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COVID-19 Clobbers Align Technology's Q1 Results

By Keith Speights – Apr 30, 2020 at 7:00AM

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The orthodontic device maker reported sharp sequential revenue and earnings declines in the first quarter because of the COVID-19 pandemic.

No one expected that Align Technology's (ALGN -0.48%) first-quarter results would be great. The orthodontic device maker began to reset expectations in late January when it provided Q1 guidance in its fourth-quarter update that was well below what Wall Street had previously estimated.

Align announced its Q1 results after the market closed on Wednesday. And the numbers were even grimmer than anticipated. Here are the highlights from Align's Q1 update.

Hand holding clear aligner with reflection appearing on a table surface

Image source: Getty Images.

Below expectations

The company reported first-quarter revenue of $551 million. Not only was this result well below the average analysts' estimate of $580.3 million, but it also fell short of Align's guidance of revenue between $615 million and $630 million. Of course, that outlook was given before the COVID-19 outbreak hit the U.S. and Europe with full force.

Align's Q1 revenue also reflected a 15% drop from the previous quarter. This decline resulted in large part from Invisalign case shipment volume tumbling 13% from Q4. In addition, the company's scanner and services revenue sank nearly 35% from the sequential quarter to $69.4 million.

The dismal revenue picture also impacted Align's bottom line. The company announced Q1 adjusted earnings of $57.9 million, or $0.73 per share. This was a steep decline from earnings of $1.25 per share in the prior-year period and $1.76 per share in the fourth quarter of 2019. 

As was the case with its top-line result, Align's Q1 earnings badly missed the consensus Wall Street earnings estimate of $1.00 per share. The company's earnings number also was much lower than its guidance range of adjusted earnings between $1.19 and $1.28.

On the other hand, Align's earnings based on generally accepted accounting principles (GAAP) looked great, at least at first glance. The company reported GAAP earnings of $1.52 billion, or $19.21 per share, compared to GAAP earnings of $0.89 per share in the prior-year period and $1.53 per share in the previous quarter. However, the improvement stemmed entirely from an income tax benefit of $1.46 billion in the first quarter of 2020.

Likely to get worse

Align Technology didn't provide guidance for its second quarter and withdrew its previous guidance for full-year 2020. The company stated that it couldn't estimate the impact that the COVID-19 pandemic might have on its operations and financial results.

It seems almost certain, though, that things will get worse for Align in the second quarter. CEO Joe Hogan noted that most Invisalign practices shut down and no longer saw patients in North America and Europe beginning in mid-March. These shutdowns are still in effect in many areas. 

Even if dental professionals resume operations in the next few weeks, Align will have experienced more than one month of significantly lower revenue in the second quarter. It's also uncertain how quickly dentists' and orthodontists' offices will reopen. And when they do reopen, it's possible that many patients will still delay visits.

This could especially be problematic for Align in North America. In 2019, around 56% of the company's Invisalign case shipments were in the Americas region.

Putting things in perspective

All of this sounds bleak for Align, but it's important to put things in perspective. Joe Hogan stated that the company's business was humming along early in 2020. He noted that through early March, most regions were performing better than the company's outlook and China was in line with its January guidance.

Even with the dismal performance in the first quarter, Invisalign case shipments actually increased 2.9% year over year. Net revenue was up slightly as well compared to the prior-year period.

Healthcare stocks like Align that rely on close interactions between healthcare professionals and patients will likely remain highly volatile for several more months. But as the worries about COVID-19 diminish, expect Align's financial performance -- and its stock -- to rebound nicely.

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

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