Shirley Stacy - VP, Corporate Communications & IR Joseph Hogan - President & CEO John Morici - CFO.

Robert Jones - Goldman Sachs Brandon Couillard - Jefferies John Kreger - William Blair & Co. Jonathan Block - Stifel Jeff Johnson - Robert W. Baird Steven Valiquette - Bank of America Merrill Lynch Matt O'Brien - Piper Jaffray.

Greetings, and welcome to the Align Technology Fourth Quarter and Fiscal Year End 2016 Conference Call. At this time, all participants are in a listen-only mode. A 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, Ms. Shirley Stacy. Thank you, Ms. Stacy. 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 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.

Joe?.

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 the 2017 unfolding. Following that I will come back and summarize a few key points and then we'll open upto questions.

Q4 was a strong 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 FX.

Q4 Invisalign case shipment 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 a $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 store [indiscernible] with Invisalign care aligners and we more than tripled our shipments of iTero standards 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 Invisalign Full and Express family of products. On a year-over-year basis, a shipment growth of 15.2% was driven by continued adoption by North American Orthos has seen a 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 seasonally a 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 market 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 with a 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 in fact returns to more normalized levels in Q4, there was a dampening effect on the shipment 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 attending an Invisalign Day at the China Orthodontic Society's Annual Meeting.

In Japan we held 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% sequential 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 start.

For the full year 169,000 teenagers started treatment with Invisalign, an increase of 19.6% we 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 that we generate through consumer demand program are offered Invisalign treatment.

Product and technology innovation are key to all these initiatives and in 2016 we continue 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 feeder [ph] 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 a ClinCheck Pro for more flexibility in treatment planning.

We also announced upgrades to our iTero Element scanner, software the Invisalign Outcome Simulator chairside app, adding 3D progress tracking to help assess Invisalign treatment progress and finding with a recommendation of many of our most experienced doctors and our North American Clinical Advisory Board, we issued a recommendation for weekly aligner wear and 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 get the result 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 to reduce overall treatment time. Our integrated consumer marketing program where we're just traditionally in media search and digital marketing, PR and social media to engage consumers at every point and consumer purchased security.

Consumer interest in demand for Invisalign treatment continues to grow. In 2016 there were over 8 million unique visitors to Invisalign website; 1.8 million potential parents searched an Invisalign provider on dock locator which is up 38% from 2015. And Invisalign social media community grew 50% to 530,000 consumers [ph].

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 North America.

Usually iTero scanners from Invisalign case submissions in place of EDS impressions continues to expand and remains a positive catalyst for Invisalign utilization. For Q4, total Invisalign cases submitted with a digital scanner 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 iTero scanner, we also are seeing some uptake for [indiscernible] which were previously qualified for the Invisalign case submission. Q4 was our first quarter supplying aligners for Smile Direct Club.

We continue to work closely with Smile Direct Club theme developing processes around the manufacturer of their aligners and continuing to ramp our efforts in the referral cases to our network of orthodontists and dentists for in-office Invisalign treatments. The potential this new entirely market, new market force is large.

While the business is going to [indiscernible] we remain very excited. I'd like to update you on our plans to expand our operations globally and get closer to our customers local market.

This past July we transitioned our order acquisition operations which is the digital scanning of the cemented TBS impression for the EMEA region, we move it 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 get immediate net cost savings for 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 of 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 more detailed plan for putting treatment planning and the other core markets in EMEA over the next few years.

International expansion of Invisalign value chain which includes order acquisitions, treatment planning and aligner fabrication is on the way. I'm excited about the opportunity and the potential to being closer to our customers.

Our operations are very flexible and we see so 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.

In addition, 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 it's 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, up 5.2% from the prior quarter and up 27.3% from the corresponding quarter a year ago.

On a constant currency basis our reported Q4 revenue was reduced by approximately $3 million, both sequentially and year-over-year as a result of foreign exchange rate fluctuations due to the strength of the U.S. dollar.

