Shirley Stacy - Director, IR Tom Prescott - President and CEO Ken Arola - VP, Finance and CFO

Matt Dolan - Roth Capital Spencer Nam - Summer Street Isaac Ro - Leerink Taylor Harris - J.P. Morgan

Good afternoon and thank you for joining us. I'm Shirley Stacy, Senior Director of Investor Relations.

Joining me today is Tom Prescott, President and CEO; and Ken Arola, Vice President and CFO. Before we begin, let me cover some housekeeping items.

We issued a press release today via PR Newswire and First Call, detailing Align's third quarter fiscal 2008 financial results. The press release is available on our website at investor.aligntech.com.

Today's conference call is being audio webcast and will be archived on our website for approximately 12 months. The telephone replay will be available today by approximately 5:30 pm Eastern Time through 5:30 pm Eastern Time on November 11.

To access the telephone replay, domestic callers should dial 877-660-6853 with account number 292 followed by pound and conference number 289246 followed by pound. International callers should dial 201-612-7415 with the same account number and conference number.

As a reminder, the information that the presenters discuss today will include forward-looking statements including, without limitation, statements about Align's future events, product outlook, and expected financial results for the fourth quarter and full year of fiscal 2008. These forward-looking statements are only predictions and involve risk and uncertainties such that actual results may vary significantly.

These and other risks are set forth in more detail in our Form 10-Q for the quarter ended June 30, 2008, and 10-K for the fiscal year ended December 31, 2007. These forward-looking statements reflect beliefs, estimates and predictions as of today and Align expressly assumes no obligation to update any such forward-looking statement.

Please also note that on this conference call, we will provide listeners with several financial metrics determined on a non-GAAP basis for comparisons to previous quarters. Most of these items, together with the corresponding GAAP numbers and a reconciliation to the comparable GAAP financial measures where practical, are contained in today's financial results press release, which we have posted on our website at investor.aligntech.com under Financial Releases and have furnished to the SEC on Form 8-K.

We encourage listeners to review these items. We have also posted a GAAP and non-GAAP historical financial statement including a corresponding reconciliation, as well as our third quarter conference call slides on our website under Quarterly Results.

Please refer to these results and these filings in more detail. With that, I would like to turn the call over to Align Technology's President and CEO, Tom Prescott.

Tom?

Thanks, Shirley. Good afternoon, everyone.

I'm pleased to report another good quarter for Align with Q3 revenues in line and EPS better than our guidance. Particularly given it was our seasonally slower quarter combined with unprecedented economic uncertainty.

On the call today, I would like to cover highlights from our third quarter and update you on the progress we have made towards achieving our key strategic initiatives, including a renewed focus on increasing efficiencies across the organization and lowering the Company's overall cost structure. Ken will follow with more detail on our financial results and outlook for the fourth quarter.

Now for highlights from the third quarter. Net revenue was $75.2 million and case shipments were $52,800, both within our guidance.

Gross margin of 75% was better than our guidance due primarily to favorable operating efficiencies. And while we're discussing production, I will add that we just reached a major milestone shipping our 40 millionth Aligner for a patient in Connecticut.

40 million completely unique Class 2 medical devices. Amazing.

Non-GAAP operating expense which excludes a $2.2 million restructuring charge was $48.5 million and substantially lower than our outlook as we continue to focus on expense management. As a result, non-GAAP net income was $7.4 million or 9.9%, and non-GAAP EPS of $0.11 exceeded our guidance of $0.04 to $0.06 per share.

Q3 net revenue and case shipments declined sequentially, due primarily to the typical summer seasonality we see in North America and Europe. In addition, we believe that continued economic weakness has been tough on some of our US customers.

On a year-over-year basis, international growth remains strong even with most of Europe on holiday, while domestic sales were flat. Let me give you a brief update on the three strategic initiatives that we have been investing in to create long-term value.

Product innovation including a recent launch of Invisalign Assist, adoption growth, trends and utilization or same practice sales among our core doctors and creation of consumer demand. Along with these three primary growth drivers, we have renewed our focus on increasing efficiencies and reducing the Company's cost base, so we can maintain profitability while continuing strategic investments, even through a period of slower growth.

Let's start with a product update. At the beginning of 2008, we said that this would be the year our product development efforts and investments would become visible and start creating impact.

We previewed three new products with you, designed to help increase utilization and overcome barriers to greater adoption. Vivera retainers, Invisalign Teen, and ClinAssist, now officially branded as Invisalign Assist.

With the launch of Invisalign Assist earlier this month, all three new products are now generally available to our North American customers. I will update you on each product in the order of launch beginning with Vivera.

Vivera retainer sales and repeat order rate continue to grow. Additionally, Vivera has had a halo effect on our original retainer business.

In fact, since the launch of Vivera retainers in January, our total retainer business has grown better than expected. We launched Invisalign Teen at the end of July.

