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Align Technology Q3 Earnings in Line, Revenues Strong

Align Technology Inc.ALGN reported earnings of 34 cents per share in the third quarter of 2015, down 27.7% year over year. Earnings however, exceeded the company-provided guidance of 28-31 cents and were in line with the Zacks Consensus Estimate.

Per management, Align's third-quarter earnings were impacted by approximately 6 cents per share on account of the company's new additional Aligners policy, announced last quarter.

Revenues

Revenues improved 9.4% year over year to $207.6 million in the quarter and comfortably beat the Zacks Consensus Estimate of $205 million. The top line also exceeded the company's expectation of $201.4-$205.7 million. Align's third quarter revenues included a non-cash reduction of approximately $7 million related to its new additional Aligners policy.

The year-over-year top-line improvement was owing to solid Invisalign case volume growth across all the customer channels, partially neutralized by lower average selling prices (ASPs) on account of unfavorable foreign exchange rates and higher revenue deferrals.

Segments in Detail

Revenues from the Invisalign Clear Aligner segment (95.5% of total revenue) increased 11.3% year over year to $198.3 million in the reported quarter, primarily driven by Invisalign case volume growth across all customer channels.

For the quarter, total Invisalign case shipments amounted to 1,475,000, up 23.3% year over year, propelled by growth across all regions, with strong demand in international market and continued progress in North America. During the third quarter, Align added 2,260 new Invisalign doctors worldwide.

Revenues from Scanner and Service (4.5%) declined 20.4% to $9.3 million in the reported quarter, owing to the new iTero Element scanner, which commenced shipping only in Sep 2015.

Margins

Gross margin contracted 50 basis points (bps) year over year to 75.9%. On the other hand, Clear Aligner gross margin also declined 40 bps year over year to 78.8%. The year-over-year decrease in gross margin was primarily driven by lower ASPs, as a result of unfavorable currency exchange rates and the new additional Aligners policy, which were partially offset by lower manufacturing costs.

During the quarter, Align witnessed a 26.2% year-over-year increase in selling, general and administrative expenses to $101.8 million and a 38.3% hike in research and development (R&D) expenses to $17.8 million. Consequently, operating margin contracted a massive 880 bps to 18.3%, primarily as a result of the impact of the new additional Aligners policy on revenues, unfavorable foreign currency exchange rates, and investments in the business related to sales expansion, R&D and enterprise resource planning (ERP).

Financial Details

Align Technology exited the third quarter with cash and cash equivalents and short-term marketable securities of $484.8 million, up from $454.7 million at the end of 2014. The company had no debt at third quarter-end.

During the third quarter, Align Technology generated $60.1 million in cash flow from operations, resulting in a free cash flow of $49.6 million.

In the third quarter, Align bought back 662,000 shares for $18.8 million. These included 332,000 shares related to the completion of the company's previously announced $70 million accelerated stock repurchase (ASR) program and another fresh 330,000 shares. Currently, the company is left with approximately $111.2 million for further repurchases under the existing stock repurchase authorization

Guidance

For the fourth quarter of 2015, Align Technology expects revenues in the range of $223-$227.9 million. The current Zacks Consensus Estimate for the fourth quarter revenues is pegged at $225 million, within the company-provided guidance range.

Earnings per share for the fourth quarter are estimated in the range of 50-53 cents. The Zacks Consensus Estimate of $1.60 lies much above the guided range. Shipments for the Invisalign Clear Aligner are expected in the band of 154,900-157,400.

Our Take

Align Technology delivered mixed third quarter of 2015 with the top line exceeding the Zacks Consensus Estimate, and the bottom line meeting the same. However, on a year-over-year comparison, while revenues demonstrated a decent increase, the bottom line staggered.

Moreover, the introduction of the new additional Aligner policy substantially influenced the company's business in the reported quarter. We believe this factor will continue to impact Align's near term performance as well, as is evident from the company's anticipation of lower revenues in the ongoing fourth quarter.

On a brighter note, Align's double-digit volume growth in the North American market offers respite. Interestingly, customers are responding positively to Align's new sales structure, while management continues to make incremental investments in go-to-market, clinical education and customer support in the significant North American market. We believe such initiatives will enable Align to witness substantial volume growth from this market, going ahead.

Align Technology currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked med/dental-supply stocks include Antares Pharma Inc. ATRS , Patterson Companies, Inc. PDCO and VWR Corporation VWR . While Antares Pharma sports a Zacks Rank #1 (Strong Buy), Patterson Companies and VWR Corporation hold a Zacks Rank #2 (Buy).

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ALIGN TECH INC (ALGN): Free Stock Analysis Report

PATTERSON COS (PDCO): Free Stock Analysis Report

ANTARES PHARMA (ATRS): Free Stock Analysis Report

VWR CORP (VWR): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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