Natus Medical Incorporated (NTUS) Q4 2020 Earnings Call Transcript

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Natus Medical Incorporated (NTUS)
Q4 2020 Earnings Call
Feb 25, 2021, 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 fourth 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 a business overview of the fourth quarter 2020, then Drew will discuss the fourth quarter financial performance. Finally, we will open the call for your 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 a description of relevant risks 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 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 today'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. Good afternoon, everyone. During our call today, we will discuss our fourth quarter 2020 financial results as well as our current business environment. Today, we reported the results for the fourth quarter and full year of 2020. Revenue for the quarter was $118.7 million, and non-GAAP earnings per share was $0.39. Both revenue and earnings per share exceeded our expectations for the quarter as the pace of business recovery was faster than we expected. Revenue for the full year was $415.7 million, and non-GAAP EPS was also $0.39 for the year.

The dynamic environment in 2020 produced significant and unforeseen challenges for our company. However, our business began to recover in the second half of the year, and that recovery continued into the fourth quarter, with revenues increasing 15.5% from the third quarter of 2020. While the effects of the pandemic had a major impact on our business, the strategic decisions, organizational changes and cost structure improvements we made over the last two years enabled us to manage through this demanding period and emerge a stronger and more efficient company.

These steps helped us generate over $34 million in operating cash this year and allowed us to continue investing in new and refreshed products, which will drive our success in the future. Our focus and commitment to providing new and improved products to our customers was evident in the fourth quarter with the release of our new standard-setting pediatric ocular imaging system, Retcam Envision as was the acquisition of Babybe and its patented remote mother-to-baby communication technology.

Looking ahead to 2021, we expect to continue to bring innovative new products and solutions to market, including a new handheld newborn hearing screener, cloud telemedicine capability for certain products and a variety of product software enhancements. As we highlighted in our last call, the fundamentals of our business remain intact. Health care providers and patients depend on our products and services every day. And the demand for our products and services continue to increase and are now approaching historically normal levels.

Our fourth quarter results exceeded our guidance, with revenue improving over the third quarter of 2020. But disruptions from the COVID pandemic continue to negatively weigh on our results versus the same quarter in 2019. Revenue from Neuro products continued to strengthen, with equipment sales increasing sequentially. Revenue for Hearing & Balance products also increased from Q3 2020, and we are encouraged by the accelerated recovery we saw in the fourth quarter. Our Newborn Care business has continued to be the least affected by the pandemic and performed within our expected range and slightly improved over the third quarter of 2020. In a few minutes, Drew will discuss more financial details.

But first, I'd like to provide some additional commentary on the quarter in each of our end markets. Natus is the global leader in neurodiagnostic equipment solutions. Our products and services are used by the majority of hospitals and neurologists worldwide. We have the most comprehensive line of neurodiagnostic equipment offered by any global manufacturer today, offering a full line of EEG, EMG and sleep solutions. Overall, our Neuro business declined by about 16% year-over-year during the fourth quarter and declined about 18% for the full year versus 2019 due mostly to pandemic-related disruptions.

The year-over-year decline for the quarter was driven primarily from lower sales of EEG equipment and neurosurgery products, while sales of EMG, sleep equipment and neurodiagnostic supplies returned back to 2019 levels during the fourth quarter of 2020. Overall, we are encouraged by the level of sales activity we saw during the quarter, and we believe that EEG capital equipment will continue to rebound over the next few quarters and again begin to grow versus prepandemic levels. 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 Hearing & Balance returned to prepandemic levels during the quarter and was comparable to the fourth quarter of 2019. We shipped 53 Otoscan digital ear scanners during the fourth quarter, the industry's only electronic in-ear scanner. We're encouraged by the industry's continued adoption of this new technology and expect it to become the standard of care in helping audiologists deliver custom hearing solutions. 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 was slightly favorable to the fourth quarter of 2019. Declines in the sales of supplies, which are generally directly tied to birth rates, were offset by increased sales in hardware and services. In summary, we're very pleased with the progress and performance of the business in 2020 and the opportunities ahead for '21. We continue to hold multiple leading positions in each of our end markets and look to expand that leadership as we grow our business. At the same time, we will continue to focus on our strategic plans for growth, investing in new products and technologies and achieving operational excellence to expand margins and cash flow.

