Natus Medical Hears a Rebound Coming

With the preannouncement of revenue missing guidance last month, Natus Medical's (NASDAQ: BABY) fourth-quarter report this week wasn't particularly surprising. Fortunately, the medical-supply company seems to have things back on track.

Natus Medical results: The raw numbers

Metric

Q4 2017

Q4 2016

Year-Over-Year Change

Revenue

$131.4 million

$107.7 million

22%

Income from operations

$5.05 million

$14.9 million

(66%)

Earnings per share (EPS)

($0.22)

$0.31

N/A

Adjusted EPS

$0.42

$0.51

(18%)

Data source: Natus Medical.

What happened with Natus Medical this quarter?

  • The 22% jump in revenue was attributable to the recently acquired Otometrics business, but Natus is paying for it with higher interest expenses, leading to lower profit for now.
  • Revenue from the newborn care business unit was down 9.8%, but the year-ago quarter had a large order from the Venezuelan government. Excluding that revenue, newborn care organic revenue growth was 3.8%.
  • Part of the shortfall came from the U.S. neurodiagnostic business, where multiple expected large orders didn't come to fruition. Fortunately, Natus has seen some of those come in already this quarter, and management noted that the others haven't been lost to competitors at this point.
  • Revenue from the Otometrics business also fell short of expectations, as Otometrics was moved over to Natus' computer system, which caused shipping delays. Some of the orders for products that customers needed immediately likely were lost, but management noted that Otometrics' backlog grew, suggesting it'll book some of the lost sales this quarter.
  • On a positive note, revenue from Natus' recently acquired neurosurgery business was above management's expectations.
  • With the one-time charges for acquisitions and the tax cut affecting GAAP earnings, the best way to compare the quarters year over year is by looking at the adjusted numbers.

Image source: Getty Images.

What management had to say

Despite the encouraging sign that some of the missed orders have been booked, president and CEO Jim Hawkins took a once-bitten-twice-shy approach when asked about the guidance: "It's early in the quarter. We think that let's -- after we had this miss in Q4, let's get through the whole quarter."

Leslie McDonald, who comes from 3M's healthcare business, will be taking over the newborn care business, which will allow chief financial officer Jonathan Kennedy, who led the unit since last April, to get back to his full-time CFO duties. As Hawkins noted, "Getting Jonathan back full time in that role, I think we will see a lot of efficiencies now come back into Natus."

Looking forward

The current guidance, which will hopefully go up as the year progresses, is for 2018 revenue of $535 million to $540 million and adjusted earnings per share in the $1.60 to $1.65 range, substantially better than the $1.45 per share Natus posted in 2017. Looking specifically at the first quarter, management thinks revenue will fall in the $125 million to $127 million range, with adjusted earnings per share of $0.23 to $0.24.

Looking beyond this year, the biggest revenue drivers appear to be the Otoscan, a device that creates a computer image of the ear for fitting hearing aids, which will contribute modest sales in the second half of this year and should ramp up from there. Natus also has a deal with Aspect Imaging to sell Aspect's Embrace MRI system. The sales force is already hawking the system, which is designed for neonatal units, but given its substantial cost, it'll take awhile for the sales to work their way into the capital-expenditure budgets of hospitals.

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Brian Orelli has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Natus Medical. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.

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