And so far its off to a good start, with nearly 2,000 orthos trained to use the new teen product. Roughly half of the trained orthos submitted teen cases during the quarter and 70% of them submitted more than one case.

The addition of our new Teen product had a particularly positive effect on our higher volume orthos, resulting in sequential revenue growth and an increase in utilization rates for that core group of Invisalign customers. Overall, Q3 Teen shipments were consistent with our expectations to ramp volume gradually.

We remain very optimistic about the overall Teen market. The most significant product update to share with you this quarter, is the launch of our first GP specific product Invisalign Assist, which is intended to help newly certified and low-volume Invisalign GP dentists to gain confidence with our product more quickly therefore speeding their adoption of Invisalign.

Invisalign Assist, includes new software and clinical protocols to make it easier for doctors to confidently select appropriate cases for their experience level or treatment approach. In addition, doctors can plan and submit cases efficiently, manage appointments with suggested tasks and receive batch shipments of aligners based on treatment progress.

Ultimately we believe Invisalign Assist, will help GP dentists move through the adoption cycle faster. The initial pilot for Invisalign Assist began about a year ago and was expanded twice during the pilot period.

The pilot began with two groups of GPs. The primary target of newly certified and a secondary group of more experienced Invisalign doctors.

As we described previously, insight gained from the pilot indicated that Assist worked very well for its primary target of newly certified GPs and slow adopters. The clinical protocols from the pilot were limited to simple crowding and spacing cases.

The key feature set which I described above, was viewed as extremely useful and embraced by the pilot participants. As a result, overall utilization increased among target doctors during the pilot period as compared to a group of similar doctors.

In addition, doctors confidence in Invisalign increased twofold after using Assist because of the incremental support during initial usage. While it's still in the launch cycle overall, we are pleased with the initial response to Invisalign Assist.

The second Group of experienced Invisalign GPs, told us that they want to be able to apply and assist streamlined approach to more difficult cases to improve efficiencies within their busy practices. However, the clinical protocols and accompanying software and Assist are not yet broad enough for the cases those GPs are currently treating with Invisalign.

They are evaluating a wider range of Assist applicability in the content context of other product roadmap priorities, which we will be discussing at our upcoming analyst meeting. On the consumer demand front, we continue to drive awareness of Invisalign, as well as consumer motivation to seek treatment using a mix of media including television, radio, print and Web-based approaches.

In Q3, we placed higher emphasis on digital search, online display ads, and social media programs during the Olympics and pre-election activity. Our goal was to effectively reach our consumers, without having to pay the elevated media costs tied to those events.

Those modifications to our media mix appear to have been effective as we have had a steady flow of prospects visiting our website and searching for an Invisalign trained doctor throughout the quarter. As expected, the number of qualified responses and leads were down a bit from the prior quarter, consistent with our lower advertising spend.

As we look to build high consumer awareness for the new Invisalign Teen product in 2009, we plan to continue to leverage the web and other digital strategies to reach Teens where they spend so much of their time. We continue to focus on adoption of Invisalign through training and certifying new practices, as well as increasing utilization or what we'd call same practice sales of our products.

During Q3, we certified 1,450 new doctors of which approximately 1,030 were new GPs, 90 were new Orthos and 330 were new international doctors. This is down from Q2, as we typically hold fewer training courses in Q3 because most practices take vacations during this period.

Consistent with Q3 seasonality, utilization rates decreased sequentially for all three key customer groups, U.S. Orthos, U.S.

GPs, and International Doctors. On a year-over-year bases, utilization for U.S.

Orthos and GPs declined slightly, while International was flat. There is no question that the continued economic slowdown has impacted some of our U.S.

customers. We know however, that those customers who have significantly integrated Invisalign into practice are doing pretty well and they consider Invisalign one of the important factors in their success.

In addition, as I just mentioned utilization among our core group of high-volume Orthos that submitted Teen cases during the quarter had an increase in utilization both sequentially and year-over-year. Now let me update you on our strategic initiative to increase operating leverage by improving efficiencies and reducing the Company's cost structure.

As you all know, 2008 has been a challenging year for Align and the industry, marked by economic uncertainty and distress across global financial markets. Despite these challenges, we've made significant progress towards our strategic initiatives and have focused on what we can control, such as the successful launch of three new products; expense management and cost reduction and improvements in operational efficiencies.

Continued economic weakness and its impact on consumer spending has made us increasingly conservative about the quarters ahead. Given our outlook for slower growth, we are taking actions now that will lower our cost structure and increase operating leverage, while continuing important investment in new products and key strategic initiatives.

To that end, we announced a major restructuring last week which includes a significant reduction of our full-time employee base in Santa Clara and the creation of a shared services organization in Costa Rica that will provide comprehensive services to our customers and internal constituents. Across the organization, we are consolidating and simplifying operational processes, eliminating inefficiencies and redundancy, and driving customer-valued activities to optimize our business model.

With this restructuring, we identified opportunities across the Company and within all functions. Let me just give you a couple of examples.

