Align Technology (ALGN) reported second quarter 2011 adjusted EPS of 20 cents, surpassing the Zacks Consensus Estimate of 19 cents but missing the year-ago quarter adjusted EPS by a penny.
Total revenue increased 10.9% year over year to $120.1 million (beating the company’s guidance of $106.5−$110.5 million), exceeding the Zacks Consensus Estimate of $111 billion. Total Invisalign revenue came in at $113.6 million on case shipments of 76 thousand during the quarter.
Revenue in the reported quarter includes contribution from the newly-acquired Cadent Holdings for two months. The company closed the acquisition on April 29, 2011. On the other hand, the year-ago quarter revenues included deferred pre-tax revenue of $14.3 million for Invisalign Teen replacement aligners.
Align witnessed balanced sales growth across all its channels during the reported quarter. The company recorded 33.2% of total sales from North America orthodontists (up 14.0% on a sequential basis to $39.9 million), 37.6% from North American GP Dentists (up 14.9% to $45.1 million), 24.2% from international (grew 15.6% to $29.1 million) and 5.0% from non-case revenues (increased 10.6% to $6.0 million).
This positive growth resulted from increased number of patients visiting the clinics along with growing interest for high-value procedures like Invisalign. Moreover, the reported quarter marks the inclusion of Cadent, which is one of the emerging powerhouses in the fast growing intra-oral scanning market. Align expects to maintain the growth momentum in the upcoming quarters, primarily on the back of scanner sales and new opportunities in the digital dentistry and restorative markets.
The company’s highest contribution (63.8% of revenues) comes from Invisalign Full, which grew 7.7% to $76.6 million compared with the first quarter of fiscal 2011. Other products including Invisalign Express/Lite (up 10.4% to $11.1 million), Invisalign Teen (up 7.9% to $12.8 million) and Invisalign Assist (up 11.3% to $7.1 million) recorded impressive performance. In addition, Non-case Invisalign revenue, improved 10.6% sequentially to $6.0 million.
Further, sales derived from newly incorporated products, Scanners and CAD/CAM Services were $2.7 million (2.3% of total sales) and $3.8 million (3.1%), respectively.
During the quarter, the adjusted gross margin contracted 130 basis points to 76.1% compared with the year-ago quarter due to a 36.7% rise in cost of sales. However, adjusted operating margin declined 1960 basis points to 14.3%. The primary reason for the significant downside in operating margin was a 46.9% rise in operating expenses due to higher sales and marketing (33.3%), general and administrative (73.9%), and research and development (44.9%) expenses.
Align recorded a 6.7% sequential improvement in international average selling price (ASP) to $1,660, while blended pricing was marginally up by 1.1% to $1,395.
Align exited the quarter with $168.6 million in cash and cash equivalents compared with $294.6 million as of December 2010.
Guidance
Align provided its outlook for the third quarter of fiscal 2011. It expects net revenue and adjusted EPS in the range $118−$123 million (Zacks Consensus Estimate being $119 million) and 17−20 cents (19 cents).
Recommendation
Align has undertaken several strategies to further penetrate the malocclusion market. The company witnessed balanced sales growth across all its channels banking on its core product, Invisalign. The acquisition of Cadent is also helping Align to further penetrate the malocclusion market. Considering the advantages of Invisalign and the strong potential of the malocclusion market, we are optimistic about the growth prospects of the company.
However, we remain concerned about the tough competitive landscape that resulted in a continuous decline in the blended prices over the past few quarters. We also remain concerned about the economic uncertainty as it makes patient defer the dental procedures, being elective in nature.
Presently, we remain ‘Neutral’ on Align.
ALIGN TECH INC (ALGN): Free Stock Analysis Report
Zacks Investment Research
