A major player in the malocclusion market,
Align Technology
's (
ALGN
) shares plunged 7.47% to close at $35.41 yesterday, following
the release of its preliminary third quarter results that missed
the Zacks Consensus Estimates on both fronts. The company also
provided a poor fourth quarter guidance which is a matter of
grave concern.
The situation is turning critical as Align is currently
conducting a goodwill impairment test of Cadent's business that
it acquired for $190 million last year. Disappointing performance
of scanner and CAD/CAM services business and the termination of
the distribution agreement with Straumann in Europe forced the
company to go for this goodwill impairment test. Straumann used
to market Cadent's product iTero intra-oral scanners in Europe
and North America. Final decision will be reflected in the fourth
quarter result.
Prelim Results
Align's preliminary third quarter 2012 net income was $24.3
million (29 cents per share), considerably higher than the
year-ago level of $19.3 million (24 cents per share). However,
after adjusting for certain one-time items from both the
quarters, adjusted earnings came in at 28 cents (within the
company's guidance range of 27−29 cents), missing the Zacks
Consensus Estimate by a penny but ahead of the year-ago quarter's
result by the same magnitude.
Total revenue increased 8.4% year over year to $136.5 million
in the quarter but was way below the Zacks Consensus Estimate of
$140 million. It also missed the company's guidance band of
$136.8−$140.8 million.
Align operates in two segments, Clear Aligner (product:
Invisalign system) and Scanner and CAD/CAM Services (products
include iTero and iOC intra-oral scanners and OrthoCAD services).
Total Clear Aligner revenue came in at $126.7 million, up 10.8%
year over year, driven by case shipments of 92.5 thousand (up
24.8% year over year) during the quarter. Invisalign teenager
case shipments increased 21.5% year over year to 24.5 thousand.
However, the company was disappointed with its soft Scanner and
CAD/CAM services revenues which were $9.8 million in the reported
quarter, down 15.5% year over year.
According to the company, more prominent summer seasonality
for capital equipment purchases acted as a dampener for its third
quarter performance as North American GP Dentists and
International doctors were irregular in this period due to summer
vacations. Align expects this softness to continue through
October which will be reflected in the next quarter's performance
as well.
The company recorded 70.7% of the total Clear Aligner sales
from North America orthodontists (up 15.1% year over year to
$43.1 million), 34.0% from North American GP Dentists (up 10.1%
to $46.5 million), 23.4% from international (up 4.8% to $29.7
million) and 5.9% from non-case revenues (up 19.2% to $7.5
million).
During the quarter, gross margin expanded 10 basis points
(bps) year over year to 73.5%. The company witnessed 5.2%
increase in sales and marketing expenses to $36.5 million; 10.6%
rise in general and administrative expenses to $23.9 million and
11.5% increase in research and development expenses to $9.9
million. Operating margin of 22.0% was up 40 bps year over
year.
Align reported international average selling price (ASP) of
$1,355 versus $1,560 in the year-ago quarter. The lower ASP
resulted from advantage rebate, promotional activity, product mix
combined with unfavorable foreign exchange rates. Blended pricing
slipped 4.9% to $1,320.
Align exited the quarter with $328.0 million in cash, cash
equivalents and marketable securities compared with $248.0
million at the end of fiscal 2011.
Guidance
Align provided its outlook for the fourth quarter of fiscal
2012 with net revenue of $134.2−$137.8 million, much lower than
the current Zacks Consensus Estimate of $148 million. For the
quarter, Align expects Invisalign clear aligner case shipments to
be in the range of 90.0−93.0 thousand cases (year-over-year
increase of 9.0% to 12.6%).
Also, the company expects adjusted EPS in the range of 21−23
cents. The Zacks Consensus Estimate of 31 cents remains far ahead
of the guided range.
Our Take
We are disappointed with both the preliminary third quarter
result as well as lower-than-expected fourth quarter guidance of
Align. The termination of the European distribution contract also
added to our concern. We remain worried about the current
economic uncertainty which continues to cast a negative impact on
dental procedures because of its elective nature. Moreover, the
company faces significant competition from players such as
3M
(
MMM
),
Danaher Corporation
(
DHR
) and
Dentsply International
(
XRAY
).
However, we believe that based on its several strategic
initiatives, Align will successfully overcome these headwinds.
Banking on its core product, Invisalign, the company witnessed
balanced sales growth across all its channels. In a recent
development, the company introduced its next generation of
Invisalign clear aligner material SmartTrack. The company expects
SmartTrack to become the standard Invisalign aligner material in
the first quarter of 2013 for Invisalign products worldwide. Over
the long term we have an 'outperform' recommendation on the
company.
ALIGN TECH INC (ALGN): Free Stock Analysis
Report
DANAHER CORP (DHR): Free Stock Analysis
Report
3M CO (MMM): Free Stock Analysis Report
DENTSPLY INTL (XRAY): Free Stock Analysis
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