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1. CFA Institute Research Challenge
Americas Regional Competition
SCU Leavey School of Business
ALIGN TECHNOLOGIES (ALGN)
TEAM Santa Clara University
Amar | Spencer | Gio | Mona | Jaden
SCU Confidential
2. SCU Leavey School of Business
Agenda
Executive Summary
Company Overview
Competitive Positioning
Investment Summary
Financial Analysis
Valuation
Investment Risks
SCU Confidential
3. SCU Leavey School of Business
Executive Summary Current Price: $33.04 (March 15th 2013)
Recommendation : Target Price: $23.70
Align
Mis-Align
Management
Concerns
Growing list of Competitors
Poor Execution Limitations of the Product
Acceleration of
Growth Concerns
Over valued based upon Intrinsic
Valuation
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview Positioning Summary Analysis Risks
SCU Confidential
4. SCU Leavey School of Business
Company Overview : ALIGN TECHNOLOGIES
Business : Global Manufacturer & Supplier of Technology rich
product for treatment of Malocclusion
Sector : Healthcare
Industry : Medical Equipment and Supplies
Listing : ALGN (NASDAQ)
Inception : March 1997 IPO : Jan 2001
Core Product : Invisalign clear aligners
Ancillary Products : iTero intra-oral scanners, OrthoCAD
digital services
Market Cap : $2.62B | FY’2012 Revenues : $560M |
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview Positioning Summary Analysis Risks
SCU Confidential
5. SCU Leavey School of Business
Market Share and Revenue Mix
Existing Clear Aligner Market Share: Regional Revenue Mix
Align vs. Competition
22%
85% 76%
NA net revenue
Europe net revenue
Other International net revenue
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
6. SCU Leavey School of Business
Competitive Positioning
Invisalign
Full
1999 Invisalign
SmartTrack
Express / Lite
2013
2005 / 08
Invisalign Vivera TM
G4 Retainers
2011
2007
Invisalign
Invisalign G3 2010
Teen
2009 2008
Invisalign
Invisalign 1.5
Assist
Can ALGN Endure or Defend its Market share?
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
7. SCU Leavey School of Business
Investment Summary - Sell
M A P S
Management ASPs Poor Slowed
Shuffle Dropping Implementation Growth
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
7 SCU Confidential
8. SCU Leavey School of Business
Management Departures
Len Hedge, Kenneth Dana
Dan Ellis,
Sr. VP Arola, CFO Cambra,
VP of Sales
Business Stepped VP of R&D,
NA, Fired
Operations, down Fired
Retired
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
9. SCU Leavey School of Business
ASPs Dropping
2011 ASP 2012 ASP YoY
Invisalign Full $1,465 $1,441 -2%
Invisalign $964 $877 -9%
Express/Lite
Invisalign Teen $1,434 $1,390 -3%
Invisalign Assist $1,311 $1,332 2%
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
10. SCU Leavey School of Business
Scanner Business Disappointing
Wrote a significant goodwill Q4 Q4 Annual
impairment charge due to a Growth
2011 2012
termination of a distribution
agreement (affects NA and
Europe) Revenue $10M $10M 0%
Questionable acquisition move
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
11. SCU Leavey School of Business
Earnings
Margins have felt the impact of increasing operations cost, lower ASP
and ineffective marketing adoption
EBITDA Margin Trend
600.0 560 40%
480 35%
500.0 33%
388 30%
400.0 27%
314 25%
Millions
23%
300.0 21% 20%
15%
200.0
130 130 129
10%
100.0 66
5%
0.0 0%
2009 2010 2011 2012
Revenue EBITDA EBITDA margin
2009 2010 2011 2012
EPS -0.45 0.95 0.83 0.80
YoY Growth -311% -13% -4%
Executive Company Competitive Investment Financial Investment
Valuation
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SCU Confidential
