Jul 22, 2010
Align Technology, Inc. (ALGN)
Executives
Shirley Stacy – Senior Director, IR Tom Prescott – President & CEO Ken Arola – VP of Finance & CFO
Analysts
Derek Leckow – Barrington Research Associates Matt Dolan – Roth Capital Partners Jose Haresco [ph] – JMP Securities [ph] Jonathan Block – SunTrust Robert Gold – Brigantine Advisors
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Align Technology second quarter 2010 financial results. At this time, all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce Shirley Stacy of Align Technology. Thank you Ms.
Stacy, you may begin.
Shirley Stacy
Good afternoon and thank you for joining us. I’m Shirley Stacy, Senior Director of Investor Relations.
And 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 our second quarter fiscal 2010 financial results press release today via GlobeNewswire and FirstCall which is available on our Web site at investor.aligntech.com. Today’s conference call is being audio webcast and will be archived on our Web site for approximately 12 months.
A telephone replay will be available today by approximately 5:30 PM Eastern Time through 5:30 PM Eastern Time on August 4th. To access the telephone replay, domestic callers should dial 877-660-6853 with account number 292 followed by pound and conference number 353357 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 of Align’s future events, product outlook and expected financial results for the third quarter of fiscal 2010.
These forward-looking statements are only predictions and involve risks and uncertainties such that actual results may vary significantly. These and other risks are set forth in more details in our Form 10-Q for the fiscal quarter ended March 31, 2010.
These forward-looking statements reflect beliefs, estimates and predictions as of today, and Align expressly assumes no obligation to update any such forward-looking statements. Please also note that on this conference call, we’ll 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 posted on our Web site under Financial Releases and have furnished to the SEC on Form 8-K. We encourage listeners to review these items.
We’ve also posted a set of GAAP and non-GAAP historical financial statements, including the corresponding reconciliation and our second quarter conference call slides on our Web site under quarterly results. Please refer to these files in more detail for information.
And with that, I’d like to turn the call over to Align Technology’s President and CEO, Tom Prescott. Tom?
Tom Prescott
Thanks, Shirley. On the call today, I’ll cover some highlights from the second quarter and provide an update on our strategic initiatives.
Ken will follow with some detail on our second quarter financials and outlook for the third quarter. I’ll come back with some closing comments and open the call up to your questions.
Q2 was an outstanding quarter for Align. Our Invisalign business continues to outperform our expectations resulting in our third consecutive quarter for record revenues and case shipments even without the positive effects from the release of 14.3 million of previously deferred revenue for Invisalign Teen as well as a credit of 8.7 million from an insurance settlement related to the OrthoClear litigation.
Overall, Q2 volumes were strong, particularly for our international channel which helped drive sequential and year-over-year growth for Align. We are pleased to see continued strong interest among our leading customers.
At key customer events including the AAO and CDA in North America and several smaller meetings in Europe, we’ve had a chance to spend time with many of our customers and gain a current view of how they’re doing and what we can do to help continue or we can continue to help to them grow their businesses. On a sequential basis, we also saw improvement with our lower volume customers.
Field sales reps in North America continue to focus their efforts on helping those doctors that want to increase their confidence in treating with Invisalign and grow their practices. A significant number of our lower volume customers are very interested in increasing their use of Invisalign and practice development programs such as Invisalign days in which a full day is allocated for Invisalign consultations in case management have been particularly helpful for those practices.
The primary way we’re building our business is to continue driving adoption of Invisalign into existing practices while expanding our customer base by training the right practices in North America and internationally. We made progress in both these areas in Q2, so let’s review the key metrics that measure our performance.
Utilization rates are what we call same practice sales of our product and the number of new doctors trained. In Q2, total utilization increased across our customer base and was up again both sequentially and year-over-year to 3.7 cases per quarter.
This is compared to 3.5 in Q1 and 3.0 in the same quarter last year and reflects an increase of 6% and 23% respectively. By customer channel, Q2 utilization increased to 5.8 cases per Ortho, 2.8 cases per GP, and 3.8 cases per international doctor.
An increase of at least 5% sequentially and 24% from the same quarter last year for each channel in North America and increase of 4% sequentially and 8% year-over-year for international doctors. This performance is consistent with our goal of increasing utilization of Invisalign in practice as we gain share.
During Q2, we trained 960 new doctors, compared to 915 in Q1 and 1,480 in Q2 a year ago. Of those, 565 were North American doctors and 395 were international.
Now I’d like to turn to an update on our strategic initiatives. As you know, our strategic game plan has a series of key elements that we discuss briefly each quarter.
