Natus Medical Inc (NTUS) Q2 2021 Earnings Call Transcript

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Natus Medical Inc (NTUS)
Q2 2021 Earnings Call
Aug 6, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and thank you for joining us today to Review our Results for the Second 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 second quarter 2021. Then Drew will discuss the second 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. Actual results may differ materially from these forward-looking statements. 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 GAAP financial statements, provide more thorough analysis to 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 A. Kennedy -- President, Chief Executive Officer and Director

Thank you, Michelle, and good morning everyone. During our call today we will discuss our second quarter 2021 financial results as well as our current business trends. Yesterday, we reported the results for the second quarter of '21. Revenue for the quarter achieved the high end of our guidance at $116 million and non-GAAP earnings per share was $0.29. We are pleased with the recovery in our overall revenues and earnings compared to the second quarter of last year, which was the most challenging quarter for Natus in 2020. Total revenues increased by 37% led by Neuro, which increased 62% and Hearing & Balance, which increased by 34% compared to the second quarter of last year.

We are optimistic in the pace of the revenue recovery in '21 compared to 2020 and we continue to focus on efforts to increase margins and execute strategic investments in new products that will drive long-term revenue growth and profitability. 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. In Neuro, Natus is the global leader in neuro diagnostic equipment solutions. Our products and services are used by the majority of hospitals and neurologists worldwide. We have the most comprehensive line of neuro diagnostic equipment offered by any global manufacturer today, offering a full line of EEG, EMG and PSG sleep solutions.

Overall, our Neuro business recovered and grew by 62% year-over-year during the second quarter, led by neuro diagnostic hardware and supplies, which increased 76% and that was offset by about a 5% decline in neurosurgery and other products in the Neuro category. Overall, our Neuro hardware business recovered and grew over 85%, while sales of Neuro supplies increased from the prior year by approximately 59%. Our Hearing & Balance products include devices and supplies used by audiologists, hospitals and ENTs to diagnose hearing disorders assist in the fitting and tuning of hearing aids and for the diagnosis of balance disorders.

Revenue from the Hearing & Balance returned to pre-pandemic levels during the quarter and recovered and grew 34% versus the second quarter of 2020. 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 3% versus the second quarter of 2020. Revenue growth and the sales of our RetCam Imaging Systems and growth in our newborn hearing screening was offset by declines in video streaming and other newborn products.

And recall that our Newborn Care business remained somewhat steady throughout 2020 and was the least impacted by the pandemic. In summary, we're very pleased with the recovery and growth 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 growth and future financial performance. We experienced another quarter of very healthy cash flow from operations and we ended the quarter with no debt.

Now, I'll 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 -- Executive Vice President and Chief Financial Officer

Thank you, Jonathan. As Jonathan stated, we reported second quarter 2021 revenue of $116 million, a 36.8% increase from the second quarter of 2020 as our business is recovering from the impact of COVID-19. Neuro and Hearing & Balance drove the increase for the second quarter compared to last year, growing 62% and 34% respectively. Newborn Care, which was not materially impacted by the pandemic declined 2% compared to the second quarter last year. Looking back to the second quarter of 2019, total revenue declined by 3% after adjusting for divestitures and discontinued products.

Revenue from our Neuro end market was $70.5 million or 61% of total revenue during the second quarter of 2021 compared to $43.5 million or 51% of total revenue during the same quarter last year. Revenue from the Neuro business increased 62% compared to the same quarter last year. The increase was mainly driven by the recovery of procedures and Neuro capital purchases throughout our markets. Revenue from our Newborn Care end market decreased 2% to $26.3 million or 23% of total revenue during the second quarter of 2021 compared to $26.9 million or 32% of total revenue during the same quarter last year.

The decrease was primarily attributable to the release of $2.5 million of NICVIEW backlog in the second quarter last year that did not repeat this year. Revenue from our Hearing & Balance end market was $19.2 million or 17% of total revenue during the second quarter of 2021 compared to $14.3 million or 17% of total revenue during the same quarter last year. The Hearing & Balance revenue recovered during the quarter but remains below of 2019 levels as further recovery is needed in our international markets. Revenue from Devices and Systems contributed 74% of total revenue in the second quarter of 2021 compared to 72% in the 2020 period.

Revenue from supplies and services was 26% of total revenue in the second quarter of 2021 compared to 28% in the 2020 period. Revenue from domestic sales was approximately 61% of total revenue and 39% from international in the second quarter of 2021 compared to 60% and 40% for the same period last year. On a non-GAAP basis, our gross margin increased by 8.6% in the second quarter of 2021 to 60.1% compared to 51.5% in the second quarter of 2020. The increase in gross margin is mainly attributable to improved operating leverage on the increase in revenues, lower material costs and lower freight costs as compared to second quarter of 2020. GAAP gross margin increased 9.4% to 57.3% in the second quarter of 2021 compared to 47.8% in the same period last year. The increase in GAAP gross margin was also due to better operating leverage, lower materials and freight costs.

