Align Technology (ALGN) Q2 Earnings Top, Shipments Rise

Align Technology Inc. (NASDAQ:ALGN) reported earnings of 62 cents per share in the second quarter of 2016, up 24% year over year.

Earnings also comfortably exceeded the company-provided guidance of 46–49 cents and the Zacks Consensus Estimate by a solid 29.2%.

Strong better-than-expected, double-digit revenue growth was the key catalyst behind the earnings improvement in the second quarter.

Revenues

Revenues improved 28.6% year over year to $269.4 million in the quarter and comfortably beat the Zacks Consensus Estimate of $260 million. The top line also surpassed the company's expectation of $253.3–$258.3 million.

Per management, on a year-over-year basis, Align’s second-quarter revenue growth was affected by approximately 4 points owing to the Additional Aligner policy change that management implemented in Jul 2015.

The year-over-year upside in the top line was driven by strong double-digit growth observed in both the operating segments of the company.

Geographically, Align witnessed Invisalign case volume of 15.3% in North America and 38.3% in the overseas.

Segments in Detail

Revenues from the Invisalign Clear Aligner segment (90.3% of total revenue) increased 21.2% year over year to $243.4 million in the reported quarter, primarily driven by continued, strong Invisalign case volume growth across all customer channels and geographies, as well as a price increase in North America and International. However, these positive factors were partially offset by lower ASPs on account of the Aligner policy change implemented last year.

In the quarter, Invisalign case shipments amounted to 177,000, up 22.4% year over year, aided by growth across all regions. During the second quarter, Align added 2,885 new Invisalign doctors worldwide; out of which 1,125 were from North America while 1,760 were from international regions.

Revenues from Scanner and Service (9.7%) improved a massive 199% to $26 million in the reported quarter, on account of an increased demand for the new iTero Element scanner.

Margins

Gross margin improved 50 basis points (bps) year over year to 76.2%. Clear Aligner gross margin expanded 30 bps year over year to 78.6%. The gross margin improvement primarily exhibited benefits that Align gained from leveraging its fixed cost over higher case volumes, which was partially neutralized by lower ASPs as a result of the additional Aligner policy.

During the quarter, Align witnessed a 20.7% year-over-year increase in selling, general and administrative expenses to $121.5 million and an 18.7% hike in research and development (R&D) expenses to $18.6 million. However, the operating margin improved 400 bps to 24.2%, due to higher gross margin.

Financial Details

Align exited the reported quarter with cash and cash equivalents and short-term marketable securities of $571.8 million, up from $548.1 million at the end of first quarter of 2016. The company had no debt at the end of the second quarter.

During the second quarter, Align generated $76.2 million in cash flow from operations, resulting in free cash flow of $57.3 million.

In the second quarter, Align bought back shares worth $50 million and has received an initial delivery of approximately 0.5 million shares based on current market prices. Upon completion of this agreement, Align will initiate repurchasing an additional $50.0 million of its common stock on the open market. These two actions will complete the Apr 2014 stock repurchase program worth $300 million.

During the quarter Align also announced a new plan to repurchase up to an additional $300.0 million of its stock, all of which remains available for repurchase as of Jun 30, 2016.

Guidance

For the third quarter of 2016, the company projects EPS of 49-52 cents on revenues of $267.2–$273.5 million. The current Zacks Consensus Estimate for EPS and revenues are pegged at 51 cents and $259.2 million, respectively.

The company also expects to register Clear Aligner case shipments in the range of 174,200-176,900 up approximately 18.1% to 19.9% from the year-ago level.

Our Take

Align Technology ended second quarter on a promising note, squarely beating the Zacks Consensus Estimate. We are also upbeat about the continued strong Invisalign volumes registered by the company, which in turn drove the top and the bottom line during the quarter.

The company also has a strong cash balance position that enables it to adopt attractive share repurchase programs and in turn pay back solid returns to its investors. Going forward, management anticipates witnessing consistent growth in its Asia Pacific region, which will mitigate the typical seasonality it usually experiences in the European nations.

Align Technology currently sports a Zacks Rank #1 (Strong Buy).

Other Stocks to Consider

Some other medical stocks worth a look are Cepheid (NASDAQ:CPHD) , Masimo Corp. (NASDAQ:MASI) and Natus Medical Inc. (NASDAQ:BABY) . All these stocks sport a Zacks Rank #1 (Strong Buy).