Fourth quarter clear aligner revenue of $251.5 million which now includes both Invisalign and Smile Direct Club aligner revenue was up 3.2% sequentially reflecting growth of Invisalign volume partially offset by lower Invisalign ASPs. Our Q4 shipment volume and revenue to Smile Direct Club were immaterial to the quarter.

Our year-over-year clear aligner revenue growth of 17.5% reflected Invisalign case volume growth across all customers' channels and geographies. Q4 Invisalign ASPs were down sequentially $50 to -- from Q3 to about $1,230 reflecting higher promotional activity and the impact of foreign exchange rate.

On a year-over-year basis Q4 Invisalign ASPs were down approximately $20, primarily due to promotional activity and again, the impact of foreign exchange rates which was partially offset by price increases.

For the fourth quarter total Invisalign shipment of about 190,000 cases were up 6.9% sequentially refracting growth primarily from our EMEA and North American customers. Year-over-year Invisalign case volume growth was 18.5% driven by growth across all regions.

For North American orthodontists, Q4 Invisalign case volume was up 3.2% sequentially and up 20.2% year-over-year. For North American GPs, case volume was up 9.1% sequentially and up 9.5% year-over-year.

For international doctors, Invisalign case volume was up 9.1% sequentially and up 25% year-over-year reflecting continued expansion of our customer base, as well as increased utilization. Worldwide Invisalign utilization in Q4 was a record 5.2 cases per doctor, up from 4.9 in Q4 last year.

North America ortho utilization was a record 11.3, up from 9.9 in the prior year. North America GP utilization was 3.2, slightly up from 3.1 in the prior year. And international utilization was 5.0, flat from Q4 last year as we continue to expand our customer base.

In Q4 we added 3,700 new Invisalign doctors worldwide of which 1,420 were new North American doctors and 2,280 of which were new international doctors. This compared to 2,615 in Q3 and 2,670 total doctors trained in the same quarter last year.

Note that the total number of doctors trained in Q4 includes 670 Invisalign Go doctors in EMEA that were recruited over the course of the year. Our scanner and services revenue for the fourth quarter was $41.7 million, up 19.3% sequentially and up 156.8% year-over-year.

Moving on to gross margin; fourth quarter overall gross margin was 75.1%, flat sequentially and up 0.1 point year-over-year. Clear aligner gross margin for the fourth quarter was 77.5%, down 0.2 point sequentially, primarily due to lower Invisalign ASPs partially offset by cost leverage from higher volume.

Clear aligner gross margins were down 0.4 point year-over-year primarily due to increased aligner's per case as we continue to treat more complex cases.

Q4 gross margins for our scanner segment was a record 61%, up 3.9 point sequentially and 23.2 point year-over-year, both the sequential and year-over-year increases were primarily a result of higher ASPs and lower manufacturing costs of our iTero Element scanner relative to our previous scanner.

Q4 operating expenses were $151.9 million, up sequentially by $4.8 million or 3.2%, primarily related to increased employee headcount which was partially offset by lower media cost and foreign exchange rate impact.

On a year-over-year basis Q4 operating expenses were up 33.8% reflecting increased headcount and continued investment in our go-to-market activity, each critical to the growth of business. Our fourth quarter operating margin was 23.3%, up one point sequentially and down two and half point year-over-year.

This sequential increase in operating margin related primarily to OpEx leverage from higher volumes and revenue. On a year-over-year basis decreased operating margin primarily reflects higher OpEx as we've grown into business.

On a sequential and year-over-year basis, Q4 operating margin was minimally impacted by foreign exchange rates as we have a natural hedge between our revenue and operating expenses. With regard to our fourth quarter tax provision, our tax rate was 19.8%, up by approximately 1.4 point compared to Q3 of '16.

Recall that Q3 was benefited by a change in our corporate structure as part of our ERP implementation. Commencing in the fourth quarter we also began to find aligners to Smile Direct Club. Revenue and cost for this activity are included in our operating profit and reported results although they were immaterial to the company.

