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Align Technology (ALGN - Analyst Report) reported second quarter 2012 EPS of 34 cents, considerably higher than the year-ago level of 14 cents. Adjusting for certain one-time items, adjusted EPS came in at 34 cents, beating the Zacks Consensus Estimate of 28 cents and the year-ago quarter adjusted EPS of 20 cents. The adjusted EPS was also ahead of the company’s guidance of 26−28 cents.

Total revenue increased 21.2% year over year to $145.6 million in the quarter, exceeding the Zacks Consensus Estimate of $143 million and the company’s guidance of $140.2−$143.7 million.

Align presently has two operating segments, Clear Aligner (known as the Invisalign system) and Scanner and CAD/CAM Services (known as iTero and iOC intra-oral scanners and OrthoCAD services). Total Invisalign clear aligner revenue came in at $133.7 million, up 17.6% year over year, driven by case shipments of 95.3 thousand (up 25.3% year over year) during the quarter.

Scanner and CAD/CAM services revenues were $11.9 million in the reported quarter, up 85.9% year over year. The company derives revenues from scanner and CAD/CAM services following the acquisition of Cadent Holdings in April 2011. Thus, the year-ago quarter result included two months of scanner and CAD/CAM services sales.

The company recorded 32.8% of the total Invisalign Clear Aligner sales from North America orthodontists (up 18.4% year over year to $43.9 million), 36.7% from North American GP Dentists (up 15.0% to $49.1 million), 24.6% from international (up 17.9% to $32.8 million) and 5.8% from non-case revenues (up 30.1% to $7.8 million).

The company’s highest contribution (66.3% of Invisalign Clear Aligner revenues) came from Invisalign Full, which grew 15.6% year over year to $76.6 million. Additionally, Invisalign Express/Lite (up 22.9% to $11.1 million), Invisalign Assist (up 2.1% to $7.3 million), Invisalign Teen (up 27.8% to $16.4 million) and Non-case Invisalign (up 30.1% to $7.8 million) delivered impressive performance.

During the quarter, gross margin contracted 119 basis points (bps) year over year to 74.7%. The company witnessed 1.3% increase in sales and marketing expenses to $39.1 million; 15.2% rise in research and development expenses to $10.6 million, offset by 15.1% drop in general and administrative expenses to $22.2 million. Operating margin of 24.7% was significantly up from the year-ago quarter level of 13.8%

Align reported international average selling price (ASP) of $1,455 versus $1,660 in the year-ago quarter. The lower ASP resulted from advantage rebate, promotional activity, product mix combined with unfavorable foreign exchange rates. Blended pricing slipped 5.6% to $1,335.

Align exited the quarter with $304.0 million in cash, cash equivalents and marketable securities compared with $248.1 million at the end of fiscal 2011.

Guidance

Align provided outlook for the third quarter of fiscal 2012 with net revenue of $136.8−$140.8 million, much lower than the Zacks Consensus Estimate of $146 million. For the quarter, Align expects scanner and CAD/CAM service business to drop sequentially due to summer seasonality for capital equipment purchases.

The company does not expect any major events providing additional selling opportunities. Added to this, scanner sales in Europe are likely to remain flat during the quarter.

However, the Invisalign clear aligner case shipments are expected to be in a range of 94.8-96.3 thousand cases, (year-over-year growth of 19.5% to 21.3%). Also, the company expects adjusted EPS in the range of 27−29 cents. The Zacks Consensus Estimate of 29 cents remains at the upper end of the guided range.

We believe that based on its several strategic initiatives, Align will continue to exhibit strong growth momentum. Banking on its core product, Invisalign, the company witnessed balanced sales growth across all its channels. Cadent’s contribution is also helping Align to expand further its presence in the malocclusion market. 

Considering the strong untapped potential of the malocclusion market, we are optimistic about the prospects of the company, which retains a Zacks #3 Rank (Hold) in the short term.

However, the current economic uncertainty continues to cast a negative impact on dental procedures because of its elective nature. Moreover, the company faces significant competition from players such as 3M (MMM - Analyst Report), Danaher Corporation (DHR - Analyst Report) and Dentsply International (XRAY - Analyst Report).

We currently have a Neutral recommendation on the company in the long term.

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