Align Technology, Inc.’s (ALGN Quick QuoteALGN - Free Report) third-quarter 2022 earnings per share (EPS) were $1.36, reflecting a 52.6% plunge from the year-ago earnings. The quarter’s EPS lagged the Zacks Consensus Estimate by 38.5%.

GAAP EPS for the quarter was 93 cents, down from the year-ago EPS of $2.28, reflecting a 59.2% decline year over year.

Revenues

Revenues declined 12.4% year over year to $890.3 million in the quarter and missed the Zacks Consensus Estimate by 8.1%. According to the company, increasing inflation, rising interest rates, and less patient traffic and dental practices are lengthening sales cycles and conversion time, hampering sales significantly. Further, a significant impact from unfavorable foreign exchange rates across all currencies affected the company’s operations.

At constant exchange rate or CER, total revenues in the third quarter dropped 6.1% year over year – one of the largest foreign exchange impacts Align has ever experienced in one quarter.

Segments in Detail

In the third quarter, revenues at the Clear Aligner segment were down 12.5% year over year to $732.8 million. Revenues were unfavorably impacted by foreign exchange translation of approximately $47.4 million or 6.1% year over year. Within the segment, Invisalign case shipments amounted to 577,170, down 11.9% year over year.

Align Technology, Inc. Price, Consensus and EPS Surprise

Align Technology, Inc. price-consensus-eps-surprise-chart | Align Technology, Inc. Quote

Revenues from Imaging Systems & CAD/CAM Services were down 11.7% to $157.5 million in the quarter. Lower scanner volume was partially offset by higher services revenues from a larger installed base. Revenues witnessed an unfavorable currency impact of 5.9% year over year.

Margins

Gross profit in the third quarter was $619.2 million, reflecting an 18% decline year over year. Gross margin in the quarter under review contracted 479 basis points (bps) year over year to 69.5% on a 3.9% uptick in cost of net revenues.

During the quarter, Align Technology witnessed a 6.9% year-over-year fall in selling, general and administrative expenses to $398.5 million and a 17.3% rise in research and development expenses to $76.9 million.

Operating income in the quarter under review was $143.6 million, indicating a decline of 44.9%. The operating margin contracted 957 bps to 16.1%.

Financial Details

Align Technology exited the third quarter of 2022 with cash, cash equivalents of $1.04 billion compared with $877.5 million recorded at the end of Q2.

Cumulative net cash provided by operating activities at the end of the quarter was $424 million compared with $899.6 million a year ago.

The company did not make any share repurchases during Q3. Currently, Align Technology has $450.0 million remaining for repurchase under its existing $1.0 billion repurchase program. The company plans to repurchase up to $200.0 million of its common stock in the fourth quarter.

Guidance

Align Technology expects to report below its 2022 GAAP operating margin target of 20%, which considers the impact from the current unfavorable foreign exchange of approximately two to three points that was not factored into the operating margin guidance for 2022, which was given back in April.

For 2022, the company continues to expect investments in capital expenditures to exceed $300 million. Capital expenditures primarily relate to building construction and improvements, as well as additional manufacturing capacity to support Align Technology’s international expansion.

Our Take

Align Technology registered dismal revenue and EPS performance in the third quarter of 2022 with both metrics missing the respective Zacks Consensus Estimate and declining significantly on a year-over-year basis. The sluggish results were due to a dull underlying market, which, per management, was impacted by macroeconomic environmental factors and extremely unfavorable currency translation. The quarter witnessed the largest foreign exchange impact that Align has ever experienced in one quarter.

The contraction of both margins is worrisome. The volatility surrounding inflationary pressure,weaker consumer confidence, the lingering impacts of COVID-19 shutdowns, primarily in China and Japan, and other macroeconomic headwinds continue to pose challenges for the company.

Zacks Rank and Key Picks

Align Technology currently carries a Zacks Rank #5 (Strong Sell).

Some better-ranked stocks in the broader medical space that have announced quarterly results are Elevance Health, Inc. (ELV Quick QuoteELV - Free Report) , Medpace Holdings, Inc. (MEDP Quick QuoteMEDP - Free Report) and Accuray (ARAY Quick QuoteARAY - Free Report) .

Elevance Health, carrying a Zacks Rank #2 (Buy), reported third-quarter 2022 adjusted EPS of $7.53, which beat the Zacks Consensus Estimate by 6.1%. Revenues of $39.63 billion outpaced the consensus mark by 1.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Elevance Health has an earnings yield of 5.5% against the industry’s (2.3%). ELV’s earnings surpassed estimates in all the trailing four quarters, the average being 4.1%.

Medpace Holdings, having a Zacks Rank #1, reported third-quarter 2022 adjusted EPS of $2.05, which beat the Zacks Consensus Estimate by 39.5%. Revenues of $384 million outpaced the consensus mark by 8.1%.

Medpace Holdings has an estimated growth rate of 22.7% for 2022. MEDP’s earnings surpassed estimates in the trailing four quarters, the average being 22.04%.

Accuray reported fourth-quarter fiscal 2022 adjusted loss per share of 4 cents, which surpassed the Zacks Consensus Estimate by 33.3%. Fourth-quarter revenues of $110 million outpaced the Zacks Consensus Estimate by 4.9%. It currently has a Zacks Rank #2.

Accuray has an estimated growth rate of 100% for fiscal 2023. ARAY’s earnings surpassed estimates in three of the trailing four quarters and lagged the same in one, the average surprise being 20.8%.