Additionally, we also report our share of Smile Direct Club's losses below operating margin in our tax provision and is entitled 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 was $0.59 compared to $0.63 reported in Q3 and $0.60 reported in the same quarter last year. Fourth quarter EPS was unfavorably impacted by a stronger U.S.

dollar which amounted to approximately $0.08 per share, primarily due to the net realized foreign exchange losses related to the revaluation of certain balance sheet accounts addressing unrealized foreign exchange losses included in other income and expense.

In conjunction with the implementation of our new international corporate structure in July we changed the function of currency of our Netherlands entity from euro to U.S. dollars. As a result, monetary balance sheet accounts are revalued into U.S. dollars and any impact from that is charged to the P&L.

Prior to this change these impacts were charged to the balance sheet. We have now changed our processes to limit our exposure and the impact of these kinds of currency movement which we believe should not have nearly as large of an impact on earnings going forward.

Moving on to the balance sheet, as of the fourth quarter cash, cash equivalents and marketable securities including both short and long-term investment were a record $700 million. This compared to $678.7 million at the end of 2015, an increase of approximately $21.3 million.

Of our $700 million of cash equivalents and marketable securities, $241 million was held by the U.S. and $459 million was held by our international entities. Q4 accounts receivable balance was $247.4 million, up approximately 1% sequentially. Our overall DSA -- DSO was 76 days, down two days sequentially and up 14 days year-over-year.

The year-over-year increase is a result of our new ERP system implemented in July 2016 and other related systems that impact the timing of our customer collective. As we indicated last quarter, we anticipate that our DSOs will remain above our historical average for several quarters as we work through these changes.

Cash flow from operations for the fourth quarter was $81 million and free cash flow for the quarter defined as cash flow from operations less capital expenditures amounted to a record $66.8 million.

Capital expenditures for the fourth quarter were $14.2 million, primarily relating to equipment purchases or additional manufacturing capacity as well as building improvement. During the fourth quarter we repurchased approximately 0.4 million shares of stock for $38 million under that April 2014 repurchase plan.

Subsequent to year end we completed this plan, we purchasing the remaining $3.8 million. We still have $300 million available for repurchased under the 2016 repurchase plan which we announced last April. Before we move to Q1 outlook, I would like to make a few comments on the full year 2016 results.

In 2016 we shipped a record 708,000 Invisalign cases of 21.5%. This reflects 32.4% volume growth from our international doctors and 16.4% volume growth from our North American doctor's. Shipments of iTero scanner were up more than three times over 2015 to nearly 4,000 units. Total revenue was a record $1.1 billion, up 27.7% year-over-year.

Full year operating income of $248.9 million or 23.1% of revenue, free cash flow was $177.1 million. For the year we repurchased 1.1 million shares of Align stock for $96.2 million. In 2016 diluted EPS was $2.33. With that let's turn to our business outlook and the factors that inform our view.

Starting with demand outlook; for our international market expect seasonally slower period for APAC with the Lunar New Year and for EMEA with winter holiday and vacation. For North America, seasonally up GP and Ortho. For our scanner business, Q1 capital equipment purchases are seasonally lower.

With this as a backdrop we expect the first quarter to shape up as follow; Invisalign case volume is anticipated to be in the range of 200,000 to 203,000 cases, up approximately 22.2% to 24% over the same period a year ago reflecting continued strong demand across all channels and region.

We expect Q1 net revenues to be in the range of $295 million to $298 million, an increase of 23.6% to 24.8% year-over-year with gross margins in the range of 74.2% to 74.5%.

We expect Q1 operating expenses to be in the range of $162.5 million to $164.5 million, up quarter-over-quarter, primarily due to the increased headcount and increased marketing expenses. Q1 operating margin should be in the range of 19.1% to 19.3%.

Regarding our tax rate; at the start of 2017 we adopted accounting standards update entitled improvements to employee share based payment accounting under this new standard excess tax benefit and deficiencies associated with employee share-based payments are no longer recognized as paid in capital on the balance sheet but instead recognized directly to income tax expense or benefit in the income statement for the reporting period in which they occur.

