Align Technology Inc. (ALGN) reported earnings of 48 cents per share in the fourth quarter of 2014, down 5.9% on a year-over-year basis. Earnings per share during the quarter remained close to the lower end of the company-provided guidance range of 47–50 cents, although the same missed the Zacks Consensus Estimate by a penny.
For full year 2014, Align reported earnings of $1.77 per share, reflecting a year-over-year improvement of 126.9%. However, the bottom line missed the Zacks Consensus Estimate, once again by a penny.
Following the earnings release, Align's share price declined 9.6% to close at $53.05 on Friday.
Revenues
Revenues improved 11.4% year over year to $198.6 million in the quarter, well within the company's guidance range of $194.9−$199.1 million. The top line also beat the Zacks Consensus Estimate of $197 million.
The year-over-year improvement in the top line was owing to Align's Invisalign case volume growth across all the customer channels, which was, however, partially neutralized by lower ASPs on account of foreign exchange rates and higher discounts.
For full year 2014, Align reported revenues of $761.7 million, up 15.4% year over year and comfortably ahead of the Zacks Consensus Estimate of $759 million.
Segments in Detail
Revenues from the Invisalign Clear Aligner segment (93.9% of total revenue) increased 12.2% year over year to $178.1 million in the reported quarter, primarily driven by Invisalign case volume growth across all customer channels. Case volume growth was 14.2%, thanks to increased utilization, primarily from North American orthodontic customers as well as expansion of both North American GP customer base and international doctors.
For the quarter, total Invisalign case shipments were 126,905, up 14.2% year over year, propelled by continued expansion of the company's customer base and increased utilization from international and North American customers.
Revenues from Scanner and Service (6.1%) inched up 0.8% to $12.2 million in the reported quarter. This increase reflects the consistent benefit Align has gained from leveraging its combined Invisalign and iTero sales and marketing resources and taking full advantage of the Invisalign and industry events.
Margins
Gross margin contracted 60 basis points (bps) year over year to 75.9% in the fourth quarter due to the impact of foreign exchange on ASPs. Clear Aligner gross margin also declined both sequentially and year over year because of lower ASPs. In Scanners as well, gross margin deteriorated due to decline in ASPs, which partially offset more favorable product mix.
During the quarter, Align Technology witnessed a 24.4% year-over-year increase in sales and marketing expenses to $55.6 million, an 8.5% hike in general and administrative expenses to $30.3 million, and a 21% rise in research and development expenses to $13.3 million. Operating margin in the quarter contracted 380 bps to 25.9% due to higher operating expenses.
Financial Details
Align Technology exited full year 2014 with cash and cash equivalents and short-term investment of $454.7 million compared with $369.9 million at the end of 2013. The company had no debt at fourth quarter-end.
During 2014, Align Technology generated $224.7 million in cash flow from operations, resulting in a free cash flow of $200.6 million.
Align repurchased a total of approximately 1.9 million shares for $98.2 million in 2014. Align expects to repurchase another $100 million worth of shares in the next 12 months.
Guidance
For first quarter of 2015, Align Technology expects revenues in the range of $187.3–$192.4 million. The current Zacks Consensus Estimate of $199 million exceeds the guided range.
Earnings per share are estimated in the range of 29–30 cents. The Zacks Consensus Estimate of 33 cents exceeds the guided range. Shipments for the Invisalign Clear Aligner are expected in the band of 124,400–127,400.
Our Take
Align Technology posted mixed fourth-quarter 2014 financial results with the company beating the Zacks Consensus Estimate on the revenue front but failing to do so with respect to the earnings front.
Interestingly, several features have been introduced across the Invisalign system, designed to address some of the most significant treatment challenges encountered by doctors. Management plans to make available Invisalign G6 clinical innovations in a limited release to Invisalign trained providers in North America during the ongoing quarter, with broader commercialization efforts in APAC, EMEA and Latin America geographies through 2015. Align also expects to release Invisalign G6 more widely in North America in early 2016. We expect these innovations to bolster the company's position in the dental market.
We are also optimistic about the company's strong balance sheet and healthy cash flow position. Overall, we believe Align Technology possesses positive potential with management successfully channelizing the three key strategic growth drivers of the company, viz. market expansion, product innovation and brand strength.
However, we are worried about the adverse impact of a falling euro as a result of which Align's 2015 revenue growth is expected to face headwinds in the range of 6-7 points. The competitive landscape remains challenging as well.
Align Technology currently carries a Zacks Rank #3 (Hold).
Stocks to Consider
Better-ranked med/dental-supply stocks include Bio-Reference Laboratories Inc. (BRLI), Halyard Health, Inc. (HYH) and AmerisourceBergen Corporation (ABC). While Bio-Reference Laboratories and Halyard Health sport a Zacks Rank #1 (Strong Buy), AmerisourceBergen holds a Zacks Rank #2 (Buy).
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