Align Technology Inc. (ALGN) reported the third quarter EPS of 25 cents, surpassing both the Zacks Consensus Estimates of 18 cents and the year-ago quarter’s 13 cents.
Total revenue increased 21% year over year to $95.9 million (above the company’s guidance of $92.0–$95.0 million), marginally beating the Zacks Consensus Estimate of $94.0 million. Outstanding sales of Invisalign (especially Invisalign Teen) led to strong growth in revenues and case shipments.
Align Technology recorded 38.3% of total sales from North American GP Dentists’ (declined 1.6% quarter over quarter to $36.8 million), 32.5% from North America orthodontists (grew 7% to $31.1 million), 24.2% from international (grew 5.5% to $23.2 million) and 5.0% from non-case revenue (declined 11.1% to $4.8 million).
Among the various products comprising Align Technology’s portfolio, highest growth (34.8% quarter over quarter to $11.3) was recorded by Invisalign Teen followed by Invisalign Assist (up 12.9% to $4.3 million). However, the company reported a decline in sales from Invisalign Full (1.3% to $66.6 million) and non-case products (11.1% to $4.8 million)
We are pleased to note that despite tough competition and contrary to the past two quarters, the worldwide blended and international average selling price (ASP), increased 2.6% quarter over quarter to $1,390 and 1.1% to $1,430, respectively.
The total number of cases shipped in the reported quarter increased 17.2% annually to 66,200 (company’s guidance of 66,000-68,000), but declined 1.8% sequentially. While cases shipped to North American Orthodontists and International cases increased sequentially by 0.3% and 1.9%, respectively, cases shipped to North American GP Dentists declined 5.7% due to low dental visits and less demand for the premium procedures.
Although cases shipped for Invisalign Express and Invisalign Teen increased 1.9% and 11.4%, respectively, Invisalign Full and Invisalign Assist recorded a decline of 4.5% and 1.9%, respectively.
Total utilization rate, defined as the ratio of the number of cases shipped to the number of doctors (to whom cases were shipped), was 3.6, compared with 3.7 in the prior quarter and 3.1 in the year-ago quarter. By customer channel, utilization remained unchanged sequentially for North American orthodontist and in the international market at 5.8 and 3.8 cases, respectively. However, utilization by the North American GP dentists declined (from 2.8 to 2.7) reflecting less usage across levels.
Align Technology’s gross margin at 78% during the quarter expanded 360 bps annually. The gross margins benefited from the increase in case volumes resulting in the increase in revenues as against only 4% increases in the cost of good sold ($21.0 million).
Operating expenses remained almost unchanged at $49.7 million compared with the year-ago quarter. Operating margins increased 1190 bps to 26.3% (above the guidance of 20.2%–21.4%), driven by higher gross margins and unchanged operating expenses.
Align Technology exited the quarter with cash, cash equivalents and short-term marketable securities of $280.1 million as compared with $186.5 million at the end of December 2009. The company generated $37.6 million in cash from operations versus $10.8 million in the year-ago quarter.
Along with quarterly results, Align Technology provided an update regarding its international operations. The company has received approval from the Chinese State Food and Drug Administration (SFDA) to market the Invisalign system as a Class II medical device to treat malocclusion. Invisalign is expected to be commercially available in the second half of 2011. This is a significant achievement for the company as Align Technology would be able to expand its foothold in one of the fastest growing market for orthodontics, China.
Guidance
Align Technology provided its outlook for the fourth quarter of fiscal 2010. It expects total revenue and EPS to be in the range $90.5 −$93 million and 15−17 cents, respectively. The Zacks Consensus EPS estimates for the fourth quarter is 19 cents.
Case volumes are expected to be in a range of 61,500 − 63,000. Gross margin and operating margin should range within 76.0%–76.5% and 19.1% − 20.0%, respectively. Align Technology expects to generate cash and cash equivalents of $295-$300 million while $4–$6 million to be spent on capital expenditures.
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