Align Technology (ALGN) Q3 Earnings Miss, Operating Margin Up
Align Technology, Inc. ALGN delivered third-quarter fiscal 2023 adjusted earnings per share (EPS) of $2.14, up 31.3% from the year-ago earnings. However, the EPS missed the Zacks Consensus Estimate by 5.3% in the third quarter.
GAAP EPS for the quarter was $1.58, reflecting a 69.9% increase year over year.
Revenues
Revenues increased 7.8% year over year to $960.2 million in the quarter but missed the Zacks Consensus Estimate by 3.7%. Moreover, revenues were favorably impacted by the foreign exchange of approximately $4.2 million year over year.
Align Technology, Inc. Price, Consensus and EPS Surprise
Align Technology, Inc. price-consensus-eps-surprise-chart | Align Technology, Inc. Quote
At the constant exchange rate or CER, total revenues in the third quarter were up 0.3% year over year.
Segments in Detail
The company has two reportable segments — Clear Aligner and Imaging Systems and CAD/CAM Services (Systems and Services)
Revenues in the Clear Aligner segment were up 8.5% year over year to $794.9 million. This figure compares with our model’s segmental projection of $815.9 million for the third quarter.
The growth was driven by higher volumes, increased Average Selling Prices and higher non-case revenues. Revenues were favorably impacted by a foreign exchange of approximately $3.8 million (or 0.5%) year over year. Total Clear Aligner shipments during the quarter amounted to 602,335, up 2.3% year over year.
Revenues from Imaging Systems & CAD/CAM Services were up 4.9% to $165.3 million in the quarter. Our model had projected the segment’s revenues for the third quarter to be $180.2 million.
Revenues witnessed a favorable currency impact of 0.3% year over year.
Margins
The gross profit in the third quarter was $663.1 million, reflecting an increase of 7.1% year over year. The gross margin in the quarter under review contracted 49 basis points (bps) year over year to 69.1% due to an increase of 9.6% in the cost of net revenues.
During the quarter, Align Technology witnessed a 2.4% increase in SG&A expenses to $408 million and a 15.3% rise in R&D expenses to $88.7 million.
The operating income in the quarter under review was $166.4 million, highlighting an increase of 15.8%. The operating margin expanded 119 bps to 17.3%.
Financial Details
Align Technology exited the third quarter of 2023 with cash and cash equivalents of $1.24 billion compared with the $942.1 million recorded at the end of 2022.
The cumulative net cash provided by operating activities at the end of the third quarter was $738.9 million compared with $424 million in the prior-year comparable period.
Currently, $1 billion is available for repurchases under ALGN’s $1 billion Stock Repurchase Program, which was authorized in the first quarter of 2023 to succeed the 2021 $1 billion program.
Full-Year Guidance
Align Technology provided an updated outlook for 2023.
For the full year, ALGN anticipates revenues in the range of $3.83-$3.85 billion (earlier $3.97 billion-$3.99 billion). The Zacks Consensus Estimate for Align Technology’s 2023 revenues is pegged at $3.97 billion.
For 2023, the company expects to report a GAAP operating margin of around one point lower than 2022 (previous outlook suggested slightly above 17%) and an adjusted operating margin of slightly higher than 21% (unchanged).
For 2023, Align Technology expects investments in capital expenditures to be approximately $200 million (unchanged). Capital expenditures are primarily related to building construction and improvements and additional manufacturing capacity to support Align Technology’s international expansion.
For the fourth quarter of fiscal 2023, ALGN anticipates revenues in the range of $920-$940 million. The Zacks Consensus Estimate for the same is pegged at $1.03 billion. The company continues to anticipate its adjusted operating margin to be slightly up on a sequential basis.
During the quarter, ALGN announced a definitive agreement to acquire privately held Cubicure GmbH for approximately €79 million, subject to customary closing adjustments and adjustments for Align’s existing ownership of capital stock of Cubicure. The acquisition is likely to close in the fiscal fourth quarter of 2023 or early 2024.
Our Take
Align Technology missed earnings and revenue estimates in the third quarter of fiscal 2023. The performance reflected lower-than-expected demand in a challenging macro environment, with published reports suggesting deteriorating trends in Dental practices and industry research firms.
On a positive note, the year-over-year increase in Align’s top and bottom lines garners appreciation. The expansion of the operating margin is another upside. A range of recent innovations developed, including ClinCheck Live Update for 3D controls and Invisalign Practice App, is expected to further revolutionize digital treatment planning for orthodontics and restorative dentistry.
The Doctor Subscription Program continues to be well received by Align’s customers and is currently available in the United States, Canada, Iberia and the Nordics, with further ongoing expansion in the EMEA region. The acquisition of Cubicure will further bolster Align’s existing intellectual property portfolio and know-how in direct 3D printing of appliances.
Zacks Rank and Key Picks
Align Technology currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks from the broader medical space are Inari Medical NARI, Insulet PODD and HealthEquity HQY.
Inari Medical, carrying a Zacks Rank #2 (Buy), reported a second-quarter 2023 adjusted EPS of 4 cents, beating the Zacks Consensus Estimate by a staggering 128.6%. Revenues of $119 million outpaced the consensus estimate by 2.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Inari Medical has an estimated earnings growth rate of 725% for next year. Inari Medical’s earnings surpassed estimates in all the trailing four quarters, the average being 66.8%.
Insulet, carrying a Zacks Rank #2, reported a second-quarter 2023 adjusted EPS of 38 cents, which beat the Zacks Consensus Estimate by 58.3%. Revenues of $396.5 million outpaced the consensus estimate by 3.3%.
Insulet has an estimated long-term earnings growth rate of 41.5% compared with the industry’s 14.4% growth. PODD’s earnings surpassed estimates in all the trailing four quarters, the average being 126.9%.
HealthEquity reported second-quarter 2023 adjusted earnings of 53 cents, which beat the Zacks Consensus Estimate by 12.8%. Revenues of $243.5 million surpassed the Zacks Consensus Estimate by 1.9%. It currently has a Zacks Rank #2.
HealthEquity has an estimated long-term earnings growth rate of 23.5% compared with the industry’s 13.4% growth. HQY’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 13.03%.
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