Natus Medical Incorporated (NTUS) Q1 2021 Earnings Call Transcript

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Natus Medical Incorporated (NTUS)
Q1 2021 Earnings Call
May 6, 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 first 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 first quarter in 2021, then Drew will discuss the first 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 these forward-looking statements.

A description of relevant risks and uncertainties pertaining to our business, please see today's press release and our periodic 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, reconstructing 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, Michelle. Good afternoon, everyone. During our call today, we will discuss our first quarter 2021 financial results as well as our current business trends. Today, we reported the results for the first quarter of 2021. Revenue for the quarter was $114.9 million and non-GAAP earnings per share was $0.16. Revenue was higher than expected, while our earnings per share was in line with our expectations. Our revenues in the first quarter of 2021 grew 5% compared to the first quarter of 2020, which was impacted by the pandemic late in that quarter. Our Neuro, Newborn Care and Hearing & Balance end markets all experienced growth compared to the first quarter of 2020. Our non-GAAP earnings per share grew 317% compared to the first quarter of 2020 on very similar revenues as a result of the operating expense improvements that we have delivered over the last two years. We are optimistic in the pace of our revenue recovery in 2021 compared to 2020.

We continue to believe our efforts to reduce our cost structure and investment in new products will drive long-term revenue growth and profitability. We see strong customer interest in our newly released Retcam Envision, ALGO 7i newborn hearing screener and our Otoscan digital ear screener -- ear scanner, which continues to build momentum in the market. 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 a 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 PSG solutions. Overall, our Neuro business increased by 6% year-over-year during the first quarter, with growth and recovery in all major product areas. And as another point of reference, our Q1 Neuro revenue was 11% higher than the first quarter of 2019.

Growth was led by our EMG product line, where sales of our recently launched next-generation UltraPro S100 neuromuscular diagnostic device contributed to a 26% year-over-year increase for EMG. We also saw encouraging recovery in our sleep and neurosurgery product areas, which grew approximately 2% and 1%, respectively, from the first quarter in the prior year. Overall, our Neuro hardware business grew just over 8%, while sales of supplies decreased from the prior year by approximately 1% after adjusting for discontinued products. 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 grew slightly versus the first quarter of 2020. We shipped 67 Otoscan digital ear scanners during the first quarter. Otoscan is the industry's only electronic in-ear scanner. We now have about 700 Otoscan devices in the market.

Otoscan device installations generate annual recurring revenue of about $1,200 to $1,600 each, in addition to the initial device sale. And there are more than 35,000 potential hearing aid dispensers and hearing clinics in the market that we believe will eventually benefit from the use of Otoscan as it becomes a 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 grew just -- grew 7% versus the first quarter of 2020. Revenue growth was driven by sales of our NICVIEW two video streaming solution and the release of our new ALGO 7i hearing screener during the quarter. NICVIEW allows parents, families and friends to view their babies in NICU remotely via phone or computer. And the ALGO 7i is our newest handheld hearing screener using our industry-leading algorithms to detect hearing abnormalities at birth.

This growth was also driven by the full implementation of our hearing screening programs with pediatrics, which offset otherwise lower supplies and service revenue as birth rates have seen declines over the past few months. In summary, we are very pleased with the recovery and growth during the quarter. We continue to hold multiple leading positions in each of our end markets and look to expand our leadership as we invest in new products and technologies that will drive growth in the years ahead.

Now let me 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 first quarter 2021 revenue of $114.9 million, a 5.1% increase from the first quarter of 2020. Revenue increased in each of our end markets, Neuro, Newborn and Hearing & Balance compared to the same quarter last year. Keep in mind, we did see a slowdown at the end of the first quarter of 2020 related to the pandemic. Total revenue in the first quarter of 2021 was also slightly higher than Q1 2019 revenue. As a result of the improvements we've made over the last two years in our cost structure, our non-GAAP EPS, earnings per share, increased 100% or $0.08 per share compared to Q1 of 2019. Revenue from our Neuro end market was $69.1 million or 60% of total revenue during the first quarter of 2021 compared to $65.4 million or 60% of total revenue during the same quarter last year.