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 fourth quarter 2020 revenue of $118.7 million, a 15.5% increase from the third quarter as our business recovers from the impact of COVID-19. The sequential quarterly revenue increase was attributable mainly to device sales, which improved by 21.5%. Supplies increased sequentially by 1.4%, mainly in Neuro. Year-over-year revenue was down 9.7% from the same period last year. Revenue from our Neuro end market was $68.2 million or 57% of total revenue during the fourth quarter of 2020 compared to $81.1 million or 62% of total revenue during the same quarter last year.

Revenue from the Neuro business declined 15.8% compared to the record quarter for Neuro last year and remains impacted by the COVID-19 pandemic. Revenue from our Newborn Care end market increased 0.7% to $28 million or 24% of total revenue during the fourth quarter of 2020. And that compares to $27.8 million or 21% of total revenue during the same quarter last year. The increase was primarily attributable to phototherapy and NICVIEW sales. Revenue from our Hearing & Balance end market was $22.5 million or 19% of total revenue during the fourth quarter of 2020 compared to $22.6 million or 17% of total revenue during the same quarter last year.

Hearing & Balance revenue recovered during the quarter and increased year-over-year after adjusting for the exit of the sound room business. In total, revenue from devices and systems contributed approximately 75% of total revenue in the fourth quarter of 2020 compared to 76% in the 2019 period. Revenue from supplies and services was 75% of total revenue in the fourth quarter of 2020 compared to 24% in the 2019 period. Revenue from domestic sales was approximately 58% of total revenue and 42% from international in the fourth quarter of 2020 compared to 60% and 40%, respectively, for the same period last year.

On a non-GAAP basis, our gross margin decreased by 3.9% in the fourth quarter of 2020 to 58.1% compared to 62% in the fourth quarter of 2019. 1.7 percentage points of the decline in gross margin was attributable to lower -- a lower mix of Neuro revenue. 0.7 percentage points was attributable to higher freight costs associated with COVID-19, and 1.5 was related mainly to inventory reserves and scrap related to site consolidations. GAAP gross margin decreased 5.9% to 55.3% in the fourth quarter of 2020 compared to 61.2% in the same period last year. The decline in GAAP gross margin was also impacted by site consolidation charges of $1.3 million or 1.1% of gross margin.

Fourth quarter non-GAAP operating expenses decreased by $7.5 million compared to the same quarter last year. The decrease in operating expense was driven primarily by cost reductions in travel, trade shows, employee and certain discretionary expenses. Our non-GAAP operating margin decreased by 2.5% compared to the same quarter last year on lower revenues and gross margin and was offset by the decrease in operating expenses. Other income was $2.2 million for the fourth quarter driven by exchange rate fluctuations related to entity consolidation. Interest expense was $0.9 million during the quarter. We expect interest expense during the first quarter of 2021 to be approximately $0.5 million and for the full year of 2021 to be approximately $1.5 million.

The fourth quarter -- our non-GAAP effective tax rate was 22.9%. We anticipate our overall 2021 non-GAAP tax rate to be between 21% and 24%. On a GAAP basis, our fourth quarter 2020 net income was $5.2 million or $0.15 per share compared to net income of $3 million the same quarter last year. Non-GAAP net income decreased $2.6 million compared to the same quarter last year. Non-GAAP earnings per share was $0.39. In the fourth quarter, we recorded $7.1 million of depreciation and amortization. Stock-based compensation was $2.4 million during the fourth quarter.

Now let's look at some highlights from the balance sheet and statement of cash flows. Our outstanding debt decreased in the fourth quarter as we repaid $10 million. We ended the quarter with $82.1 million of cash and $57 million in debt. Cash flow provided by operations was $16.3 million during the quarter. Our days of sales outstanding decreased three days versus the same period in the prior year to 82 days. Non-GAAP shares outstanding increased to 33.9 million shares compared to 33.8 million shares in the same period last year.