Under this new standard we expect our Q1 effective tax rate to be approximately 1% to 2% which includes $12 million in extra tax benefit.

We estimate the Q1 impact of the Smile Direct Club transaction will reduce earnings per share by $0.01 per diluted share, and diluted shares outstanding should be approximately $81.3 million exclusive of any share repurchases.

Taken together, we expect our Q1 diluted earnings per share to be in the range of $0.64 to $0.67 which includes approximately $0.14 of excess tax benefit. Finally, it should be noted that our Q1 CapEx will be larger than normal as we recently entered into a purchase agreement for the new -- for our new facility in San Jose, California.

Accordingly Q1 CapEx should be approximately $70 million to $75 million. Now let me turn our view to the full year. We anticipate 2017 revenue growth to be above the midpoint of our long-term operating model range of 15% to 25%. We also expect Invisalign revenue and volume growth to be at or above midpoint of that model.

As for our scanner business, recall that 2016 revenue and volume growth significantly benefited from the unfilled backlog carried over from 2015. And while we expect the scanner business to do well and continue to grow, we would not expect the same rate of growth of volume and revenue as we saw in 2016.

We expect operating margins to be flat to slightly up over our 2016. Those investments will include geographic expansion both in countries and markets we already serve, as well as expansion into new territories including Latin America and India.

And aggressive direct to consumer advertising campaign targeted directly at teen, international expansion of the Invisalign value chain including order acquisition and treatment planning to get closer to our customers as Joe mentioned.

Commercialization of several new products including in class two and tubular [ph] advancement feature for international markets, Invisalign Go for North America and new iTero scanner features and functionality, and implementation of the CFM model in North America and APAC which was previously rolled out in EMEA.

We believe these investments are key to the continued customer adoption and acceleration of our growth. Similar to last year, many of these investments will take time before they realize meaningful return. We expect the equity loss from our investment in Smile Direct Club would be two to three times the 2016 losses we recorded.

We expect our tax rate for 2017 to be approximately 18% which includes $19 million of excess tax benefit. Finally, as typical, we expect our earnings power in the second half of the year to be stronger than in the first half with second half operating profit to account for somewhere in the range of 56% to 58% of our full year results.

With that I'll turn it back over to Joe for final comments.

Joe?.

Thanks, John. In closing, I'm pleased with our continued progress but behind all this progress and hard work, what we've really done is to build on the original vision and work started 20 ago this year, and that has created digital way to move [indiscernible] predictably, comfortably and statically and we're doing that.

Digital is the future of what Donek [ph] which means all season in future will be moved digitally throughout. We have good momentum and energy heading into 2017, something we all felt that they are still waiting to 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 dentist, expanded opportunities through Smile Direct Club and our new consumer campaign to much more. I look forward to following up with many of you in the coming weeks at various financial conferences and industry meeting.

Before I open the call to questions, I want to take a minute to welcome Lin [ph] who will join Align on February 27 in the newly created position of VP, Americas.

This newly created 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 to 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 Americans under one leader, just as we have in EMEA and APAC region, 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 as many contributions to the company over the past three years and which him the best is his retirement. With that we'll now open for any questions you might have.

Operator?.

[Operator Instructions] Our first question comes from the line of Robert Jones of Goldman Sachs..

Thanks, Joe and welcome John. So I guess you know 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, I guess 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 think you can never negate what traffic, I mean it's important that you have -- store traffic in that senses point of view there.

I mean witness what happened to us in the third quarter and obviously from a GP market segment we saw that decline so I think what you're seeing here is, you know GP did come back kind of from a seasonal standpoint we expected that as we indicated in our forecast. So also you see this ortho utilization really picking up in a big way also.

