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Dental technology company Align Technology Inc. (ALGN - Analyst Report) reported its second-quarter 2013 earnings per share of 36 cents, up 5.9% from the year-ago earnings of 34 cents a share. Further, net income of $29.3 million was 2.8% above the year-quarter figure of $28.5 million. The earnings result was ahead of both the company’s guidance range of 26–28 cents and the Zacks Consensus Estimate of 28 cents. We note that the year-ago net income included certain pre-tax charges related to acquisition and integration, severance and benefit with a total income tax-related adjustment of $0.8 million.

Revenues

Net revenue increased 12.5% year over year to $163.8 million in the reported quarter, surpassing the Zacks Consensus Estimate of $156 million. It also exceeded the previously guided range of $153.6−$157.4 million issued by the company.

Total Invisalign Clear Aligner revenues were up 14.7% year over year to $153.3 million. The revenues were primarily driven by increased Invisalign shipments and higher ASPs. For the quarter, total Invisalign case shipments were 106,100, up 8.1% year over year, driven by continued expansion of the company’s customer base and increased Invisalign utilization. However, the second-quarter result includes a $1.2 million decrease in revenues due to the change in the mid-course correction policy, effective Jun 15, 2013. Revenues from Scanner and CAD/CAM services were down 12.5% year over year to $10.5 million.

The company recorded 32.9% of the total Invisalign Clear Aligner sales from North America orthodontists (up 15.0% year over year to $50.5 million), 33.8% from North American GP Dentists (up 5.5% to $51.7 million), 26.3% from the international market (up 22.6% to $40.3 million) and 7% from non-case revenues (up 38.2% to $10.8 million).

Margins

Gross margin expanded by about 79 basis points (bps) year over year to 75.5% in the second quarter. During the quarter, Invisalign gross margins declined slightly due to higher material costs for the SmartTrack aligner material, while gross margin for Scanner and CAD/CAM services increased due to lower training cost and scanner standard cost.

The company witnessed a 22.4% increase in sales and marketing expenses to $47.8 million; 17.4% rise in general and administrative expenses to $27.0 million and a 2.2% increase in research and development expenses to $10.9 million. As a result, operating margin contracted 159 bps to 23.1% in the quarter.

Balance Sheet

Align exited the quarter with $164.5 million in cash and cash equivalents compared with $306.4 million at the end of fiscal 2012. During the quarter, Align also purchased 2.6 million shares for a total of $92.7 million. With this, the company completed its existing stock repurchase program.

Outlook

For the third quarter of 2013, the company expects revenues in the range of $154.9−$160.0 million. The current Zacks Consensus Estimate of $159 million remains at the upper end of the guided range. Earnings per share are expected in the range of 28–30 cents compared with the Zacks Consensus Estimate of 31 cents.

Shipments for the Invisalign clear aligner are expected to increase in the range of 12%–15% on a year-over-year basis to 103,600–106,100.

Our Take

Align exited second quarter 2013 on a positive note. The company’s revenues and earnings continue to increase, surpassing the previous guidance.

We are also encouraged by the company’s recent step to reconvert six indirect country markets of Australia, New Zealand, Hong Kong, Singapore, Macau and Malaysia  to a direct Invisalign sales region. Align has already started realizing direct sales at its full Invisalign ASP, rather than the discounted ASP under the distribution agreement.

The stock currently carries a Zack Rank #1 (Strong Buy). Other medical stocks such as China Cord Blood Corporation (CO - Snapshot Report), ResMed Inc. (RMD - Analyst Report) and Health Net, Inc. (HNT - Analyst Report) also carry a Zacks Rank #1 and warrant a look.

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