Q3 Asia Pacific trained total of 745 new doctors, the most ever in a single quarter, with 50% coming from China.

In total for Q3, we added 2525 new Invisalign doctors worldwide, a year-over-year increase of 51%. While the number of doctors trained was relatively flat on a quarter-over-quarter basis, we normally experience less training events in the summer quarter. In Q3 total Invisalign utilization of 4.4 cases per doctor increased slightly from 4.3 in Q3 2013.

North American ortho utilization of 8.8 was a record, an increase from 8.4 in the prior quarter. North America GP utilization of 2.8 decreased slightly from 2.9 in the prior year, and international doctor utilization of 4.3 increased from 4.1 in Q3 2013.

Third quarter revenue for our scanner and services segment was $11.7 million, an 8.3% sequential decrease as expected due to lower capital equipment purchasing during the summer months. On a year-over-year basis, our scanner and services revenue increased 7.1%, reflecting increased ortho care services offset by slight decrease in scanner volume.

Moving on to gross margin. Third quarter overall gross margin was 76.4%, up sequentially 0.8 points and up 0.4 points year-over-year. Clear aligner gross margin for the third quarter was 79.2%, up 0.4 point sequentially and down 0.7 points year-over-year.

This sequential increase was primarily the result of fewer training events in Q3 and lower freight expense. The year-over-year decrease was primarily the result of the benefit recorded in the prior year relating to the change we made in our mid-course correction policy in June 2013, this was partially offset by higher ASPs in the current quarter.

Q3 gross margin for our scanner segment was 33.5%, up 4.0 point sequentially, and up 11.3 points year-over-year. The sequential increase was primarily the result of favorable product and service cost.

The year-over-year increase was primarily the result of more favorable product cost and the prior year’s results being unfavorably impacted by the sale of older and of light products. Q3 operating expenses were $93.5 million. On a sequential basis, operating expenses were down $3.2 million, due primarily to lower sales and marketing spend.

Also recall that operating expenses in the prior quarter, Q2 2014, benefited from a $1.2 million refund of medical device excise taxes that we paid earlier this year in Q1.

On a year-over-year basis Q3 operating expenses were up $9.9 million, incidental for the growth of the business which primarily relates to continued market expansion and new and existing markets and geographies. Our third quarter operating margin was 27.1%, up 1.8 points sequentially, and 1.9 points year-over-year.

Our quarter-over-quarter improvement was primarily driven by higher Invisalign gross margin and lower operating expenses as just described. Other income and expense for the quarter included a charge of approximately $2.1 million associated with foreign exchange losses which primarily relate to the decline of the euro to the US dollar.

Including this impact, and the euros impact on revenue, net of operating expenses and taxes that amounted to approximately $0.02 per share. With regards to our third quarter tax provision our tax rate was 22.8%. Third quarter diluted earnings per share was $0.47 compared to $0.43 reported in Q2 and $0.42 reported in the same quarter last year.

Moving onto the balance sheet. For the third quarter our accounts receivable balance was $130.0 million, down approximately 0.7% sequentially. Our overall DSO was 62 days, up one day sequentially and up two days over the same period a year ago.

Capital expenditures for the third quarter were $7 million, primarily relating to manufacturing capacity additions. Cash flow from operations for the third quarter was $67.6 million, and free cash flow for the third quarter defined as cash flow from operations less capital expenditure amounted to $60.6 million.

Cash and cash equivalents and marketable securities, including both short and long term investments were $561.5 million, this compares to $472 million at the end of 2013, an increase of $89.5 million.

During Q3 2014, the company repurchased 500,000 shares of stock including 364,000 shares relating to the completion of the company’s previously announced $70 million accelerated stock repurchase and 136,000 shares amounting to $7.4 million in open market repurchases.

Repurchases are part of Align’s three-year $300 million stock repurchase program announced on April 23, 2014 with $100 million of that amount authorized to be purchased through April 2015. Year-to-date, the company repurchased 1.5 million shares for $77.4 million.

The company anticipates repurchasing the remaining $22.6 million of the first $100 million of the authorization over the next six months. Let’s now turn to our business outlook for the fourth quarter and the factors that inform our view.

Fourth quarter is typically a seasonally slower period for North America orthos as fewer teenagers start orthodontic treatment after the school year started. This was typically offset by North American GPs as they recover from a slower summer season to the vacations.

In aggregate we expect Invisalign volume for North America to be up sequentially in Q4. Our Q4 – our fourth quarter has historically been a stronger quarter for our international doctors as they rebound from a seasonally slower summer. We expect Invisalign volume for international to be up sequentially in Q4.

Our scanner business performed very well this past quarter despite it being a seasonally slower period and similarly, we expect our scanner volumes to be up sequentially on a stronger Q4.