So I think those two combined variables but I mean to specifically answer your question, so what traffic goes down 20% in ortho, this is going to affect us in one way or another but a continuation of 2016 into 2017 is what we're projecting when you heard with forecasted -- I think that's why we're still bullish in a sense of as we look at 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, when you -- look Robert, we have some promotional activity but obviously nothing would have been outline as what we've done in the past and fourth quarters except there is one 75% -- $75 bonus that we gave to the orthodontic community that came through Las Vegas. And we saw a pretty big uptick from that thing.

And so you know, 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 central [ph]..

Got it. Okay, thanks so much..

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

Thanks, good afternoon.

Joe, on -- in terms of the '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?.

Yes, I'll take the FX and ASP. You know we've set our plan for 2017 based on current FX rate, so we've adjusted to what we're currently seeing and that's what's in our guidance. And as far as ASPs, we expect them to be flat to slightly up as we plan for 2017 from that standpoint.

And then from a spend standpoint we're continuing to invest in our sales and marketing organization and specifically on the marketing on the direct to consumer and really targeting that team market. So it's a continued investment that we're making in 2017.

And as we think about this from year to year is, you know we've done the last few years in this business, we really hit the channels hard in a sense of hiring sales people, seeing the international growth that we have.

Just to look at our business next year is doing exactly the same thing; we're running the same plays maybe to a higher degree because we have higher momentum and higher volumes to deal with.

So real added cost is our team focus these for next year, you know that will be anywhere between $10 million and $14 million but I would say that's the inordinate kind of change from your year that we would have had versus our normal kind of OpEx extension that we feel -- you know, I mean that's why we struggled so much in the first quarter in a sense of it could be lowered all these investments so we can realize those in the second half of the year..

And just curious about you think about the potential risk of a board of 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?.

Well, I mean out of everything our production right now is slowly and whereas in Mexico, and 60% of our production goes to North America and 40% goes overseas. Now you're asking me to comment on Trump's comments, I don't know which tweet you want me to address. I'd say all those tweets have different financial scenarios.

Part of it also is going to be reduction of the corporate tax rate, it looks like it's come together maybe the 20% range or so; so it's really hard -- it's kind of washed that's been out right now.

What I want to give investors' confidence that we're aware of it, and we'll make the new kind of changes from a flexibility standpoint, we could be nimble on what new to be done.

But the last thing I'd say is, you know our Mexican facility, I don't want it to be looked as the low cost facility, this is an incredibly high tax credit -- incredibly important aspect to us and so we've invested tons of money over 20 years to bring this as a modern day production facility, it's the biggest 3D printing business in the world.

This is really a valuable asset for us and we'll do all we can just to make that asset as productive as possible regardless of what we see..

Great. Thanks a lot..

Our next question comes from the line of Steve Bouchard [ph] of Morgan Stanley. Please proceed with your question..

Hi, good afternoon and thanks for taking the questions everyone.

I wonder if we could reflect just for a minute on the first quarter guidance when I think back to the company's approach to guidance over the years, that there has been -- you know, there have been times when we thought well, you know, the guidance could have been a little higher but the company has pretty steadfastly stuck to this view of looking at past sequential trends, seasonal trends to say, okay, here is where we think the business is going to grow.

When I look at the first quarter though, the guidance for the sequential volume growth -- significant -- relative to trend, stronger than normal trend; so I wonder if you could spend just a minute there -- kind of clue us into anything we might be missing about what might be different this time around?.

Steve, this is John.

I think what we saw -- we saw a very good volume in Q4 and I think that's what led to strong shipments and strong revenue performance in Q4 and we've seen that continue into January and into 2017 that we feel very good about where we're at from a volume standpoint and that's why we've given the Q1 guidance and it helped strengthen where we think we're going to be at 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 upto the latter stages of the year and into January?.

I think you got to look at Q4, Q1 normal list -- you know how -- 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 1Q is the two main variables and why we're predicting that Q1 to be what it is..

Just a final on Steve, I -- do you recall a few -- the order imbalance that we referenced on the Q3 call that -- you keep in mind right that strength carried over, [indiscernible] which is the received strength obviously carried over as the inventory and backlog, even down in Q4 and that strength obviously has carried over to Q1..

