Natus Medical Inc (NTUS) Q3 2021 Earnings Call Transcript

Image source: The Motley Fool.

Natus Medical Inc (NTUS)
Q3 2021 Earnings Call
Nov 5, 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 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 this forward-looking statements. For a description of the relevant risks 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, restructurings 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 call 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, operator and good morning to 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, the mid range 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 in 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 Neuro Diagnostics. Our products and services are used by a 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 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 product increased by 16%.

Our Hearing & Balance products include devices and supplies used by audiologist, 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 Hearing & Balance grew by 6% versus the same quarter last year, led by an 11% increase in hearing assessment product revenue and a 33% increase in our hearing aid fitting product revenue. Supply constraints let 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 some order delays affecting certain international customers that use our newborn hearing screening products.

In summary, we're very pleased with the growth that 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 -- Executive Vice President and Chief Financial Officer

Thank you, Jonathan. As Jonathan stated, we reported third quarter revenue of $113.9 million, an 11% increase from the third quarter of 2020. Supply constraints did impact our revenue results this quarter, however, we believe, demand for our products remains healthy as evidenced by our backlog order of $25.6 million. 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 Neuro -- from our Newborn Care end market decreased 4.8% to 24.5% 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 the device supply constraints.

Revenue from our Hearing & Balance end market was $19.4 million or 17% of total revenue during the third quarter 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 '21, 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 year.

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 of North American 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% -- compared to 46.2% in the same period last year. The increase in GAAP gross margin was also impacted by an 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 of 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 five 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 38 -- 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 increase in every quarter this year. Historically, we experienced our highest quarterly revenue for the fourth quarter and we expect that to hold through 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 to $0.46 per diluted share.

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

Questions and Answers:

Operator

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

Jayson Bedford -- Raymond James -- Analyst

Hi. Good morning, guys. I guess, just a few quick questions. First on the supply constraints, it was 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 A. Kennedy -- President, Chief Executive Officer and Director

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

Jayson Bedford -- Raymond James -- Analyst

Okay. And Drew, maybe how big is that business? I think you said it was -- Balance was down 55%. I'm not sure what the impact of that was? And frankly, the supply constraints, are they confined to balance? Or they impacting revenue in other areas of the business?

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

Hey, Jayson. It's Jonathan. That's about $2.5 million quarter business per quarter for that business. And so, half of that is supply chain. We do have sporadic both supply constraints and logistic and -- freight constraints and logistic constraints of other sorts that have just built our backlog and our -- you know, what I think everybody has seen in the market that I would categorize it that way. We have a few products that -- 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 ship 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, by late in the fourth quarter, early in the first quarter, we should be able to get those back in shipping mode.

Jayson Bedford -- Raymond James -- Analyst

Okay. And so, it sounds like Balance is kind of the only area of the business that's being impacted from a revenue generation standpoint. I realize I'm assuming there's probably some cost pressure on the expense side. But from an ability to ship product and generate revenue, the only supply constraint seems like it's on the Balance. Is that fair?

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

Balance is one of the bigger pieces, but we do have a few others in hearing diagnostics and tuning fitting that are less impactful, but we do have. If you look at our -- where our orders are that we were unable to ship during the quarter, that growth was in Hearing & Balance and to some extent in the Newborn Care. In Neuro, we've been pretty good. We manufactured great products and keep a pretty good lead of inventory in those areas. But if you think about 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 stock inventory and ship it when you're ready.

Jayson Bedford -- Raymond James -- Analyst

Retcam, any way to kind of quantify the contribution in the quarter and just kind of the demand profile going forward for the new device?

Drew Davies -- Executive Vice President and Chief Financial Officer

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 we could have -- had we had more lenses, we could have shipped more. We did Envision in total. We easily 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 -- Raymond James -- Analyst

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 realize 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 US? And then just how is the end market feeling today versus where it was, say, in third quarter?

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

There was a little bit of noise about that. I would be hesitant to point to, right, material impact from Delta and the clog up at hospitals during the third quarter, that impacted us anyway. Since you mentioned it, yes, COVID definitely has a lot of follow-on effects, which we described in the supply constraints and the logistics 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 interaction. We've moved a lot of that online to webinars and all the virtual ways to do it, and that has seemed to suffice, 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 -- Raymond James -- Analyst

Okay. And then, I guess, 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 A. Kennedy -- President, Chief Executive Officer and Director

Yes. Thanks for the compliment on the balance sheet. We worked really hard to bring working capital down and cash up. We have cleared all the debts that we're -- the cash you see there is unencumbered cash. Our priorities remain and we still have an interest in building the business and acquisitions. There's a few opportunities in the pipeline that we continue to evaluate and sort of tuck-in businesses that would be complementary to what we already do. Second to that, opportunities to return shareholders' cash through share buybacks is probably the next run down and something that we had done prior to COVID and 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 -- Raymond James -- Analyst

Okay, all right. Great. Thanks guys.

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

Thanks, Jayson.

Drew Davies -- Executive Vice President and Chief Financial Officer

Thank you, Jayson.

Operator

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

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

Thank you, operator. I'd like to thank all of our employees, partners and customers for the 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

[Operator Closing Remarks]

Duration: 20 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 -- Analyst

More NTUS analysis

All earnings call transcripts