Natus Medical Incorporated
Q4 2020 Earnings Call Transcript

Published: 28 Feb 2021

[Operator:]

Good afternoon, everyone. And thank you for joining us today to review our results for the Fourth Quarter of 2020. On the call today from Natus is Jonathan Kennedy, Natus’ President and Chief Executive Officer; and Drew Davies, Natus’ Executive Vice President and Chief Financial Officer. Jonathan will begin today with a business overview of the fourth quarter 2020. Then Drew will discuss the fourth quarter financial performance. Finally, we will open the call for your questions. Today’s call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include management’s beliefs and expectations about our future results. Our actual results may differ materially from these forward-looking statements. For a description of relevant risks and uncertainties pertaining to our business, please see today’s press release and our periodic and annual reports filed with the SEC.

[Jonathan Kennedy:]

Thank you, Operator. Good afternoon, everyone. During our call today, we will discuss our fourth quarter 2020 financial results, as well as our current business environment. Today, we reported the results for the fourth quarter and full year of 2020. Revenue for the quarter was $118.7 million and non-GAAP earnings per share was $0.39. Both revenue and earnings per share exceeded our expectations for the quarter as the pace of business recovery was faster than we expected. Revenue for the full year was $415.7 million and non-GAAP EPS was also $0.39 for the year. The dynamic environment in 2020 produced significant and unforeseen challenges for our company. However, our business began to recover in the second half of the year and that recovery continued into the fourth quarter, with revenues increasing 15.5% from the third quarter of 2020. While the effects of the pandemic had a major impact on our business, the strategic decisions, organizational changes and cost structure improvements we made over the last two years enabled us to manage through this demanding period and emerge a stronger and more efficient company. These steps helped us generate over $34 million in operating cash this year and allowed us to continue investing in new and refreshed products, which will drive our success in the future. Our focus and commitment to providing new and improved products to our customers was evident in the fourth quarter with the release of our new standard-setting pediatric ocular imaging system, Retcam Envision, as was the acquisition of Babybe and its patented remote mother-to-baby communication technology. Looking ahead to 2020 -- 2021, we expect to continue to bring innovative new products and solutions to market, including a new handheld newborn hearing screener, cloud telemedicine capability for certain products and a variety of product software enhancements.

[Drew Davies:]

Thank you, Jonathan. As Jonathan stated, we reported fourth quarter 2020 revenue of $118.7 million, a 15.5% increase from the third quarter as our business recovers from the impact of COVID-19. The sequential quarterly revenue increase was attributable mainly to device sales, which improved by 21.5%. Supplies increased sequentially by 1.4%, mainly in Neuro. Year-over-year revenue was down 9.7% from the same period last year. Revenue from our Neuro end market was $68.2 million or 57% of total revenue during the fourth quarter of 2020, compared to $81.1 million or 62% of total revenue during the same quarter last year. Revenue from the Neuro business declined 15.8% compared to the record quarter for Neuro last year and remains impacted by the COVID-19 pandemic. Revenue from our Newborn Care end market increased 0.7% to $28 million or 24% of total revenue during the fourth quarter of 2020 and that compares to $27.8 million or 21% of total revenue during the same quarter last year. The increase was primarily attributable to phototherapy and NicView sales. Revenue from our Hearing & Balance end market was $22.5 million or 19% of total revenue during the fourth quarter of 2020, compared to $22.6 million or 17% of total revenue during the same quarter last year. Hearing & Balance revenue recovered during the quarter and increased year-over-year after adjusting for the exit of the sound room business.

[Operator:]

Our first question is from Jayson Bedford with Raymond James. Your line is open.

[Jayson Bedford:]

Hi, guys. Congrats on the recovery that you guys are seeing in 4Q offering. So regarding the guidance, I just want to get a little breakdown on how you see it between the three segments, Newborn, Neuro and Hearing? What kind of revenue growth do you approximate in each one of those segments?

[Drew Davies:]

Yeah. We see our Newborn Care business holding up and continuing where it’s been. I think the -- compared to the same quarter last year for it to be pretty similar. And Hearing & Balance is recovering and should be a similar level to last quarter as well. We are seeing a little bit slower recovery in Neuro U.S. That’s where we saw the softness or the comparable lower revenue compared to last year was in U.S. Neuro and we would expect that to kind of recover slower in the first quarter as well.

[Jayson Bedford:]

That’s helpful. Thank you. And regarding full year, just I know you guys haven’t given us guidance on full year 2021, but is it fair to think that like in terms of where it was back in 2019, is there any kind of baseline that you guys can provide us for the full year?

[Drew Davies:]

Yeah. We didn’t give specific guidance, but we think that our -- each quarter this year, if you kind of look at the guidance that we gave for Q1, we have got a quarter that is potentially a little bit better than Q1 last year.

[Jayson Bedford:]

Okay. That’s helpful. And do you anticipate by the end of the year that, that business will recover to where it was pre-pandemic or it’s better or any kind of…

[Jonathan Kennedy:]

Yeah.

