Align Up on Better than Expected Earnings

Zacks

Shares of Align Technology Inc. (ALGN) inched up 1.6% to $59.42 after the market closed on Jan 31 following its 2013-fourth quarter adjusted earnings of 51 cents per share that rose from the year-ago level of 26 cents by 96.2%. Earnings per share also beat the Zacks Consensus Estimate of 43 cents per share. Reported earnings were the same as adjusted earnings compared with 12 cents in the 2012-fourth quarter.

For full year 2013, adjusted net earnings were $1.54 per share, up 36.3% from $1.13 in 2012. Reported net earnings came in at 78 cents per share for the year compared with 71 cents in the previous year.

Revenues in Detail

Revenues improved 24.9% year over year to $178.3 million in the fourth quarter, surpassing the Zacks Consensus Estimate of $172 million.

For the full year, revenues increased 17.9% year over year to $660.2 million, surpassing the Zacks Consensus Estimate of $654 million.

Growth in revenue was primarily driven by strong Invisalign sales from company’s international doctors in Europe and the Asia Pacific.

Segments in Detail

Revenues from Invisalign Clear Aligner segment (93.2% of total revenue) increased 25.2% year over year to $166.2 million in the reported quarter. This growth in the top line was driven by higher Invisalign volumes from orthodontists and GP Dentists, as well as higher international average selling prices. For the quarter, total Invisalign case shipments were 111,100, up 22.8% year over year, propelled by continued expansion of the company’s customer base and increased Invisalign utilization.

In the reported quarter, Align Technology recorded 31.3% of the total Invisalign Clear Aligner sales from North American orthodontists, 31.8% from North American GP Dentists, 30.4% from the international market and 6.4% from non-case category, which comprises Invisalign training, ancillary products and retainers.

During the fourth quarter, revenues went up 18.9% year over year to $52.1 million from North American orthodontists, 10.4% to $52.9 million from North American GP Dentists, 55.7% to $50.6 million from the international market and 21.8% to $10.6 million from non-case category.

Revenues from Scanner and CAD/CAM Services segment (6.8% of total revenue) rose 21% to $12.1 million in the reported quarter. This increase reflects continued penetration in the market and increasing market share gains.

Margins

Adjusted gross margin expanded by about 200 basis points (bps) year over year to 76.5% in the fourth quarter. Operating margin during the quarter expanded remarkably by 940 bps to 29.7% due to higher sales volume and increased gross margins.

During the quarter, Invisalign adjusted gross margins went up 100 bps to 79.8%. This was primarily driven by higher average selling prices and absorption of manufacturing costs from higher case shipment volumes. Adjusted gross margin for Scanner and CAD/CAM services increased 1,260 bps to 31.1% on the back of increased absorption of manufacturing costs through higher sales volume and higher average selling prices owing to lower promotional activities.

Align Technology witnessed a 18.3% year-over-year increase in sales and marketing expenses to $44.7 million but a 0.4% fall in general and administrative expenses to $27.9 million, and a 6.8% decline in research and development expenses to $10.9 million in the quarter.

For full year 2013, adjusted gross margin rose 90 bps to 75.4% while operating margin was up 220 bps to 24.4%.

Financial Details

Align Technology exited 2013 with cash and cash equivalents and short-term investment of $369.9 million compared with $334.9 million at the end of 2012. The company had no debt at the quarter-end.

In 2013, Align Technology generated $186.0 million in cash flow from operations, up 39% year over year. Capital expenditure decreased 49.3% year over year to $19.4 million.  Free cash flow for the year came in at $166.6 million, up 74.5% from the year-ago period.

Guidance

For the first quarter of 2014, Align Technology expects revenues in the range of $175.2–$179.6 million, with an annualized growth rate of 14 –17%. The current Zacks Consensus Estimate of $178 million is close to the higher end of the guided range.

Earnings per share are expected in the range of 32–34 cents, below the Zacks Consensus Estimate of 35 cents. Shipments for the Invisalign clear aligner are expected in the range of 110,100–113,100.

Our Take

Align Technology’s fourth-quarter 2013 financial results are encouraging with the company beating the Zacks Consensus Estimate on both earnings and revenue fronts.

We are also optimistic about the company’s initiative to reconvert six indirect country markets in Australia, New Zealand, Hong Kong, Singapore, Macau and Malaysia to direct Invisalign sales regions. The company also launched a few innovative products like Invisalign Outcome Simulator and SmartTrack.

Align Technology’s pipeline also seems attractive with Invisalign G5, the latest version of Invisalign, and ClinCheck Pro on the cards. Overall, the company possess positive potential with the management successfully implementing the three key strategic growth drivers, i.e. market expansion, doctor preference, and brand strength.

Align Technology currently carries a Zacks Rank #2 (Buy). Other stocks worth considering in the medical/dental supply industry are Cardinal Health, Inc. (CAH), MWI Veterinary Supply, Inc. (MWIV), andUroplasty, Inc. (UPI).Allthese stocks also carry a Zacks Rank #2 (Buy).

Read the Full Research Report on ALGN
Read the Full Research Report on CAH
Read the Full Research Report on MWIV
Read the Full Research Report on UPI


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