We have continued to identify and eliminate redundant skill sets or positions within the recently consolidated IT and R&D Groups and are moving more of our software development to our team in Moscow. We've also scaled back on some of our non-critical technology infrastructure projects, has improved our release cycle times significantly.

In North America, Marketing and Sales, we are integrating professional and general marketing along with sales operations into a single team. We are also scaling back the number and scope of clinical education and corporate events.

In addition, we have consolidated human resources under business operations led by Len Hedge. In the six years since we moved our treat operations facility from Pakistan to Costa Rica, we've built a high-performance team of skilled clinical technicians and support personnel in a very scalable environment.

This gives us a solid foundation to build a shared services organization in Costa Rica to consolidate business operations and customer-facing support elements, such as customer care, credit and collections, and event registration, enabling us to leverage our existing infrastructure and the talent base in Costa Rica at a lower overall cost. The majority of what we are doing is structural and many valued employees are affected.

These actions while difficult are essential to Align becoming a more efficient company and will result in a more robust operating model with flexibility to weather the current challenging environment and room to invest in future growth. I'll now turn the call over to Ken for some more detail on our third quarter financials and then come back for a few closing remarks.

Ken?

Thanks, Tom. And let's review our third quarter financial results in more detail, beginning with the income statement.

Q3 revenues of $75.2 million decreased 5.9% sequentially and increased 5.2% on a year-over-year basis. As expected, the sequential decrease reflects lower case volumes, resulting from the typical summer seasonality in both North America and Europe.

Q3 gross margin was 75% compared to 74.7%, in quarter 2 and 74.6% in the same quarter of last year. Our gross margin performance for the quarter reflects continued operating efficiencies and reduced spending.

Q3 gross margin also included $437,000 of stock-based compensation expense compared to $471,000 in quarter 2 and $259,000 in the same quarter last year. Q3 GAAP operating expense was $50.7 million compared to $55.8 million in quarter 2 and $44.9 million in the same quarter last year and included stock-based compensation expense of $4 million, $4.3 million and $3.1 million respectively.

Q3 GAAP operating expense also included a $2.2 million restructuring charge related to the cost savings actions we initiated in July. Sequential decrease in Q3 operating expense reflects a savings realized from these actions, which included a reduction of 36 full-time headcount and discretionary spending cuts.

Additionally in Q2, we incurred costs associated with three customer events that did not reoccur in quarter 3. Q3 non-GAAP operating expense was $48.5 million excluding the $2.2 million restructuring charge.

Q3 GAAP EPS was $0.08 compared to $0.06 in quarter 2 and $0.13 in quarter 3, 2007. Q3 non-GAAP EPS was $0.11 compared to $0.06 in quarter 2 and $0.13 in quarter 3, 2007.

Our GAAP and non-GAAP earnings per share were well above our outlook and reflect expense management across the Company. Taking a look at the balance sheet, cash, cash equivalent and short-term marketable securities were $114.3 million compared to $127.9 million at the end of 2007.

Cash generated from operations in quarter 3 was approximately $31 million compared to $13.6 million in quarter 2 and $35.8 million in the same quarter of last year. During quarter 3, we used $11.7 million to repurchase 930,000 shares at an average price of $12.62 per share.

To date, we have repurchased 3.1 million shares at an average price of $12.64 for a total of $39.3 million. We have $10.7 million remaining under the authorization.

Q3 DSOs were 59 days compared to 52 days in quarter 2 and 58 in the same quarter last year. Now let me turn to our outlook for the fourth quarter.

Before I do so, I would like to touch on financial aspects of the major restructuring we announced last week. The restructuring plan includes a phase reduction of 48 full-time headcount and substantial cuts in discretionary spending.

Additionally, we are creating a new shared services organization in Costa Rica. Upon completion of this transition to Costa Rica over the next few quarters, 62 additional positions in Santa Clara will be eliminated for a total reduction of 110 full-time headcount.

As a result of these actions, we will be reporting a restructuring charge of approximately $5 million, of which $3.5 million will be realized in quarter 4 and the remainder over the first half of 2009. With these actions, we will realize cost savings of approximately $12 million to $15 million in 2009.

This is in addition to the $10 million to $12 million in annualized savings from the actions announced in July, which consisted primarily of headcount cuts and a substantial reduction in planned headcount hiring. The leverage created by increasing our efficiencies and lowering our costs will enable us to invest effectively in strategic initiatives, including new products and market expansion without increasing our operating expense run rate in 2009.

With that said our outlook is as follows. For Q4 we expect revenues to be in a range of $72.5 million to $76.5 million on case volume of 52,500 to 55,000 cases, primarily reflecting slightly lower volumes than expected in our base business as well as the impact of the stronger dollar on European revenues.

We expect Q4 gross margin to be in a range of 72.5% to 73% and is expected to include $400,000 in stock-based compensation expense. The exchange rate impact on international revenue is expected to reduce gross margins by approximately 1 percentage point sequentially.

