Align Technology (NASDAQ:ALGN) did something in October 2018 that it has rarely done: disappoint investors with its quarterly update. The orthodontic-device maker best known for its Invisalign clear aligners reported slowing revenue and earnings growth for the third quarter.

Because of the unexpected weakness in the third quarter, Align had a lot riding on its fourth-quarter earnings update. The company announced those fourth-quarter results after the market closed on Tuesday. Here are the highlights.

Smiling woman holding clear dental aligner

Image source: Getty Images.

Align Technology results: The raw numbers

Metric 

Q4 2018 

Q4 2017 

Year-Over-Year Change

Sales

$534 million $421.3 million

26.7%

Net income from continuing operations

$97.4 million $10.3 million

848.9%

Diluted earnings per share (EPS)

$1.20 $0.13

823.1%

Data source: Align Technology.

What happened with Align Technology this quarter?

Align Technology yet again posted record-high revenue in the fourth quarter. The company's strong results stemmed from solid performances from its core Invisalign business, as well as its scanner and services business.

Invisalign shipments increased 30.9% year over year to 333,800 cases. But while average selling prices (ASPs) for Invisalign increased from the third quarter of 2018, they were lower than the prior-year period. The combination of higher shipments and lower ASPs resulted in a 22.4% year-over-year increase in clear aligner revenue to $445.6 million.

Align's scanner and services business really flourished in the fourth quarter. The company reported $88.4 million in sales for the unit, up 54.8% over the same quarter in 2017.

Don't think too much of Align's huge year-over-year gains in earnings, though. Most of the improvement was due to the negative impact of a provision for income taxes in the prior-year period. Align's net income and EPS slipped a little from the third quarter because of higher operating expenses in the fourth quarter. 

Align also achieved several milestones in the fourth quarter, including:

  • Expanding the Invisalign interactive brand experience program by adding eight new stores in major U.S. cities.
  • Announcing a $50 million accelerated stock repurchase program.
  • Launching a new Invisalign treatment with mandibular advancement for teens in the U.S. after receiving FDA approval in October.
  • Treating the 6 millionth patient, a teenager in China, with Invisalign. 

What management had to say

Align Technology CEO Joe Hogan emphasized the many positives with his company's fourth-quarter performance:

Our fourth quarter was a strong finish to a great year. Q4 revenues were better than expected reflecting higher Invisalign ASPs and volume growth of 31% year over year, as well as another record quarter for our iTero scanners with revenue up 55% year-over-year. Q4 sequential growth was driven by a strong quarter for EMEA [Europe, Middle East, and Africa] with record growth from teens, as well as continued traction with Invisalign Lite and Invisalign Go. Q4 operating margin of 22.6% reflects higher doctor training and manufacturing costs, as well as higher legal fees than anticipated, partially offset by a sequential improvement in Invisalign ASPs.

Looking forward

Align's 2019 first-quarter guidance was disappointing. The company expects revenue between $525 million and $535 million, reflecting a year-over-year increase of 20% to 22%. That wouldn't be bad for most companies, but it's slower growth than what Align has delivered in the past.

The company also expects first-quarter diluted EPS between $0.78 and $0.84. This range represents a significant drop from Align's bottom-line results achieved in 2018.

Align's business appears to be facing more headwinds now than it has in the past. Average selling prices are flat as the company targets international opportunities and encounters more competition from its rivals. 2019 could be something of a transitional year for Align as it adapts to the changing dynamics in its market.  

Keith Speights owns shares of Align Technology. The Motley Fool owns shares of and recommends Align Technology. The Motley Fool has a disclosure policy.