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Why Is Align Technology (ALGN) Down 18.7% Since Last Earnings Report?

It has been about a month since the last earnings report for Align Technology (ALGN). Shares have lost about 18.7% 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 its most recent earnings report in order to get a better handle on the important drivers.

Align Technology Tops Q1 Earnings, Gross Margins Contracts

Align Technology delivered first-quarter fiscal 2024 adjusted earnings per share of $2.14, up 17.6% from the year-ago earnings. The reported figure topped the Zacks Consensus Estimate by 8.1%.

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GAAP earnings per share for the quarter was $1.39 compared with $1.14 in the same period last year.

Revenues

Revenues increased 5.8% year over year to $997.4 million in the quarter and exceeded the Zacks Consensus Estimate by 2.6%. Moreover, revenues were favorably impacted by the foreign exchange of approximately $10 million sequentially.

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 3.5% year over year to $817.3 million. The upside reflects revenue growth across the regions from strong year-over-year volume growth across APAC markets and the EMEA region.

Revenues were unfavorably impacted by a foreign exchange of approximately $3.9 million (or 0.5%) year over year.

Revenues from Imaging Systems & CAD/CAM Services were up 2.4% to $180.2 million in the quarter. Revenues witnessed an unfavorable currency impact of 0.5% year over year.

Margins

The gross profit in the first quarter was $697.8 million, up 5.6% year over year. The gross margin in the quarter under review contracted 9-basis points (bps) year over year to 70.0% on an increase of 6.1% in the cost of net revenues.

During the quarter, SG&A expenses increased 2.8% to $451.8 million, while R&D expenses rose 5% to $91.9 million.

The operating income in the quarter under review was $154.1 million, increasing 15.4%. The operating margin expanded 130 bps to 15.5%.

Financial Details

Align Technology exited the first quarter of 2024 with cash and cash equivalents of $865.8 million compared with $937.4 million recorded at the end of the fourth quarter.

The cumulative net cash provided by operating activities at the end of the first quarter was $28.7 million compared with 199.9 million in the year-ago period.

Stock Repurchase

In January 2024, Align Technology repurchased approximately 1.1 million shares in total at an average price per share of $230.13 under the Q4'23 ASR contract. There remains $650.0 million available for repurchase of its common stock under its January 2023 Repurchase Program.

During the second quarter of 2024, the company anticipates repurchasing up to $150.0 million of its common stock through either a combination of open market repurchases or an accelerated stock repurchase agreement.

Guidance

Align Technology updated its financial outlook for full-year 2024 and provided second quarter 2024 outlook.

For the full year, ALGN anticipates revenues to be up 6-8% year over year (up from the previous guidance of up mid-single digits in 2023). The Zacks Consensus Estimate for the company’s 2024 revenues is pegged at $4.04 billion.

Both GAAP and adjusted operating margins for the full year are anticipated to be slightly above the 2023 GAAP and adjusted operating margins, respectively.

The company expects to invest approximately $100 million in capital expenditures, primarily related to building construction and improvements and manufacturing capacity, to support continued expansion.

For the second quarter of 2024, ALGN anticipates worldwide revenues in the range of $1.03 billion-$1.05 billion. The Zacks Consensus Estimate is pegged at $1.03 billion.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, Align Technology has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, 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 #2 (Buy). We expect an above average return from the stock in the next few months.

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