We also expect increases in freight and fulfillment costs and we will be incurring transition costs in the quarter associated with completing the move of our order acquisition group to Juarez, Mexico. In Q4, we expect GAAP operating expense to be in a range of $52.1 million to $53.6 million, which includes approximately $3.7 million in stock-based compensation expense.

This operating expense reflects the continued cost savings we expect to realize from the actions we took in July plus the initial cost savings we are expecting from the restructuring announced last week. It also includes $3.5 million of the $5 million restructuring charge announced last week, plus the remaining $500,000 from the actions announced in July.

Excluding the restructuring charges, we expect non-GAAP operating expense to be in a range of $48.1 million to $49.6 million. For quarter 4, we expect GAAP EPS to be between $0.01 and $0.03.

We expect non-GAAP EPS to be between $0.06 and $0.09. We expect diluted shares outstanding for quarter 4 to be approximately 68.1 million shares.

The effects of any additional share repurchases are not included in this outlook. I also want to mention that this outlook does not reflect the release of our tax valuation allowance.

We will continue to monitor our position and make a determination on the potential release as we exit the quarter. But it's determined to release the valuation reserve that will result in a significant one-time benefit to our P&L in quarter 4 of approximately $60 million to $70 million or $0.88 to $1.03 per share.

After the release of the valuation allowance, we expect our effective tax rate to range from approximately 32% to 37%. Lastly, let me update you on a couple of balance sheet items.

For fiscal 2008, we expect an increase in deferred revenue remains in the range of $5 million to $8 million, primarily relating to the introduction of new products. As a result, total deferred revenue on the balance sheet is expected to be approximately $17 million to $20 million.

We expect to continue being cash flow positive and estimate cash on hand at the end of 2008 to approximately $115 million to $120 million. Again, this does not include any stock repurchases.

We expect DSO to remain comparable to Q3 at 59 days. Now I'll turn the call back to Tom.

Thanks, Ken. In summary, I am pleased with our results during these very challenging times.

We are committed to continuing investment in new products and in our key strategic initiatives, while lowering our overall cost structure which will position the Company for renewed growth and profitability as the environment improves. Cost-saving actions we announced last week, coupled with the actions we took in July, are significant steps in actively reducing our cost structure and moving towards a healthier financial model.

We intend to discuss our strategy and financial model at an upcoming analyst meeting on November 21, where we will provide greater detail and allow for more thorough and interactive discussion. I encourage all of you to attend in person or to dial into the audio webcast.

For those of you who can join us in Las Vegas, it will be a great opportunity for you to get to know the management team, learn more about our business and meet a few of our great customers face-to-face. I do look forward to seeing you there.

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

This is Seth for Tao can you hear me okay?

Yes we can Seth go ahead.

Yeah I've got a little echo on my -- sorry. So to first, maybe if we could touch on the restructuring program you talked about and, specifically, the Shared Service organization.

Could you talk a little bit about the jobs you are going to move to Costa Rica? And also you said you are going to have about $12 million to $15 million in annual savings, so when can we start to see those in the P&L?

I'll start and then ask Ken to provide some commentary on the numbers and how that phases into the P&L. We are moving a large part of our customer facing organization that includes customer care, that includes credit collections, as well some back office finance and a few other roles.

In addition to that new Shared Services facility in Costa Rica will be putting in, we are also moving some software development to Moscow which is not part of that but part of our restructuring. I'll ask Ken to speak to the numbers and how the phasing will occur.

Hey Seth this is Ken, as far as the headcount reductions are concerned out of the 110 people about 52 of those people will be transitioning jobs down to Costa Rica. And that's going to occur between now and the middle of 2009.

So the way you need to think about that is the phased approach of that and so we'll get about a half a year of savings out of that transition, after we factor in the fact that we are going to add people in Costa Rica, but at a lower cost base. The other 48 or 50 people that are being released from the Company between now and the end of January will have a full year impact on headcount and salary savings.

And that's about half of the overall savings that we described of $12 million to $15 million. The other half of the $12 million to $15 million is coming from discretionary spending [asset] Company.

Okay that helps. Also the -- you also mentioned 10 to 12 in savings from the other restructuring.

Some of that, it sounded like, was due to the reduction of [plant] hires. So are there any sales force in those [plant] hires that are being reduced and again when can we expect that to hit the P&L as well?

Yes, there was no significant plant hires in the sales area that were taken out as far as that reduction of plant headcount. But let me go back to that $10 million to $12 million savings that we referred to last quarter.

About 4 or 5, about 5 million of that on an annualized basis was in our cost base, with full-time headcount as we eliminated about 38 heads and also cut out some discretionary spending at that point in time. A good portion of that cost savings was the cost savings against our outlook in the future.

So in other words we had planned headcount forecasted that we either eliminated or deferred out even further. So those costs were not in our cost base.

So what that $10 million to $12 million referred to last quarter about $5 million or $6 million of it, it was in the cost base on a go forward basis that will come out. The other remaining half of that $10 million to $12 million was just in essence deferred cost.

