(ALGN) Align Technology Beats The Street – Margins Lag

Align Technology (ALGN) reported third quarter 2011 adjusted EPS of 27 cents, beating the Zacks Consensus Estimate of 20 cents as well as the year-ago quarter adjusted EPS by 2 cents. Reported EPS was also ahead of the company’s guidance range of 17-20 cents.

Total revenue increased 31.3% year over year to $125.9 million, exceeding the Zacks Consensus Estimate of $122 million and the company’s guidance of $118-$123 million. Total Invisalign revenue came in at $114.3 million, up 19.1% year over year driven by case shipments of 79.4 thousand (up 19.8%) during the quarter.

Align witnessed improved sales performance during the reported quarter. This positive growth was attributable to increased Invisalign case volume in North American Orthodontists and International doctors, strong growth of Invisalign Teen and higher earnings on the heels of lower-than-projected operating expenses.

Revenue in the reported quarter includes contribution from the Cadent Holdings, which was considered as one of the emerging powerhouses in the fast growing intra-oral scanning market. The company closed the acquisition on April 29, 2011.  The improved sales were also attributable to Align’s interoperability with Cadent products.  Align expects to maintain the growth momentum in the upcoming quarters, primarily on the back of scanner sales and new opportunities in the digital dentistry and restorative markets.

The company recorded 33.8% of the total sales from North America orthodontists (up 6.8% on a sequential basis to $42.6 million), 36.7% from North American GP Dentists (up 2.3% to $46.1 million), 24.5% from international (grew 6.1% to $30.9 million) and 5.0% from non-case revenues (increased 4.3% to $6.3 million).

The company’s highest contribution (59.7% of revenues) comes from Invisalign Full, which spiked 1.9% year over year to $75.1 million. Barring Invisalign Express/Lite (down 5.4% to $10.5 million) and Invisalign Assist (down 1.8% to $7.0 million), the other products like Invisalign Teen (up 20.1% to $15.4 million) and Non-case Invisalign (up 4.3% to $6.3 million) registered impressive performance. Further, sales derived from Scanners (4.3% of total sales) were $5.4 million and CAD/CAM Services were $6.2 million (4.9%), respectively.

During the quarter, adjusted gross margin contracted 420 basis points year over year and stood at 73.9% due to a 59.5% rise in cost of sales. Adjusted operating margin declined 320 basis points to 23.2%. The significant downside in operating margin was due to higher sales and marketing (up 28.6%), general and administrative (up 33.3%), and research and development (up 36.9%) expenses.

Align reported a 6.0% sequential decline in international average selling price (ASP) to $1,560. Blended pricing was marginally down 0.7% to $1,385.

Align exited the quarter with $202.2 million in cash and cash equivalents compared with $294.6 million at the end of fiscal 2010.During the quarter, Align also authorized a share repurchase program of up to $150 million, effective immediately.


Align provided its outlook for the third quarter of fiscal 2011. The company expects net revenue and adjusted EPS in the range $124.0?$128.5 million (Zacks Consensus Estimate: $123 million) and 20?22 cents (19 cents).

Align has undertaken several strategies to further penetrate the malocclusion market. However, the company is witnessing margin pressure due to higher operating expenses arising from continuous strategic investments in the international market, portfolio expansion and costs associated with the Cadent acquisition.

Moreover, the competitive landscape is quite tough with the presence of players like Danaher Corporation (DHR) and Dentsply International (XRAY). We also remain concerned about the economic uncertainty as it makes patient defer dental procedures.

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