Compared to the same quarter in 2019, non-GAAP gross margin increased 100 basis points to 59.1%. The improvement was mainly due to reductions in operations overhead costs offset by higher material costs and higher freight costs as compared to the same quarter of 2019. Second quarter non-GAAP operating expense increased by $7.8 million compared to the same quarter last year. The increase in operating expense versus second quarter last year was driven primarily by increases in employee expenses for the sales and marketing team and travel. Also all Natus employees were asked to take two weeks of vacation in the second quarter of 2020 and that did not repeat this year.

Our non-GAAP operating margin increased by 17.2% compared to the same quarter last year on higher revenues and gross margin and offset by increased operating expenses. Other expense was $100,000 in the second quarter driven by a loss on equity investments. Interest expense was $600,000 during the quarter. We expect interest expense for the third quarter of 2021 to be approximately $400,000 and for the full year of 2021 to be approximately $1.7 million. Our second quarter non-GAAP effective tax rate was 23.8%. We anticipate overall 2021 non-GAAP tax rate to be between 21% and 25%.

On a GAAP basis, our second quarter 2021 net income was $3.5 million or $0.10 per diluted share compared to a net loss of $8.9 million the same quarter last year. Non-GAAP net income increased $14.3 million to $9.9 million compared to the same quarter last year. Non-GAAP earnings per diluted share was $0.29. In the second quarter, we recorded $7.2 million of depreciation and amortization expense. Share based compensation was $2.5 million during the second quarter. Now, let's look at some of the highlights from the balance sheet and the statement of cash flow. During the second quarter we repaid the remaining balance on our outstanding debt of $37 million and we ended the quarter was $62.5 million in cash.

Cash flow provided by operations was $19.4 million during the quarter. Our days sales outstanding increased 2 days versus the same period in the prior year to 75 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, during the second quarter of 2021 we began to see or began to experience supply chain delays and constraints. Our guidance for the remainder of the year reflects similar impacts for the third quarter but also does not factor in any possible further delays or constraints.

With this in mind, we expect our revenues for the third quarter of 2021 to be between $113 million and $117 million. For the full year of 2021, we expect revenues between $468 million and $475 million. GAAP net income is expected to be in the range of $3.3 million to $5.7 million for the third quarter of 2021 or $0.10 to $0.16 per diluted share. Non-GAAP net income is expected to be in the range of $8.8 million to $11 million or $0.26 to $0.32 per diluted share. We expect GAAP and non-GAAP earnings per share for the full year to be between $0.55 and $0.67 and between a $1.13 and $1.25 respectively.

And with that, we will now open it up for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Jayson Bedford with Raymond James. Your line is open. Please go ahead.

Jayson Bedford -- Raymond James Financial Inc. -- Analyst

Thanks, and good morning, guys. I guess a handful here -- just on the quarter, 2Q look very much like 1Q at least on the top line. Typically there's a bit of seasonality lift here in 2Q. I'm just wondering if you could speak to that. And is it just partly a function of 1Q being strong and coming in a little hot or and Drew, you mentioned some supply chain delays mid-quarter. Did that have an impact on revenue?

Drew Davies -- Executive Vice President and Chief Financial Officer

Yeah. So we had a little bit of tightness. Our backlog did build a little bit this quarter on the tightness on the supply chain. But we think that Q1 was a little better than usual from some snapback from the COVID. We had had some orders that were probably pent up in prior quarters and they came through in Q1 and we did a little bit better than we expected there. We did build backlog. We had backlog of about $23 million that grew $3 million this quarter. I think if you look back in prior quarters before COVID we were running in kind of the $15 million to $20 million backlog levels. So we've got a little bit higher backlog than we typically have.

Jayson Bedford -- Raymond James Financial Inc. -- Analyst

Okay, that's helpful. Can you talk about some of the strength in Neuro? EMG, I believe was strong year-over-year last quarter. Did you continue to see that strength from the new product launch?

Jonathan A. Kennedy -- President, Chief Executive Officer and Director

We did. This is Jonathan. We did. We did. It continues to do well. EEG as well does well. The whole device category, as I mentioned was up significantly in the quarter but supplies were not too bad either.

Jayson Bedford -- Raymond James Financial Inc. -- Analyst

Okay. And then where do we stand with RetCam? I know there were some supply issues on the lens side. Can you just get us up to speed as to where that launch stands today?

Drew Davies -- Executive Vice President and Chief Financial Officer

Yeah. We're still working on it. We've got two different lenses, the premium lens is a 130 degree lens and that's the one where we've had some manufacturing issues. We expect that to get finished up this quarter in Q3 so that we can begin shipping that lens again. We did have a few sales of the 100 degree lens in the quarter and. And so we had -- we did have some RetCam sales but we didn't ship as many as we would expect. And we look forward to that in Q3 for that -- that to get back to normal.