Now turning to guidance. Our business historically sees year-end cyclicality and strength in the fourth quarter and some sequential decline in the first quarter. We expect our revenues to continue to recover from the pandemic in the first quarter of 2021 and to be in a range similar to the revenues in the first quarter last year, which experienced COVID-19-related softness in the last few weeks of the quarter.

With this in mind, we expect our revenues for the first quarter of 2021 to be between $108 million and $112 million. GAAP net income is expected to range from a loss of $600,000 to a profit of $1.7 million for the first quarter of 2021 or a loss of $0.02 per share to a profit of $0.05 per share. Non-GAAP net income is expected to be in the range of $3.9 million to $6.2 million or $0.11 to $0.18 per diluted share.

And with that, we will now open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Jayson Bedford with Raymond James, your line is open.

Jayson Bedford -- Raymond James -- Analyst

Hi guys, congrats on the recovery that you guys are seeing in 4Q. So regarding the guidance, I just want to get a little breakdown on how you see it between the three segments, Newborn, Neuro and Hearing? What kind of revenue growth do you approximate in each one of those segments?

Drew Davies -- Executive Vice President and Chief Financial Officer

Yes. We see our Newborn Care business holding up and continuing where it's been. I think compared to the same quarter last year -- for it to be pretty similar. And Hearing & Balance is recovering and should be a similar level to last quarter as well. We're seeing a little bit slower recovery in Neuro U.S. That's where we saw the softness or the comparable lower revenue compared to last year was in U.S. Neuro. And we would expect that to kind of recover slower in the first quarter as well.

Jayson Bedford -- Raymond James -- Analyst

That's helpful. Thank you. And regarding full year, just I know you guys haven't given us guidance on full year 2021. But is it fair to think that like in terms of where it was back in 2019, is there any kind of baseline that you guys can provide us for the full year?

Drew Davies -- Executive Vice President and Chief Financial Officer

Yes. We didn't give specific guidance, but we think that our -- each quarter this year, if you kind of look at the guidance that we gave for Q1, we've got a quarter that is potentially a little bit better than Q1 last year. We would definitely expect to be better than Q2 last year, which was the lowest quarter of the year. And then we believe, with continued improvement in the COVID situation around the world and the economy, that Q3 and Q4 will be better than last year as well.

Jayson Bedford -- Raymond James -- Analyst

Okay. That's helpful. And do you anticipate by the end of the year that, that business will recover to where it was prepandemic or it's better? Or any kind of guidance around that?

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

Yes. I mean there's still some lack of visibility in the full year that really prevented us from giving the guidance. Normally, we would give guidance, but we see the first quarter recovering nicely. We saw it in Q4. But to be honest, we didn't feel comfortable, with the volatility out there, in giving further guidance for the rest of the year.

Jayson Bedford -- Raymond James -- Analyst

Okay. And in terms of within the -- I mean, I guess, now that we're at the end of February, have you guys seen recovery in the business this month versus like Jan and December? Or how is that -- how has that trend been within the quarter?

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

Yes. I think you're right, it's late in the quarter. We've got another few weeks to go here, and the strength has continued through Q1. We ended the quarter -- the fourth quarter with a pretty decent backlog. So that gives us confidence, a little more confidence than normal for Q1. But as you know, we're -- our capital business can be pretty back-end loaded. We're entering that period of the quarter where the capital order starts to come in, and we kind of finished strong with that.

So I do think that the strength definitely continued through the first couple of months here, certainly on supplies, and a smaller level of capital has started to return to what looked normal maybe back in 2019. But we still have some recovery left to go in the Neuro equipment business, especially in the U.S., where that hasn't been as strong as we saw in '19 yet.

Jayson Bedford -- Raymond James -- Analyst

Okay. That's helpful. So in the fourth quarter, bulk of the orders that you guys -- was that from -- deferred from like a backlog or pent-up demand from 2Q to -- the second and third quarter? Or was it new orders that were not previously from -- that were not from previous quarters?