Because it was planned headcount that we did not hire.

That's real helpful. And now just one last question and then I'll hop in the queue.

You know Tom, in your comments you spoke about the ClinAssist program and Invisalign Teen. It seemed that you put a little more priority on the ClinAssist program.

Maybe if you want to talk or if you could just give us a little more color on the two and uptake and specifically you know why would that one be more of a, be a larger opportunity? I thought it actually was the other way around.

Thanks.

Well I guess so to answer your question simply, I wasn't giving one over the other higher, I was simply getting to them in kind of order of launch, Vivera being first, Teen second and Assist, most recently. We think both, putting this in perspective we think over the long term, Teen is important and will become very significant.

And we also think over time in doing a better job of engaging the low-volume GP will become very important. So Assist is a good first step there.

But I won't frame this in terms of relative importance. Does that help?

Yeah, that's helpful. Thank you very much.

Great thanks.

Thanks Seth, next question operator.

Hi guys good afternoon.

Hey Matt.

Hey Matt.

First question, Tom, on the International business can you talk about the growth you are seeing there with the U.S. kind of being flat to down in certain segments?

Where are you seeing the growth there? How under-penetrated are you in those markets and really as talk of the slowdown turns global, how should we think about that part of your business in being able to continue to show revenue growth overall?

So the first thing is we lowered guidance a little bit because of the Euro/Dollar affects issues, but volume still continues to grow. What we are being it's -- we are very under-penetrated in the U.S.

We are even more under-penetrated in the major countries in Europe. So I don't think we are constrained in near-term or mid-term for the lack of patients or potential, but I think it is appropriate to be prudent here about the nearer term outlook.

And we believe with the U.S. in recession, Europe will follow and it's only prudent to believe that this could get a little softer.

So we are counting on the economy being a more difficult scenario. Still believe there's lots of patients and doctors out there and we are going to do our best to create growth, but we believe it'll be slower growth overall.

Okay so as we look out maybe longer term than the outlook you've provided, its safe to say you are still expecting growth on the revenue side overtime, despite the uncertainty that's out there? And I guess the second follow-on to that is depending on your answer, are you expecting to show improved operating leverage?

Growth be damned, essentially, if growth continues either way or becomes flat?

So let me go back to what I said or close to what I said in my comments. And that is by making, taking the hard actions we've taken and making sure we can be as efficient as we can be, we are putting ourselves in a position even in a slower growth environment, to maintain profitability even while we are continuing to invest in our important strategic objectives.

So let me just answer it that way and we'll tab the opportunity in Las Vegas at our Investor Day as well as in January to talk much more fully about our outlook for 2009.

Okay and last one on Teen, now that you've got in some usage and some anecdotal feedback are you still expecting these initial docs to kind of do a trial period to see their outcomes? Or have you had some more positive feedback or learned anything new, relative to that initiative?

The answer is yes. That is just a behavior that Orthos show and we, especially for mainstream part of their business, we expect them to try it on a few patients and experience those great results and get going.

What's interesting is the doctors that have gone the farthest were among the early ones to try it in pilot. They went through their learning curve.

They've had great results. They've seen terrific patient compliance and they continue to grow and I think and when we look at our data they actually significantly increased utilization, even through quarter that typically is slower for us in Q3.

So we did get some of their Teen business in Q3, which was one of our objectives. And they are putting more effort into Invisalign broadly in their practice.

So it's actually helped us kind of recharge their practices.

Okay great thanks a lot guys.

Thanks.

Thanks Matt next question operator.

Thanks for taking my question. I just have a couple of questions here.

The first question is on your cost reduction program that you've initiated. You mentioned that so many of the operations would move down to Costa Rica, some of them being customer-facing parts, such as customer care and credit and collection.

I'm just kind of curious how you guys and what the strategy and the tactics you have on this? Whether you are going to use some outside vendors for this or are you guys are trying to hire people in Costa Rica to cover this?

The reason being my understanding is that Costa Rica is a Spanish-speaking country, and I don't know how that would work with English-speaking customers here. Notwithstanding there, there should be a lot of high-quality employees.

I am just curious what kind of, how this all comes together as you transitioned this as part of your business?

Sure. Maybe I can take a moment and remind you that when we took a fresh look back in 2001, 2002, if we could set up a major facility anywhere in the world where the skills and competencies we needed which included good English-speaking skills, educated work force, certainly in that environment stable political economy and all that, we zeroed in on Costa Rica.

Secondly it's aligned with central time zone of North America, U.S. So, we already have close to 700 employees at our three facility that already interface a lot with our doctors on clinical issues and other matters and our customers, our doctors look at that place as a kind of a strength for us.

And it is a core competency for us. So, English as a second language at least is very broadly a reality in Costa Rica and these will be at our employees.