Jayson Bedford -- Raymond James Financial Inc. -- Analyst

So can we say that the full launch for the new RetCam is in 3Q here?

Drew Davies -- Executive Vice President and Chief Financial Officer

Well, I mean, we launched it in -- at the beginning of the year and we sold a few units. And then we slowed down and basically put the 130 degree lens on ship-hold and that delayed the launch. And then subsequently that -- the first part in January was for the European market for the CE Mark countries. And then we've subsequently gotten the 510(k) approval. And in Q3 we'll be able to ship in both geographies.

Jayson Bedford -- Raymond James Financial Inc. -- Analyst

Okay. Can you talk about the ALGO 7i launch in Europe? Just the reception you're seeing there. And then timing on a new newborn screener here in the U.S.?

Jonathan A. Kennedy -- President, Chief Executive Officer and Director

Sure, this is Jonathan. So the ALGO 7i continues to be well received outside the U.S. We expect to release that in the U.S. here too before the end of the year so a new handheld device that we'll offer in the U.S. As far as the new -- the ALGO platform, this is something that -- is a 2023 type launch product. So that's something that's in the very, very near-term. But the ALGO 7 does continue to have quite a big demand outside the U.S.

Jayson Bedford -- Raymond James Financial Inc. -- Analyst

Okay. And then you had a release the other day, and I might mispronouncing this, but the XactTrode Electrodes. What's the business case? Is there higher ASP? Do you think you'll get more utilization of Quantum?

Jonathan A. Kennedy -- President, Chief Executive Officer and Director

Yeah, there is a higher ASP. This is for a more acute situation that the XactTrodes, our electrode that actually go up under on the brain -- of under the skull and under the brain, several thousand dollars for a set of XactTrodes that would be used -- in a per case basis. So from a business perspective, very high ASP on a per patient basis; from a technology perspective you just get a much more, much better fidelity on exactly where the issues are in the brain. It's something we've been working on for a while.

It's one of the more innovative supplies that we've come out with and we're excited. It's a newer technology. So we would expect the ramp of it to be kind of in line with what -- new brain surgery and brain monitoring techniques would be. So I'd call it slow to medium. But it is a very nice product. Our clinicians and doctors so far have had good experience with it and we expect it to be something that just continues to grow and add to the profitability of the Neuro supplies line.

Jayson Bedford -- Raymond James Financial Inc. -- Analyst

Okay. And then getting back to the earlier comment, Drew, just on the supply chain delays, a little unclear. Is that impacting margins or are your sales impacted by these supply chain delays?

Drew Davies -- Executive Vice President and Chief Financial Officer

Well, I think it's part of the reason the backlog is built. So it's impacted sales to a certain extent and margins are still impacted by supply chain in the form of freight expenses having to pay expedite charges, having to maybe pay a premium to get things done and get things shipped. So there is some impact there. So we look for that to be hopefully in future quarters when these things get cleared up to be somewhat of a tailwind to our gross margin.

Jayson Bedford -- Raymond James Financial Inc. -- Analyst

Okay. Just on the cost side. Looked like there was a lot better leverage in 2Q versus 1Q; you added, let's call it, $1 million in sales. Opex was down on a non-GAAP basis by about $4 million. Is the business, do you feel kind of right-sized at this cost level here in 2Q and it kind of grows with sales going forward?

Drew Davies -- Executive Vice President and Chief Financial Officer

Yeah, it's getting there. We had a pick up on the operating overhead in cost of goods sold with the Taastrup facility closure. So that helped us -- that's getting a little bit better. So that gave us a little bit more leverage. And our spending will -- has been coming down with MDR and we expect that to continue. We're completing all the MDR requirements that we've had to go through for Europe and which is essentially kind of sustaining a remedial activity to keep our products in the market in Europe. And that's going to be a nice opportunity for us going forward to reallocate those dollars to innovation and growth products. And then some of that should go to the bottom line as well.

Jayson Bedford -- Raymond James Financial Inc. -- Analyst

Okay. I think that's it for me. I appreciate the time guys.

Jonathan A. Kennedy -- President, Chief Executive Officer and Director

Thanks, Jayson.

Drew Davies -- Executive Vice President and Chief Financial Officer

Thanks, Jayson.

Operator

Thank you. And this concludes our question-and-answer session. And I would like to turn the conference back over to Jonathan Kennedy for any further remarks.

Jonathan A. Kennedy -- President, Chief Executive Officer and Director

Sure. Well, thank you everybody for participating on our call today. I'd like to thank all of our employees and partners and customers for their outstanding efforts and partnerships throughout the quarter. Thank you everyone and have a great day.

Operator

[Operator Closing Remarks]

Duration: 22 minutes

Call participants:

Jonathan A. Kennedy -- President, Chief Executive Officer and Director

Drew Davies -- Executive Vice President and Chief Financial Officer

Jayson Bedford -- Raymond James Financial Inc. -- Analyst

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