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

I think on the hardware side, the sales cycles are pretty long. So it's probably safe to say that there was some deferral from the second quarter, third quarter that pushed into Q4 and probably continued to push into Q1 and beyond. On the supply side and on smaller purchase, I think that is new orders, more turns type business for us. That is more real time. So hopefully that answers your question. I think on the hardware side, there's delay, but on a more day-to-day services and supplies, I think we're at a real-time level.

Jayson Bedford -- Raymond James -- Analyst

Okay. And within the capital sales, are you seeing -- like, is it mostly normal-sized ordering patterns? Are there more large orders or smaller orders? Just so we can kind of gauge what level of activity we're seeing.

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

I'd say it's in the normal range. We -- as usual, we usually have a handful of larger capital deals that are in the pipeline at any given time that are closer to finishing, and we have that today. Look, so the backlog is decent, so that's going to help drive a little more confidence here in the first quarter. We'll see how that continues going into Q2, Q3, etc. On the supplies and smaller, less expensive pieces of capital, it's pretty normal, too, normal pace. I don't think -- on the smaller pieces, smaller hardware and supplies, as I said, I think we're more to real-time state there today.

Jayson Bedford -- Raymond James -- Analyst

So you guys lay out started with the pipeline. Can you give us an update on where the RetCam device is? And if there's any other products that are coming in the pipeline that we should look forward to in 2021?

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

Sure. So the Retcam Envision, we launched in the market in December. And we've sold a few of those in Europe, where it's approved. We filed for the 510(k) in the U.S. and expect to get that here in the next, I think, like two to three months. And at that point, we'd start marketing and selling that in the U.S. For what we have closer to release now that's not yet released is our ALGO 7i, which will be our international-destined handheld hearing screener that will replace our ALGO 3i. We also have a pretty significant upgrade to our NeuroWorks software that's coming out soon. And then much later in the year, we expect to possibly release our Babybe mother-child communication device.

Jayson Bedford -- Raymond James -- Analyst

That's helpful. What kind of revenue contribution should we expect from RetCam in 2021?

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

RetCam is typically a $15 million, $16 million business. I think as we roll out the upgrades, it should go from there, from a -- just driven from upgrade cycle. I don't think we've put a forecast by product out there that we'd be comfortable with. But I can tell you, historically, it's about that, $15 million, $16 million annual, and I think it grows from there.

Jayson Bedford -- Raymond James -- Analyst

Okay. That's helpful. And you guys touched on what weighed on gross margins in the fourth quarter. Is there guidance that you guys feel comfortable regarding gross margins going forward for 1Q of '21?

Drew Davies -- Executive Vice President and Chief Financial Officer

Yes. I think our gross margins are going to -- they'll continue to improve a bit as we go. We've got some continued savings from the site consolidations that we're doing. So the EPS guidance that we've given is based on high 50s to around 60% gross margin. So just over 60% or just below 60% is kind of the range that we have to get to that EPS guidance.

Jayson Bedford -- Raymond James -- Analyst

And regarding geographic trends, should we expect roughly the same as '21 -- sorry, '20? Or any kind of shift within geographies in '21?

Drew Davies -- Executive Vice President and Chief Financial Officer

I think it will be similar. It will be largely the same that it's been historically, kind of that 60 to -- 60-40. 60 domestic, 40 international. That usually fluctuates a few percentage points each quarter, but it will be in that range.

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

And I'd point out to you that the Neuro capital business continues to strengthen. That generally favors gross margin and also the U.S. market.

Jayson Bedford -- Raymond James -- Analyst

Got it. Got it. So regarding the -- regarding geographic mix, also, is there -- what kind of FX impact -- we've seen a lot of companies reporting a decent tailwind from FX for next -- for 2021. Is there some kind of FX guide that you guys are comfortable with?

Drew Davies -- Executive Vice President and Chief Financial Officer

We don't generally forecast foreign exchange, but we have seen some softness lately just in our operating expenses or we've seen, I guess, I should say, a negative impact in our operating expenses in Europe. And we've had that impact there. But we do have some revenue in euros and some revenue in Danish kroner, where we have our factories. So we have a little bit of a natural hedge there. But we've had a few hundred thousand dollars the last couple of quarters in negative impact.