It actually allows us to build a deeper work force and offer job growth, management opportunities for a lot of our employees. So we actually, while it is very disruptive for our employee work force here, we've got great people and we are going to say goodbye to them over an extended period of time.

We've given them lots of notice. We are going to work to transfer this very, very well.

But it does give us the ability to build a larger customer-facing organization in Costa Rica and have that become an even more important part of the Company.

I appreciate the detailed answer. Moving on to the overall sort of outlook if you will, I know you guys don't provide guidance going forward.

But I mean, when we think about the toughening environment and it seems to me that over the last couple of quarters, projecting the following, the succeeding or projecting the guidance for the rest of the year, if you will, was a little bit of a challenge and then there had to be some adjustments made down the line as things changed so rapidly. How should we think about long-term, as you guys provide guidance going forward?

And I don't know whether you will provide some of that during the upcoming, the analyst meeting, but as you provide those numbers, I mean how should we really interpret that? Do we think of that as a ballpark target numbers that we should consider, based on the current environment or you guys have putting a lot of stake on some of these figures.

And as you get further out into the future, say, over six months to 12 months, what kind of confidence level can we have on your guidance?

There's no question that it's more difficult for visibility looking forward. We continue to do all the normal tracking and serving, everything else.

Our near-term visibility remains the same about 30 days based on the difference between case received and case shipment. We know our low-volume docs are more conservative in their approach and less likely to engage in procedures like this.

And beyond that, Spencer, we can't project on the current turmoil in the financial markets and the impact on consumers is going to affect our docs, our customers and their patients. What we did say is our view of the quarters ahead is a bit more conservative and I think that's where I ought to leave that.

Thanks very much.

Thanks Spencer, next question please.

Hey guys, thanks for taking the question.

Hey Issac.

Hey Issac.

Sorry to pick on this item one more time and I understand that it is a difficult marketplace that's moving very quickly, but you guys have lowered guidance a couple times this year and I'm just wondering what steps can you provide us statistically that you are taking to improve your forecasting, particularly as it relates to forward quarter guidance? I think management credibility is nearly as important as the fundamentals in this environment.

So, anything here that would be significant, I think, would be welcomed by investors.

Issac this is Ken. From our internal forecasting point of view, we take a pretty diligent view of looking at the forecast from a bottoms up and tops down basis as we move into any quarter and try to call the quarters as we see them.

Now, one of the things that we had a hard time predicting was the exchange rates. If you think about exchange rates in Europe going from 155 in the middle of August down to 125 today in a two month period of time certainly back in the summer timeframe, we were forecasting revenues with a higher exchange rate certainly has an impact.

Then also over the last two months or so in the economic environment, certainly, there's been a lot more turmoil. And I'm not sure if anybody is specifically being able to hone that out and understand what the specific forecast ramifications of that are.

We are doing the best we can with the information we have and as Tom said, we are certainly being more conservative in our views looking forward with everything going out in the marketplace.

Okay and then on the Invisalign Teen, it sounds like you guys are getting a good start there and I'm wondering do you guys think you can get some level of reimbursement for the product? And if not, how do you look at your market share for that type of a product versus traditional wires and brackets over time?

We have the same reimbursement opportunities through prepaid standard dental insurance that every other orthodontic appliance has, as long as it is full orthodontic treatment, and so that means if you have a $2,000 benefit for covered life, our doctors get to collect that payment and then the patient is out-of-pocket is the rest of the defiance. So, there is no difference in much of dentistry and orthodontics is not an exception.

There's very little public forms of reimbursement, Medicare, Medicaid or other kinds of payments. So, we are largely in orthodontics for certain private pay.

So, there's really not a reimbursement opportunity. There may be in some other countries around the world over time, but those countries today, the UK, Germany that have specific dental reimbursement or orthodontic reimbursement, some of those reimbursement structures are in the process of undergoing change, and probably will not be a net benefit for the current model.

So, we're basically private pay, our opportunities with our doctors is to help motivate patients to seek a better healthier their smile and we are doing reasonably well with that.

Okay and then just lastly on -- looking back how do you feel about your yield on the ad spending you did in the first half this year and do you see maybe the mix of channels that you employ changing in '09 and maybe more on the online side versus television or print? And then are you saying any change in rate from your various ad vendors?

Do you think that that market is becoming more favorable? Or are you still waiting to take a wait-and-see approach on your ad budgets for next year?

So, when we take the last part of that first, there is a lot of prepaid ad purchasing that goes up in events. We will have better visibility the next 30 days if, in fact, there is unsold space and ad rates start to come down.

But again we are heading right in to the holiday season and a lot of people that aren't using [year-over-year command]. So I guess if you listen to media experts, they are not forecasting dramatic drops in spend because the big household names are out there working as hard as ever.

That's the first answer, so we don't have any visibility to ad rates going down in near-term. The second part of that is we are very, very pleased year-to-date we are ahead of our expectations for all the metrics that we track.

