NuVasive's Growth Falls Short of Investors' Hopes

Innovation is a great way for companies to thrive, and NuVasive (NUVA) has sought to create advances in spine surgery by providing solutions that can be integrated into surgical procedures in a minimally disruptive way. The company has done a good job of growing in its niche market, and coming into Tuesday's third-quarter financial report, NuVasive shareholders wanted to see continued evidence that the spine specialist's growth trajectory remains steep. For its part, NuVasive said that its revenue fell short of its own expectations, and that was enough to send the stock sharply lower in response despite the fact that earnings looked healthier. Let's look more closely at what NuVasive said and what lies ahead for the medical device company.

Image source: NuVasive.

NuVasive deals with a setback

NuVasive's third-quarter results were mixed in most investors' eyes. Revenue posted an impressive 19.5% increase to $239.6 million, but the problem was that the consensus forecast was for even faster growth of 21.5%, disappointing those following the stock. Results in the earnings front were closer to expectations, with adjusted net income rising 17% and producing adjusted earnings of $0.40 per share. That matched what investors were expecting to see on NuVasive's bottom line.

Taking a closer look at NuVasive's numbers, the trends that we've seen in recent quarters continued to appear during the period. Currency impacts have entirely ceased to be a negative factor for the company, with NuVasive reporting that revenue would have increased at a slightly slower rate in currency-neutral terms.

One problem that NuVasive had was that some of its margin figures were weaker than in previous periods. Adjusted gross margin on a non-GAAP basis actually climbed from year-ago levels by nearly a full percentage point to 76.3%, although the corresponding GAAP figure fell a small fraction of a percentage point. However, adjusted operating expenses grew at a nearly 22% rate from year-ago levels, outpacing revenue gains and thereby putting at least minimal pressure on the company's operating margin.

Another issue had to do with the company's Japanese market. NuVasive said that its dilator product was off the market in Japan for a large part of the third quarter, and that resulted in lower revenue for the company's XLIF, or Extreme Lateral Interbody Fusion, surgical procedure. The company speculated that if XLIF procedures had occurred in Japan at normal rates, revenue would have climbed mid- to high-single digit percentages in its core business.

Nevertheless, CEO Greg Lucier was optimistic about NuVasive's future. "While our revenue results for the quarter were lower than our expectations," Lucier said, "we believe this minor disruption is temporary." The CEO pointed to higher procedure volume figures and more surgeons converting to use of NuVasive devices, each of which should help bolster the business in the future.

What's ahead for NuVasive?

Even with the shortfall, NuVasive remains confident in its ability to deliver on most of its goals. Lucier said that the company would reiterate its full-year 2016 financial guidance in all aspects except for revenue, affirming expectations for $1.64 per share in adjusted earnings, gross margin of 76.4%, and adjusted operating margin of 16%. On the revenue front, NuVasive now believes that it will post revenue of $952 million, which is down $10 million from its previous guidance.

Still, a lot depends on how NuVasive is able to win over new business. The company also said on Tuesday that it would introduce new spine innovations at an industry meeting later this month, including its expanded Integrated Global Alignment platform. With the ability to do all spinal procedures, including cervical alignment, NuVasive thinks it can win over more business, and proprietary image enhancement software could also prove useful to medical professionals.

Nevertheless, NuVasive investors weren't happy with the revenue shortfall, sending the stock down more than 11% in after-hours trading following the announcement. Until the company's results start to reflect fully the promise that it has in producing long-term growth, NuVasive will have to work hard to convince skeptics that it has the ability to bounce back from temporary setbacks like it faced this quarter.