Align's Earnings Miss Estimates - Analyst Blog

Align Technology (ALGN) reported fourth quarter adjusted EPS of 14 cents, missing both the Zacks Consensus Estimate of 17 cents and the year-ago quarter's 16 cents. For fiscal 2010, adjusted EPS came in at 80 cents, missing the Zacks Consensus Estimate by 2 cents, but higher than 41 cents in 2009.

Total revenue increased 7.3% year over year to $92.9 million (within the company's guidance of $90.5–$93.0 million), barely beating the Zacks Consensus Estimate of $92.0 million. For fiscal 2010, revenue came in at $372.8 million (after adjusting for $14.3 million of previously deferred revenue for Invisalign Teen replacement aligners), up 19.4% compared with 2009 and marginally beating the Zacks Consensus Estimate of $372.0 million.

Despite higher revenues, EPS came down due to lower gross and operating margin. While gross margin came down by 140 basis points to 77.2% compared to the fourth quarter of 2009, adjusted operating margin declined by 460 basis points to 17.2%.

The primary reason for the huge decline in operating margin was a 13.2% rise in operating expenses driven by higher sales and marketing (8.4%), general and administrative (20.3%), and research and development (19.2%) expenses.

Align recorded 36.4% of total sales from North American GP Dentists (declined 8.1% quarter over quarter to $33.8 million), 31.1% from North America orthodontists (declined 7.2% to $28.9 million), 26.7% from international (grew 6.9% to $24.8 million) and 5.8% from non-case revenue (increased 12% to $5.4 million).

On a sequential basis, barring revenue from non-case products which increased 12% to $5.4 million, all the products in Align's portfolio recorded a decline. The company's highest contribution (69.8% of total revenues) comes from Invisalign Full, which declined 2.6% compared to the third quarter of fiscal 2010.

Other products including Invisalign Teen (down 6.2% to $10.6 million), Invisalign Express (6.4% to $8.3 million), and Invisalign Assist (13.7% to $3.7 million) had a disappointing quarter.

Align recorded a 6.6% improvement in international average selling price (ASP) ($1,525), while the blended pricing improved marginally (0.72% to $1,400). The company said that although it had been struggling regarding the case shipments in the US market in the beginning, the situation improved in the second half of the year and continued into the first quarter of 2011.

The total number of cases shipped in the reported quarter increased 3.9% annually to 63,490 (company's guidance of 61,500 − 63,000), but declined 4.1% sequentially. While cases shipped to the International market remained almost unchanged at 16,295, cases shipped to North American Orthodontists and North American GP Dentists declined 5.3% and 5.8%, respectively.

Moreover, cases shipped for Invisalign Full, Invisalign Express, Invisalign Teen and Invisalign Assist recorded declines of 2.4%, 9.1%, 8.6% and 3.5%, respectively.

Along with quarterly results, Align provided an update regarding its operations. The company has received approval from the Chinese State Food and Drug Administration (SFDA) to market the Invisalign system as a Class II medical device to treat malocclusion. Invisalign is expected to be commercially available in the second half of 2011. 

This is a significant achievement for the company as it would help Align to expand its foothold into one of the fastest growing markets for orthodontics, China. Moreover, in January 2011, Align entered into an agreement to jointly develop software applications that will run on Cadent scanners and be used for Invisalign treatment.

Guidance

Align provided its outlook for the first quarter of fiscal 2011. It expects total revenue and EPS to be in the range $99.0−$102.5 million and 15 cents−17 cents, respectively. Although the revenues guidance exceeds the Zacks Consensus Estimate of $95 million, the EPS guidance lags behind the Zacks Consensus Estimate of 19 cents.

Case volumes are expected to be in a range of 67,000 − 69,500. Gross margin and operating margin should range within 77.3%–77.8% and 17.2% − 18.8%, respectively. Align expects to generate cash and cash equivalents of $315-$320 million while $8–$10 million of capital expenditures.

Recommendation

Align has undertaken several strategies to further penetrate the malocclusion market. However, Align's performance was affected by lower demand from the US GP dentists and the elimination of the minimum case requirements program.

As expected, this trend continued in the fourth quarter as well. We also remain concerned about the economic uncertainty as dental procedures, being elective in nature, often get deferred.

We are currently Neutral on the stock.