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Investors were left disappointed when Align Technologies (ALGN - Analyst Report), a major player in the malocclusion market, announced that it will be able to touch just the low ends of its earlier announced top and bottom line guidance for the fourth quarter 2012. On top of this, the news of some expected job cuts caused further concern among stakeholders, leading to a downward rally of the stock price since the announcement.

Notably, in October, while declaring its preliminary sales result, the company forecast its fourth quarter guidance with net revenue of $134.2−$137.8 million and adjusted EPS in the range of 21−23 cents. The Zacks Consensus Estimate for revenues of $135 million for the fourth quarter exceeds the latest guidance. Also, the Zacks Consensus Estimate for EPS of 23 cents remains far above the low end of the projected band.

Align attributed the earnings warning to its sufferings for the past few months, due to the impact of general economic slowdown that affected the overall dental market and led to continued soft dental sales for Align. The dental procedures are primarily elective in nature, which are deferred in a rising unemployment scenario. Continued weakness in the global economy results in a challenging environment for dental technology sales; dentists may postpone investments in capital equipment, such as intra-oral scanners. Also hurricane Sandy led to significant sales disruptions, affecting Align’s customer practices.

In addition, we are concerned about the recent termination of the distribution agreement with dental manufacturer Straumann in Europe that forced the company to go for a goodwill impairment test. Straumann used to market the company’s Cadent products iTero intra-oral scanners in Europe and North America. We believe this to get reflected in the fourth quarter result. Adding to our worries, the company also declared that its vice president, research and development Dana Cambra and vice president, North American Sales, Dan Ellis had both left the company.

To overcome these challenges the company has adopted several strategies including management churn and retrenchment with job cuts to drive its bottom line. The company expects to reduce its workforce by eliminating 25 regular employees (the company’s current full-time employee base being 3,090 globally).

The company also stated that, Greg Morrow, a marketing veteran with past experience in Johnson & Johnson (JNJ - Analyst Report), Coca-Cola Enterprises (CCE - Analyst Report) and Procter & Gamble (PG - Analyst Report), will be appointed as the vice president and general manager for the Clear Aligner product line. In addition, Christopher Puco, the company’s existing vice president of sales strategy will take over the position of Dan Ellis.

We are disappointed with the lower-than-expected fourth quarter guidance for Align. The job cuts and higher management churn, accompanied by the termination of the European distribution contract also added to our concern. We also remain worried about the current economic uncertainty which continues to cast a negative impact on dental procedures. 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). The company currently retains a Zacks #5 Rank (Strong Sell) in the short term.

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