Align Technology Beats on Top & Bottom, Guides High - Analyst Blog

Align Technology Inc. ALGN reported adjusted earnings of 39 cents per share, up 50% from the year-ago level of 26 cents. Earnings per share also topped the Zacks Consensus Estimate of 36 cents by a wide margin. However, the 4.7% drop in share price since the earnings release does not give a true reflection of the company's performance in the first quarter of 2014. Align Technology's shares closed at $50.00 on April 25.

Including certain one-time items, the company reported earnings per share same as the adjusted earnings figure, comparing favorably with a loss of 52 cents incurred in the first quarter of 2013.

Revenues in Detail

Revenues improved 17.6% year over year to $180.6 million in the quarter, steering ahead of the Zacks Consensus Estimate of $177 million.

Growth in revenues was primarily driven by strong Invisalign sales from international doctors in Europe, Middle East and Africa (EMEA) and also the Asia Pacific regions.

Segments in Detail

Revenues from Invisalign Clear Aligner segment (93.1% of total revenue) increased 18.8% year over year to $168.2 million in the reported quarter. Growth in the top line was driven by higher Invisalign volumes from international doctors, as well as higher international average selling prices ASP. For the quarter, total Invisalign case shipments were 112,180, up 14.3% year over year, propelled by continued expansion of the company's customer base and increased Invisalign utilization.

Revenues from Scanner and CAD/CAM Services segment (6.9% of total revenue) rose 3.3% to $12.4 million in the reported quarter. This increase reflects continued penetration in the market and increasing market share gains.

Margins

Gross margin expanded by about 240 basis points (bps) year over year to 75.9% in the first quarter. The increase came on the back of higher ASPs and lower inventory reserves. 

Align Technology witnessed a 25.1% year-over-year increase in sales and marketing expenses to $52.9 million, a 3.9% fall in general and administrative expenses to $29.2 million, and a 18.6% rise in research and development expenses to $13.4 million in the quarter. Operating margin during the quarter expanded by 430 bps to 23.1% due to higher sales volume and increased gross margins.

Financial Details

Align Technology exited reported quarter with cash and cash equivalents and short-term investment of $364.4 million compared with $369.9 million at the end of 2013. The company had no debt at the quarter-end.

During the reported quarter, Align Technology generated $18.0 million in cash flow from operations. Capital expenditure incurred by the company was $5.0 million resulting in a free cash flow of $13.0 million, for the quarter.

Guidance

For the second quarter of 2014, Align Technology expects revenues in the range of $181.7–$186.5 million, with an annualized growth rate of 10.9–13.8%. The current Zacks Consensus Estimate of $186 million approximately coincides with the higher end of the guided range.

Earnings per share are expected in the range of 36–39 cents.  The Zacks Consensus Estimate is at par with the higher end of the guided range. Shipments for the Invisalign clear aligner are expected in the range of 116,500–119,500.

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 strong balance sheet and healthy cash flow position. Management expects second-quarter 2014 to be busier thus, making us more optimistic about continued growth driven by consistent progress in the EMEA and Asia Pacific regions. The popularity gained on the back of the two newly launched products – Invisalign G5 and ClinCheck Pro further strengthens our confidence in the company's potential.

Another positive highlight during the quarter was Align Technology's achievement of the tax exemption status for its clear aligner business in Mar 2014, which benefited the first quarter by approximately $600,000.

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, Align Technology currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some better-ranked stocks in the broader healthcare sector that warrant a look are Enzymotec Ltd. ENZY, Myriad Genetics Inc. MYGN and Natus Medical Inc. BABY. Enzymotec and Myriad Genetics sport a Zacks Rank #1 (Strong Buy) while Natus Medical carries a Zacks Rank #2 (Buy).