Natus Medical Incorporated
Q3 2021 Earnings Call Transcript

Published: 5 Nov 2021

[Operator:]

Good morning, everyone, and thank you for joining us today to review our Results for the Third Quarter of 2021. 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 third quarter 2021, then Drew will discuss the third quarter financial performance. Finally, Drew will return the call to Jonathan for closing remarks. 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 the relevant risk and uncertainties pertaining to our business, please see yesterday’s press release and our periodic and Annual Reports filed with the SEC. Management’s presentation of the financial results will be on a GAAP and non-GAAP basis. The non-GAAP results exclude amortization expense, restructuring and certain other charges and their related tax effects. Management believes that the presentation of these non-GAAP measures, along with our GAAP financial statements, provide a more thorough analysis of our ongoing financial performance. You can find a reconciliation of our financial results on a GAAP versus non-GAAP basis in yesterday’s earnings release. I would now like to turn the conference over to Jonathan Kennedy, President and Chief Executive Officer of Natus Medical. Mr. Kennedy?

[Jonathan Kennedy:]

Thank you, Operator, and good morning, everyone. During our call today, we will discuss our third quarter 2021 financial results as well as our current business trends. Yesterday evening we reported the results for the third quarter of 2021 and revenue for the quarter achieved at the high end of our guidance at $113.9 million, and non-GAAP earnings per share was $0.28. We are encouraged by the 11% increase in revenue in the third quarter of 2021 compared to the same quarter of 2020 despite the recent supply chain constraints. Demand for our products and service continued to improve throughout the quarter. We saw the benefits of our investments in innovation this quarter with the release of the new Retcam Envision newborn eye imaging system in the United States. We also saw the first successfully performed clinical case using Natus’ newly launched XactTrode family of subdural electrodes and another quarter of growing sales for our UltraPro EMG device, which was released in the fourth quarter of last year. In a few minutes Drew will discuss more financial details, but first, I'd like to provide some additional commentary on the quarter and each of our end markets. As you know, Natus is the global leader in neurodiagnostics. Our products and services are used by a majority of hospitals and neurologists worldwide. We have the most comprehensive line of neurodiagnostic equipment offered by any global manufacturer today offering a full line of EEG, EMG, and PSU solutions. Overall, our Neuro business grew by 19% year-over-year during the third quarter, led by EEG and EMG sales which increased by 27% and 22%, while neurosurgery products increased by 16%. Our Hearing & Balance products include devices and supplies used by audiologists, hospitals and ENTs to diagnose hearing disorders and assist in the fitting and tuning of hearing aids and for the diagnosis of balance disorders. Revenue from Hearing & Balance grew by 6% versus the same quarter last year, led by 11% increase in hearing assessment product revenue and a 33% increase in our hearing aid fitting product revenue. Supply constraints led revenue from our balance products to decrease by 52% versus the prior year. Natus' market-leading Newborn Care product family is used by hospitals worldwide. Major product categories in this family include our newborn hearing screening solutions, neonatal eye imaging and brain injury monitoring, video streaming services and phototherapy solutions. Overall, Newborn Care revenue declined by 5% versus the third quarter of 2020, primarily from order delays affecting certain international customers that use our Newborn hearing screening products. In summary, we're very pleased with the growth we had during the quarter. We remain focused on our strategy of investing to refresh our market leading products and deliver new innovations, which we believe will drive our growth and future financial performance. Now I'd like to turn the call over to Drew Davies, our Executive Vice President and Chief Financial Officer for a deeper dive into our financial results. Drew?

[Drew Davies:]

