Align's Earnings Beat Ests, Revs Grow

Zacks

Dental technology company - Align Technology Inc. (ALGN) reported its first-quarter 2013 net loss of $42 million (or 52 cents a share), well below the year-ago earnings of $21 million (or 26 cents a share).  The decline in the net earnings was primarily due to the inclusion of impaired assets worth $26.3 million and goodwill impairment charge of $40.7 million.

However, after adjusting for one-time items, adjusted earnings came in at 26 cents, surpassing the company’s guidance range as well as beating the Zacks Consensus Estimate of 23 cents. Nonetheless, adjusted earnings were in line with the year-ago figures.

Revenues

Net revenue increased 13.7% year over year to $153.6 million in the reported quarter, surpassing the Zacks Consensus Estimate of $149 million. It also exceeded the previously guided range of $146–$150.5 million issued by the company.

Total Invisalign Clear Aligner revenues were up 14.8% year over year to $141.6 million. The revenues were primarily driven by 98,175 (up 15% year over year) cases shipped in the quarter. Revenues from Scanner and CAD/CAM services inched up 2.2% year over year to $12 million.    

The company recorded 34.5% of the total Invisalign Clear Aligner sales from North America orthodontists (up 17.2% year over year to $48.9 million), 34% from North American GP Dentists (up 6.6% to $48.2 million), 22.5% from the international market (up 7% to $31.2 million) and 9% from non-case revenues (up 88% to $12.7 million).

Margins

Gross margin contracted by about 110 basis points (bps) year over year to 73.5% in the first quarter. The margin contraction was on account of lower average selling price (ASP). The company witnessed a 9.2% increase in sales and marketing expenses to $42.3 million; 29.1% rise in general and administrative expenses to $30.3 million and a 7.2% increase in research and development expenses to $11.3 million. As a result, adjusted operating margin contracted 190 bps to 18.8% in the quarter.

Balance Sheet

Align exited the quarter with $328.7 million in cash and cash equivalents compared with $306.4 million at the end of fiscal 2012. During the quarter, Align also purchased 75 thousand shares for a total of $2.4 million. Currently, the company has $92.7 million remaining under its existing stock repurchase authorization.

Outlook

For the second quarter of 2013, the company expects revenue in the range of $153.6 million and $157.4 million. The current Zacks Consensus Estimate of $157 million remains at the upper end of the guided range. Earnings per share are expected in the range of 26–28 cents compared with the Zacks Consensus Estimate of 30 cents.

Shipments for the Invisalign clear aligner are expected to increase in the range of 7.2%–9.8% on a sequential basis to 102.2–104.7 thousand.

Our Take

Align exited first quarter 2013 on a positive note. The company’s revenue and earnings continue to increase, surpassing the previous guidance. However, the year-over-year decrease in the average selling price remains a cause of concern as it negatively affects the gross margin. This is reflected in the conservative second-quarter guidance. Eventually, the company will likely overcome the headwinds as it has performed well.

The stock currently carries a Zack Rank #2 (Buy). However, medical stocks such as Oculus Innovative Sciences, Inc. (OCLS), The Cooper Companies Inc. (COO) and West Pharmaceutical Services, Inc. (WST), which also carry a Zacks Rank #2 (Buy) are expected to do well and warrant a look.

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