12. SCU Leavey School of Business
Product Channel and Mix
North America International
35% 35%
30% 30%
25% 25%
20% 20%
15% 15%
10% 10%
5% 5%
0% 0%
-5% 2009 2010 2011 2012 2009 2010 2011 2012
vs. Prior vs. Prior vs. Prior vs. Prior vs. Prior vs. Prior vs. Prior vs. Prior
Case Volume Case Revenue Case Volume Case Revenue
22%
Revenue Growth - YoY
share of
2009 2010 2011 2012 Adult
Unit Share of 4%
Invisalign Full -8% 13% 14% 12% Applicable cases
share of
Invisalign Teen 318% 249% 42% 23% Market Teen
Invisalign Assist 817% 167% 86% 5% cases
Product mix focus and international expansion growth is questionable
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
13. SCU Leavey School of Business
Financial Metrics
Patterson
Apr 12- 5 Yr Average
ALGN Cos. Inc XRAY-US HSIC-US
1
Price/Earnings 23.96 17.28 20.09 17.33
Price/Sales 3.51 1.14 2.38 0.71 OVERpriced
Price/Book Value 3.82 2.71 3.1 2.34
Enterprise Value/EBITDA 15.44 10.07 13.13 9.35 UNDERperformed
EPS (diluted) 0.64 1.79 1.78 3.23
1
ALGN PE based on simple average
as of Feb 12 ALGN S&P 500
P/E last 4Q 45.5 16.4 ALGN possesses an encouraging
P/Sales last 4Q 4.7 1.38 and DISRUPTIVE innovative
P/Book 4.5 6.7 product BUT reflects a POOR
ROE 10.9 14.3 strategy plan execution
ROIC 10.7 12.2
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
14. SCU Leavey School of Business
ALGN Price Performance vs. S&P 500
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
15. SCU Leavey School of Business
Valuation
Compared to current
Valuation Share Price
market price
Intrinsic Valuation (DCF) $23 -30%
Comparables Valuation $25 -23%
Average Valuation $24 -28%
Target Price: $24
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
16. SCU Leavey School of Business
Valuation
Assumptions
Risk Free Rate: closer to 30-year US govt. Treasury yield of 3%
Equity Risk Premium: 5.5% as per Duff & Phelps
Tax Rate: 27% (lower than statutory 35% due to efficient tax
structure of the company)
Terminal Growth Rate: 4%; as a result of ALGN’s presence in
international regions where growth is typically higher
WACC: 14.5%; Discount rate (WACC) considers only cost of equity
(using CAPM) since company debt is almost negligible and equity
beta of 2.09
Terminal Value calculated using Gordon Growth Model
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
21. SCU Leavey School of Business
Investment Risks
Upside Downside
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
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22. SCU Leavey School of Business
Investment Risks – upside
Increased performance of
Core Aligner product
Great performance of
Cadent holding
New momentum by new
management
Stable customer base
Effective marketing strategy
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
23. SCU Leavey School of Business
Investment Risks – downside
• Consumer confidence • Danaher
level drop • Great Lakes
• Unemployment Rate • Dentsply
• 3M
• And more
Macro Econ Competition
Environment Environment
Align
Litigation
Management
issues
& Product
• Patent expiration • No New products
• International market: pipelined in near to
weak intellectual long-term
property protection
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
24. SCU Leavey School of Business
Investment Risks – Competition Environment
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
25. SCU Leavey School of Business
Investment Risks – Align Management & Product Risk
Unclear
Important Unsuccessful
Product
Management Marketing
Innovation
Changes Strategy
Plan
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
26. SCU Leavey School of Business
Investment Risks – downside
