Align Technology Inc. (ALGN) reported earnings of $38.2 million or 47 cents per share in the third quarter of 2014, up 10.7% and 11.9%, respectively, from the year-ago level of $34.5 million or 42 cents. Earnings per share during the quarter topped the company-provided guidance range of 41–44 cents and also surpassed the Zacks Consensus Estimate of 43 cents.
Revenues in Detail
Revenues improved 15.4% year over year to $189.9 million in the quarter, almost on par with the upper end of the company’s guidance of $186.3–$190.2 million. The top line also steered ahead of the Zacks Consensus Estimate of $188 million.
Apart from higher Invisalign ASPs, growth in revenues was also driven by strong Invisalign volume across all customer channels and geographies with continued strong growth among international doctors. In addition, consistent growth in the number of teenagers initiating orthodontic treatment with Invisalign during summer also contributed to the quarter’s performance.
Segments in Detail
Revenues from the Invisalign Clear Aligner segment (93.8% of total revenue) increased 16% year over year to $178.1 million in the reported quarter. Growth in the top line was driven by Invisalign case volume growth across all customer channels as well as favorable ASPs from a higher mix of Invisalign full products and a higher mix of international business.
For the quarter, total Invisalign case shipments were 119,615, up 11.9% 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 (6.2% of total revenue) rose 7.1% to $11.7 million in the reported quarter. This increase reflects increased ortho care services which were offset by slight decrease in scanner volume. In the reported quarter, Align expanded the workflow options for its iTero intra-oral scanner with Dentsply Implants Atlantis Custom Abutments and Atlantis Custom Abutments.
Margins
Gross margin expanded 35 basis points (bps) year over year to 76.4% in the third quarter. Clear Aligner gross margin declined as the benefit recorded in the prior-year period related to the change made in mid-course correction policy in Jun 2013, was partially offset by higher ASPs in the current quarter. In Scanners, on the other hand, gross margin improved year over year with more favorable product cost.
Align Technology witnessed a 15.8% year-over-year increase in sales and marketing expenses to $52.3 million, 2.9% hike in general and administrative expenses to $28.3 million, and a 17.8% rise in research and development expenses to $12.9 million in the quarter. Operating margin during the quarter expanded 194 bps to 27.1% due to increased gross margins and lower operating expenses.
Financial Details
Align Technology exited the reported quarter with cash and cash equivalents and short-term investment of $425.5 million compared with $369.9 million at the end of 2013. The company had no debt at quarter-end.
During the reported quarter, Align Technology generated $67.6 million in cash flow from operations. Capital expenditure incurred by the company was $7 million resulting in a free cash flow of $60.6 million, for the quarter.
Year-to-date, the company has repurchased 1.5 million shares for $77.4 million. The company expects to buy back the remaining $22.6 million of the first $100 million authorization over the next six months.
Guidance
For the fourth quarter of 2014, Align Technology expects revenues in the range of $194.9−$199.1 million, with an annualized growth rate of 9.3–11.7%. The current Zacks Consensus Estimate of $198 million falls near to the higher end of the guided range.
Earnings per share are estimated in the range of 47–50 cents. The Zacks Consensus Estimate of 51 cents falls outside the guided range. Shipments for the Invisalign Clear Aligner are expected in the band of 125,100–127,600.
Our Take
Align Technology posted solid third-quarter 2014 financial results with the company beating the Zacks Consensus Estimate on both the earnings and the revenue front.
Over the past few quarters, sales have increased consistently riding on the strength of this product. Moreover, several features have been introduced across the Invisalign system, designed to address some of the most significant treatment challenges encountered by doctors. The company’s Invisalign G3 and G4 are working successfully. Moreover earlier this year, Align launched Invisalign G5 innovations specifically to treat deep bite malocclusion. Successful adoption of Invisalign G5 continues followed by positive customer feedback specifically from North American orthodontists.
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 also worried about the current economic uncertainty which continues to cast a negative impact on dental procedures. The competitive landscape remains challenging as well.
Align Technology currently carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Some better-ranked stocks that warrant a look in the broader healthcare sector are Henry Schein, Inc. (HSIC), Cardinal Health, Inc. (CAH) and Straumann Holding AG (SAUHF), all carrying a Zacks Rank #2 (Buy).
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