Morningstar | Align's 3Q Performance Marred by Lower-Than-Expected Pricing
Align's third-quarter performance fell below our expectations mainly due to weaker clear aligner average selling prices. We are maintaining our narrow moat rating, but we anticipate a modest reduction in our fair value estimate after we update our assumptions. Worldwide ASPs dropped roughly 6% compared with the year-ago period, driven by promotional pricing programs, unfavorable foreign exchange rates, and increased product mix shift toward less differentiated products. Furthermore, the company’s outlook for the remainder of the year implies weaker profitability and slightly lower case volume than we previously expected.The company’s worldwide ASP weakness was driven mainly by Align's product mix shift and promotional pricing trends in North and South America. The specific promotion (which the company has discontinued) had a stronger-than-expected uptake for comprehensive cases and contributed to the approximate 7% comprehensive ASP decline. We think this promotional pricing issue is mostly temporary, with pricing likely to recover in 2019, but we remain concerned about the increasing product mix shift towards noncomprehensive aligners, where the company will face increasing competition, especially in less complex orthodontic cases.
We still anticipate strong clear aligner case volume growth for the company in the near term, but we think competitive pressures will somewhat constrain Align’s long-term profitability. The company's clear aligner gross margin dropped 260 basis points compared with the prior-year period due to the lower ASPs and manufacturing expansion activity. We think the company's clear aligner margins will benefit somewhat once pricing recovers and manufacturing facilities approach capacity, which should allow Align to spread more of its fixed costs across higher case volume. Separately, Align's scanner gross margin grew 390 basis points versus the year-ago period thanks to improved manufacturing efficiencies.
Align Technology is a medical device company engaged in the design, manufacture and marketing of Invisalign? clear aligners and iTero? intraoral scanners and services for orthodontics, restorative and aesthetic dentistry. The company's segments are: Clear Aligner, which includes the Invisalign System, a method for treating malocclusion based on a proprietary computer-simulated virtual treatment plan and a series of doctor-prescribed, custom manufactured, clear plastic, removable aligners; and Scanners and Services, which includes Intraoral scanning that enables the dental practitioner to create a 3D image of the patient's teeth (digital scan) using a handheld intraoral scanner.
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