Got it. Now last one for me….

This was actually Steve -- I think you even said something about this on the last earnings call you asked whether this would carry over into Q1 and that's potentially what you're seeing..

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

We won't give you credit for the strength but --.

Last one 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 -- what's the early feedback or clinicians thinking about this as in any way changing the way they go about using Invisalign? Thank you..

Yes, I think we've had good reception from a doctor's standpoint Steve.

And the data we presented, the clinical evidence was as far as wide smart track, smart force, that you need aspects of our product line that allows us to happen, honestly we feel -- some of the doctors are aggressively pursuing this and it's ones who are really investing in this line in a big way, it's significant.

Other ones are more cautious I think in a sense of how they start up and that is part of the tendency of this industry.

The last thing I'd say is, it's going to be really important for us as part of our communications to patients is that the availability of this kind of opportunity, I think as patients ask for that as they movie with the GP treatment that you will see a more and more enthusiasm and uptake in that..

Got it. I really appreciate the help..

Our next question comes from the line of John Kreger of William Blair. Please proceed with your question..

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 upon 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 to 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 what 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 you know, right now we're not looking at any kind of -- I say material effect in the sense of ASP because you know balance is going other full patients in things that we offer.

So as we go forward, we will be continuing to report as 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..

Our next question comes from the line of Richard Newitter of Leerink Partners. Please proceed with your question..

Hi, good afternoon. This is actually Ravi [ph] in for Rich. One question on the gross margin, it's a little bit [indiscernible] came in guidance for a little bit later than we had thought.

Your base volume guidance is little bit higher, I'm just wondering if you could plan to put to take around that?.

Yes, I mean from a gross margin standpoint I mean we're going to continue to see some FX pressure. ASPs what we expect in the first quarter to be a little bit better than the first quarter due to some of the promotional activity that won't continue from Q4 into Q1.

And you know, I think it's -- we haven't -- from a standpoint of planning our pricing for 2017, in the past we've taken is it's price increases in the past couple years we haven't planned that for 2017 yet so that might be something that is further down..

Great, thanks.

And then one on this -- forced in 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 is growing faster than clear aligner business? Sort of what commentary you can 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 growth for an equipment business now for iTero.

So for 2017 we expect consistent [ph] growth to maybe a little bit better than Invisalign but certainly not nothing like we saw in 2016 because of the backlog..

That's it for me. Thanks..

Thanks, Ravi.

Operator, next question?.

Our next question comes from the line of John Block of Stifel. Please proceed with your question..

Great, thanks and good afternoon guys. Joe, you gave '17 guidance and maybe now I can ask about 2018 and beyond. But -- you better top line for '17 but also higher spends, so it looks like you're getting to a similar operating income or you're absolute dollar is not far off from where we were but just a different formula getting there.

And in around that 23% op margin, just taking a step back -- when you look out where the business is today or from an investment standpoint, where do we start to see that sort of elusive leverage? I mean you've got tremendous topline and it really is huge but you're still short of a good couple of hundred basis points below the low end of that 25 to 30 EBIT goal; so maybe can you speak to -- when you look out beyond '17, how you bring the leverage back to the business?.

When you say bring the leverage back [indiscernible] this happens to the point of the 25 or 30 that -- everyone here wants to get to and what you've got to look for.

I'd say John, we're constantly faced here with are actually, really great short-term investments for us to expand this business significantly and an operating expense, it's almost immediately accretive within that year.

And so you know what -- I think at some point in time as we become more and more penetrated or over utilization of these markets more spread internationally in a sense when we go internationally, you just don't hire sales people, you have to put infrastructure in place, you have legal firms, so a lot of things you have to put in place that puts this organization together.

So I can't tell you that I don't want to start forecasting 2018, 2019 or whatever John but I hope what you see here is an incredibly profitable business that throws out a ton of cash year-in, year-out; we're in the 23%, we're in striking distance for the 25% range.

