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Align Technology (ALGN) Beats on Q1 Earnings & Revenues

Align Technology Inc. ALGN reported earnings of 50 cents per share in the first quarter of 2016, up 13.6% year over year. Earnings also comfortably exceeded the company-provided guidance of 37–40 cents and the Zacks Consensus Estimate by 28.2%.

 

Per management, Align’s first-quarter earnings were impacted by approximately 9 cents per share from the company's new Aligners policy, announced in Jul 2015, and also by the year-over-year currency headwinds.

Strong double-digit revenue growth primarily drove this earnings improvement in the first quarter.

Revenues

Revenues improved 20.5% year over year to $238.7 million in the quarter and comfortably beat the Zacks Consensus Estimate of $237 million. The top line also exceeded the company's expectation of $232.5–$236.6 million.

Per management, on a year-over-year basis, Align’s first-quarter revenue growth was impacted by approximately 5 points owing to the Aligner policy and adverse foreign exchange rates.

The year-over-year upside in the top line was led by strong growth observed in both the operating segments of the company.

Geographically, Align witnessed growth of 21% in its North American shipments; while international shipment count rose by 34%.

Segments in Detail

Revenues from the Invisalign Clear Aligner segment (92% of total revenue) increased 2.7% year over year to $219.7 million in the reported quarter, primarily driven by continued, strong Invisalign case volume growth across all customer channels and geographies, partially offset by lower ASPs on account of the Aligner policy change and foreign currency exchange rates.

In the quarter, Invisalign case shipments amounted to 1,637,000, up 25.2% year over year, supported by growth across all regions. During the first quarter, Align added 2,470 new Invisalign doctors worldwide; out of which 870 were from North America while the remaining were from international regions.

Revenues from Scanner and Service (8%) improved 72% to $19 million in the reported quarter, owing to increased demand for the new iTero Element scanner, which were being shipped from Sep 2015.

Margins

Gross margin contracted 60 basis points (bps) year over year to 75.7%. Clear Aligner gross margin also declined 80 bps year over year to 78.3%. The gross margin contraction was primarily induced by lower ASPs, associated with the Aligners policy.

During the quarter, Align witnessed a 27.1% year-over-year increase in selling, general and administrative expenses to $112.2 million and an 8.6% hike in research and development (R&D) expenses to $15.1 million. Consequently, the operating margin contracted 240 bps to 22.3%, primarily because of the impact of the new additional Aligners policy on revenues and unfavorable foreign currency exchange rates.

Financial Details

Align exited the reported quarter with cash and cash equivalents and short-term marketable securities of $548.1 million, up from $527.3 million at the end of 2015. The company had no debt at the end of the first quarter.

During the first quarter, Align generated $30.7 million in cash flow from operations, resulting in free cash flow of $10.5 million.

In the first quarter, Align bought back shares worth $200 million and expects to repurchase another $100 million over the next 12 months. Further, along with its first-quarter earnings call, Align announced to the authorization of a repurchase plan of up to an additional $300 million of the company's stock. This latest authorization is in addition to the existing $300 million authorization announced in Apr 2014, which reaches the total share buyback amount to $600 million.

Guidance

For the second quarter of 2016, the company projects EPS of 46-49 cents on revenues of $253.3–$258.3 million. The current Zacks Consensus Estimate for EPS and revenues are pegged at 47 cents and $257 million, respectively.

The company also expects to register Clear Aligner case shipments in the range of 1,745,000–1,770,000, up approximately 20.7% to 22.4% from the year-ago level.

Our Take

Align Technology kick-started 2016 on a promising note, with its first-quarter results squarely beating the Zacks Consensus Estimate. We are also upbeat about the continued strong Invisalign volumes registered by the company, which in turn drove the top and the bottom line during the quarter.

Moreover, it is worth mentioning that the company’s operating expenses in the first quarter was driven by increased head count and continued investments in go-to-market activities incidental to the growth of the company’s business, as well as Align Technology’s ERP implementation project. Encouragingly, all these factors reflect Align Technology’s successful efforts in expanding its business.   

On the flip side, unfavorable foreign exchange fluctuation continued to be drag on Align technology’s business throughout the first quarter. Nevertheless, the company delivered strong growth in the emerging markets of Asia-Pacific; particularly buoyed by the upside in Invisalign volumes in Southeast Asia and Taiwan.

Align Technology currently carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

Other favorably ranked medical stocks are Baxter International Inc. BAX, Orthofix International N.V. OFIX and Boston Scientific Corp. BSX. While Baxter and Orthofix sport a Zacks Rank #1 (Strong Buy), Boston Scientific carries a Zacks Rank #2.

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