The first is to accelerate product and technology innovation which includes product like Invisalign Teen as well as significant evolution in new features and functionality and in customer phasing software. Second, continually working to enhance the customer experience, which we typically address through evolutions in those customer facing systems.
Third, increasing the effectiveness of our consumer demand creation process and extending brand awareness for Invisalign. And finally, continuing to drive international growth principally in Europe, while we’re opening up additional new markets around the world.
So starting with product first, I’ll provide a brief update on Invisalign Teen, which for us means both the specific Invisalign Teen product and the all important teenage orthodontic segment. In Q2, we continued to gain traction in the teenage market segment for orthodontic case starts.
Teenage patients 19 and under using Invisalign products increased 10% sequentially and 40% year-over-year to make up 22% of total worldwide volume. This is compared to 20% of worldwide volume in Q2 2009 and 17% of the total in Q2 2008; reflecting continued steady share gain in the teenage segment.
In addition to gaining share of the teenage segment overall, the average age of our teenage patients has begun shifting towards younger patients, 11 to 17 years old, which represents the bulk of teen orthodontic case starts. In Q2, the average age of our teenage starts was 15.5 and we’d expect it to get a bit younger as our penetration in this segment continues.
In terms of our Invisalign Teen specific product, Q2 revenues were 8.4 million or 9% of total revenues, an increase of 3% sequentially and 53% from Q2 a year ago. Q2 teen volume was 6,800 cases or 10% of total volume, a slight decrease from 7,400 or 11.6% of total volume in Q1.
As mentioned on the Q1 call, the initial Invisalign Teen promotion was intended to drive initial usage and repeat rates and was very successful in getting doctors to use Invisalign Teen on their patients, both teens and adults alike. As the promo was then changed to exclude adults, the comps are masking the continued underlying growth of teenage patients.
For Q2, North American teenagers using Invisalign Teen increased 10% sequentially and 52% from the same quarter a year ago. This nice progress plus faster growth in the teenage segment overall means we’re continuing to gain share.
Beyond new market-specific products like Teen, we continue to deliver significant evolutions in product features and functionality as well as customer-facing systems, like the one we released last October. In this fall we will launch the largest such evolution in our history, a collection of innovation that will touch every product and virtually every system at Align that has been engineered to deliver even better, more predictable clinical results with wider applicability that will allow our doctors to treat more complex and challenging cases.
As part of this launch, significant improvements and enhancements are being made in our customer-facing systems like VIP and ClinCheck. These improvements are designed to make it easier for our doctors and staff to communicate their treatment plans, reduce ClinCheck treatment plan revisions and manage account details.
We’re very excited about what’s coming, because we believe these new features and overall improved performance will have an even greater positive impact on adoption than we saw with our very successful release last October. Over time, we expect a significant evolution will continue to support more widespread adoption into our customers’ practices.
As we get closer to release, we’ll have more detail to share with you regarding these very exciting developments. Turning to consumer demand initiatives, consumer interest remains strong during Q2 thanks to our integrated consumer marketing platform which integrates conventional print media, PR and event marketing and digital media and social networking.
On the conventional print and media side, our overall advertising spend remained flat compared to Q1, but was up compared to Q2 of last year. Our advertising messaging has been focused on two key targets, reinforcing the value of adult treatment, and reminding younger consumers about Invisalign Teen.
With media emphasis on national cable networks such as Bravo, Lifetime, the Travel Channel and TBS. On the public relations front, we continue to focus on programs that reach and educate prospective teen patients and their parents while also integrating adult treatment messaging.
In Q2, we generated great local and national media coverage in more than 220 markets through our Spring Beauty Tips & Trends and Family Summer Survival & Family Fun satellite media tours which were focused on Invisalign Teen. That’s for event marketing.
Summer offers a good opportunity to reach teens and their families at events where they live, play, or vacation. In Q2, we kicked off Journeys Backyard Barbeque Tour as an official sponsor and event participate.
This nationwide action sports tour hosted over 81,000 attendees in five major cities. In addition to our Invisalign Smile station at each tourist stop, we hosted a lead generating sweepstakes with onsite and online entry opportunities and brought in and involved local area doctors to do Q&A on consumer education.
Q2 also marked the launch of a new entertainment-based marketing platform to create even more excitement for Invisalign Teen. This is a great example of how event marketing, PR and digital media can work together to leverage our marketing opportunities.
This effort will involve celebrity Invisalign patients in a variety of marketing activities, including public relations efforts with the press and social media activity online. We’re very excited about launching this marketing platform in conjunction with Invisalign sponsorship of the annual Teen Choice Awards which airs primetime on August 9 on FOX.