With this as a backdrop, we expect the fourth quarter to shape up as follows; Invisalign case volume is anticipated to be in the range of 125.1000 to 127.6000 cases, an increase of 4.6% to 6.7% from Q3.

We expect net revenues to be in the range of $194.9 million to $199.1 million, an increase of 2.6% to 4.9% from Q3 reflecting lower ASPs primarily as a result of a weaker euro. We expect gross margin to be in the range of 74.2% to 74.6%, down sequentially from Q3 primarily reflecting slightly lower ASPs as just mentioned.

Increased rate cost for higher international mix and increased training expense for Q4 which is seasonally a stronger training quarter. We expect operating expenses to be in the range of $94.7 to $95.5 million. This is higher when compared to Q3 reflecting continued investment in our strategic growth drivers.

These increased investments are partially offset by the translation of our international SG&A expenses at weaker exchange rates. Our operating margin should be in the range of 25.6% to 26.6%. Our effective tax rate should be approximately 23%. And diluted shares outstanding to be approximately $81.9 million, net of anticipated stock repurchases.

Taken together, we expect diluted EPS to be in the range of $0.47 to $0.50. With that I’ll now turn the time back over to Tom for closing comments..

Thanks, David. We are pleased to have delivered another good quarter with progress across the business paced by the strong growth in our EMEA and APAC regions. North America delivered a solid result in a softer market and yet we know we can do better.

Despite of challenging global environment we are confident we can continue to deliver growth rates at multiples above market growth in every geography we serve.

Our confidence is based on continued strong execution of product innovation combined with continued investments in the right sales coverage and go to market initiatives each of which become far more effective when we add in high impact that’s why our marketing campaign. The Align team is excited about the opportunities ahead of us.

We look forward to a very busy fourth quarter with important trade shows, major customer events like our North America orthodontic summit and a full calendar of new customer training events. We look forward to seeing many of you at upcoming investor conferences and to sharing our continued progress when we discussed our UN results in late January.

That’s it for now, and we can move to take your question.

Operator?.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Jon Block with Stifel. Please proceed..

Great, thanks. Excuse me guys, good afternoon. I think the first one, David just for you, maybe a two point question. One, if you can comment at all on trends throughout the quarter, maybe what you saw. And then to the guide, can we have some more detail there.

It just seems to be like a big sequential step up, you called out North America being up 4Q versus 3Q, but when I look back in 2012 you were down 3% sequentially, 3Q to 4Q last year you were flat in North America sequentially, and you’re still positioning this is a tough environment here with a slower return on some of your investments.

So what gives you the confidence North American cases will be up 3Q to 4Q? Thanks, guys..

Okay Jon, back to the first question on trends on Q3. I don’t know if there is anything peculiar in terms of trends versus any other Q3 we’ve experienced.

I think one – perhaps one anomaly that Tom mentioned in his prepared remarks had to do with our team season potentially being a little bit earlier in the year than what we saw last year since we got a very good uplift in the second quarter but the uplift in the third quarter is a little bit soft than what we have anticipated.

But other than that I think the case – our business is fairly linear to the quarter, and in summer months typically we see a soft August, particularly in the international area, particularly EMEA as people are taking vacations and closing their offices and so forth.

And then we hold our breadth for a little bit, you might say for September waiting for things to kind of pick back up as people wake up from vacation to get back engage. But other than those trends there I’d say fairly consistent with third quarter at least a year ago and other quarters that we’ve seen.

As it relates to Q4 North America, couple of things; if we look at our three-year average, sequential average it’s typically been up – just a little bit under 1% quarter-over-quarter.

And as we look at North America and our guidance, I’m sorry, it has typically been up around – roughly flat quarter-over-quarter from Q3 to Q4 and our guide is up, I think want to say about 5% or so.

One of the things that influences that is, we’ve – Tom talking about DSOs and so as we engage with more of those selling organizations and so forth, we expect to see uplift as those doctors are trained and as they become engaged with the Invisalign product, so that’s part of the uplift works that can be seen in the fourth quarter.

And we’re continuing also with some of the promotions we ran in Q3, expecting them to receive some protraction in Q4. And we’ll also see some more immediate spend in Q4 as well. So those things tend to give us a little bit more of a seasonal uptick in Q4 from Q3..

Okay..

Jon, if I pile on for just a second?.

Absolutely..

I mean, the couple of year’s you called out were really non-linear for us and the reason why we were sequentially down going into – in twelve, especially and there were couple of other ones because volume disappears late in the quarter and we went into the quarter with a little less flow of business.

