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Natus Medical Incorporated (NASDAQ:NTUS)
Q2 2020 Earnings Call
Jul 30, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone, and thank you for joining us today to review our results for the Second Quarter of 2020. 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 the business overview of the second quarter 2020, then Drew will discuss the second quarter financial performance. Finally, we will open the call for questions. [Operator Instructions]

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 description of relevant risk and uncertainties pertaining to our business, please see today'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 expenses, restructurings and certain other changes -- charges and their related tax effects. Management believes that the presentation of these non-GAAP measures along with our GAAP financial measures -- statements provide a more thorough analysis of our ongoing financial performance.

You can find the reconciliation of our financial results on a GAAP versus non-GAAP basis in today's earning 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, Michelle. Good afternoon, everyone, and thank you for joining us today. During our call today, we will discuss our second quarter 2020 financial results as well as our current business environment and how we expect the COVID-19 pandemic to impact our business over the near term. Before we get started, I'd like to thank our employees, partners and customers for their commitment and efforts during the past quarter.

While we will discuss our current business dynamics, we will not provide financial guidance at this time as visibility into demand remains just too uncertain. The fundamentals of our business remain intact. Health care providers and patients depend on our products and services every day. And while the demand for our products remain lower than normal during the pandemic response, we remain market leaders in most of our product categories. We continue to invest in our product portfolio with a number of new and refreshed product launches expected within the next several months. In addition, we are making progress with our cloud-based and data management initiatives and believe these investments are critical to maintaining leadership positions over the long term.

Our balance sheet remain strong and despite lower than normal revenue due to the pandemic, we continue to expect positive cash flow from operations for the full year 2020. As we discussed last quarter, our investments in inventory have ensured our ability to mitigate potential supply chain disruptions and our efforts to quickly reduce cost have reduced our annual operating expenses by approximately $20 million. And we'll continue to prioritize spending on investments in products and services that are key elements of our strategy for profitable growth in the years ahead.

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. Today, we reported the results for the second quarter 2020. Revenue for the quarter was $84.8 million and non-GAAP loss per share was $0.13. Overall, our revenue declined 32.5% versus the same quarter in the prior year. As expected, we saw significant impact from COVID-19 during the second quarter. Our Neuro market was impacted by the decline in spending at many hospitals and Hearing & Balance revenue declined due to reduced activity in audiologist's offices and retail hearing centers. Our Newborn Care business performed well during the quarter with revenue increasing 1% compared to the second quarter last year as births continued at expected rates and we benefited from the release of our new NICVIEW II camera, video streaming product.

Now let's look at some more details around the end markets.Our Neuro market, which includes our industry-leading neurodiagnostic solutions as well as our neurosurgery and neurocritical care products experienced a 39.2% reduction in revenue compared to the same quarter last year. This decline affected capital purchases as well as demand for supplies almost equally on a percentage basis. However, we did see a pickup in supplies at the end of the second quarter that so far has continued into the third quarter.

Our Hearing & Balance products include devices and supplies used by audiologists, hospitals and ENTs who guide those hearing disorders, assist in the fitting and tuning of hearing aids and for the diagnosis of balance disorder. Revenue from this product family declined 47.6% from the same quarter last year due to reduced activity in our customers' hearing centers. While we have seen some increased activity in this market, we remain cautious on its near-term outlook.

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. Newborn Care revenue improved by 1% during the quarter versus the same quarter last year. We're very pleased with these results as our Newborn Care business is beginning to show success with its revamped portfolio.

Before I turn the call over to Drew, I want to again thank all of our employees, customers and partners for their commitment and results during these challenging times. 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 2020 revenue of $84.8 million, a 32.5% decrease from the same period last year. The revenue decline was driven primarily by the impact of COVID-19 demand, partly offset by growth in our domestic Newborn Care device sales. Revenue from our Neuro end market was $43.5 million or 51% of total revenue during the second quarter of 2020 compared to $71.6 million or 57% of total revenue during the same quarter last year. The 39.2% decrease in Neuro revenue resulted from a decline in both capital spending for Neuro hardware and supplies.

Revenue from our Newborn Care end market increased 1.3% to $26.9 million or 32% of total revenue during the second quarter of 2020 compared to $26.6 million or 21% of total revenue during the same quarter last year. The increase was primarily attributable to the shipment of the backlog of NICVIEW devices. Revenue from our Hearing & Balance end market was $14.4 million or 17% of total revenue during the second quarter of 2020 compared to $27.4 million or 22% of total revenue during the same quarter last year. The Hearing & Balance revenue was lower than the previous year, primarily due to a significant decline in demand from audiologist's offices and retail hearing centers related to the COVID-19 pandemic.