If you want to cut back some of that investment and sacrifice some growth, we can be at 27% tomorrow. We just feel like it's the right thing for this business to keep investing in these. But I would say accretive types of investments, the payback was less than a year to 18 months and you're seeing in our results, you're seeing in the growth.

But as we go forward, I'm very confident we're going to reach a 25% to 30% range, it's just -- we will continue to invest to grow and improve that utilization rate where it makes sense for the business..

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 4Q orders were higher than shipments and arguably that sets up well for 1Q '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 -- you know the early traction or findings from IGo in EMEA. And when do you expect IGo to be released here in North America? Thanks..

You know as far as IGo uptake, I mean we saw good uptake in the UK, we're working through Germany; Germany you see has a slower infusion rate than most countries in a sense of how we go about things.

We're moving into Australia in that sense and working over to APAC and we will introduce it -- we're beginning to introduce it here in certain regions in the United States.

So we'll keep you updated John, I mean we're excited about that product, we do need something for that GP segment, it's simple, it will allows GPs to assimilate this product quickly and see how it's integrates into your workflow. And so you will see us aggressively push that product around the globe in North America as we move in 2017..

Alright, thanks guys..

Our next question comes from the line of Jeff Johnson of Robert W. Baird. Please proceed with your question..

Thank you. Good afternoon. So Joe, let me follow-up I guess on John's margin questions and you might not have liked his question, you'll probably like mine even less I guess. But I'm just trying to understand -- you know, operating margin has been down a couple of hundred basis points this quarter.

It seems like you're guiding down 250 basis points or so next quarter, and yet guiding flat for the year and I really respect a lot of the investments you're making; I think they're the right calls for the business in 2017 and beyond.

So just trying to understand if the last couple quarters or at least 4Q and 1Q are down; how do we get flat for all of '17 in the face of some of these investments that you are making?.

Jeff, I think -- you know, I've been here long enough to be through a few of these first quarters now, I think you know that our first quarter a lot of something that presses up working margin in expenses, that's is a reason how we account for things, we lay in investments for the rest of the year so it's always our most pressured quarter from an operating profit standpoint.

So I mean look at that comparison from 4Q to 1Q, that's always a tough comparison in sense of how we're offering. I'll step back, you know, Jeff, I don't mind John's question, in fact I think it's a question that we've always asked ourself here so I never wanted you guys to misinterpret that we will get unsettled for a question like that.

I think it's legitimate in something we wrestle [ph] this year. You know as we forecast for next year, you're right, we're keeping our projections for operating profit or you know, it's pretty much flat with what we thought this year. This year it's pretty phenomenal and sensible what we're forecasting.

We think that's the right focus for this business right now.

You know, look, I'd just say it from respect to the standpoint if I came in closer, we're going to be 18% operating profit for all of the next year because we're doing something -- I'd say that and we'll probably be out of the room or what we will speak of this team but we want to be as close to the edge as we possibly can in making sure we produce good margin and cash for this business and take advantage of all the opportunities we've had and that the balance we hope that we're communicating for you and now we're executing..

That's helpful. And last question I guess or two, one for John, just -- can you remind me John, does the peso of weakness that we've seen so much in accelerate here recently, does that help at all from a margin perspective? I think the answer is yes, but just if you could remind me there.

And then on ASPs, I know the question's been asked a couple times Joe but just want to circle back there; they have been declining here over the last couple of years and I know the promotional activity and some of the utilization rates, people are hitting their targets, things like that so that's all good but I think you said DSO is flat on the year and that would definitely be a change in the trend line from the last couple years so just want to confirm maybe what's driving the flattening out of those ASPs after a couple years of having come down a bit..

Just to answer your question on 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. You know, 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 thing falling down the overall total. But you will see the DSOs can grow aggressively, they will be rewarded for it and so we'll continue to grow that.

From an ASP standpoint, I think you have to remember we've got price 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 and I have no idea….

International mix..

Yes, international mix. So I think David continue to guide ASPs that we're pretty much constant from year to year. We still think about that but there is a lot of noises when we think about that from oceans that we do and mix like Shirley mentioned. But we're counting on it pretty level as we go into 2017..