As part of our red carpet presence, the Invisalign Smile Cam will be on-site with teenage celebrity correspondents encouraging celebrity attendees to have their photos taken to help support America’s Tooth fairy, the National Children’s Oral Health Foundation or NCOHF. For every celebrity that takes a photo, Align will donate $1,000 and those celebs smiles will be uploaded in Invisalign Teen Facebook page during pre-show broadcast.
In addition, we’ll offer each of the five nominees in the Choice Smile Award category, the opportunity to gift Invisalign treatment to an underserved youth. We’re working closely with FOX to coordinate an exciting and high impact Red Carpet presence at the show as well as heavy digital media sponsorships and social media activity leading up to and surrounding the Teen Choice Awards.
Shifting to our international growth initiatives, our international team delivered a strong quarter with record shipments in every region. Q2 case volumes of 16,000 or nearly 24% of our worldwide volume increased 23% sequentially and 33% year-over-year.
Q2 non-GAAP revenues of 22 million or 23% of total increased 10% sequentially and 22% from the same quarter last year. At the beginning of Q2, we launched Invisalign Lite and so far it’s off to a good start with positive adoption across Europe.
Recall please, that Invisalign Lite replaced Invisalign Express in Europe and offers doctors a new option for less complex orthodontic cases such as short-term aesthetic cases, relapsed cases and pre-restorative treatments using a limited number of aligners at a more affordable overall price. And to ensure that our international team continues to deliver those great results, I’m very pleased that we now have Richard Twomey onboard as our new VP International.
Richard has extensive senior management experience with several large med-tech companies including 13 years leading Johnson & Johnson’s DePuy Orthapaedic International Business. His first day on the job was July 12, and he is quickly coming up to speed in our market and our business.
Richard will ultimately be based here in San Jose and I’m sure many of you will get a chance to meet him sometime in the near future. I’ll now turn the call over to Ken for more detail on our second quarter financials and our outlook for Q3.
And I’ll come back for a few closing remarks.
Ken Arola
Thanks, Tom. Q2 was a great quarter across the board and I’m very pleased with our results.
Before I reveal our second quarter financials in more detail, I’d like to describe two items that are included in our GAAP financials that for comparison to previous quarters are excluded from our non-GAAP financials. First, the release of $14.3 million of previously deferred revenues for Invisalign Teen replacement aligners.
Recall, that Invisalign Teen includes up to six free replacement aligners and revenue for those aligners were deferred based on 100% of the fair market value for the aligners, or approximately $350 per case until the case completed or the aligners were used. Over the past two years, we’ve evaluated the usage experience of Invisalign Teen replacement aligners and now have sufficient historical evidence to support a deferral for estimated usage of approximately $20 per case.
As a result, in Q2 we reduced deferred revenue on the balance sheet for all in-process Teen cases to reflect the new estimated usage and recognized 14.3 million of incremental revenue. Going forward, for all new Teen case shipments we will defer approximately $20 per case for replacement aligners and recognize replacement aligner revenue as it is used.
With this significant lower estimated usage, we expect minimal deferral impacts to the P&L and balance sheet related to all new Teen case shipments. Although on a sequential basis, Q2 to Q3, there will be some favorable impact to revenue as a result of the change in estimated usage.
The great thing is that teenagers are being very compliant and not losing their aligners. Second, operating expenses reflect $8.6 million credit for insurance settlement related to the OrthoClear litigation.
Now let’s review Q2. Q2 net revenue was $108.2 million, an increase of 20.1% sequentially and 41.8% from the same quarter last year.
Non-GAAP net revenue which excludes the release of 14.3 million for previously deferred revenue just mentioned was 93.9 million, an increase of 4.2% sequentially and 23% year-over-year. The sequential increase in non-GAAP net revenue reflects higher Invisalign case volumes, offset somewhat by lower ASPs.
The decrease in Q2 ASPs resulted primarily from foreign exchange rates associated with international shipment, as the dollar has strengthened against the euro, higher levels of volume discounting including the 15% additional rebate we offered to elite and premiere providers in quarter two and to a much lesser extent the consumer rebate. Case shipments of 67.5000 in Q2 increased 6.1% sequentially and 27.3% from the same quarter last year.
Strong international volumes drove sequential growth in quarter two. North American Ortho and GP’s continued to remain engaged as a greater number of doctors obtained advance rebate discounts during the quarter.
On a year-over-year basis, case growth was strong across all customer channels. Q2 non-GAAP revenue by channel consisted of 39.8% for North American GP’s, 31% for North America orthodontists, 23.5% for international, and 5.7% for non-case revenue.
Q2 non-GAAP revenue by product consisted of 71.9% for Invisalign Full, 9.3% for Invisalign Express, 9% for Invisalign Teen, 4.1% for Invisalign Assist, and 5.7% for non-case revenues. Moving on to gross margin, Q2 GAAP gross margin was 80.4% compared to 77.4% in quarter one and 76% in the same quarter last year.