So when David speaks to some reasonable linearity, not as strong as we like in North America, that’s actually a good thing. And we’ve been – linearity means it’s building so that we’ve got solid progress going in the quarter which means for the first months of that quarter, the pipes reasonably fall.

With all that said, the second thing is we continue to build in Asia and is that becoming more meaningful in total volume, that has a bigger contribution totally. And all this time so far in Europe that they continue their trajectory, our doctors are back to work and building and despite more challenging economy in the new G here there solid.

So I think when you put all of building blocks together with the same methodology we always use, reasonably confident that we can go deliver that guidance..

Okay, that was very helpful. And Tom just as a follow up, maybe at a high level, you can just speak to return on investment in sales reps, I guess where I’m going with this is, the North America GP market is just proven to be challenging and you guys have thrown more bodies at it over the past 18 to 24 months.

Of course four five years ago I got to bring up the pay worthy proficiency program, where I’m going with this is, is there an opportunity to redeploy investments elsewhere, you’re doing so well in teen, international is crushing it.

You sort to say, you know what, GPs will get some growth there as we add and train new docs but let’s throw bodies and investments elsewhere that seems more ripe for accelerating growth. Thanks guys..

Sounds like you’ve been sitting in some of our meetings as we do resource allocation, hard choices. Let me start with your very last point around DSOs, that is the place we’ve deploy more resources in terms of program and approach and training, and we are getting some early traction there.

It takes time since they have anywhere from dozens to hundreds of offices scattered across the country in some cases, and as we activate we want them to have high quality capability when that patient comes in even if this is a new line of practice for them. So these are all very different the way they work but we are deploying a way to do that.

So that’s one example of deploying additional resources there.

Secondly we are deploying more resources and our really fast growing geographies like China, we don’t have an annual resources allocation discussion with an annual plan, we look at that every quarter literally, and if they can keep delivering on their plan we give them more resources against a game plan. So that’s going on as a consistent theme.

To some extent the same is true in EMEA with that more frequent relook at resource allocation; they earn the right to get more headcount, a little more for consumer, and in some cases acceleration of a key product initiative.

When you come back to North America, we actually are making progress in GP utilization; it’s just that it’s hard to see against the 20,000 or more GPs that we do business with at some level of frequency.

And if I go back to late last year when we rolled out in pilot our new fundamentals training course, we had hopes that would help and in fact, in general these are smaller attended groups, more intensely supported by coordinated marketing and sales, and we can look back and see in virtually every case the doctors, the GPs that go to those classes start their cases, their first case is much sooner and they adopt more quickly, kind of the angle of attack is better.

So that’s really where we already have redirected some of the selling time and effort, away from the mass towards those GP practices that want to make it some more of a priority, and that’s one reason why the tail is on utilization down.

But again, I’ll step back that – the strategic importance of the GP market is high for us, we do know that it’s going to take a while and it’s going to take all three of our leverage to do it but your point is well taken, our job is to thread the needle between all the investment choices we’ve got and managing the combination of short or tactical investments to drive the business in the very near term against things that are very, very important to our owners for the long term, and that’s the line we’re trying to walk..

Sure. Thank you, guys..

Thank you. Our next question comes from Robert Jones with Goldman Sachs. Please proceed..

Great, thanks for the questions. Just looking out of the 4Q and the guidance, the cases certainly there seem stronger than what we’re looking for. I know you guys just commented on that but I guess I would say at those levels I think we would have been looking for sales range to be a touch higher than what the guidance is.

I was wondering if you guys should maybe just spend a little bit of time talking about your expectations for ASP growth from both a product level, and then also from a geographic standpoint just given some of the trends we saw in the quarter..

Bob, I’ll start it with few broad strokes and then I’ll let David fill in behind that with some of the facts that we laid out in the framework for guidance. First would be we expect a little bit of mix shift, we’ve already got a little bit of FX headwind, I’m not going to speak to it, everything is captured in guidance.

So that believes a little bit right off the top but we expect a little more mix shift as the team is going a little more aggressively after i7 and i14 in EMEA and Express 5 and Express 10 in North America, and part of that is promotions, part of that is little bit of increasing interest from our GPs and some orthos.

So whether we never quite get that right it has been pretty stable, if that stays where it is the mix will be a little higher and we’ll have little more revenue lift out of that but as we see it today going in, our internal outlook which informs us says there is a little mix shift and there is some promos with that.

Other than that those are the two big factors and I’ll let David build on that just a little..

Yes, just to add to the foreign exchange piece of it.

Most of our international business in EMEA is built in euro, and if you’ve tracked currency trends, I’m sure you have, we’ve seen some big moves in that just in the last couple of months but principally beginning in the early September and that’s really influenced our third quarter in amounts that we’ve not seen historically or in the company for a long time at least.