Thank you, Jonathan. As Jonathan stated, we reported third quarter of $113.9 million, and 11% increase from the third quarter of 2020. Supply constraints did impact our revenue results this quarter and I really believe demand for our products remains healthy as evidenced by our backlog order of $25.6. Revenue from our Neuro end market was $70 million or 62% of total revenue during the third quarter of 2021 compared to $58.8 million or 50% of total revenue during the same quarter last year. Revenue from the Neuro business increased 19.2% compared to the same quarter last year. The increase was driven by growth and devices, supplies and service. Revenue from our Newborn Care end market decreased 4.8% to $24.5 million or 21% of total revenue during the third quarter of 2021 compared to $25.7 million or 25% of total revenue during the same quarter last year. The decrease was primarily attributable to lower revenue from supplies related to the number of births and device supply constraints. Revenue from our Hearing & Balance end market was $19.4 million or 17% of total revenue during the third quarter of 2021 compared to $18.3 million or 18% of total revenue during the same quarter last year. Hearing assessment and hearing fitting devices led the year-on-year increase in Hearing & Balance. In total, revenue from devices and systems contributed 74% of total revenue in the third quarter of 2021 compared to 71% in the 2020 period. Revenue from supplies and services was 26% of total revenue in the third quarter of 2021 compared to 29% in the 2020 period. Revenue from domestic sales was approximately 63% of total revenue and 37% from international sales in the third quarter of 2021 compared to 62% and 38% respectively for the same period last. On a non-GAAP basis our gross margin increased by 4.8 percentage points in the third quarter of 2021 to 61% compared to 56.2% in the third quarter of 2020. The increase in gross margin was attributable to the higher mix in North America Neuro sales, lower operations overhead, and the increase in revenue compared to the third quarter last year offset by increases in materials cost. GAAP gross margin increased 13.3 percentage points to 59.5% in the third quarter of 2021 compared to 46.2% in the same period last year. The increase in GAAP gross margin was also impacted by the intangible asset impairment in the prior year that did not repeat this year. Third quarter non-GAAP operating expenses increased $2.8 million compared to the same quarter last year. The increase in expenses was driven by higher incentive pay related to the increase in revenues and the savings last year from required time off that did not repeat this year. Our non-GAAP operating margin increased by 7.4% compared to the same quarter last year on the increases in revenue and the improvements in gross margin. Other expense was $700,000 for the third quarter of 2021 driven by exchange rate fluctuations. Interest expense was $300,000 during the quarter. We expect interest expense in the fourth quarter of 2021 to be the same and for the full year to be approximately $2 million. Our third quarter of 2021 non-GAAP effective tax rate was 24.9%. We anticipate our overall 2021 non-GAAP tax rate to be between 21% and 25%. On a GAAP basis third quarter 2021 net income was $5.6 million or $0.16 per diluted share compared to a net loss of $9.3 million in the same quarter last year. Non-GAAP net income increased $6.1 million to $9.3 million compared to the same quarter last year. Non-GAAP earnings per diluted share was $0.28. In the third quarter of 2021 we recorded $7 million of depreciation and amortization expense. Share based compensation was $2.6 million during the third quarter 2021. And now let's take a look at some of the highlights from the balance sheet and cash flow. We ended the quarter with $68.8 million in cash. Cash flow provided by operations was $7.1 million during the quarter. Our days sales outstanding increased 5 days versus the same period in the prior year to 77 days. Non-GAAP diluted shares outstanding increased to 33.9 million shares compared to 33.8 million shares in the same period last year. Now turning to guidance. Compared to last year we've seen demand for our products and services increasing every quarter this year. Historically, we experience our highest quarterly revenue for the fourth quarter and we expect that to hold true this year. With the increases in revenues, we also expect to benefit from positive leverage resulting in higher gross margin and income. With this in mind, we expect our revenues for the fourth quarter of 2021 to be between $124 million and $128 million. GAAP net income is expected to be in the range of $9.5 million to $11.6 million for the fourth quarter of 2021 or $0.28 to $0.33 per diluted share. Non-GAAP net income is expected to be in the range of $13.8 million to $15.5 million or $0.41 and $0.46 per diluted share. And with that we will now open it up for questions.

[Operator:]

Your first question comes from the line of Jayson Bedford of Raymond James. Please go ahead.

[Jayson Bedford:]

Hi, good morning, guys. I guess just a few quick questions. First on the supply constraints. As mentioned a few times specifically on balance, so if there's any way you could detail kind of what is the issue that you're seeing out there and when will it be alleviated?

[Jonathan Kennedy:]

Yes, we've got our balance product, the ICS Impulse, we've got some supply chain delays there and we expect to get start getting more supply late in the fourth quarter or in the first quarter next year.

[Jayson Bedford:]

Okay and Drew maybe, how big is that business, when you said it was balancing down 55%, I’m not sure what the impact of that was. And frankly, the supply constraints are really confined to balance or they impacting revenue in other areas of the business?

[Jonathan Kennedy:]

Yes, hey Jayson, this is Jonathan. That’s about a $2.5 million quarter business.

[Jayson Bedford:]

Okay.

