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Align Technology (ALGN) Up 14% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Align Technology (ALGN). Shares have added about 14% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Align Technology due for a pullback? 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 drivers.

Align Technology Lags Q3 Earnings, Operating Margin Up

Align Technology delivered third-quarter fiscal 2023 adjusted earnings per share of $2.14, up 31.3% from the year-ago earnings. However, the earnings per share missed the Zacks Consensus Estimate by 5.3% in the third quarter.

GAAP earnings per share for the quarter was $1.58, reflecting a 69.9% increase year over year.

Revenues

Revenues increased 7.8% year over year to $960.2 million in the quarter but missed the Zacks Consensus Estimate by 3.7%. Moreover, revenues were favorably impacted by the foreign exchange of approximately $4.2 million year over year.

At the constant exchange rate or CER, total revenues in the third quarter were up 0.3% year over year.

Segments in Detail

The company has two reportable segments — Clear Aligner and Imaging Systems and CAD/CAM Services (Systems and Services)

Revenues in the Clear Aligner segment were up 8.5% year over year to $794.9 million. This figure compares with our model’s segmental projection of $815.9 million for the third quarter.

The growth was driven by higher volumes, increased Average Selling Prices and higher non-case revenues. Revenues were favorably impacted by a foreign exchange of approximately $3.8 million (or 0.5%) year over year. Total Clear Aligner shipments during the quarter amounted to 602,335, up 2.3% year over year.

Revenues from Imaging Systems & CAD/CAM Services were up 4.9% to $165.3 million in the quarter. Our model had projected the segment’s revenues for the third quarter to be $180.2 million.

Revenues witnessed a favorable currency impact of 0.3% year over year.

Margins

The gross profit in the third quarter was $663.1 million, reflecting an increase of 7.1% year over year. The gross margin in the quarter under review contracted 49 basis points (bps) year over year to 69.1% due to an increase of 9.6% in the cost of net revenues.

During the quarter, Align Technology witnessed a 2.4% increase in SG&A expenses to $408 million and a 15.3% rise in R&D expenses to $88.7 million.

The operating income in the quarter under review was $166.4 million, highlighting an increase of 15.8%. The operating margin expanded 119 bps to 17.3%.

Financial Details

Align Technology exited the third quarter of 2023 with cash and cash equivalents of $1.24 billion compared with the $942.1 million recorded at the end of 2022.

The cumulative net cash provided by operating activities at the end of the third quarter was $738.9 million compared with $424 million in the prior-year comparable period.

Currently, $1 billion is available for repurchases under ALGN’s $1 billion Stock Repurchase Program, which was authorized in the first quarter of 2023 to succeed the 2021 $1 billion program.

Full-Year Guidance

Align Technology provided an updated outlook for 2023.

For the full year, ALGN anticipates revenues in the range of $3.83-$3.85 billion (earlier $3.97 billion-$3.99 billion). The Zacks Consensus Estimate for Align Technology’s 2023 revenues is pegged at $3.97 billion.

For 2023, the company expects to report a GAAP operating margin of around one point lower than 2022 (previous outlook suggested slightly above 17%) and an adjusted operating margin of slightly higher than 21% (unchanged).

For 2023, Align Technology expects investments in capital expenditures to be approximately $200 million (unchanged). Capital expenditures are primarily related to building construction and improvements and additional manufacturing capacity to support Align Technology’s international expansion.

For the fourth quarter of fiscal 2023, ALGN anticipates revenues in the range of $920-$940 million. The Zacks Consensus Estimate for the same is pegged at $1.03 billion. The company continues to anticipate its adjusted operating margin to be slightly up on a sequential basis.

During the quarter, ALGN announced a definitive agreement to acquire privately held Cubicure GmbH for approximately €79 million, subject to customary closing adjustments and adjustments for Align’s existing ownership of capital stock of Cubicure. The acquisition is likely to close in the fiscal fourth quarter of 2023 or early 2024.

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 -9.89% due to these changes.

VGM Scores

Currently, Align Technology has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. 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. Notably, Align Technology has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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