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Encouraging Square Beat for Align

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Dental technology company Align Technology Inc. (ALGN - Free Report) reported fourth quarter 2012 net earnings of $9.6 million (or 12 cents per share), considerably lower than the year-ago net earnings of $20.4 million (or 25 cents per share). The year-over-year decline was primarily due to a goodwill impairment charge of $11.9 million (or 14 cents per share) in the reported quarter associated with the scanner and CAD/CAM services franchise of the company.

However, after adjusting for certain one-time items, adjusted earnings were 27 cents per share (surpassing the company’s guidance range of 21-23 cents), missing the year-ago adjusted earnings per share by a penny. On the upside however, adjusted earnings per share in the fourth quarter exceeded the Zacks Consensus Estimate by 22.7%.

Adjusted earnings per share in 2012 increased 20.6% from 2011 to $1.17, a 4.5% beat over the Zacks Consensus Estimate.

Total net revenues increased 10.8% year over year to $142.8 million in the quarter surpassing the Zacks Consensus Estimate by 5.8%. It also exceeded the company’s guidance band of $134.2−$137.8 million. Year-over-year growth was solely driven by Invisalign Clear Aligner.

Annual net revenues were $560 million, up 16.7% year over year and edging past the Zacks Consensus Estimate by 1.4%. The robust sales of Invisalign Clear Aligner resulted in a 70% jump in Invisalign volume on the back of higher utilization and increased adoption in 2012.

Total Invisalign Clear Aligner revenues came in at $132.8 million, up 11.7% year over year, driven by case shipments of 90.5 thousand (up 9.6% year over year) in the quarter. However, the company disappointed with its Scanner and CAD/CAM services revenues which stood at $10 million, flat on a year-over-year basis.

The company recorded 33% of the total Invisalign Clear Aligner sales from North America orthodontists (up 1.5% year over year to $43.8 million), 36.1% from North American GP Dentists (down 0.7% to $47.9 million), 24.5% from international market (up 6.6% to $30.4 million) and 6.6% from non-case revenues (up 22% to $8.7 million).

Gross margin expanded 40 basis points (bps) year over year to 74.5% in the fourth quarter. The margin expansion was on account of higher average selling price (ASP) as well as improved manufacturing efficiencies. The company witnessed a 4.6% increase in sales and marketing expenses to $37.8 million; 21% rise in general and administrative expenses to $27.2 million and 22.4% increase in research and development expenses to $11.7 million. As a result, operating margin contracted 40 bps to 20.8% in the quarter.

Align reported global ASP of $1,375 (versus $1,360 in the year-ago period) and international ASP of $1,455 (versus $1,530 in the prior-year quarter). The higher global ASP reflects increased ASP for Invisalign in North America on the back of lower Advantage rebates due to lower utilization by North American orthodontists in the quarter.

Align exited 2012 with $356.1 million in cash, cash equivalents and marketable securities compared with $248.0 million at the end of 2011.


Align expects net revenues in the band of $146 million and $150.5 million for the first quarter of fiscal 2013. The Zacks Consensus Estimate of $144 million lies below the company’s guidance band.

The company forecast for earnings per share is in the range of 21 cents to 23 cents. The current Zacks Consensus Estimate of 26 cents is above Align’s expectation.

Our Take

Align exited 2012 on an encouraging note with its fourth-quarter results exceeding expectations. With the completion of step two of the goodwill impairment analysis, the pressure on the bottom-line should wane. We believe that manufacturing efficiencies and margin expansion should further leverage Align’s earnings going forward.  We look forward to the company’s performance in 2013 with optimism.

The stock currently carries a short-term Zack Rank #3 (Hold). However, medical stocks such as ResMed (RMD - Free Report) , Cantel Medical and Merit Medical (MMSI - Free Report) , carrying a Zacks Rank #1 (Strong Buy) are expected to do well and warrant a look.

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