Stock-based compensation expense included in gross margin was $401,000 in quarter two, compared to 435,000 in quarter one and 406,000 in the same quarter last year. Q2 non-GAAP gross margin which excludes the impact from the release of previously deferred revenue was 77.4% compared to 78.3% in quarter one and 76% in quarter two, 2009.
The sequential change in non-GAAP gross margin primarily reflects the benefit from higher case volumes, offset primarily by the impact of foreign exchange rates and higher levels of volume discounts. Q2 GAAP operating expenses of 41.7 million include the $8.7 million credit for an insurance settlement related to the OrthoClear litigation.
This is compared to 49 million in quarter one and 51.7 million in the same quarter last year. Stock-based compensation included in Q2 operating expense was 3.8 million and compares to 3 million in quarter one and 3.9 million in the same quarter last year.
Q2 non-GAAP operating expense which excludes the credit for insurance settlement was 50.3 million compared to 49 million in quarter one 2010 and 51.3 million in the same quarter last year. Q2 non-GAAP operating expense was relatively unchanged from Q1 2010 and Q2 last year, and reflects lower than anticipated spending related to G&A expenses and international marketing programs during the quarter.
Q2 GAAP operating income was 45.3 million and compares to 20.7 million in Q1 2010 and 6.3 million in quarter two a year ago. Excluding the impact from the release of previously deferred revenue and the credit for an insurance settlement, Q2 non-GAAP operating income was 22.4 million or 23.8%.
This compares to 21.5 million or 24% in quarter one and 6.7 million or 8.7% in the same quarter last year. Our strong operating margins this quarter reflect leverage in our financial model from continued overachievement in volumes as well as lower than expected spending.
Q2 GAAP diluted earning per share was $0.42 compared to $0.19 in quarter one and $0.07 in the same quarter last year. Q2 non-GAAP diluted earnings per share was $0.21 compared to $0.20 in quarter one and $0.07 in Q2 of last year.
Now let’s move on to the balance sheet. Cash, cash equivalents and short-term marketable securities were $244.8 million.
This is compared to 186.5 million at the end of 2009. In Q2, we generated roughly 42.6 million in cash from operations compared to 18.7 million in quarter one and 18.5 million in the same quarter last year.
Q2 DSOs were 60 days compared to 59 days in quarter one and 63 days in the same quarter last year. Deferred revenue on the balance sheet decreased to 27 million at the end of the quarter as a result of the release of previously deferred seen revenue.
Now let’s turn to our business outlook for the third quarter of 2010. Before I get into the details, I would like to outline several factors that contribute to our view of quarter three.
The summer timeframe is typically the busiest time in ortho practices that have a high percentage of adolescent and teenage patients. Last year, we saw solid sequential growth from Q2 to Q3 and expect that we will continue to gain share in this very important segment this summer.
We believe the expected growth in teenage case starts will be offset somewhat by slower traffic in GP’s and European doctors’ offices. Also, because of the summer vacation schedules, we typically hold fewer training classes during summer months and therefore expect to have less training revenue in quarter three as compared to quarter two.
And lastly, approximately 90% of our international business is done in Europe where we are exposed to the euro. Therefore major changes in quarter-to-quarter in foreign exchange rates can impact top-line revenue and gross margin as we saw in quarter two.
Now let’s go through more detail on the outlook. For quarter three, we expect case volume to be in a range of 66 to 68,000 cases and revenue to be in a range of 92 to $95 million.
We expect Q3 GAAP gross margin to be comparable to quarter two and be in the range of 77.3 to 77.8%, reflecting some impact from foreign exchange rate offset somewhat by lower levels of discounting and lower levels of training revenues which carry nominal gross margin. We expect Q3 GAAP operating expenses to be in a range of 52.5 to $53.5 million.
The increase in Q3 operating expenses reflects increased spending in international sales and marketing to expand sales coverage and media advertising. Consumer demand programs in North America including advertising and media especially for Invisalign Teen around the Teen Choice Awards, as well as continued investment in product and technology innovation.
In Q3, we expect operating margin to be in a range of 20.2 to 21.4% and earnings per share to be in a range of 0.16 to $0.18. In quarter three, we expect the effective tax rate to be in a range of approximately 28 to 30%.
From a cash position, we expect to pay minimal cash taxes as we can utilize the net operating losses on our tax returns. We expect diluted shares outstanding for quarter three to be approximately 78 million shares and from a balance sheet perspective cash on hand at the end of quarter three is expected to be approximately 255 to $260 million.
I’ll now turn the call back to Tom for some closing comments.
