Source: Align Technology

Will Align Technology (NASDAQ:ALGN) disappoint again? That was the question shareholders in the orthodontic device maker have likely had in mind in recent weeks. The company lowered its outlook for the third quarter in July, leading to a sell-off of the stock. Align announced its third quarter results after the market closed on Thursday and probably left most investors smiling -- despite a decrease in year-over-year earnings. 

Align results: The raw numbers

 Q3 2015 ActualsQ3 2014 ActualsGrowth (YOY)
Sales $207.6 million $189.9 million 9.4%
Net Income From Continuing Operations $27.6 million $38.2 million (27.8%)
Adjusted EPS $0.34 $0.47 (27.8%)

YOY: Year over year. Data source: Yahoo Finance!

What happened with Align this quarter?
You might look at those raw numbers and think Align had a bad quarter, but that wasn't the case. Both revenue and earnings came in above the high end of the company's prior guidance.

Align's lower earnings stemmed from a big change the company made last quarter. In the past, Align charged customers for additional aligners after their initial treatment. But as of July 18, in a move to address customer complaints, the company began providing free additional aligners for eligible Invisalign treatments. Aside from this significant policy change, Align had several other key developments during the third quarter:

  • International Clear Aligner shipments soared by 35.1% compared to the third quarter of 2014.
  • North American Clear Aligner shipments increased a solid 18.6% year-over-year.
  • Clear Aligner shipments for the teenage market jumped 22.3% higher than the prior year period.
  • Align's cash stockpile increased modestly to $630.0 million in cash, cash equivalents and marketable securities as of Sept. 30, compared to $602.6 million at the end of 2014.
  • The company bought back 662,000 shares as part of a three-year, $300 million stock repurchase program started in 2014.

The fourth quarter appears to be shaping up nicely for Align. The company provided updated fourth-quarter revenue guidance of $223.0 million to $227.9 million. Earnings are expected to come in between $0.50 and $0.53 per diluted share -- higher than many industry observers anticipated.

What management had to say
Joe Hogan, Align Technology's president and CEO, probably enjoyed sharing its results a lot more this time around than he did three months ago. "Our results were driven by strong Invisalign case volume," Hogan stated, "with growth across all customer channels and geographies, reflecting our highest year-over-year growth in North America in three years with continued strength coming from EMEA and APAC, expansion in low-stage product segment, and seasonally strong uptake by teenage patients, which account for 75% of the orthodontic market."

Looking forward
Align's Invisalign system faces several competitive challenges. Danaher (NYSE:DHR) stands out as one of its biggest rivals, and could make sustained double-digit growth harder to achieve for Align.

While Danaher's dental segment accounts for less than 13% of the company's total revenue, sales for its business unit are growing faster than Align's revenue. Danaher, though, benefits from several product lines, including dental implants, that don't go head-to-head against Align's products.

Moreover, some of Align's key patents expire in 2017. This could set up a scenario in which Danaher and other competitors become even more threatening to Align. That's still in the future, however. For now, Align Technology seems poised to continue its growth. 

 

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.