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Align Technology Inc. Disappoints With Q3 Outlook

By Keith Speights - Jul 23, 2015 at 4:25PM

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Q2 revenue and earnings looked good, but Align slashes its Q3 guidance.

Source: Align Technology.

After a strong first quarter for Align Technology (ALGN 0.05%), investors eagerly anticipated how the maker of dental medical devices would follow up on that success. Align announced its second-quarter results after the market closed on Thursday. The market reacted negatively, with shares falling over 8% in after-hours trading. Here's what happened.

By the numbers
First, the good news: Align reported second-quarter revenue of $209.5 million -- an 8.8% year-over-year increase. The figure also narrowly beat the analysts' consensus revenue estimate of $209.79 million.

Align's earnings picture also looked OK for the second quarter. The company announced net profit of $31.4 million, or $0.39 per diluted share. That's down from the $35.6 million, or $0.43 per diluted share, figure reported in the same quarter of 2014. However, it topped the $0.37 per share expected by Wall Street.

What's the bad news? Align provided very disappointing guidance for the third quarter. The company forecast net revenue between $201.4 million and $205.7 million, well below the nearly $213 million that analysts anticipated. And Align's earnings projections for the second quarter of $0.28 to $0.31 per diluted share weren't even close to the consensus analysts' estimate of $0.45 per share.

Behind the numbers
This negative surprise for Align's third-quarter outlook stems from what appears to have been a significant customer issue. In the past, Align charged customers for additional aligners needed after the initial treatment plan. In the face of customer complaints, though, the company has reversed course and will now provide these additional aligners at no charge.

While the move should make customers happier, it comes with a hefty price tag. Align estimated that the new policy will lower third-quarter revenue by $6 million to $7 million and reduce fourth quarter revenue by another $7 million to $8 million.

Align also announced a corporate reorganization on Tuesday. This shakeup includes having the sales organization report directly to company CEO Joe Hogan. Raphael S. Pascaud, formerly Align's vice president of its international business unit, is moving up to a newly created role of  chief marketing portfolio and business development officer. The previous chief market officer, John Graham, has left the company. Meanwhile, Tim Mack, the former VP of business development, has moved into the VP of scanner and services position. 

Looking ahead
When a company slashes its outlook and announces a major reorganization, it usually hints at serious problems. In Align's case, though, things might not be quite as bad as they seem at first glance.

For one thing, shipments of the company's core Clear Aligner products continue to show solid double-digit percentage growth. International shipments jumped 30.4% year over year in the second quarter, while North American shipments were up 17.4%. Align forecasts year-over-year shipment growth of around 20% for the third quarter.

Also, Align's decision to quit charging for additional aligners doesn't necessarily mean that customers were hopping mad at the company. Actually, CEO Joe Hogan noted that Align's Net Promoter Score, a key customer experience metric, has "continued to rise" over the past couple of years.

Align's less optimistic revenue and earnings outlook probably mean that the stock could languish for a while. However, It's quite possible that the factors leading to Align's stock price plummet now could result in greater success for the company over the long run.

Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Align Technology. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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