Tom Prescott
Thanks, Ken. Just to recap, Q2 was another great quarter for Align and I’m pleased with our results.
Even without the two positive effects we previously discussed, we had our third consecutive quarter of record volume in revenues and our operating margin was 24% significantly higher than our expectations. As you can see from our results over the first half of 2010, we’ve also made significant progress towards our strategic initiatives.
We’re continuing to see the benefits from our new products including the new features and enhancements we launched last October and we’re even more excited about the upcoming release this fall. We continue to make steady progress in the teenage segment and are looking forward to competing for our share of share in the ortho’s office over the remainder of this summer.
And finally I’ll remind you to watch for us on August 9 at the Teen Choice Awards. And with that, I’ll open up the call to your questions.
Operator?
Operator
Thank you. (Operator instructions) Our first question comes from the line of Derek Leckow with Barrington Research Associates. Please proceed with your question.
Derek Leckow – Barrington Research Associates
Hi, everybody. Thanks a lot and congratulations on a great quarter, and especially congratulations on that Teen information, that’s really nice to see.
Tom Prescott
Great. Thanks, Derek.
Derek Leckow – Barrington Research Associates
The teenage patient volume being up 10% sequentially, you said that was masked by the fact you had this promotion going on. But I wondered will we see that become more or like the parity number or the number actually equals the teenage population adopting the product next quarter?
Tom Prescott
Probably a quarter or two we’re going to see some kind of comparative effects until we actually get past the time when we had that promotion in play which is really the end of the year. But I think what we’re trying to do is show you as you just described in two ways, one is what’s going on with the Invisalign Teen product as well as what’s going on in the all important teenage segment.
And I think, as we’ve described we’re sequentially growing in virtually every quarter which is our primary goal.
Derek Leckow – Barrington Research Associates
And does this have more of an impact over the summer month, as you mentioned this is when we see more of the balance of teenage case starts beginning here in this quarter. It will be tougher for us to see that I think in the fourth quarter; is that right?
Tom Prescott
Well, I guess maybe stepping back, we do know that the lion’s share, an outsized percentage and we’ve heard numbers as high as35% to 40% of the pediatric and adolescent starts in the North American ortho’s office happen during those summer months, kind of June to the beginning of September. So that’s where the traditional orthodontic suppliers do most of their volume.
We’re trying to bore our way and get some of that share. So if we can show sequential increase through the whole cycle that’s positive, we still have a lot of head room to grow.
But I guess I don’t want to get into Q4 yet, let’s see where we wind up through the end of Q3 and then we’ll talk about our expectations for continued Teen growth into the fourth quarter when we get there.
Derek Leckow – Barrington Research Associates
Yes, I think what I’m trying to gauge here, Tom, is just the rate of penetration. I think you guys mentioned you’re at, you thought 3% or 4% penetration in the Teen market overall.
I just wanted to know what you thought will be as a reasonable goal to achieve by let’s say next year at this time?
Tom Prescott
Let me just come back. What we think is I can’t guarantee every quarter’s going to be sequential growth, right?
(inaudible) seasonality and everything else. But what we believe is the kind of growth in general into the teenage segment is sustainable for a while; because with the opportunity is there is to continue to gain share.
Again to do that, we’ve got to execute well, we’ve got to have the right evolution in products and everything else. But, I think we have a view that we can continue to grow share for some period of time.
Derek Leckow – Barrington Research Associates
And just one more quick question here. The new product you’re launching in the fall, does this have anything to do with your collaboration with Danaher or is this a different product?
Tom Prescott
No, this is another significant evolution, more significant evolution than what we did last October, which really touched virtually every product. Features, functionality, software, et cetera.
And this will be probably one of the largest releases in our history.
Ken Arola
And Derek, this is Ken, just to add to that. It’s not specifically a product, but as Tom said features and functionality in the product and easier to use engagement with the doctors through our software systems.
Tom Prescott
Derek Leckow – Barrington Research Associates
And does this deal with the collaboration with Danaher?
Tom Prescott
This is simply Align. We’re still in the early stages of defining a very different unmet set of needs for extremely complex cases.
Today, they decline treatment because they don’t want just brackets and wires. And today, most orthodontists wouldn’t use Invisalign as their first choice.
That’s why they have a totally different opportunity.
Derek Leckow – Barrington Research Associates
Thanks. Let me jump back in the queue.
I appreciate all the questions. Thanks a lot.
Shirley Stacy
Thanks, Derek. Next question, operator.
Operator
Thank you. Our next question comes from the line of Matt Dolan with Roth Capital Partners.
Please proceed with your question.
Matt Dolan – Roth Capital Partners
Hi guys, good afternoon. Congrats on the numbers.