[Jayson Bedford:]

…forward guidance around that?

[Jonathan Kennedy:]

Yeah. I mean there’s still some lack of visibility in the full year that really prevented us from giving the guidance. Normally, we would give guidance. But we see the first quarter recovering nicely, we saw it in Q4. But to be honest, we didn’t feel comfortable with the volatility out there, in giving further guidance for the rest of the year.

[Jayson Bedford:]

Okay. And in terms of within the, I mean, I guess, now that we are at the end of February, have you -- how -- have you guys seen recovery in the business this month versus like Jan and December, how has that trend been within the quarter?

[Jonathan Kennedy:]

Yeah. I think you are right it’s late in the quarter. We have got another few weeks to go here and the strength has continued through Q1. We ended the quarter -- the fourth quarter with a pretty decent backlog. So that gives us confidence, a little more confidence than normal for Q1. But as you know, we are -- our capital business can be pretty back-end loaded. We are entering that period of the quarter where the capital order start to come in and we kind of finished strong with that. So I do think that the strength definitely continued through the first couple of months here, certainly on supplies and a smaller level of capital has started to return to what looked normal maybe back in 2019. But we still have some recovery left to go in the Neuro equipment business, especially in the U.S., where that hasn’t been as strong as we saw in ‘19 yet.

[Jayson Bedford:]

Okay. That’s helpful. So in the fourth quarter, bulk of the orders that you guys -- was that from -- deferred from like a backlog or pent-up demand from 2Q, the second and third quarter or was it new orders that were not previously from -- that were not from previous quarters?

[Jonathan Kennedy:]

I think on the hardware side, the sales cycles are pretty long. So it’s probably safe to say that there was some deferral from the second quarter, third quarter that pushed into Q4 and probably continued to push into Q1 and beyond. On the supply side and on smaller purchase, I think, that is new orders, more turns type business for us. That is more real-time. So hopefully that answers your question. I think on the hardware side there’s delay, but on a more day-to-day services and supplies, I think, we are at a real-time level.

[Jayson Bedford:]

Okay. And within the capital sales, are you seeing, like, is it mostly normal sized ordering patterns, are there more large orders or smaller orders? Just so we can kind of gauge what level of activity we are seeing.

[Jonathan Kennedy:]

I’d say it’s in the normal range. We -- as usual we usually have a handful of larger capital deals that are in the pipeline at any given time that are closer to finishing and we have that today. Look, so the backlog is decent, so that’s going to help drive a little more confidence here in the first quarter. We will see how that continues going into Q2, Q3, et cetera, on the supplies and smaller, less expensive pieces of capital. It’s pretty normal too, normal pace. I don’t think on the smaller pieces, smaller hardware and supplies, as I said, I think, we are more to real-time state there today.

[Jayson Bedford:]

And you guys kind of started with the pipeline, can you give us an update on where the Retcam device is and if there’s any other products that are coming in the pipeline that we should look forward to in 2021?

[Jonathan Kennedy:]

Sure. So the Retcam Envision, we launched in the market in December and we have sold a few of those in Europe, where it’s approved. We filed for the 510(k) in the U.S. and expect to get that here in the next in two months to three months, and at that point, we would start marketing and selling that in the U.S. For what we have closer to release now that’s not yet released is our ALGO 7i, which will be our international destined handheld hearing screener that will replace our ALGO 3i. We also have a pretty significant upgrade to our NeuroWorks software that’s coming out soon and then much later in the year, we expect to possibly release our Babybe mother-child communication device.

[Jayson Bedford:]

Thanks. That’s helpful. Regard -- what kind of revenue contribution should we expect from Retcam in 2021?

[Jonathan Kennedy:]

Retcam is typically a $15 million, $16 million business. I think as we roll out the upgrades, it should go from there, from a just driven from upgrade cycle. I don’t think we have put a forecast by product out there that we would be comfortable with. But I can tell you, historically, it’s about that, $15 million, $16 million annual and I think it grows from there.

[Jayson Bedford:]

Okay. That’s helpful. And you guys touched on what weighed on gross margins in the fourth quarter. Is there guidance that you guys feel comfortable regarding gross margins going forward for 1Q of ‘21?

[Drew Davies:]

Yeah. I think our gross margins are going to -- they will continue to improve a bit as we go. We have got some continued savings from the site consolidations that we are doing. So the EPS guidance that we have given is based on high 50s to around 60% gross margin. So just over 60% or just below 60% is kind of the range that we have to get to that EPS guidance.

[Jayson Bedford:]

And regarding geographic trends, should we expect roughly the same as ‘21, sorry, ‘20 or any kind of shift within geographies in ‘21?

[Drew Davies:]

I think it will be similar. It will be largely the same that it’s been historically kind of that 60 to 40, 60-40, 60 domestic, 40 international. That usually fluctuate a few percentage points each quarter, but it will be in that range.