And that can continue to happen if the dollar doesn't strengthen against the euro and the kroner. We do have some exposure from an operating standpoint in Canada as well, but it's usually pretty stable. We did have an item this quarter. We were consolidating some entities, and there was some accumulated foreign exchange that hit the P&L this quarter. But that -- we wouldn't expect that to happen again.

Jayson Bedford -- Raymond James -- Analyst

You guys mentioned you guys sold 50 -- 15 Otoscan units in 4Q. Can you talk a little bit more about what -- hello?

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

Yes. Sorry. It was 53 units, yes. five-three.

Jayson Bedford -- Raymond James -- Analyst

53 units.

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

Yes.

Jayson Bedford -- Raymond James -- Analyst

Thank you for the correction. Can you guys -- what's required for broader adoption of Otoscan?

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

Well, I think we're seeing some increase. I think we sold 30 last quarter, 53 this quarter. There are several hundred out there, probably 350 or so would be my latest guess here. Broader adoption really is as the market realizes the benefits of a better patient experience, a faster cycle time within the office and a better fit for the hearing aid. As that becomes more in focus, I think you'll see broader adoption.

Jayson Bedford -- Raymond James -- Analyst

And the 53 is less -- can you -- I mean, I can look this up, but can you guys compare to how it was in fourth quarter of last year?

Drew Davies -- Executive Vice President and Chief Financial Officer

We were -- actually, in fourth quarter last year, I believe we didn't have that in the market. We had a quality issue that we were working on. So we didn't have it in the market. But in -- we were kind of -- we've kind of been going along about 30 a quarter, either high 20s or just over 30. In Q, I think it was Q1 this year or -- we had -- we sold 90, but that was because we had been out of the market for three quarters. So it kind of averaged out to that 30 per quarter when we came back in the market. So this is a good quarter for us. We've got over -- well over 300 units in the market now.

Jayson Bedford -- Raymond James -- Analyst

That's very helpful, actually. And do you think that some of the 53 was -- did 95 in 1Q of 2020. Do you think some of these 53 units was backlog or most of them were new orders?

Drew Davies -- Executive Vice President and Chief Financial Officer

No. This is -- I think we're back to current orders now. I mean maybe there was a little bit of catch-up from people delaying purchases due to COVID and some of the hearing centers, the audiologist office being shut down or having less traffic. But that -- we were back to selling about 30 a quarter. And so this is a nice step-up. And we think that as this continues to get momentum and the installed base gets bigger and the standard in the industry is to do it digitally, we can see acceleration in sales going forward.

Jayson Bedford -- Raymond James -- Analyst

And what was the neurosurgery growth in 4Q?

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

Yes. Neurosurgery declined in 4Q versus last year.

Jayson Bedford -- Raymond James -- Analyst

And one final question here. Do you guys have any capital allocation priorities for 2021? What do you think you guys plan on doing with the cash?

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

Yes. I think primarily, the easiest thing to do for us is to pay down our revolving credit line. That delevers and reduces interest expense and continues to keep our cash available via the revolving credit line. Second to that, we do anticipate making some strategic acquisitions throughout the coming quarters, things that -- like our Babybe, maybe things that are a little bit larger than that. But that would be second. And then third, we do still have an open share buyback program that, as we've exited COVID here, we'll start to reconsider how we might best deploy that program.

Jayson Bedford -- Raymond James -- Analyst

Thank you very much guys. I appreciate it.

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

Bedford, you're welcome. Thank you.

Operator

I am showing no further questions at this time. I would now like to turn the call back to Mr. Kennedy.

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

Okay. Thank you. Thank you for joining us today. I'd like to thank all of our employees and partners and customers for their outstanding efforts and achievements throughout the year. The Natus team has successfully executed on several strategic initiatives and continue to serve our customers every day throughout the year. We truly have one of the best teams in the industry. Thank you, operator. That concludes our program for today's call. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 32 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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