In total, revenues from devices and systems contributed 73% of total revenue in the second quarter of 2020 compared to 74% in the 2019 period. Revenues from supplies and services was 27% of total revenue in the second quarter compared to 26% in the same period in 2019. Revenue from domestic sales was approximately 60% of total revenue and 40% from international in the second quarter of 2020 compared to 59% and 41%, respectively for the same period last year.

On a non-GAAP basis, our gross margin decreased 7.6% in the second quarter of 2020 to 51.5% compared to 59.1% in the second quarter of 2019. Lower Neuro revenue made up approximately 1% of the decrease, higher freight costs related to COVID-19 approximately 2%, one-time costs of deploying hearing screeners to Pediatrix 1.4%, lower manufacturing, overhead absorption as a result of lower revenues made up 1.8% and the other fluctuations in cost of goods sold made up the balance of the decline.

GAAP gross margin decreased 9.1% to 47.8% in second quarter of 2020 compared to 56.9% in the same period last year. Second quarter non-GAAP operating expenses decreased by $9.9 million compared to the same quarter last year. The decrease in operating expense was driven primarily by cost reductions in travel, tradeshows, employee and certain discretionary expenses offset by an increase in R&D expenses. R&D -- higher R&D included spending on remediation and the medical device regulation for Europe. Only two of the 15 Seattle remediation products -- projects remain and are expected to be completed in this quarter.

Our non-GAAP operating margin decreased by 18.2% compared to the same quarter last year on Neuro revenues and gross margin and offset by a decrease -- the decrease in operating expenses. Non-GAAP other income was $200,000 for the second quarter, driven primarily by exchange rate fluctuations. Interest expense was $1 million during the quarter. We expect interest expense during the third quarter of 2020 to be approximately $800,000 and for the full year, approximately $2.9 million. Our second quarter non-GAAP effective tax rate was 19%. We anticipate our overall 2020 non-GAAP tax rate to be between 20% and 22%.

On a GAAP basis, our second quarter net loss was $8.9 million or $0.26 per share compared to net income of $3.5 million or $0.10 per share, the same quarter last year. Non-GAAP net income decreased $15 million compared to the same quarter last year. Non-GAAP loss per share was $0.13. In the second quarter, we recorded $6.9 million of depreciation and amortization. Stock-based compensation was $2.4 million during the second quarter.

Now, let's look at highlights from the balance sheet and the statement of cash flow. Our outstanding debt decreased in the second quarter, as we repaid $13 million. We ended the quarter with $85 million in cash and at this time, expect to remain cash flow positive for the year. Cash flow used in operations during the quarter was $7.8 million. Our days sales outstanding decreased four days versus the same period in the prior year to 72 days, driven primarily by the decline in revenues. Non-GAAP shares outstanding increased 33.8 million shares compared to 33.7 million shares in the same period last year.

As we indicated in our earnings press release, a significant amount of uncertainty still exists in our business as a result of the COVID-19 pandemic. With this in mind, the company will not provide detailed guidance at this time. However, we do expect revenues and margins to improve compared to the second quarter, but remain below historical levels. Similar to the second quarter, we expect the demand for Newborn Care products and services to be the least impacted by the pandemic. We believe our Neuro and Hearing & Balance businesses will show some incremental improvements in the third quarter, but again remain below the same quarter last year.

In the early part of the second quarter, orders of supplies across our businesses have declined significantly. In the last two weeks of Q2 and continuing into this third quarter, we have seen a pickup in supplies orders. We believe this is a leading indicator of improvement in demand. In Q2, we took several actions to reduce spending, which in -- which will continue into the third and fourth quarters. Reductions include minimal travel, canceled tradeshows, reductions in employee expenses, discretionary spending and reductions in the outside services. The annualized benefit of these actions is in excess of $20 million. We look forward to providing quarterly and annual guidance when the revenue visibility and predictability stabilizes in the coming quarters.

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

Questions and Answers:

Operator

[Operator Instructions] We have a question from Jayson Bedford of Raymond James. Your line is open.

Jayson Bedford -- Raymond James -- Analyst

Hi. Good afternoon. Thanks for taking the questions. I guess, I have a few. I guess, just to start with the capital trends, are you seeing any difference between kind of lower priced and higher priced devices? Additionally, have you seen any kind of geographic -- it looked like the U.S. international business was down pretty similarly, but I'm just wondering, are you seeing pockets of either strength or weakness in certain geographies.

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

Yeah, there -- Jayson, it's Jonathan. There are -- there definitely is difference [Technical Issues] higher priced large [Technical Issues] than maybe the smaller ones and we still shipped and sold a number of nice deals in the quarter, just not at the volume that we normally do for capital. And I would definitely point out that Europe as a stronger versus normal -- versus the U.S. is a better market and sort of recovering little faster and China as well has been a little bit better this quarter than what was the prior quarter. So if we have to look at just our numbers, you'd see better improvement in Europe than in Asia over the U.S. The U.S. still remains kind of weak, but that is a major market for us.