Revenue from our Neuro end market increased 5.7% compared to the same quarter last year, led by our UltraPro EMG devices. Revenue from our Newborn Care end market increased 7% to $25.9 million or 23% of total revenue during the first quarter of 2021 compared to $24.2 million or 22% of total revenue during the same quarter last year. The increase was primarily attributable to sales of our NICVIEW streaming devices. Revenue from our Hearing & Balance end market was $19.9 million or 17% of total revenue during the first quarter of 2021 compared to $19.8 million or 18% of total revenue during the same quarter last year. Hearing assessment and balance devices sales increased during the quarter and were offset by the exit of the sound room business. In total, revenue from devices and systems contributed approximately 75% of revenue in the first quarter of 2021 compared to 72% in the 2020 period.

Revenue from supplies and services was 25% of total revenue in the first quarter of 2021 compared to 28% in the 2020 period. Revenue from supplies and services was 25% of total revenue in the first quarter of 2021 compared to 28% in the 2020 period. Revenue from domestic sales was approximately 59% of total revenue and 41% from international in the first quarter of 2021 compared to 62% and 38%, respectively for the same period last year. On a non-GAAP basis, our gross margin increased 40 basis points in the first quarter of 2021 to 59.6% compared to 59.2% in the first quarter of 2021. The increase in gross margin was mainly attributable to the leverage on the increase in revenues during the quarter. And gross margin -- GAAP gross margin increased 50 basis points to 57.9% in the first quarter of 2021 compared to 57.4% in the same period last year. First quarter non-GAAP operating expenses decreased by $1.6 million compared to the same quarter last year. The decrease in operating expense was driven primarily by lower spending on R&D remediation projects.

Our non-GAAP operating margin increased by 4.4% compared to the same quarter last year on higher revenues and lower operating expenses. Other expense was $900,000 for the first quarter, driven by exchange rate fluctuations. Interest expense was $800,000 during the quarter. We expect interest expense during the second quarter of 2021 to be approximately $600,000, and for the full year to be approximately $10 million. Our first quarter non-GAAP effective tax rate was 20.5%. We anticipate our overall 2021 non-GAAP tax rate to be between 21% and 25%. On a GAAP basis, our first quarter 2021 net income was $2.4 million or $0.07 per diluted share compared to a net loss of $3.6 million the same quarter last year. Non-GAAP net income increased $4.1 million to $5.4 million compared to the same quarter last year. Non-GAAP earnings per diluted share was $0.16. In the first quarter, we recorded $7.3 million of depreciation and amortization expense. Share-based compensation was $3 million during the first quarter.

Now let's look at some highlights from the balance sheet and the statement of cash flow. Our outstanding debt decreased in the first quarter as we repaid $20 million. We ended the quarter with $80.5 million in cash and $37 million in debt. Cash flow provided by operations was $24.7 million during the quarter. Our day sales outstanding increased three days versus the same quarter -- versus same period in the prior year to 79 days. Non-GAAP diluted shares outstanding decreased to 33.8 million shares compared to 33.9 million shares in the same period last year. Now turning to guidance. We continue to monitor the economic recovery of our markets around the world and expect revenues to improve year-on-year in the second quarter of 2021. With this in mind, we expect our revenues for the second quarter of 2021 to be between $112 million and $116 million. GAAP net income is expected to be in the range of $4.5 million to $6.4 million for the second quarter of 2021, or $0.13 to $0.19 per diluted share. Non-GAAP net income is expected to be in the range of $8.9 million to $10.8 million or $0.26 to $0.32 per diluted share.

And with that, I will now turn it back to Jonathan.

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

Thank you, Drew. I'd like to thank all of our employees, partners and customers for their outstanding efforts and partnerships throughout the quarter. And thank you, everyone, for joining the call today. Have a good afternoon.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 14 minutes

Call participants:

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

Drew Davies -- Executive Vice President and Chief Financial Officer

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