And so as we look about that going forward certainly that does have some impact on ASPs going forward when you translate those back into dollars and that has put a little bit of you might say headwind into the revenue guide for Q4 but it is included in the guidance, I’ll make that clear.

But one point I think to make a note of is the fact that when you look at the countries that we’re selling internationally, most of those revenues are denominated in local currency and we incur our selling, marketing and to some extent some G&A expense locally in those markets as well.

So while it puts a little bit of headroom you might say or headwind into the top line, we have somewhat of a natural hedge to some extent given that the expenses will translate back at a lower amount as well, and then when you net that of a tax it mitigates a little further.

So if you look at our Q4 guidance so forth, about $0.01 a share roughly is the impact of currency relative to where it was earlier in Q3..

That’s helpful and that might actually partially answer my follow up question which was if I look at SG&A it was actually little lighter than what we were looking for and yet you seem to be rolling out a lot of new initiatives to reach the consumer.

I guess I was wondering kind of outside of FX, is there any level of efficiency that you guys are realizing and getting the word out or should we be thinking about investment in sales and marketing, kind of reaccelerate it back to more normal levels from this point forward?.

We’re always looking at new investments and we’re constantly evaluating new opportunities to invest in the business whether it’s on the product side or whether it’s on the sales or marketing side. So I don’t think there is anything new there.

Clearly, one of our objectives is to – as we penetrate further and further into the market one of our objective is obviously is to get with better adoption to get better field efficiency you might say with the people we have out in the field that are in that selling position.

But if you look at the Q3 expenses as you looked at – some of that is just some seasonality, lower media spend in Q3 is very typical for us and the fact that payroll tax is being enrolling off for some of the employees here in the US, and so those are some of the contributing factors why Q3 was little bit lower..

Bob, before we may finish beating this one to death, there are a couple of examples, explicitly on marketing spend that we do get efficiency out of, and I’ll give you a small example but it’s big dollars.

We can lock in especially when the markets will softer for media, we can lock in traditional media out multiple quarters, sometimes it’s far as a year to get placement rates in the programs that fit with our brand, and we can get literally millions of dollars of improvement or leverage out of those working media dollars.

And then in addition one of the things that comes with a little bit of math now that in this line it’s becoming a well-known brand at least in North America and we’re taking first steps in Europe is that we call paid media, traditional media, unpaid media is people doing their own videos on YouTube and talking about on their blogging how it changed their lives.

So we get that, that all goes into the impact in search and impressions that people form in total and in many cases that has greater weight than paid media, so we tend to tune off ads and listen more carefully to what I'll call honest conversation.

And that is the place that efficiency shows up for us and we see some of that in North America for sure, starting to see a little bit on the digital side in Europe, again, we’re still earlier days there but that’s very specific example of some leverage..

That’s helpful, thanks so much..

Thanks..

Thank you. Our next question comes from Glen Santangelo with Credit Suisse. Please proceed..

Yes, thanks. Tom, I just want to follow up on this North American GP issue just one more time.

I mean it’s clear this seems to be sort of the onetime the ointment for you guys in terms of achieving higher growth and I’m just kind of want to get your perspective, I mean do you feel at all concerned that maybe the North American GP market is becoming maybe a little bit saturated with your product? Do you feel like you’re choking on large numbers in this market or you just really feel that the company hasn’t really executed that well in this customer class and you just – you don’t need to do a better job?.

I’ll start with that last part and say yes, we can do – I think we’ve executed well, there aren’t that many companies that have built a great standalone business with the North American GP given the enormous amount of fragmentation.

But I’ll go to your fetch, so I’m saying yes, we can do better, we have lots of ideas how to do that, we’ve got experiments going on all over the place to make that happen.

The saturation point, it’s actually the opposite, we are so far from saturation, in fact even our – even routine customers do Invisalign almost as a hobby in GP, even our biggest customers on the GP side have multiple practices and Invisalign is still a very small fraction of the 3000 to 5000 to 7000 procedures they do a year even if there are multispecialty office.

And so our job is becoming more relevant and meaningful and making Invisalign which is orthodontics which isn’t as typical a part of a GP practice worked towards mainstream.

We know what success looks like Glen, I mean you’ve been an observer here, not just us but others for a long time and we know how to replicate that success, we have to do it office-by-office across the country and I think we know how to do that, it just takes time.

I’ll point back to a comment I made earlier, we’ve completely overhauled our clinical education frontend and it’s working much better, that’s the foundation.

We wind up with the rep meeting the doctor literally within a week or when they were in class where they meet them, and they were out there working together to get the staff and everybody else onboard, in many cases they bring the staff with them to training.

So the goal is to get the whole team organized and involved versus the doctor coming back from a weekend program on their own and it’s working better.