Tom Prescott
Thanks, Matt.
Matt Dolan – Roth Capital Partners
First question Tom, maybe you can help us with the pacing of the business that you saw throughout the quarter; now that the Proficiency minimum case requirements are behind you. Did you see that anticipated drop in usage from your lower volume group or was there less of an impact than you expected?
Tom Prescott
Well, maybe I’ll take the high level and Ken can speak in context of guidance. Again, when we sat here three months ago, we literally were announcing this to our customers as we announced it to you.
And so there was some uncertainty for us. What played out during the quarter looked a little more normal for summer; orthodontists were at their office at trade shows and other kind of things.
We saw GP’s that were trying to grow their practice, continuing to trying to grow their practice. Those GP practices that weren’t that engaged, didn’t do much.
We didn’t see anything precipitous with the minimum case requirements going off the board. And again, I think we’ve worked through that now.
We can put it behind us. And I think we have pretty good visibility going forward.
Ken Arola
Yes. And if I add to that Matt, if you think about some of the events we were at over the past quarter, like the AAO as an example, we saw good engagement with the orthodontists at that show and that was right after we had change the case requirement.
But the doctors were very pleased, they’re engaged, our booth was full all day long with the doctors getting training and the like. So just as one data point, the enthusiasm is there from the ortho perspective.
And the overall from a quarterly perspective, the GP’s maintained their volumes in total, relatively consistent with last quarter, quarter one to quarter two. And one of the other things I’m really pleased about is, we did have more advantage rebate discounts that we gave out but we have more doctors hitting those levels of cases for the quarter.
So that’s a good thing.
Matt Dolan – Roth Capital Partners
All right. That’s helpful.
And then, if we can shift to the international business, we’ve seen several quarters’ now very strong growth there. How sustainable do you feel that is?
Are you opening up new territories in Asia or South America, or is this just the core business and Western Europe still just kind of taking off? And is that a sustainable trajectory?
Tom Prescott
So the short answer is yes and it’s both. We continue to make progress.
Again, on small relative basis, in each of these markets we’re still small players. In some markets orthodontic penetration is lagging far behind the North America.
So if I take those in pieces, a core Europe which is the biggest part of volume, continues do very well. They’re a bit seasonal, and as you know everybody takes holiday for an extended period in the summer months.
So we typically see Q2 as a solid quarter for them and they show that. This was across the five major countries in Europe that we support and pretty consistent, solid progress in each.
And in each of those places we have opportunities to grow share and take more of the existing volume plus grow market in those places where we can add a little bit of consumer demand. When I come to the other geographies, certainly, China is a long-term opportunity.
There’s no revenue there yet. Japan grew a little on a very small base for us.
And then we have all the distributor geographies growing very nicely on volume, not quite as much revenue impact, because of the distributor margin, but growing actually at a rate faster in general than even Europe. So, very pleased with that.
But again, it’s coming about from implementing new products, all the new technologies we’ve talked about here. And as we make the product better and get the offerings better and create better support, more localized support, customers do predictable things and use us and let us be a bigger part of their practice.
So we’re pleased, but we still have a lot more to go. So I’m not going to make a long-term projection, but we’re still very under penetrated into the existing market in core Europe and I think there’s a lot more latent demand there to be had.
Matt Dolan – Roth Capital Partners
And then finally, there has been a fair amount of market chatter out there surrounding competition and pending competitive launches. Can you just maybe give us your general take on Invisalign’s competitive landscape as it stands today?
Tom Prescott
Well, we take every competitor very seriously. We are very prepared to compete.
And we’re going to compete through continual evolution of the product, making it better, becoming a more indispensable partner with our practices that work with us, helping them grow their volume and their practice, bringing patients to their office, covering them with the best and largest sales force in the orthodontic industry. Our nearest competitor to us has as a sales force less than half our size and they focus on brackets and wires and may be some day a little bit of clear aligners.
Our team focuses only on clear aligner therapy and is more practice management consultant than sales rep. So in addition, across the board we’re prepared to compete.
That doesn’t mean we’re looking forward to it, but it’s predictable that the leaders in this industry are going to do things like try to enhance their existing products. In Dentsply case, their MTM which they’ve had for many years.
In Ampco’s case they simplify. I think they’re probably looking around at the wreckage after the last economic downturn saying this is probably one of the only segments in the dental industry that actually grew.
So if I was in their shoes, I’d do the same thing. And we’re going to make sure that we’re prepared to compete with that.
Matt Dolan – Roth Capital Partners
Great, thanks for the time, guys.
Tom Prescott
Sure.
Operator
Thank you. Our next question comes from the line of Jose Haresco [ph] with JMP Securities [ph].
Please proceed with your question.