If there is an area where we question and it is probably has to do with likely some stretching of the time frame for a prospective patient from the moment they get engaged with us, start talking to doctors until they actually decide to start treatment. We think that's probably one specific way and can't really quantify it yet, one specific way that the broader economy may be impacting that cycle.

But, again, we've tracked that out to 12 months, so it's a little too early to isolate. But to this point, web traffic qualified responses and ultimately qualified leads are ahead of our plans down slightly from Q2 because our media spend was lower in Q3, but ahead of our expectations year-to-date.

So we are again we are satisfied, but we are watching very carefully to see what could be going on here.

Okay thanks.

Thanks a lot I have a couple of questions here. So first of all, I guess I would make the comment that I'm surprised actually that revenues aren't going to be worse in the fourth quarter than what you guys are forecasting.

You are still, despite the weakness you are still looking at year-over-year growth in the fourth quarter. So Tom, a couple of questions on that.

First of all, what do you think differentiates your business from some other parts of the dental market, that we are seeing actually go negative? Or other discretionary health care items?

And then, as a second part of that maybe talk to us about what are the dynamics of the amount of time, the lag time it takes from somebody thinking about the purchase, talking to his dentist or orthodontist and then actually doing it? And so that the question there really is, we've seen a huge plummeting of consumer confidence.

Is the fourth quarter when you would expect that to show up or should it be the first quarter or the second quarter of next year when all of that really starts to flow into the numbers?

Let me answer your second question with a very firm I don't know. There are lot of experts that just look at this as a very discontinuous set of events.

We just you know the media experts, advertising wizards, people that rely heavily on statistics and trends and inflection points, we don't know enough yet to see what's really going to happen as far as that is the real economy what the implications for ultimate job loss are. But there is actually along with the Conference Boards data today on consumer incentive being the lowest 39 at a rating of 39 and 40 plus years ever.

We also have the first turn of leading indicators they track going positive. But that also are long lagging those are long leading events.

We simply don't know yet. I'm going to answer ultimately your second part question by saying what's underneath most of this is we are so under-penetrated where we are, that there are many, many consumers and I know many of them that are saying boy now is not the time for me to buy a new car to do anything.

I can wait for a better smile. Whatever the choice might be, we still have millions and millions of people that do have the resources, they have their dental insurance but aren't worried about their jobs.

The real economy is not completely in a ditch. Its going to go through some pressure for sure.

And we make get into that 10% - 12% employment which would be badness. But with that said, we think we are so under-penetrated we have an opportunity to pick that off.

And now maybe I'll come back to that comment in just a second here. The first part of your question, I was just down at ADA about, why are we maybe not as bad as you thought or others may have thought.

I'm going to knock on wood here. We believe we are doing the right things.

We have a very differentiated product, both in for our customers into their practice and our value propositions to consumer's potential patients really resonates with them. And again, in that very under-penetrated space there is still lots of people there.

I've talked to maybe 100 different doctors in San Antonio a week or so ago from people who do a lot of veneers to people who do more traditional drill and fill. And there seems to be a pretty big -- the very, very high-value procedure for full mouth veneers though it seems like that business is really down.

There are practices that are down 30% to 40%. If that was their mainstay they are working to fill that.

But in speaking to a lot of dentist, their schedules are pretty full. Their traffic is still good in-office.

I think the bigger factor from our perspectives now and we see this in our low-volume GPs, they have a tendency to become more conservative and not try to offer any kind of higher value procedure to a patient with the thought that the patient might say, 'Are you crazy? Forget it.'

So they are kind of pulling their horns and we are doing what we can to help them. Assist is actually going to maybe help us get back in the game with some of those low volume customers.

But ultimately if you go back to your first part about the top line, what we've done over the past two quarters now is to put ourselves in a position with our business model that we have more flexibility than we've ever had. And are less dependent on an increasing level of volume to drive operating leverage in our business.

So as I said in my comments, we believe even in a slower or slowing growth environment even while we are investing significantly in our key strategic priorities, we can maintain profitability and create a greater level of flexibility in our business model. So again can't no, we don't know about the future.

We think its going to be a difficult environment in the next four maybe six quarters. But we believe, we are a far better company and we'll come through this and start growing again well as the economy, broader economy starts to accelerate.

Okay, great. Thanks for that answer.

When you -- so maybe for those of us who do have to put models out there for 2009, at this point, do you think is base case that we say, here's what they are going to do in the fourth quarter and that's about what things look like for the next several quarters? Or is it really just too early to even tell that?

Taylor this Ken I think the latter. I think is too early to tell that.

I mean as Tom mentioned in his comments, we are certainly more conservative as we are thinking about the quarters ahead. I think one of the things that you can think about and now you actually mentioned that on the call which was the cost-cutting actions that we've taken, certainly have positioned us to continue with strategic investments and products investments with maintaining basically a run rates of expenses.

We exit quarter 4 here and keeping that in mind as you go forward, but certainly from a top line perspective we are going to be much more conservative. But we are not going to speak to guidance at this point in time.