Second color maybe for the long term is building our core prices to be with DSOs that are growing fairly rapidly, very business focused and increasingly upscale and where we can bring the same brand leverage for individual practice, we can leverage that much more broadly on a regional basis with a partner, a significant partner who understands compliance with programs.

So there are a whole lot of things we’re working on, it will take time to move the needle to where you will see an utilization number but we do know what success looks like. I’ll go back, we can do better..

Tom, just maybe one more point that I want to make. Obviously everyone is focused on the uptake in the case volume in Q4 guidance and I think in your remarks you sort of said that Europe has continued its trajectory so far here in the fourth quarter from the third quarter.

Is there any comment to make in North America that regard? Have you seen an uptake post this summer long in the North American GP market?.

Yes, I think as David said it’s for the framework for thinking about guidance was – was that these are GPs returning, in fact orthos maybe two minute down a little bit, start treating more adults after the summer rush for teens.

GPs offices get busy again after Labor Day and that’s in our thinking, we expect GPs offices to pick up, we expect EMEA to get busy, they came screaming back in September and that push is on until the end of the year, and again, APAC is still running like the dickens.

So all those factors go together and are reflected in the guidance that David spoke..

And maybe just one….

I was just going to say APAC, APAC just kind of pile on a guess, we saw a very strong September in APAC which is very encouraging for us as we think about Q4..

Okay, maybe if I just ask my last question on the margin side..

This is your last one Glen..

This is number two..

I’ll jump off; I’ll give others a chance..

No, no, no. It’s okay, go ahead..

I just going to ask on the margin side, I mean basically this is the second best operating margin we’ve seen in the company’s history, at least as long as my history with it, obviously you’ve got a benefit on your gross margin line and you control the expenses, I mean should we think about maybe pushing higher into that 25% to 30% operating profit range, I mean do you think you can finally push into the higher end of that range given the groundwork you’ve laid this quarter?.

Let’s not getting into a discussion between the CEO and CFO here so I will take that one. Look, what we’ve said consistently as we’ve got a long term model out there, we’re trying to thread the needle quarter-to-quarter through that.

We want you to think about a whole year of performance and we have a lot of investments, we always dropped against the wall to make and where we’re confident we can continue to generate leverage in the business we’ll make more but we’re not ready yet to think about the long term financial model, I’d like to put that aside for the moment..

Yes, I’ll just add to that.

I think we’ve said consistently that as it relates to our long term model our objective has been and continues to be to deliver a full year within that model, we’re yet to do that, we hope we’re on track to do that this year but at the end of the year we can talk more about what that model looks like if we change it or otherwise..

Thank you..

Thanks, Glen..

Thanks, Glen..

Thank you. Our next question comes from Jeff Johnson with Robert W. Baird. Please proceed..

Thank you, good evening guys. David I wanted to start with you on ASPs, I want to go to backup point there. It looks your ASPs have been running up, about 4% or 5% on average over the last four quarters or so.

If I back into your ASP guidance for fourth quarter it looks to me down a point or two year-over-year and maybe that’s a little aggressive but that’s where my math has taken me.

Is that all currency because if I do the math on that, that’s about an $8 million swing and in the past your currency swings when they’ve been bad, has been maybe a $1 million or $2 million, so this seem like it’s bigger than that.

So I’m wondering if it’s all currency in that swing or if there is something else in there that might be swing in the ASPs even more than currency..

Currency is probably the largest component of it. Mix as we talked about a few minutes ago is also a component of it because we’re expecting to see some traction on the express side of our business in the fourth quarter with some promotions we’re running, particularly internationally, so those two are the biggest contributing factors to it.

Long term however I guess I would still emphasize the point that we believe that our ASPs long term are going to continue to grow as our international business treats more complex cases and is growing at a rate faster than North America, and in particularly APAC where they treat the most complex cases.

So while we might see some – little bit of volatility in ASP from quarter-over-quarter basis and that reflect in our Q4 guidance, I think long term we still accept – it would expect the ASPs to be stable to modestly up..

Jeff, if I just pile on for a moment. We would look at a mix shift ASP because the mix shift would be a positive effect because it’s something we’re actually trying to engineer, even though in our fall through in terms of operating margin is as good as or better than a full case.

So for us that’s a good thing, it’s a case we might not have participated in in a growing area.

And then secondly, I think as David said, if you think about our business in Europe specifically, almost all of our volume shifts in September and that’s exactly when the big – it was the biggest step we’ve ever seen in the percentage basis in the company, and because of virtually all of our shipments – because our doctors ask us to hold their cases until they are back from holiday, shift in September, it all got – it was all based on revenue based on a completely different euro and literally I think September 2nd or something it took a dive.