[Jonathan Kennedy:]

Per quarter for that business. And so perhaps that is the budget. We do have sporadic, both supply constraints and logistics and freight constraints and logistic constraints of other sorts that just built our backlog. And what I think everybody has seen in the market, I would now categorize it that way. We have a few products, a few sub components that are unique and we’ve had some issues with them as well, and that keeps us from being able to shift the balance products. We do believe though that we have a pretty good line of sight of when that will come back and as Drew said probably late in the fourth quarter, early in the first quarter, we should be able to get those back in shipping mode.

[Jayson Bedford:]

Okay, so it sounds like balance is kind of the only area of the business that’s being impact from a revenue generation standpoint, I realize I’m assuming there is pricing cost pressure on the expense side, but from an ability to ship product and generate revenue the only supply constraints seems like it’s on the balance, is that fair?

[Jonathan Kennedy:]

Balance is one of the bigger pieces, but we do have a few others in hearing diagnostics and in turning, fitting that are less impactful, but we do have. If you look at where our orders are that we were unable to ship during the quarter, that growth wasn’t here in the balance and to some extent in Newborn Care. And Neuro we've been pretty good. We manufacture those products and keep a pretty good lead of inventory in those areas. But if you think of like Hearing & Balance, it’s a little more of a supply and a larger flow and a larger volume. And so, it's a little bit more impacted by either shipping constraints or supply constraints, where it’s a little more of an ongoing business as opposed to hardware heavy where you can stop the inventory and ship it when you're ready.

[Jayson Bedford:]

quantify the contribution in the quarter and just for the demand profile going forward for the new device?

[Jonathan Kennedy:]

Yes, we got the Retcam back in the market during the quarter. We were constrained on the lenses; we got the lens fixed and we got them back into the market during the quarter and they began shipping again. But had we could have, had we had more lenses, we could have shipped more. We did Envision in total, we usually do anywhere from $3 million to$5 million a quarter and this last quarter we did about $2.7 million Envision for the quarter. So, we could have definitely had higher revenues had we had more lenses. And we've got, we’re building a nice backlog and the customer acceptance and customer interest in that product is very high.

[Jayson Bedford:]

Okay, I’d have to go back to my notes here, but I don't think the word COVID was mentioned, which was refreshing, and I realized that the supply constraints are kind of knock-on effects of that. But I guess the question here is, when you look at the end market for your products out there, was there a disruptive impact from the flare up of Delta in the U.S.? And then just how is be the end market feeling today versus where it was say, in third quarter?

[Jonathan Kennedy:]

There was a little bit of noise about that. I would be hesitant to point to you a material impact from Delta and the clog up at hospitals during the third quarter, that impacted us anyway. Since you mention it, yes COVID definitely has a lot of follow-on effects, which we described the supply constraints and the logistic issues, but in terms of hospital sentiment, I think we are in a fairly decent place. I will say the one thing that still remains unusual versus maybe times past, is access to customers. So that's still virtual, there's still less than times past of face-to-face customer action. We've moved a lot of that online to webinars and all the virtual ways to do it and that has seemed as a fight. But I think that's the piece that's finally missing that we don't know when we'll see that coming back to normal, but definitely not yet.

[Jayson Bedford:]

Okay and then just lastly, your balance sheet is in a really good spot here. What are the priorities in terms of capital allocation at this point?

[Jonathan Kennedy:]

Yes, thanks for the complement. Actually we worked really hard to bring working capital down and cash up. We have cleared all the debts, so the cash you see there is unencumbered cash. Our priorities remain. You'll still have an interest in building the business and then accusations. There's a few opportunities in the pipeline that we continue to evaluate and sort of tuck-in, and tuck-in businesses that would be complementary to what we already do. Second to that, opportunities to return shareholders cash through share buybacks, it's probably the next rung down and something that we had done prior to COVID and then pulled back as we faced some uncertainty, but something that we would be willing to discuss over time here as the business recovers.

[Jayson Bedford:]

Okay. All right, great. Thanks guys.

[Jonathan Kennedy:]

Thanks Jayson.

[Drew Davies:]

Thank you, Jayson.

[Operator:]

These are all the questions we have. I would like to hand the conference back to Mr. Kennedy.

[Jonathan Kennedy:]

Thank you, operator. I'd like to thank all of our employees, partners and customers for their outstanding efforts again during the quarter and look forward to finishing the year in a strong way. Thank you everybody and have a great day.

[Operator:]

This ends today’s conference call. Thank you for participating. You may now disconnect.