Jose Haresco – JMP Securities
Hi, folks and congratulations on a really strong quarter.
Tom Prescott
Thanks, Jose.
Jose Haresco – JMP Securities
Let’s talk about those margins for a bit. And Ken you’d mentioned that as long as you guys keep seeing those increases in volume that it will really help the gross margins?
At this point it has surpassed most of my expectations for where those margins could go. So could you give us a more of a kind of a longer term outlook on a three to five-year basis?
Where can we see those margins go in the long run?
Ken Arola
Well, Jose, I guess I’d answer your question as the following. We have our long-term model out there.
We’ve articulated that in the past. We’re certainly very pleased that we’ve been exceeding that model in the recent quarters.
But for the long-term, and our prospects of the business we still think that’s the right long-term model to be running under. And it does a couple things; it allows us to continue to invest on strategic initiatives.
At the same time, we think it’s providing us an opportunity to drive additional shareholder value over the longer term, while making those investments.
Jose Haresco – JMP Securities
So we’re still thinking kind of in the high 70s range, again over the long run?
Ken Arola
The model we have out there is 73 to 78 and we’re not providing any update on that. And we think we’ll be driving within that range for the foreseeable future.
Jose Haresco – JMP Securities
Can you differentiate between how much of that improvement could be volume-driven versus further investments in the manufacturing technologies and the production license you got in South America?
Ken Arola
Well, the biggest driver as far as margins are concerned, gross margins are concerned is volume. So as you know when we have a significant uptick in revenues or on case shipments in a quarter, that gives us more leverage in our factories, because they’re relatively fixed cost in the factory, both in Juarez as well as Costa Rica, at least in the short-term perspective.
Now over time, given case volumes and projected growth in the business, we continue to look at capacity and those types of things. We think we have ample capacity right now.
And so if we continue to drive additional case volume in the business, keeping those margins in the range that we have out there as a long-term model. Now the other thing I would say is, don’t forget that we do business in core Europe, in euros, so we are subject to exchange rate impacts there.
We saw some of that this quarter from quarter one to quarter two, which puts a little bit of downward pressure on margins. And then we’re continuing to just every year drive additional efficiency into the factories.
Jose Haresco – JMP Securities
Alright, thanks again.
Tom Prescott
Thanks, Jose.
Shirley Stacy
Thank you, Jose.
Operator
Thank you. Our next question comes from the line of Jonathan Block from SunTrust.
Please proceed with your question.
Jonathan Block – SunTrust
Thanks and good afternoon, guys. First question, just maybe on the consumer rebate program, you mentioned that it sounded like the program was successful.
I don’t believe you’re running that in 3Q. So just may be what you guys experienced through that program.
Is that something that you will bring up once a quarter on an annual basis; did it reach sort of the NPV goals, etc.?
Tom Prescott
Thanks, Jonathan. The short answer is it was successful and it wasn’t used as much as we had anticipated.
The reason why we spoke about it in the detail we did was because from an accounting perspective we had to project the worst possible impact about $1 million in cost and it got integrated into our guidance. And so with that as the framework, it was used substantially less and the way it worked out it was targeted at those lower volume GP practices that were wanting to elevate their practice and doing marketing and making efforts with the Align rep.
And during those Invisalign days or other marketing activities, the rep in the office having one of those in their pocket, if they felt there was a consumer those on the fence ready to start or not start a case they could use that for $250 coupon which could be redeemed if they started before June 31. The fact is probably less than a third or those or around a third of those were actually used for what were distributed out to the sales force for these purposes.
And the feedback which is great feedback from our customers said, it wasn’t required to get them to say yes. So that’s a wonderful, wonderful problem.
So it wasn’t used as much, there are no plans to do that in the future right now and it was a bit of a pilot and it accomplished a lot of its objectives.
Jonathan Block – SunTrust
Perfect. And then maybe just to switch gears and moving over to Proficiency, it would seem through your numbers and maybe even more importantly through your guidance that that should be behind investors.
But just maybe if you can speak to what your sales reps are encountering every day out in the field? Is Proficiency in your mind sort of rear-view mirror?
I mean, it’s over and done with or is it still cropping up some angst among some docs here and there?
Tom Prescott
Well, the answer is it’s really in the rear-view mirror for everybody. And there are no minimum case requirements.
We’ve had lots of opportunities to talk to thousands of our customers, ortho’s and GP’s. And for the most part, the discussions we’re having with them is, even if they didn’t really like it they understand what we were trying to accomplish.
And many of those practices are now significantly more engaged than they were before. So, the short answer again is yes, that is in the rear-view mirror.
