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Align Technology (ALGN) Down 10.9% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Align Technology (ALGN). Shares have lost about 10.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Align Technology due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Align Technology Gains on Solid Invisalign Growth in Q2

Align Technology’s second-quarter 2019 earnings per share (EPS) came in at $1.83, reflecting a 40.8% increase from a year ago.

The figure beat the Zacks Consensus Estimate by 21.2%.

Revenues

Revenues grew 22.5% year over year to $600.7 million in the quarter, surpassing the Zacks Consensus Estimate by 0.8%.

The robust top-line growth was led by a double-digit increase in Invisalign case shipments from the year-ago quarter. Moreover, increased revenues from iTero scanner contributed substantially.

Segments in Detail

In the second quarter, revenues at the Clear Aligner segment rose 14.6% year over year. Within the segment, Invisalign case shipments amounted to $377.1 million, up 24.6% year over year. The upside was primarily driven by continued adoption by teenage and younger patients as well as increased utilization among orthodontists and expansion of the company’s global customer base.

During the quarter, Invisalign volumes were up 16.5% and 36.7% year over year in the Americas and International regions, respectively. Invisalign volume for teenage patients was 103.7 thousand cases, up 32.2% year over year.
Revenues from Scanner and Services improved a significant 82.4% to $104 million on increased sales of iTero scanner and services.

Margins

Gross margin in the quarter under review contracted 260 basis points (bps) year over year to 71.9% on account of a 35% rise in cost of net revenues.

During the quarter, Align Technology witnessed a 26.3% year-over-year increase in selling, general and administrative expenses to $267.9 million and a 26.1% rise in research and development (R&D) expenses to $38.9 million. Accordingly, adjusted operating margin contracted 414 bps to 20.9% in the quarter under review.

Financial Details

At the end of the second quarter, Align Technology had cash, cash equivalents and short-term marketable securities of $720.9 million, compared with $732.5 million at the end of the first quarter.

In the reported quarter, Align Technology repurchased 0.2 million stocks for $49.5 million under its existing buy-back authorization. The company currently has approximately $400.5 million left under the May 2018 repurchase program.

Q3 Guidance

For the third quarter of 2019, the company projects EPS of $1.09-$1.16 on revenues of $585-600 million (indicating 16-19% growth from a year ago). The company estimates Invisalign case shipments in the band of 370,000-380,000, suggesting a 16-19% rise from a year ago.

Meanwhile, the Zacks Consensus Estimate for third-quarter EPS is pinned at $1.43 on revenues of $622.9 million. The earnings estimate is above the guided range while that for revenues is slightly above the high end of the projected band.

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How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -20.26% due to these changes.

VGM Scores

At this time, Align Technology has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Align Technology has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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