
Align Sees Significant Slowdown in 3Q23 and Guides to Ugly 4Q23; Is it a Harbinger for Elective Procedures, Competition, or Both?
Align Technology has released its financial results for the third quarter of 2023 revealing significant economic headwinds and potentially increased competitive headwinds are emerging that are negatively impacting growth. The company, which designs, manufactures, and sells the Invisalign System and is the global market leader in clear orthodontics, reported total revenues of $960.2 million for Q3’23. This represents a 7.8% year-over-year growth, although but a 4.2% sequential decline and the street had been looking for revenue of $996.5 million. The significant miss will likely weigh heavily on stocks tied to dental markets and more elective or cosmetic procedures tomorrow.
Align Technology’s Clear Aligner business, the core of its operations, generated $794.9 million in Q3’23, with a year-over-year increase of 8.5%. The Clear Aligner volume reached 602.3 thousand cases, marking a 2.3% year-over-year growth, however management changed its accounting for volume to include touch-up cases which likely raises eyebrows in light of the disappointing results. Total doctors ordering cases grew 1% year-over-year to over 85,000 dentists and orthodontists. One area of strength was a 9.9% sequential and 8.4% year-over-year increase in Clear Aligner shipments to teenagers driven by the popularity of Invisalign First, a product tailored to younger patients. Management also noted discounting that led to lower pricing on a sequential basis. The company’s Imaging Systems and CAD/CAM Services segment delivered revenues of $165.3 million, reflecting 4.9% year-over-year growth. The company noted a tougher capital equipment environment for its imaging systems. This could weigh on companies such as Dentsply Sirona, Sonendo, and others leveraged to dental capital equipment purchases.
Align Technology’s President and CEO, Joe Hogan, mentioned that dental practices and industry research firms have reported deteriorating trends. These include decreased patient visits, increased appointment cancellations, and fewer orthodontic case starts, especially among adult patients. Despite these headwinds, the company maintained strong growth. The company noted the Gaidge report for September, which includes insights from over 1,200 North American orthodontic practices, showed new orthodontic patient appointments were down 8.7% year over year, and orthodontic case starts were down 6.9% year over year.
In terms of profitability, on a non-GAAP basis, Q3’23 operating income reached $209.7 million, with an operating margin of 21.8%. Operating margins did improve year-over-year from 20.2% last year showing expense control. Management noted lower consumer marketing spend. Adjusted EPS were $2.14 versus street expectations of $2.27.
Hogan affirmed the company’s commitment to balancing investments in both near- and long-term growth drivers while delivering improvements in operating margins. This approach reflects Align Technology’s ambition to continue promoting the digital transformation of the dental industry, aided by products like Invisalign clear aligners, iTero scanners, and the Align Digital Platform. The company’s strategic initiatives include expanding its product range. In September, Align Technology introduced its first direct 3D printed orthodontic device, the Invisalign Palatal Expander. This product offers a safe, comfortable, and clinically effective alternative to traditional metal palatal expanders. Furthermore, the company aims to enhance its treatment planning software, ClinCheck, and introduce innovative features to improve the patient experience and reduce the need for attachments, thereby increasing aesthetic appeal. Align Technology also plans to expand its digital capabilities with the Align Oral Health Suite, including a collaboration with X-Ray Insights to aid doctors in identifying and educating patients about oral health conditions. Additionally, Align recently announced the acquisition of Cubicure GmbH, a move that will strengthen its intellectual property portfolio and 3D printing capabilities.
From a guidance perspective, the company guided to total annual revenue of $3.83 to $3.85 billion. At the mid-point it implies 4Q23 revenue of $935 million implying a significant sequential decline in total revenue and slowdown in growth. In line with its strategic goals, Align Technology announced plans to repurchase up to $250.0 million of its common stock in the fourth quarter of 2023. The company has over $1.0 billion available for stock repurchases under its 2023 Stock Repurchase Program.