Update ALGN delivers big time again

In after hours trading, ALGN was up 11.46% or $23.27, after reporting today, 10/26/2017, its Q3 2017 financials.
ALGN Q3 2017 Financial Results Slides and Historical Data

Back in May 2017, I brought Align Technology (ALGN) to the attention of this board due to its strong fundamentals, superior value creation for shareholders, a solid capital structure with zero debt and strong growth performance in revenues, net income and EPS.

As an update, two quarters later, ALGN continues to substantially outperform its own guidance given for Q2 2017 and today for Q3 2017 as shown below.

ALIGN TECHNOLOGY (ALGN)	      Q3 ’17 GUIDANCE	  **Q3 ‘17**	   Q3 ‘16	Y/Y CHANGE
Net Revenues 	             $ 355 M - 360 M	$ 385.267 M	$ 278.6 M         38.3%	
Gross Margin	               74.7% - 75.7%	   75.9%	   75.09%	
Operating Margin	       22.7% - 23.6%	   25.6%	   22.28%	
Net Income per Diluted Share. $ 0.78 -  0.81	   $1.01	   $0.63          60.3%	
Case Shipments	               231 K - 234 K	 236,065	  177,755         32.8%	
Capital Expenditure	     $ 70 M  -  75 M	$ 48.1 M	 $ 17.3 M	
Stock-based Compensation 	 $ 14.9 M	$ 14.967 M	 $ 13.711 M	

ALIGN TECHNOLOGY (ALGN)	     Q2 ’17 GUIDANCE	  **Q2 ‘17**	   Q2 ‘16	Y/Y CHANGE
Net Revenues 	            $ 340 M - 345 M	$ 356.482 M	$ 269.362 M	  32.3%
Gross Margin	                74% - 75%	   76.0%	   76.2%	
Operating Margin	      21.0% - 21.7%	   23.4%	   24.2%	
Net Income per Diluted Share $ 0.71 -  0.74	   $0.85	   $0.62	  37.1%
Case Shipments	              221 K - 224 K	  231,890	  176,995	  31.0%
Capital Expenditure	     $ 30 M -  35 M	 $ 18.5 M	 $ 18.8 M	
Stock-based Compensation 	$ 14.7 M	 $ 14.245 M	 $ 13.699 M	

For the next Q4 2017, Align provides the following guidance:

Net Revenues 	             $ 391 M - $ 398 M	$ 293.203 M
Gross Margin	               75.0% - 75.5%	   75.1%
Operating Margin	       24.3% - 24.8%	   23.3%
Net Income per Diluted Share  $ 0.92 - $ 0.95	   $0.59
Case Shipments	               245 K - 250 K	  190,055
Capital Expenditure	     $ 55 M  - $ 60 M	 $ 14.2  M
Stock-based Compensation 	 $ 15.3 M	 $ 14.214 M


Align Technology continues its recent trend, realizing significant year-over-year increases in quarterly revenues and quarterly EPS as shown in the following table.

**REVENUE     YoY      EPS $ 	 YoY**
**$ million   Change   diluted	Change**

Q3 '17    385.267    38.3%      1.01    60.3%
Q2 '17	  358.482    32.3%	0.85    37.1%	
Q1 ‘17	  310.341    30.0%	0.85	70.0%
FY 2016	1,079.874    27.7%	2.33	31.6%
Q4 ‘16	  293.203    27.3%	0.59	-1.7%
Q3 ‘16	  278.589    34.2%	0.63	85.3%
Q2 ‘16	  269.362    28.6%	0.62	59.0%
Q1 ‘16	  238.720    20.5%	0.50	13.6%
FY 2015	  845.486    11.0%	1.77	 0.0%
Q4 ‘15	  230.276    15.9%	0.60	25.0%
Q3 ‘15	  207.636     9.4%	0.34   -27.7%
Q2 ‘15	  209.488     8.8%	0.39	-9.3%
Q1 ‘15	  198.086     9.7%	0.44	12.8%
FY 2014	  761.653		1.77	
Q4 ‘14	  198.600		0.48	
Q3 ‘14	  189.876		0.47	
Q2 ‘14	  192.531		0.43	
Q1 ‘14	  180.646		0.39	


The following table shows the following major changes to date since the 5/05/2017 financials given in my 5/9/2017 ALGN post:
• With a substantial increase in Market Cap, Align Technology joined the coveted S&P 500 benchmark on June 16, 2017, and was also added to the S&P 500 Global Industry Classification Health Care Supplies Sub-Industry index.
• ALGN stock price has substantially increased over 50% (from $138.03 on 5/5/17 to a 52-week high of $207.65).
• Diluted EPS for Q3 2017 increased 18.8% sequentially from $0.85 to $1.01 (60.3% year-over-year as previously mentioned above).
• P/E increased from 51.50 to 69.50.

