Can Align Get Past Headwinds When It Reports Earnings?

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Last year was a roller coaster ride for investors in Align Technology (NASDAQ: ALGN). The orthodontic device company produced back-to-back record-setting quarters -- which caused its stock to soar -- before succumbing to slowing growth in the third quarter. The disappointing results sent some shareholders running for the exits, and the stock gave up all its gains for the year. A record fourth quarter gave investors a dose of optimism, and the Invisalign maker has come roaring back to start 2019.

So far this year, the stock is up nearly 40% and expectations are high as Align prepares to report the financial results of its first quarter after the market close on Wednesday, April 24. Let's recap the fourth quarter results and look at recent developments that could have a material impact on the results for the quarter.

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More record-setting growth

For the fourth quarter, Align generated record revenue of $534 million, up 27% year over year. This was driven higher by clear aligner sales that increased 22% and scanner and services revenue that jumped 55%. Net income soared 849% to $97 million, the result of a tax charge in the prior-year quarter. Adjusting for the tax charge, diluted earnings per share of $1.20 would have been essentially flat.

Invisalign shipments increased 31% to 333,800 cases. Average selling prices (ASP) for Invisalign faced headwinds, and while they were up compared to the third quarter, they were lower year over year. This was the result of expansion into international markets and increased competition.

Recent events

Align has finally settled its long-standing dispute with SmileDirectClub (SDC), a competitor that provides clear aligners for the at-home teeth-straightening market. Early last year, SDC initiated proceedings against Align, saying that its Invisalign store pilot program breached non-compete provisions of an agreement between the two companies. Align holds a 19% stake in SDC, and it supplied the company with clear aligners for its customers.

Early last month, Align announced the results of binding arbitration that found the company had indeed breached the non-compete agreement and, as a result, Align was forced to close its Invisalign stores by April 3. Additionally, the arbitrator extended the non-compete agreement to Aug. 18, 2022 and ordered Align to sell back its membership interest in SDC at "its stated capital balance," which is significantly below the fair market value of the investment. As a result, Align said it will "incur a material charge in the first quarter."

However, that wasn't the only settlement during the quarter. A patent dispute with Straumann Group came to a favorable conclusion for Align. The companies agreed to dismiss existing actions in the U.S., U.K., and Brazil, and Straumann will pay Align a $35 million settlement. Additionally, the companies signed a five-year agreement whereby Straumann intends to distribute 5,000 of Align's iTero Element scanners. If that deal falls through, Straumann will pay Align an additional $16 million.

What the quarter could look like

For the first quarter, Align forecast revenue in a range of $525 million to $535 million, up about 21% at the midpoint of its guidance. The company projected case shipments of between 340,000 and 345,000, an increase of about 26%. Align also anticipated operating margins in a range of 15.1% and 16.1%, resulting in diluted earnings per share between $0.78 and $0.84.

It's important to note that the legal settlements will impact the final results, and without knowing all the numbers, it's difficult to know how the metrics will shake out. We'll know more when Align reports earnings on Wednesday, April 24, so stay tuned.

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Danny Vena owns shares of Align Technology. The Motley Fool owns shares of and recommends Align Technology. The Motley Fool has a disclosure policy.