• Consumer confidence • Danaher
level drop • Great Lakes
• Unemployment Rate • Dentsply
• 3M
• And more
Macro Econ Competition
Environment Environment
Align
Litigation
Management
issues
& Product
• Patent expiration • No New products
• International market: pipelined in near to
weak intellectual long-term
property protection
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
27. SCU Leavey School of Business
GOOD GOOD
COMPANIES INVESTMENT
v/s
Growth Stock Value Stock
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
28. SCU Leavey School of Business
Summary
Executive Company Competitive Investment Financial Investment
Valuation
Summary Overview positioning Summary Analysis Risks
SCU Confidential
31. SCU Leavey School of Business
Consumer Confidence Level
160 80
140 70
120 60
Align Revenue in Millions
100 50
Consumer Index
80 40
60 30
Align Revenue(Millions)
40 20
Consumer Index
20 10
0 0
Align Revenue and Consumer Index Correlation
Executive Company Industry Competitive Investment Financial Investment
Valuation
Summary Overview Overview positioning Summary Analysis Risks
SCU Confidential
32. SCU Leavey School of Business
Lingual Traditional Invisalign
Braces Braces Aligners
Completely invisible from Outside Y
Appropriate for Most Patients Y Y
Always on and always working toward your Y Y
final result
Can eat and drink with them on Y Y
Cant be misplaced or lost Y Y Y
100% Customized Y Y
Priced Slightly higher than traditional braces Y
SCU Confidential
33. SCU Leavey School of Business
Competitive Positioning
- Gold Standard - Elective & Expensive nature of treatment
- Patent Protection (490 till date) - Several limitations with Treatment
- Product Innovation - YOY Rev Growth decline in Aligner segment
- Production Automation - X-factor is the treating Dentist
- Early Mover Advantage - No new products in pipeline as of date
- Most Treated Patients - Management Changes
- Strong Marketing Force - Gross margins under pressure
STRENGTHS WEAKNESSES
OPPORTUNITIES THREATS
- Only 15% of worldwide addressable - Near Term Macroeconomic Uncertainties
orthodontic market has been captured - Surge of Competitors
- Under penetrated Teen Segment - Declining Average Selling Prices
- Potential for growth in emerging markets - Termination of distribution agreements
- Continuing Litigation Expenses
SCU Confidential
34. SCU Leavey School of Business
ALGN Price Performance vs. NASDAQ 100
SCU Confidential
35. SCU Leavey School of Business
Income Statement
2010 2011 2012
% Inc/(Dec) % Inc/(Dec) % Inc/(Dec)
$ in millions except per share data $ $ $
from Prior Yr from Prior Yr from Prior Yr
Revenue/Sales 387 24% 480 24% 560 17%
Cost of revenue 84 6% 118 40% 144 22%
Gross profit 303 30% 361 19% 416 15%
Operating expenses
Research and development 26 18% 37 42% 43 16%
Sales, General and administrative 192 -21% 231 20% 248 7%
Restructuring, merger and acquisition -100%
Other operating expenses (17) 2 -112% 40 NM
Total operating expenses 201 -25% 271 35% 331 22%
Operating income 103 -403% 90 -13% 86 -4%
Interest Expense
Other income (expense) (1) N/A - N/A (1) N/A
Income before taxes 102 -400% 90 -12% 84 -7%
Provision for income taxes 28 NM 23 -18% 26 13%
Net income from continuing operations 74 -339% 67 -9% 59 -12%
Net income 74 -339% 67 -9% 59 -12%
Net income available to common shareholders 74 -339% 67 -9% 59 -12%
Earnings per share
Basic 1 -318% 1 -12% 1 -15%
Diluted 1 -311% 1 -13% 1 -14%
Weighted average shares outstanding
Basic 76 10% 78 3% 81 4%
Diluted 78 13% 80 3% 83 4%
SCU Confidential
36. SCU Leavey School of Business
Balance Sheet
2010 2011 2012
% Inc/(Dec) % Inc/(Dec) % Inc/(Dec)