ALIGN	       10/26/2017	5/05/2017
Market Cap	$ 16.27 B	$ 11.09 B
Employees	   6,060	   6,060
52-wk high	  207.65	  145.24
Price	          202.98	  138.03
52-wk low	   83.27	   74.48
EPS diluted (mrq)   1.01	    0.85
EV/EBITDA (mrq)	   50.78	      NA
P/E (ttm)	   69.51	   51.50
Fwd P/E	           49.75	   35.67
P/B (mrq)	   15.09	   10.56
P/S (ttm)	   13.13	    9.8
Annual dividend	      0	              0
Yield	            0.0%	    0.0%


As shown in the following table, for the recent past 5 fiscal years, Align Technology has realized exceptionally strong increases in Return on Invested Capital (ROIC) and superior ROIC-Weighted Average Cost of Capital (WACC) spreads or Economic Value Add (EVA).
Currently, on 10/26/2017, ALGN is creating 48.3 cents of pure economic value for every dollar invested.

10/26/17  59.9%  11.6%  48.3%			
05/04/17  57.2%	  9.8%	47.4%
2016	  58.1%   9.5%	48.6%
2015	  47.2%  10.4%	36.8%
2014	  52.8%   9.8%  43.0%
2013	  25.5%  19.2%   6.3%
2012	  24.4%  14.3%  10.0%


Align Technology maintains a rock solid capital structure as shown in the following table.

Cash (mrq)	          $ 362.613 M
Working Capital	          $ 639.634 M
Current ratio (mrq)	      2.39
Total Capitalization	$ 1,181.958 M
LT Debt (mrq)	                $ 0 M
Total Debt	                $ 0 M
Total Equity (mrq)	$ 1,181.958 M
Debt/Equity (mrq)	      0.0%
Debt/Capitalization	      0.0%

Align Technology has strong free cash flow.

FCF (million $)	
Q3 '17	 70
Q2 '17	 92
Q1 ’17  (12)
2016	177
2015	185
2014	203
2013	167
2012	 95
2011	100
2010	111


Reiterating from my previous post, according to Align, malocclusion, or the misalignment of teeth, is one of the most prevalent clinical dental conditions, affecting billions of people, or approximately 60% to 75% of the population. Annually, approximately 10 million people in major developed countries elect treatment by orthodontists worldwide, of which approximately 50% or 5 million have mild to moderate malocclusion and are applicable to Invisalign treatment - Align’s served market. In addition, approximately 100 million people with malocclusion want to straighten their teeth; however, they will not seek orthodontic treatment in a doctor’s office and would instead elect to receive clear aligner treatment in the convenience of their own home - referred to as the doctor-directed at home market.

The following table provides the case shipment volume for Clear Aligner and shows (a) substantial growth in total case shipment for fiscal years 2015 and 2016; and (b) significant increases in international case shipments for fiscal years 2011 through 2016.

**Case Shipment Volume   AMERICA  Change  NATIONAL  Change  TOTAL	 Change**
(in thousands)						
FY 2016	       464.5   16.6%	244.7	 32.4%	 709.2	 21.6%
FY 2015	       398.4   17.7%	184.8	 32.5%	 583.2	 22.0%
FY 2014	       338.5	7.8%	139.5	 28.6%	 478.0	 13.2%
FY 2013	       313.9   13.4%	108.5	 25.0%	 422.4	 16.2%
FY 2012	       276.7   16.0%	 86.8	 22.6%	 363.5	 17.5%
FY 2011	       238.6   19.7%	 70.8	 15.1%	 309.4	 18.6%
FY 2010	       199.4		 61.5		 260.9	

ALGN has already targeted and penetrated the People’s Republic of China/Asia Pacific market. On June 1, 2017, Align Technology announced the opening of a new Invisalign treatment planning facility in Chengdu, China. The state of the art facility is Align’s first manufacturing operations in China and represents the Company’s commitment to geographic expansion and investment in the Asia Pacific region. The Chengdu Treatment Planning and Training Centre of Excellence will provide treatment planning services for Invisalign providers in China, which was previously done in San Jose, Costa Rica. It will also serve as a major training facility that will allow Align to educate doctors across the region and showcase the Company’s latest product and technology innovation. Julie Tay, Align vice president and managing director, Asia Pacific, stated: "China is our number one market outside of North America and Asia Pacific is our fastest growing region. As our business in China and across Asia grows, we want to ensure we provide doctors in the region with the products and services they need to deliver great treatment outcomes to Invisalign patients. To meet this goal, we must provide treatment planning, clinical education and customer support, as well as training and education in the same time zone, same language, and be geographically closer to our customers across the Asia Pacific region. The Chengdu Centre is the first of many investments Align is making to provide the localized service and support that our customers deserve.”


