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A major player in the malocclusion market, Align Technology's (ALGN - Analyst Report) shares rushed more than 5% to close at $45.93 yesterday, following the release of its preliminary third-quarter 2013 results.

The results surpassed the Zacks Consensus Estimate on both fronts. Along with revenues, earnings per share (EPS) remained above the guidance range. This has led the company to provide a strong fourth-quarter guidance, which further boosted investors’ confidence. 

Result in Details

Align reported its third-quarter 2013 earnings per share of 42 cents, a significant increase from the year-ago break-even level. We note that the quarter’s net earnings figure includes certain one-time tax benefits related to the fiscal 2012 U.S. federal income taxes, while the year-ago net loss included certain pre-tax charges related to goodwill impairment and acquisition and integration.

However after adjusting for these one-time items, the adjusted EPS during the reported quarter came in at 40 cents, reflecting a stupendous 42.8% increase on a year-over-year basis.The earnings result was also way ahead of the company’s guidance range of 28–30 cents.

Revenues

Net revenues surged 20.5% year over year to $164.5 million in the reported quarter, surpassing the Zacks Consensus Estimate of $159 million. It also exceeded the previously guided range of $154.9−$160.0 million issued by the company.

Total Invisalign Clear Aligner revenues were up 21.2% 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 106,900, up 15.5% year over year, propelled by continued expansion of the company’s customer base and increased Invisalign utilization. Revenues from Scanner and CAD/CAM services were down 12.2% year over year to $11.0 million.

The company recorded 34.2% of the total Invisalign Clear Aligner sales from North America orthodontists (up 21.8% year over year to $52.5 million), 33.5% from North American GP Dentists (up 10.6% to $51.4 million), 25.4% from the international market (up 31.1% to $38.9 million) and 6.9% from non-case revenues (up 43.2% to $10.8 million).

Margins

Gross margin expanded by about 250 basis points (bps) year over year to 76.0% in the third quarter. During the quarter, Invisalign gross margins were up 230 bps reflecting higher average selling prices (ASPs), resulting from price increase,and from change in the company’s mid-course correction policy. Gross margin for Scanner and CAD/CAM services increased 160 bps to 22.2% as a result of lower manufacturing costs, which were partially offset by lower ASPs.

The company witnessed a 24.1% increase in sales and marketing expenses to $45.2 million; 11.0% rise in general and administrative expenses to $27.5 million, and a 9.7% increase in research and development expenses to $10.9 million. Operating margin during the quarter expanded a remarkable 384 bps to 25.2%.

Balance Sheet

Align exited the quarter with $400.4 million in cash and cash equivalents compared with $356.4 million at the end of fiscal 2012.

Outlook

For the fourth quarter of 2013, the company expects revenues in the range of $169.1−$173.1 million. The current Zacks Consensus Estimate of $165 million remains far below the guided range. Earnings per share are expected in the range of 41–43 cents compared with the Zacks Consensus Estimate of 36 cents.

Shipments for the Invisalign clear aligner are expected to increase to an encouraging range of 21.2% to 23.9% on a year-over-year basis to 109,700–112,100.

Our Take

Align exited third-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 initiative to reconvert six indirect country markets in Australia, New Zealand, Hong Kong, Singapore, Macau and Malaysia to direct Invisalign sales regions. Align has already started realizing direct sales at its full Invisalign ASP, rather than the discounted ASP finalized under the distribution agreement.

The stock currently carries a Zacks Rank #2 (Buy). Other medical stocks such as Cardinal Health, Inc. (CAH - Analyst Report), ResMed Inc. (RMD - Analyst Report) and Bio-Rad Laboratories, Inc. (BIO - Snapshot Report) carry a Zacks Rank #1 and warrant a look.

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