Fair enough, thanks guys..

Our next question comes from the line of Steven Valiquette of Bank of America Merrill Lynch. Please proceed with your question..

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 loss in news in the UK, we don't have as much background than UK market dynamics; so I guess I'm just wondering you are able to provide any current approximate market share splits maybe for you and other such as clear correct 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 entity over in UK, I want the o be certain when those bounce like direct but it's not, it's something to do with this, and is still pretty much [indiscernible] here, just trying to continue with the model that they have in that and hook up with someone in the UK that really wants to try to implement it in the model.

And so you know obviously our lawsuit is not exactly what we do but it's extended as we mentioned to the international market and we'll continue to be aggressive in defending our IP..

Okay, and then as far as the implications in refilling 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?.

We've got a special guest today..

Good afternoon everybody. The patents that are before the court in the clear correct action are a combination of patents that will expire in the next couple of years and also patents with a longer life span..

Okay, but as far as….

[Indiscernible]..

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..

We can set up a call with Roger..

Okay, thanks..

Our next question comes from the line of Matt O'Brien of Piper Jaffray. Please proceed with your question..

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 market to be 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, that's starts to become important.

So again, as we talk about moving into new markets just think we have -- we laid out a lot of infrastructure, spend money to put sales people in place and then you start to see almost geometric growth in those areas but that's not what I would say to drive in anyway. Right now the kind of forecast we're getting in for 2017 or what we saw in 2016..

Okay.

And then also you guys point out low volume docs in Q3; how did those guys perform in the quarter?.

They were good. And we had -- we had -- because we had the issue obviously in the third quarter, they came back pretty strong. You saw the GP in United States from 3.1 to 3.2 utilization standpoint, that might sound small but that's pretty big when you look at it across more than 150,000..

Okay, great. Thanks..

Operator, we'll take one more question please..

Our last question comes from the line of Jeff Matthews of [indiscernible]..

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 you know 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 the things but we spent in a course of 20 years a $1 billion in trying to learn and accomplish significant predictable orthodontic movements and increasingly as you've seen our G-series, you know, from G3 all the up to G7, we just announced; we just improved that capability year in and year out.

So I think depending on when you take, when you go back in history, many of the people in Nordic [ph] community, they have gone way up and they wanted their competence.

And 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 but they do it large.

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 Joe in this production shift, moving closer to end market even before the election result made it sort of a headline issue; but given all of the comments that you made about how much you've invested in [indiscernible] and 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?.

You know, honestly Jeff, I've done this is in other businesses I've been in the moving products and facilities in some locations to others and I'd say over learning here is what I've seen in other areas. One is, you never been just transfer production unit to unit, it's going to be different and have to reflect culture and where you're moving to.

So if you look at APAC, we'll probably look at different types of automation in different aspects of that plan because as you know there is a difference than what you have from a labor standpoint in Mexico to do that.

I think we're learning that our infrastructure is really a challenge in the sense of the IT piece and I have to have much more flexibility to be able to handle these things and when you get away from a unitary spot and you move to a broader area.

But you also understand from our customers, you see the excitement from our customers knowing that things like ClinCheck, or to get closer to with China because we have many interactions for Mandarin, you know, the fact that English that goes between Costa Rica and China and different part of APAC; great excitement from our customer base to really improve that efficiency and to have more of a regional -- kind of a cultural aspect to the business.

So those three things aren't a surprise to me but what I really love is how much customers embraced it.

And we have flexibility in the sense of how we manufacture products and how we do things in that whole value chain that we talked about between OA and clinical IT and also the fact for using -- disassemble and reassemble those change around these areas to make it better for our customer base and that's a great thing about them..

Great, thanks so much..

Thanks, Jeff. Well, thank you everyone. This concludes our conference call. We appreciate you taking the time today. 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..

This concludes today's conference. Thank you for participation. You may disconnect your lines at this time. Have a wonderful rest of your day..