$ in millions except per share data $ $ $
from Prior Yr from Prior Yr from Prior Yr
Assets
Current assets
Cash
Cash and cash equivalents 295 178% 241 82% 306 127%
Short-term investments 9 45% 7 78% 28 400%
Total cash 303 163% 248 82% 335 135%
Receivables 65 118% 92 142% 99 108%
Inventories 3 150% 9 300% 15 167%
Prepaid expenses 17 94% 32 188% 35 109%
Other current assets 4 2
Total current assets 389 149% 385 99% 486 126%
Non-current assets
Gross property, plant and equipment 98 103% 129 132% 165 128%
Accumulated Depreciation -68 97% -75 110% -86 115%
Net property, plant and equipment 31 124% 54 174% 79 146%
Equity and other investments 9 21
Goodwill 0 135 99
Intangible assets 2 40% 50 2500% 46 92%
Deferred income taxes 42 68% 22 52% 22 100%
Other long-term assets 3 150% 3 100% 3 100%
Total non-current assets 88 94% 264 300% 271 103%
Total assets 477 134% 649 136% 756 116%
Liabilities and stockholders' equity
Liabilities
Current liabilities
Accounts payable 8 133% 22 275% 22 100%
Taxes payable 5 7 140% 6 86%
Accrued liabilities 46 107% 62 135% 66 106%
Deferred revenues 34 106% 52 153% 62 119%
Total current liabilities 93 115% 148 159% 156 105%
Non-current liabilities
Other long-term liabilities 6 600% 10 167% 19 190%
Total non-current liabilities 6 600% 10 167% 19 190%
Total liabilities 99 121% 158 160% 175 111%
Total stockholders' equity 378 138% 491 130% 581 118%
Total liabilities and stockholders' equity 477 134% 649 136% 756 116%
SCU Confidential
37. SCU Leavey School of Business
Cash Flow
Period Ending
in thousands 12/30/12 12/30/11 12/30/10
Net Income 58,691 66,716 74,253
Operating Activities, Cash Flows Provided By or
Depreciation 17,811 17,477 15,013
Adjustments To Net Income 60,659 13,734 29,670
Changes In Accounts Receivables (9,138) (21,693) (12,184)
Changes In Liabilities 15,326 60,974 24,497
Changes In Inventories (5,718) (4,058) (508)
Changes In Other Operating Activities (3,853) (2,681) (1,212)
Total Cash Flow From Operating Activities 133,778 130,469 129,529
Investing Activities, Cash Flows Provided By or
Capital Expenditures (38,333) (30,404) (18,031)
Investments (42,313) 10,317 2,256
Other Cash flows from Investing Activities 2,346 (191,519) (145)
Total Cash Flows From Investing Activities (78,300) (211,606) (15,920)
Financing Activities, Cash Flows Provided By or
Dividends Paid - - -
Sale Purchase of Stock (4,876) 17,747 11,822
Net Borrowings - - -
Other Cash Flows from Financing Activities (2,106) (1,897) (1,080)
Total Cash Flows From Financing Activities 10,205 27,241 14,707
Effect Of Exchange Rate Changes 28 (93) (139)
Change In Cash and Cash Equivalents 65,711 (53,989) 128,177
SCU Confidential
39. SCU Leavey School of Business
Goodwill Impairment Preliminary Analysis
Disclosed in Q312 Form 10Q
• In Q312 we determined that there were sufficient indicators of a potential
impairment to the goodwill attributed to the Scanner and CAD/CAM Services
reporting unit (SCCS), therefore conducted step 1 of the goodwill impairment
analysis and determined the goodwill was impaired.
• These indicators included the termination of an exclusive distribution
arrangement with Straumann for iTero intra-oral scanners in Europe, as well as
the termination of their non-exclusive distribution arrangement for iTero intra-
oral scanners in North America, together with market conditions and business
trends within SCCS.
• Based on our preliminary analysis we recorded an estimate of $24.7 million for
the SCCS goodwill impairment charge.
• Expect to finalize step 2 of the goodwill impairment analysis and record any
change from our estimate, if necessary, in Q412.
SCU Confidential