A related issue concerns patents. First off all, keep in mind, according to U.S. Patent and Trademark Office: “Since the rights granted by a U.S. patent extend only throughout the territory of the United States and have no effect in a foreign country, an inventor who wishes patent protection in other countries must apply for a patent in each of the other countries or in regional patent offices. Almost every country has its own patent law, and a person desiring a patent in a particular country must make an application for patent in that country, in accordance with the requirements of that country. Similarly, local laws apply to trademark, copyrights, and other forms of intellectual property in each jurisdiction.” According to estimates by Robert W. Baird analysts, starting this October 2017, about 40 of Align’s early patents will expire, including several that protect the process that Align uses to digitally plan and manufacture clear aligner sets for patients. It’s the first group in what is expected to be an average of 23 expirations a year through at least 2028. As these U.S. patents enter the public domain, Align Technology will likely have to deal with more competition.

Regarding competition, for now, with its arsenal of more than 400 U.S. and 300 foreign-issued patents covering everything from the type of plastic that’s worn in patients’ mouths to the software orthodontists use to plan out teeth movements millimeter-by-millimeter, months in advance, ALGN CEO Hogan foresees significant barriers of entry, stating: “I think as competition comes in, they’ll help to legitimize the marketplace even more. They’ll basically have to come in with technology that’s about 10 years behind us.” For now, Align’s competitors are able to manufacture their own simple plastic aligners, but rather than using a computer to plan the outcome of a patient’s case from beginning to end, each stage must be built by hand, estimating how teeth will move from the first aligner, to the second and so on. With only a few aligners, it’s fairly easy to do. With the 30 to 60 needed to complete an average Invisalign case? The errors compound themselves and costs go up.

Regarding patents and competition, I’ve had some very interesting discussions with one of my friends at my local gym, who is an executive at Ormco, a subsidiary of Danaher Corporation and ALGN competitor, which operates its U.S. manufacturing plant in Glendora, California. I asked her now that the seven-year Ormco-Align Technology collaboration in the U.S. ended last year, are both on a collision course again securing patents in China and other Asian markets? She said, not yet and Align is again one of their top competitors at home and abroad. She related that both Ormco and Align have been aggressively pursuing and securing patents in China. When asked who were primary competitors as Ormco and ALGN patents expire, she responded without any hesitation, “3M” which has been sitting on the sidelines with substantial financial resources and means to make a big splash in the clear aligner market.
[For those interested:
http://www.3m.com/3M/en_US/orthodontics-us/ ]
I asked if Ormco/Danaher plan to build and operate a manufacturing facility in China? She said no and that the Chinese government had directed Ormco to print “Made in the U.S.A.” in Chinese and English on all their packaged products sent to China because Chinese customers highly regarded and preferred medical devices made in the U.S. Although many large companies have bailed out of California, she related that Danaher decided to keep Ormco in Los Angeles County with its work force in place and would be relocating from Glendora to newly built facilities on the west “better” side of Pomona, CA. [Pomona includes one of LA County’s most notorious hell holes with very high crime rates and tons of gang-related problems.]


In domestic and foreign regional marketplaces, Align Technology has successfully developed and produced several popular viable product lines - primarily Invisalign® and secondarily iTero® intraoral scanners and services - that have significantly enabled strong fundamentals, superior value creation for shareholders, a solid capital structure with zero debt and strong growth performance in revenues, net income and EPS, especially for FY 2016 and Q1, Q2 and Q3 for 2017. IMO, Align’s strong financials coupled with the huge growth potential in China, its number one market, greatly offset and outweigh its currently high 69.5 P/E. I have been accumulating ALGN stock in 6 accounts (my wife’s 2 IRAs, my 2 IRAs, 1 taxable account held in the name of our trust and 1 taxable account for me) for over the past two years, when the stock prices were in the $60s in 2015 and the last time in May 2017 for $138.

As always, conduct your own due diligence and decision-making.



I was just about to post results here on Align. These are incredibly strong results. Well done on the bravery to buy high.


My report:

Align Technology’s earnings conference call is a real eye opener.


Denny Schlesinger


Excellent joh, Ray. If I were to build from scratch a perfect template for an earnings report analysis, it would look just like yours.

Well done, sir!


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