So I think that’s the rational for via change FX will give and take but I think on the mix side we’re actually trying to do this, we want to separate those two factors..

Alright, that’s helpful. An interesting September point there let me just – I guess my follow up Tom, on the i7, i14 and the mix shift there I understand kind of trying to engineer some volumes you might not have had in the past.

But I know it’s been two or three quarters in a row here when you and I have had conversations where – when the mix has been going the other way to the fall and some of the team cases in that, especially in the international markets, your explanation to me has been that docs really don’t see in advantage from a price standpoint, they just assume to pay a little bit more to get all the flexibility of 30 Aligners instead of 7 or 14 or something and you’ve made it sound like docs just don’t even see a reason to use i7, i14, does the forward in teen are a much better product for lot of the guys in the international markets and now it seems like that argument is kind of shifting here and I’m just trying to understand why you would promote the i7, i14 if you’ve been seeing this kind of shift towards the fall in the higher revenue cases?.

The short answer is we will continue to see in very unpenetrated markets around the world, a bias towards comprehensive treatment because the bulk of adults never got treatment as kids.

Because we’re making progress, because the brand is getting out there and because there were children that were treated as kids by the National Health System in the UK, by the German Health Program in Germany etcetera, and never had retainers and relapsed, they are starting to see some cases with people that just want – they basically have a good bite and a solid occlusion but they are wanting to be strained up in front and so they are open minded about doing something for themselves, this is actually a wonderful thing because it means the idea of oral health and a better smile is slowly starting to catch on in Europe and it has not been at the top of their list ever.

So it’s really – I think a good positive dynamic of market growth and this is feedback from some of our customers, and we’re trying to be responsive of that and give them incentives to try the product more..

That’s helpful, thank you..

Sure..

Thank you. Our next question is from Brandon Couillard with Jefferies. Please proceed..

Good afternoon..

Hey, Brandon..

David just on the 4Q gross margin guidance, can you quantify those moving parts between ASPs, freight, and training cost and in terms of magnitude of effect because this will be the lowest gross margin I think in quite some time, if you could just give us some color there it would be helpful..

Well some of that is – there is probably three pieces to it; ASP which we’ve talked about, freight and higher training, and as you listen to calls in the past right because we’ve talked about training.

Training ebbs and flows with some amount of seasonality in it, it’s relatively a breakeven proposition for us financially and so as training increases in one particular quarter it’s going to tend to be a drag on margins, it won’t be a drag on dollars but it winds up being a little bit of a drag on percent.

The other piece to it is, our scanner business, we’re anticipating that to be a little bit down from a gross margin standpoint. So probably those three things together, I don’t have a waiting here to give you between them if I was to put them in order, a rank order, high ASP is the first item and primarily as a result of FX.

And then training and freight and this kind of business..

Tom, one for you.

As we look at the North American business, I know you don’t usually talk about it this way but in terms of the growth rates we’ve seen and case volumes over the last couple of quarters, can you speak to the trend between teen and non-teen markets and if you’ve seen I guess in the deceleration in the non-teen segment over the past in terms of the trajectory in recent periods..

Let me answer this way, the numbers show a deceleration in volumes or in rate of growth, we’re growing steadily but the rate of growth it’s slowing over a number of quarters, this is mostly the case in GP space.

And I think going back to an earlier question, we have not generated leverage there yet, it’s something that’s highly, highly important to us and we’re working hard on it.

If I strip all those parts away, there is still this huge laid demand in North America, 20 million to 25 million adults that want a better smile, that do not want brackets and wires, that know that the treatment cost is about $5000 and what they need is to become more important on their list of 20 or 30 things they would like to do.

And we know because we talk to thousands of consumers. So I think our job is, when they are ready to make sure they go after Invisalign and then when they are after Invisalign they get to a practice that says we’re thrilled to put you into Invisalign. All those things don’t happen perfectly each time but we’re working on fixing that.

So we have lots of opportunity, we can do a better and better job of creating demand, of activating that at a doctor’s office and make use of the doctor’s office is ready to rock.

It just takes some time, I would saw finally we don’t pat ourselves in the back but one of the things I said purposely is we expect to grow multiples above market growth and competitive growth in every market we serve and we still do that even though we’re a little frustrated with our pace in North America right now.

So I think our view is it was a softer orthodontic market and a softer dental procedures market during the quarter and we take no comfort there because our expectations were higher. But now we see all the opportunity, it drives us crazy sometimes but it’s there to be had..

Thank you..

Thank you..

(Operator Instructions) And next question comes from Jeffrey Matthews with Ram Partners. Please proceed..

Thank you, can you hear me?.

Yes Jeff, we can. Good afternoon..