Jonathan Block – SunTrust
Last one if I can just slip it in. I’ll sort of follow-up on Jose’s question, you said the gross margins, op margins; I think revenues I believe were up 23% year-over-year and non-GAAP OpEx actually it was down on an absolute basis.
So what’s going on there? Is it sort of all the restructuring investments in 2009 and where can op margins go long-term?
Thanks, guys.
Ken Arola
Sure. So I’ll go back to kind of the same answer that which is our long-term model out there.
We’re not updating at this point in time. We still again feel it’s the right model to be running the business under.
Over the long-term just going back to investments we want to make, and I’ll use China as an example, we’re going to looking at regulatory approval and then we’ll be building up a team over there, a small team but, its investment for us for the long-term revenue opportunities. Over the past quarter, we had some savings in the G&A area on our OpEx for reasons that were good reasons.
Our receivables are in excellent shape on days sales outstanding. So we had no requirement for bad debt reserves in the quarter.
We under spent in some legal fees in the quarter and other areas. And we’re seeing that flow through the P&L here right now.
So I think we’re being very mindful of our spend in the business and the restructuring we took when in late 2008, we started seeing some benefit over the second half of 2009 and we’re just continuing to be diligent about our spending and making sure we’re spending on the right things.
Jonathan Block – SunTrust
Thank you.
Tom Prescott
Thanks very much.
Operator
Thank you. Our next question is from the line of Robert Gold with Brigantine Advisors.
Please proceed with your question.
Robert Gold – Brigantine Advisors
Thanks for a great quarter, guys, really very strong. Just had a quick comment, we’ve heard from a lot of the comments across the med-techs base and also in the clinical testing markets that some patients are deferring physician visits and some elective surgical procedures have been deferred.
So just kind of a question about the overall market dynamics in Europe and the U.S. given the uncertainties right now.
And what you’re hearing from the clinicians in kind of a pushback on that level?
Tom Prescott
So I mean, the geographies we’re talking about are very different with very different dynamics. I guess, it was slightly better news that came out today about European kind of the 16 countries in euro zone that are reporting slightly better economic activity and growth, which may be takes some broad risk off the table.
I don’t know if that’s the answer. But the bigger fact for us, Robert is that we’re just very, very under-penetrated into an existing market.
And then on the margin, our cost effective efforts to expand the category, expand the market are being rewarded. So there are still a very large number of potential patients.
We’re decades behind some of the other aesthetic procedures and growth into the latent demand for ophthalmology and some other aesthetic kinds of procedures. So I think the blessing here is for us that we don’t yet track the broader market, because we have a slow penetration.
If I break that down a bit more, what we hear from our customers in North America and Europe is schedules are solid and full. They’re doing a lot of consults.
They’ve learned to fight a little more for the business. They aren’t taking it for granted, so I think they’re probably working a bit harder.
The orthodontists we talk to are extremely engaged. In North America they’re real busy time, and they’re at it hard.
In Europe they’re kind of tying up loose ends before everybody disappears for middle of July kind of turns to the late August and they disappear on holiday. So it’s pretty quiet over there.
But business is solid. If I get more focused in Europe, probably Germany has been a softer market in general, probably a bit more conservative.
UK, Italy, Spain and some others have been really good. But again, the bigger fact is that our penetration is still very low, and at least where we are as a player and as a segment, we don’t yet track market.
Robert Gold – Brigantine Advisors
That’s very helpful. Thank you.
And just finally, outside of the U.S., I think you mentioned that ASPs in Q3 may be under a little bit of pressure and you mentioned that it was largely due to currency impact. Is there anything else at play there in terms of overall mix or discounting?
Ken Arola
So with our guidance in relation to currency, we think there’s going to be some impact and we built some impact in there just like we saw this past quarter for core Europe. Other than that the only other things really impacting our ASPs is actually more in a favorable direction offsetting some of that potential FX impact is this past quarter we had an additional 15% rebate that we provided to our premiere and elite doctors.
That was a one-quarter promotion for those doctors in quarter two and we’re not repeating that in quarter three. So we’ll have some upside from and a little less discounting there and as well as on we only ran the rebate program in quarter two and that’s not repeating in quarter three.
So that will have some upward pressure on ASPs.
Robert Gold – Brigantine Advisors
Got you. Thank you very much.
Tom Prescott
Thank you, Robert.
Shirley Stacy
Thanks, Robert.
Operator
Ladies and gentlemen, at this time, I would like to turn the floor back to management for any closing comments.
Shirley Stacy
Thank you. And thank you everyone for joining us today.
That concludes our conference call. If you have any further follow-up questions, please contact Align Investor Relations.
Thanks and have a great day.
Operator
Thank you. Ladies and gentlemen, you may disconnect your lines at this time.
Thank you for your participation.