Jayson Bedford -- Raymond James -- Analyst

And just on the capital side, have you seen outright cancellations or do you get the sense that these are more deferrals?

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

Well, it's a good question and we ask that question quite frequently. The news from customers is deferral and so I think, hospitals still remain interested and somewhat committed to developing their capital in the Neuro space and to a lesser degree in Newborn Care and hearing, but it is deferrals that they talk about. Now, whether that moves from deferral to cancellations, we haven't seen that yet certainly on a wide scale, but that is what we see today.

Jayson Bedford -- Raymond James -- Analyst

Okay. And your commentary around a pick up in late June, July, that was specifically on the supply side. Can I assume that you haven't seen a commensurate increase or pickup in capital in June, early July?

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

There is more evidence on the supplies than there is on the capital, but the capital has been better than it was most of Q2. So I would say in the spectrum, the supplies is we feel that a bit more leading, because it's a little more prevalent, but the capital, it sort of -- it's hopeful, I would put in that category, but not so much that we felt confident remarking on it, it's not it was.

Jayson Bedford -- Raymond James -- Analyst

Just on the cap -- OK, on the capital side, can we make the assumption that June was better than May?

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

Yes.

Jayson Bedford -- Raymond James -- Analyst

Okay. On the Neuro side, I was a little surprised, I thought that business could hold in there a bit better. You referenced some new products over the next, I think, you said few months, maybe few quarters, I forget exactly the term you used, but can you maybe just talk about the new product pipeline and is that a driver for stabilization in the Neuro side?

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

No, we've been -- that wasn't the intent of the comment. It was really to identify some of the opportunities we have in the pipeline. They weren't just Neuro. We have a new RetCam device coming out at the end of the year. We have a new hearing screener, mostly international market hearing screener that comes out by the end of the year. We have a major upgrade to our Neuro software, which is a Neuro product out by the end of the year as well. And so that's what I referred to. So kind of a mix across the board, Of course, we've got our Otoscan product that actually did quite well this quarter. All things considered, we sold another 30 units of Otoscan during the quarter. So there is still good interest there. So I really wanted to kind of point out, we continue to go full speed ahead with not just product development, but product introductions as well.

Jayson Bedford -- Raymond James -- Analyst

Okay, that's helpful. Just on the Newborn side, I think that was clearly an area of stabilization and strength. Is there any way you can kind of quantify the impact of the new NICVIEW video streaming device?

Drew Davies -- Executive Vice President and Chief Financial Officer

Yeah. Hi, Jason. It's Drew. Yeah, it did just under $3 million for the quarter. So we -- and it was we called it backlog. It was -- the product was being released in the Q2 and we had built up a number of orders over time and we were able to get those into the market and it did really well during the quarter.

Jayson Bedford -- Raymond James -- Analyst

And I apologize, Drew, at least on my end. You kind of blanked out there on the number, what was the dollar value?

Drew Davies -- Executive Vice President and Chief Financial Officer

Yeah, it was just under $3 million.

Jayson Bedford -- Raymond James -- Analyst

$3 million. Okay. Okay, and then in terms of capital and use of capital, obviously this is a difficult environment [Technical issues]. Are you seeing any opportunities for either tuck-in M&A or creative uses of your cash?

Drew Davies -- Executive Vice President and Chief Financial Officer

We do. We've been slowly but surely rebuilding our M&A pipeline and there are number of tuck-in technology we have been looking at. So I think, the opportunities [Technical Issues] interested and looking at those things and hopefully, find something that fits in the portfolio that can be accretive to future earnings.

Jayson Bedford -- Raymond James -- Analyst

Okay. And then I appreciate you're not giving guidance, but is there any way you can give us some sense as to when the business can return to -- show revenue growth?

Drew Davies -- Executive Vice President and Chief Financial Officer

Yeah, it's tough to predict revenue growth, I guess depends on which period you're comparing from. We did say we thought Q3 will be better than Q2, but not as high as historical levels but still kind of the range that we put it in. I think that's about all, we are able to do at this point. It's just tough to know, because we are dependent at the margin on this hardware sales for -- mostly for Neuro.

Jayson Bedford -- Raymond James -- Analyst

Okay. Okay, that's it from guys. I will let someone else ask, if there are any.

Drew Davies -- Executive Vice President and Chief Financial Officer

Thanks, Jason.

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

Thank you, Jason.

Operator

There are no further questions. Like to turn the call back over to Natus.

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

Okay. Thank you so much. Today, we are doing our best to keep the people that make Natus work safe and productive. We are a dynamic and dedicated global organization, driven by the needs of our patients and our business is fully operational. And most importantly, we have the commitment and financial strength to support our customers and succeed during this challenging environment. Thank you for joining us on today's call and have a good day.

Operator

[Operators 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 -- Analyst

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