Natus Medical's (NASDAQ:BABY) second-quarter earnings report on Wednesday wasn't exactly a blowout, but considering how the company has fared over the last few quarters, investors were excited about the medical device maker meeting revenue guidance and exceeding its bottom-line projections. Even the lowering of full-year expectations for revenue and earnings couldn't get investors down.

Natus Medical results: The raw numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$130.7 million

$122.2 million

7%

Income from operations

($3.8 million)

($6.3 million)

N/A

Earnings per share (EPS)

($0.08)

($0.15)

N/A

Adjusted EPS

$0.35

$0.34

3%

Data source: Natus Medical.

What happened with Natus Medical this quarter?

  • All of revenue growth was due to recent acquisitions. Organic revenue declined 2% in the second quarter, but according to president and CEO Jonathan Kennedy, the decline was due to discontinuing newborn-care products "that did not have the required scale to remain viable," which probably means they weren't (very) profitable. All told, revenue from the newborn-care business declined by 15% year over year.
  • Revenue for Otometrics, Natus' hearing-aid fitting business, grew 8.3%; a little over half of the revenue came from organic growth and the rest from changes in exchange rates. Natus has been shooting for revenue growth of 10% from Otometrics in 2018, which still seems attainable, since there were some large orders in the year-ago quarter that made the second-quarter comparison challenging.
  • Natus' third segment, its neurology business, grew 2.1% organically.
  • The adjusted operating margin increased to 13%, compared to 12% in the year-ago quarter, due to increased gross margin and cost savings from the Otometrics integration. With lackluster revenue growth, squeezing out profits by reducing costs seems prudent.
Mom holding newborn in a hospital bed

Image source: Getty Images.

What management had to say

Kennedy has only been CEO for two weeks, but he's been with the company for a long time as head of the newborn-care business and then as CFO, so he sees this as a fairly seamless transition: "I think my imprint is on the business; it's been so for several years. I see it as a gradual increase in my involvement in more strategic decisions and more operational things than what I did in the past."

Why the pullback in guidance? It looks like management is being cautious given the fourth quarter of last year, when sales didn't materialize in the quarter that management projected they would. Kennedy said: "We are encouraged by the promising signs reflected in our second-quarter financial results. However, we are taking into account the effects of potentially shifting seasonality and the effects of global trade uncertainty, which affects our visibility into the second half."

Looking forward

For the third quarter, management is looking for revenue of $131.0 million to $135.0 million and adjusted earnings of $0.40 to $0.44 per share, which is basically flat organic revenue growth at the low end, with adjusted earnings up about 5% to 7%.

For the full year, management lowered revenue guidance to between $525 million and $535 million, and adjusted earnings guidance to between $1.50 and $1.60 per share. Nevertheless, the earnings guidance still calls for a stellar fourth quarter, potentially setting up the company for a good 2019 -- assuming, of course, that Natus can continue to hit its expectations.

Brian Orelli has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Natus Medical. The Motley Fool has a disclosure policy.