Okay. On the restructuring program when you talk about maintaining profitability, as you look at '09, are you telling us you think you can maintain an absolute level of profitability above 0?

Or are you saying given what we know about the potential top line environment, maybe it's flat, maybe it is even negative, we can keep profits where they are from the 2008 level?

Yes. I guess I'd hold off Taylor on comments on guidance until we get out to the year-end here.

But from our perspective as we look at the economy it certainly is impacting the business especially as Tom said, low-volume doctors. So again I'm just going to go back to the words we have been using which is conservative in our view as the economy going forward.

And what we're trying to do is position the Company to maintain profitability on a go forward basis through a tough economic time.

Last question, on the impact of Visalign Assist in 2009. Just remind us what's the deferral -- this is a -- you are going to have a high revenue deferral component here.

So how much of your GP customer base do you think that could affect in 2009?

We just introduced the product to the marketplace. It's for doctors coming out of certification.

And we are expecting it to help those doctors. But they are going to be starting a few cases with this so it is going to be a slower ramp as we go through 2009.

The thing to think about is that doctors would get shipped cases in batches. If it's one batch, we will recognize the revenue immediately.

If it's more than one batch, we will recognize it when they complete the case. And it will depend on each case submitted by the doctor and the patient that he's trying to treat.

And maybe to add to that a little bit is, you think about the scope of our new doctor CERT training. We provide those numbers typically.

That's probably the footprint you would imagine going after quickly, on a go-forward basis as well as, so reaching back some. So we are not going out to 20,000, 30,000 GPs quickly with this new product.

We are really going to isolate the newly certified docs and overtime circle back to those very low docs, low-volume docs that aren't in the game.

Okay. Thanks a lot you guys.

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

Oh, I guess I get to sneak in for a follow-up. Thank you.

Right.

I just wanted to touch on some metrics if you could. I wanted to see if you could provide us with the percentage of like the 80, 20 percentage?

I don't know, if there are utilization trends for your top maybe 10% or 20% docs? I think we all at least have an idea that they make up… they do a large volume cases kind of like you've said on the call.

Are there any metrics you could provide there?

What I will do is kind of maybe repeat what we've spoken about before in general terms. We again have a large fragmented base of relatively speaking low volume, low volume customers.

And it's a little different from Ortho and GP. On the Ortho side, kind of the top in a given quarter, we have 3000 to 3500 orthos in North America submitting cases and probably the 1200 of those orthos make up a little better than two-thirds of the volume.

It is a very long tail to where you go down to the lowest volume orthos submitting might only be doing one or two. So I think again, at the ortho level, it's not going to be 20.

It's more like one-third, two-thirds. One-third of the docs, two-thirds of the volume.

If we extract out of that ortho volume and say, look to the top 10% of doctors, they actually had both sequential and year-over-year increases in utilization. We spoke about that in general.

The common theme there was they were working with Teen. Not all of them were doing Teen, but those practices that had Teen in them, they all went up and those higher volume orthos did very well in Q3.

Interesting because it's usually one of our softer ortho quarters. So we are not surprised that ortho utilization is down in general in Q3 in North America because that is a very typical seasonal effect.

There's other things going on and we think the softness in the economy is part of an effect there. It is a little hard to see clear patterns on the GP side because it's a very different distribution.

There's fairly few really high-volume GPs and then there's this very long tail of 10,000, 15,000 low-volume docs. And I wish it was 80/20, it would be easier for us to cover that 20%.

It's not as clear there. But again, the utilization… utilization was down broadly in GP.

And the high-volume GP is actually up a little bit, but it wouldn't be the top 10%. It would be actually smaller than that.

The biggest effect on GP and it pulled the whole thing down is probably half of the GPs are going down. They are lessening their focus on Invisalign and other high value procedures.

And as a result, their volumes have gone down. Therefore total average utilization goes down.

That’s kind of what's behind the numbers. Does that answer your question?

No, that does. That's fair enough.

Just real quick if I could just follow on that. Have you seen any… I guess have any of your marketing programs, let's say like case rebating, what not, to the orthos and GPs, has that helped reverse the trend of lower utilization?

Or is it just that to your point before that the decision making process is a little bit pushed out and it's just not, the business isn't there just yet?

I think it's the latter. The rebates have been a very effective way to share price and value with our biggest customers rather than a broad effect.

We look at it as a strategic issue. The bigger issue driving broad utilization numbers is deceleration in low-volume orthos and deceleration in low-volume GPs.

And we think that's the economy affecting their willingness to market, differentiate their practice, put effort into high value procedures. And again, we are working on trying to do that but I think Assist is a step one to try and get at that on the GP side.

It is helpful. Thank you.

Thanks very much.

Thanks. Thanks, Seth.

And that concludes our conference call this afternoon. Thank you for joining us.

We look forward to seeing you at our Analyst Day in Las Vegas on November 21. If you have any follow-up questions, please feel free to contact Investor Relations.