Hi, good afternoon. Two things. One is, the progress you're making with DSOs seems more significant at this point than I would've expected.

And I wonder if there is something about what you offer that is attractive to that organization, as opposed to an individual GP? Is it an easier sell for you for some reason? And then my second question is about China. I'm sort of gob smacked by the growth there.

And I wonder really what your outlook is for the next couple of years in China, and why you seem to be kind of hitting this inflection point?.

Let me start with the second, wouldn’t want you to be hanging there gob smacked. If you’re observer, you’ve spent real time over there and I think you told me at one point when you were in Shanghai you saw Invisalign signs or something.

The receptivity – I think we’ve got the formulae right, we tried a multiple different ways in countries in Europe and in Asia, and when we went into China we decided that it was more important to build the right foundation than it was to go for volume, and part of that was based on launching with G4 several years ago in May and we waited till G4 was available because it was our first real opportunity to really treat the most complex cases.

And then we brought in SmartTrack, shortly behind that one we got approval in China.

So I think the second thing we did was we worked three or four year’s building relationships with universities and clinical leaders and try to do it in a very Chinese way as they would describe it, and we were very patient about starting to train doctors, it was only until we felt we had clinical supporters that it treated and finished cases there that can teach to other Chinese doctors with those Chinese cases and demonstrated great results where we really ready to step on the gas which we’ve done over the last couple of years.

So we’re pleased, we think long term, I won’t put guidance kind of language around this, and I think we talked about this a little bit, Raphael Pascaud, our VP of International spoke about it in our Analyst Day.

We think China is probably the one country in the world that offers that kind of rough sized opportunity of the US and so we’re approaching it with that kind of potential. I wouldn’t want to put a finer point on it for the next few years but it’s one of our biggest investment opportunities and we continue to work hard to scale it.

I’ll stop in there and give it over to DSOs if I can..

Thanks..

Sure. I don’t want to let you think that the business results are screaming with DSOs yet, I’m reflecting on it because; A, it showed up significantly in training new doctors, and we’ve been on this for about a year and a half, two years working on this.

And I think we’ve got the formula down pretty well even though the different DSOs have different approaches.

We’re attractive to them and they are attractive to us, they bring regional breadth, cross country breadth in some cases, they bring very operational mindset where they are used to driving for efficiency in cost yet still delivering great results clinically for patients.

They are used to developing their own brand and series of treatment centers, and so we come in and they work hard to develop demand for each of their offices and each of their areas. We come out and alongside that we’re one of the best practice building opportunities in dentistry today with the Invisalign brand.

And so what they can bring is a mindset with clinical leadership and a compliance mentality that this is one of the three things we’re going to focus on this year and everybody is going to get trained, we’re all going to do it, we’re going to measure it, and the company is going to line up behind us to help us.

And I would say we’re in the early days there but we think this is a more focused approach to move the GP market.

We’re not at all giving up on office-by-office, we have great customers out there doing incredible things, it’s just that 90 plus percent of all dental procedures in North America happen in individual provider offices and fragmentations, the operative term.

So we have to do it from both directions and make sure our value proposition, our coverage, our product and our support model fit every side. But DSO early days it will turn into business results in the coming years..

Got it, thanks very much..

Sure, take care..

Thank you. Our next question comes from Steve Beuchaw with Morgan Stanley. Please proceed..

Hi, good afternoon and thank you for taking the question..

Steve, how are you?.

Very well, thank you.

Just trying to turn attention on the GP channel, I wonder if Tom you could look at it from a different angle, maybe reflect back on your experience, one year into the realign initiative and I wonder if you have any updated views on how it may or may not make sense to push the gas pedal a little bit on the distribution channel in that way.

And then my second question which is also actually about distribution, it relates to Europe.

That business is growing quite nicely, I wondered if you could give us a sense for how much in your runway you think you have there? And more specifically, how your view on execution and the growth opportunity in Europe is changing, now that you have a more direct line of sight into how that channel is evolving. Thanks so much..

Let’s see the first one here, realign is still not meaningful, we are learning a lot and as we think about our long term evolution of our business model and customers, many GP customers that want to respond to a patients request but maybe don’t want to do a weekend course, don’t want to go deep, there is something there to be had and I’d say the Shine organization and our team are both working on how to make that scale.

And I would say good success in a handful of regions but it is not been replicated across the Shine team or across our team. I think the second piece goes back to something I’d said in my prepared comments which is about – we’re still not relevant enough to the average GP, I guess there is an earlier question.

We’re still not relevant enough to get them to link towards orthodontics, well it’s not something to do routinely, in fact they’ve got very little of it in most of their dental programs and they spent much more time on drilling fill and anesthetic and cosmetic and veneers and all that.