[Jonathan Kennedy:]

And I’d point out to you that the Neuro capital business continues to strengthen. That generally favors gross margin and also the U.S. market.

[Jayson Bedford:]

Got it. Got it. So regarding the -- regarding geographic mix, also is there -- what kind of FX impact guide, I know we have seen a lot of companies reporting a decent tailwind from FX for next -- for 2021, is there some kind of FX guide that you guys are comfortable with?

[Drew Davies:]

We don’t generally forecast foreign exchange, but we have seen some softness lately just in our operating expenses or we have seen, I guess, I should say, a negative impact in our operating expenses in Europe and we have had that impact there. But we do have some revenue in euros and some revenue in Danish kroner, where we have our factories. So we have a little bit of a natural hedge there. But we have had a few hundred thousand dollars the last couple of quarters in negative impact and that can continue to happen if the dollar doesn’t strengthen against the euro and the kroner. We do have some exposure from an operating standpoint in Canada as well, but it’s usually pretty stable. We did have an item this quarter. We were consolidating some entities and there was some accumulated foreign exchange that hit the P&L this quarter, but that -- we wouldn’t expect that to happen again.

[Jayson Bedford:]

You guys mentioned you guys sold 50 -- 15 Otoscan units in 4Q. Can you talk…

[Jonathan Kennedy:]

Yeah.

[Jayson Bedford:]

… a little bit more about what -- hello?

[Jonathan Kennedy:]

Yeah. Sorry. It was 53 units, yeah. 5-3.

[Jayson Bedford:]

53 units.

[Jonathan Kennedy:]

Yeah.

[Jayson Bedford:]

Thank you for the correction. Can you just talk about what’s required for broader adoption of Otoscan?

[Jonathan Kennedy:]

Well, I think, we are seeing some increase, I think, we sold 30 last quarter, 53 this quarter. There are several hundred out there, probably, 350 or so would be my latest guess here. Broader adoption really is as the market realizes the benefits of a better patient experience, a faster cycle time within the office and a better fit for the hearing aid. As that becomes more in focus, I think, you will see broader adoption.

[Jayson Bedford:]

And the 53 is less, can you -- I mean, I can look this up, but can you guys compare to how it was in fourth quarter of last year?

[Drew Davies:]

We were -- actually, in fourth quarter last year, I believe we didn’t have that in the market, we had a quality issue that we were working on. So we didn’t have it in the market. But in -- we were kind of -- we have kind of been going along about 30 a quarter, high 20s or just over 30. In Q, I think it was Q1 this year or -- we had nine -- we sold 90, but that was because we had been out of the market for three quarters. So it kind of averaged out to that 30 per quarter when we came back in the market. So this is a good quarter for us and we have got over -- well over 300 units in the market now.

[Jayson Bedford:]

That’s very helpful actually. And do you think that some of the 53 was -- did 95 in 1Q of 2020, do you think some of these 53 units was backlog or most of them were new orders?

[Drew Davies:]

No. This is -- I think we are back to current orders now. I mean maybe there was a little bit of catch-up from people delaying purchases due to COVID and some of the hearing centers, the audiologist office being shutdown or having less traffic. But that -- we were back to selling about 30 a quarter and so this is a nice step-up. And we think that as this continues to get momentum and the installed base gets bigger and the standard in the industry is to do it digitally, we can see acceleration in sales going forward.

[Jayson Bedford:]

And what was the neurosurgery growth in 4Q?

[Jonathan Kennedy:]

Yeah. Neurosurgery declined in 4Q versus last year.

[Jayson Bedford:]

And one final question here, do you guys have any capital allocation priorities for 2021? What do you think you guys plan on doing with the cash?

[Jonathan Kennedy:]

Yeah. I think, primarily the easiest thing to do for us is to pay down our revolving credit line, that delevers and reduces interest expense and continues to keep our cash available via the revolving credit line. Second to that, we do anticipate making some strategic acquisitions throughout the coming quarters, things that, like, our Babybe, maybe things that are a little bit larger than that. But that would be second. And then third, we do still have an open share buyback program that as we have exited COVID here, we will start to reconsider how we might best deploy that program.

[Jayson Bedford:]

Thank you very much guys. Appreciate it. That’s all I have.

[Jonathan Kennedy:]

You are welcome.

[Drew Davies:]

Thank you.

[Operator:]

I am show -- I am showing no further questions at this time. I would now like to turn the call back to Mr. Kennedy.

[Jonathan Kennedy:]

Okay. Thank you. Thank you for joining us today. I’d like to thank all of our employees and partners and customers for their outstanding efforts and achievements throughout the year. The Natus team has successfully executed on several strategic initiatives and continued to serve our customers every day throughout the year. We truly have one of the best teams in the industry. Thank you, Operator. That concludes our program for today’s call. Have a good day.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect. Have a great day and stay safe.