Image source: Getty Images.

After a rough first quarter, Natus Medical (NTUS) is back on track, with revenue increasing 4.5% year over year and adjusted earnings per share 15% higher than the year-ago quarter.

One of the reasons given for the missed guidance last quarter was a pushback of neurology orders, which materialized this quarter as expected. In fact, the company booked a $1.8 million order from one hospital in the quarter, a company record. The lumpy sales may continue, but long-term investors needn't worry about short-term fluctuations.

Image source: Natus Medical.

Natus Medical's new services businesses are growing well, although they're still small compared to the medical equipment business, so the growth doesn't affect overall revenue much. Nevertheless, the numbers are quite impressive with NicView, which installs and maintains cameras for families with babies in neonatal intensive care units, seeing revenue growth of 90% year over year and its newborn infant hearing business, Peloton, growing revenue by 80% year over year. Global Neurodiagnostics was the laggard, only growing by 45% year over year.

On the downside, international sales remain slow, partially because hospitals don't want to outlay capital for equipment given their home countries' economic slowdowns and partially because the stronger dollar makes Natus Medical's equipment more expensive when translated into the local currency. To address the latter, Natus Medical is considering cutting its prices internationally to help compete.

Gross margins slipped from 62.4% in the year-ago quarter to 59.9% in the most recent quarter, but management said the decline was mostly due to one-time issues. One product with lower-than-average margins had unusually higher sales because the company cleared its log of backorders. There were also unusually high expenses for warranties that the company doesn't believe will continue. Management noted that gross margins will return to the 61% to 62% range next quarter.

Adjusted earnings grew faster than revenue despite the lower margins thanks to a lower tax rate. That kind of growth can't continue forever, but it appears that the benefit will continue with the permanent reinstatement of the R&D tax credit and Natus' more efficient operating structure.

The repurchase of $7.7 million shares also helped boost earnings on a per-share basis. With fewer shares outstanding, investors now own a larger piece of the growing pie.

Looking forward

Natus Medical increased its 2016 revenue guidance to a range of $388 million to $390 million compared to previous guidance of $378 million to $382 million. A bulk of the increase comes from $7 million in sales of RetCam, a neonatal camera for the eye that Natus purchased earlier this month, but management also has higher expectations for the rest of its business.

Sales from the Venezuela contract, which was cut from guidance last quarter, continue to remain out of the picture although president and CEO Jim Hawkins did note that the Ministry of Health believes there's still a need for the products that the country agreed to buy and is working to get the down payment made, but it's still unclear when (or if) Venezuela will execute on the contract.

Hawkins gave a little more color about the company's plans to make additional acquisitions, noting that it was looking for acquisitions with sales in the $10 million to $100 million range. At the top of that range, a large bolt-on acquisition would require the company to take on debt to complete an acquisition, but given Natus' track record for acquisitions, the earnings from the new products would likely be more than enough to service the debt.