So that’s what they normally do at where most of their business is, preventive and restorative. So where we come along, we try to get them do something different.

I think when this really comes visible which realign where it’s hard to assess what you can treat in five stages with a realign case and don’t even have the benefit of scaling it up to an Express 10 if you’re a direct customer or a full case, automatically when our systems in stuff.

And so I think a couple of things will happen to changes overtime Steve; one is that as scanners become ubiquitous and share side applications that provide utility and value, we with iTero and other high quality scanner manufacturers are going to be helping to reduce friction, support clinical decision making, ride at share side and they will be able to look at patients dentition and it won’t just be malocclusion but it will be other things, there could be other problems they are having, whether it’s brushes them grinding or whether they are trying to surely sign the paradontal decay and decline.

There will be tool surrounding that dentist the clinical practice that will help them look to a solution, and at that point in time there will be a whole series of products we believe digitally informed, like realigned or into a direct – through distribution or to a direct customer of ours that can use a range of things.

So in our minds this is a very early step, it’s great learning, we’re learning a lot from the Shine team, they are learning from us, we can do a lot more but I’d say it will be easier when we get scanners in there. And I think that’s coming.

I’m going to flip the second thing mindful at time here and you talked about growth rates are seeing in EMEA be persistent and we believe so.

The degree of penetration of orthodontic treatment is an order of magnitude lower than in North America which is already under penetrated against the insertion and widespread nature of malocclusion here and it tends to be more acute, in other words, the malocclusion is worse, and people lose teeth more frequently because of that malocclusion as they age.

So with all that they have a great opportunity, adults are more conscious of it now, they are more conscious, you have some countries in Europe that are very fashion conscious, so there is a reason why they care about their esthetic, feel and look, and you look at countries like Spain and Italy that on paper look like economic basket cases and our businesses are very, very strong there and that’s being driven by adults that want to look and feel better, and in many cases adults that are 50, 60, 70.

So we look at this as we’ve now earned the opportunity to build a bigger business, we’re in the process of doing that. The more we can feed that with the evolving clinical products, scanners that surround the orthodontist, make it easier, reduce friction all around that process; it just gets better and better.

And I think the biggest test I’d show you is in Asia where they treat the hardest case in the world right now and we’re growing like crazy because we finally have as a critical math and more coming around that clinical product experience where the doctor can deliver that great results with confidence.

So two very different extremes here, the examples you just asked but hopefully that answers your question..

No, it’s perfect. Thanks so much Tom..

Thanks, Steve..

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

Sure. Our next question is from John Kreger with William Blair. Please proceed..

Great, thanks. Not until time, I’ll just ask maybe two quick ones. Tom you just mentioned a minute ago that key is getting more scanners out there, any progress you can give us on your efforts to get more interoperability with other scanner operators? That would be helpful.

And then the second, you talked a fair amount about DSOs on the call, as that ramps do you think that will have any impact on your ASP or on your margins? Thanks..

I will take that one first.

As we look at programs we look at contribution margin more than we look at ASP and as long as we hear that contribution margins that will drop through to operating margins based on the entire support model, we are comfortable with different price points and a good example of that is our elite or super elite customers that we support with different resources and try to teach them how to use the product we work with them and business planning for what their years are going to look like, and with the company resources look at helping them do great local campaigns to get word of mouth and all that.

So while we trade higher discount or lower ASP with those elite customers we also don’t put all the resources in the training and support that we do for a low volume customer that ultimately pays list.

And the same can be said for DSO, they have clinical leaders that on a regional basis and national basis that will own programs and support, and these DSOs working alongside us, we pay training for those groups in language they use and then they go working support in challenge in a positive way, the local offices and the regional teams and they put experts out there in the field right alongside, and in many cases they don’t want our reps even calling on their accounts.

They say look, let you have a corporate rep calling me, pull your reps out of those accounts and you don’t have to put that energy and effort in. So we can then take that rep and deploy them to another account that’s not owned by the DSO.

So in our mind although you would see maybe some more ASPs going down, imagine that’s like an advantage effect but operating margins, contribution margins still very, very attractive and worth doing. And I completely forgot the second one you asked, I’m sorry..

Yes, just a follow up on any interoperability progress..

I wasn’t trying to shine in the topic, no.

We continue to work with leading players on if we could and how we could validate and confirm interoperability as I have been saying clearly, it’s in our best interest to do so and while it will cost us some installed base sockets, iTero scanners, not everybody is going to buy an iTero scanner even though we believe it’s the best scanner in the world.

So the upside is when there is more news we’ll let you know and until then you should assume it’s in our interest to do so..

Great, thanks..

Thank you, everyone. That concludes our conference call today. We look forward to speaking with you at upcoming conferences and meetings. Have a great day..

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