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Align Technology Disappoints Investors with Reduced Guidance

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Align Technology’s earnings performance

Yesterday, Align Technology (ALGN) reported its second-quarter earnings results after the market closed. The company’s stock closed 0.81% up to $275.16 yesterday. However, the stock fell by 20.88% to $217.70 in the after-market trading session.

In the second quarter, Align Technology reported revenues of $600.70 million, a YoY rise of 22.53%. This surpassed the consensus revenue estimate by $1.32 million. The revenues were also higher than the company’s guidance of $590 million to $800 million. According to the second-quarter earnings call, the company benefitted mainly from the robust growth of Invisalign sales volumes in international markets. Sales of iTero Scanner and Services also rose dramatically by 84% on a YoY basis.

In the second quarter, Align Technology reported non-GAAP EPS of $1.33, a YoY rise of 2.31%. This was, however, lower than the consensus estimate by $0.18. The company also missed its second-quarter non-GAAP EPS guidance of $1.47 to $1.52. To know more about market projections for Align Technology for the second quarter, please read Align Technology: What to Expect in Q2.

Align Technology’s fiscal 2019 guidance

In the first quarter, Align Technology forecasted annual revenue growth of 20% to 30% and a gross margin of 73% to 78%. The company has an estimated operating expense percentage of 45% to 50% and operating margin of 25% to 30%. The company also guided for annual free cash flow growth of 20% to 25%. This guidance was provided for a period of the next three to five years.

However, in the second-quarter earnings call, the company revised its fiscal 2019 revenue growth to be at the low end of the long-term revenue guidance. The company expects the fiscal 2019 operating margin to be 22%.

According to the second-quarter earnings call, the reduced margin guidance reflects the increased expenses of the company as legal fees and for corporate structure reorganization, consumer marketing, and closing Invisalign stores. The company, however, benefitted by $16 million from termination of discussions about development and distribution agreement with Straumann. This coupled with payment owed to Align Technology by Straumann as a part a patent settlement agreement, totals to around $51 million.

Align Technology has highlighted demand uncertainty in the Chinese market as the major reason for the reduced fiscal 2019 outlook. The company based these assumptions on a slowdown in the market in June 2019. The depressed consumer sentiment is considered to be a fallout of the increasing US-China trade tensions. Investors were disappointed by the softer fiscal 2019 guidance and penalized the stock in the after-market trading session.

Third-quarter guidance

Align Technology has guided for third-quarter revenues of $585 million to $600 million, a YoY rise of 16% to 19%. The guidance does not assume any revenue contribution from SDC (Smile Direct Club) in the third quarter. The company, however, earned $8.0 million from SDC in the second quarter.

Align Technology expects its third-quarter gross margins to be 71.9% to 72.5%, a slight improvement from 72% gross margin in the second quarter. This is attributable to a rise in prices of Invisalign and improvements in manufacturing productivity. The company has guided for third-quarter operating expenses of $305 million to $312 million, significantly higher than second-quarter operating expenses of $255.8 million. The difference is mainly due to $51 million paid by Straumann and adjusted in the expenses in the second quarter.

Align Technology has guided for an operating margin of 19.8% to 20.5% in the third quarter. The company expects depreciation and amortization to be $24 million to $26 million and effective tax rate to be 24%. The company has guided for non-GAAP EPS of $1.09 to $1.16 in the third quarter.

Align expects to repurchase a minimum of $100 million worth of shares from the open market in the third quarter. The company has guided for capex of $50 million to $55 million in the third quarter.

Sales trends in the third quarter

The company has also guided for lower international market sales volumes in the third quarter on a sequential basis. According to the second-quarter earnings call, this trend is attributable to a seasonal slowdown in EMEA markets. However, the impact is expected to be partly offset by the seasonal boost from APAC markets. Uncertainty around sales in China is a key challenge for the company.

Align Technology has forecasts North American sales volumes to rise sequentially in the third quarter. The company expects to benefit from seasonality since orthodontists treat a peak number of teens in the summer season. Align Technology also expects the launch of its new advertising campaign to further boost sales.

Based on these assumptions, Align Technology has guided for a flat to slight sequential rise in overall Invisalign volumes in the third quarter. The company expects the iTero Scanner and Services’ sales volumes to be sequentially down in the third quarter. This is attributable to the record growth reported in the second quarter. However, the company expects the iTero business to report YoY volume growth in the third quarter.

In its second-quarter earnings call, Align Technology has guided for Invisalign shipments of 370,000 to 380,000 cases in the third quarter, which is YoY growth of 16% to 19% despite the previous quarter being that of record growth in volumes for Invisalign. In the third quarter of 2018, Invisalign shipments increased by around 2% due to promotions targeted towards teens and adults despite lower ASPs (average selling prices).

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