Natus Medical (NASDAQ:BABY) continued its slow-but-steady growth in the third quarter with newly acquired business and new products making up for some headwinds for the legacy part of its business.

Natus Medical results: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$130.6 million

$122.6 million

6.5%

Income from operations

($2.9 million)

$8.5 million

N/A

Earnings per share (EPS)

($0.17)

($0.26)

N/A

Adjusted EPS

$0.40

$0.40

0%

Data source: Natus Medical.

What happened with Natus Medical this quarter?

  • The neurology products, which make up about half the business, helped boost the overall revenue with a 17.6% year-over-year increase. Most of the growth came from acquired business over the last year, but organic growth was up 2.1%, and changes in foreign exchange rates contributed another 0.5%.
  • The newborn-care business, which makes up about a quarter of the total revenue, continues to struggle, with sales down 7.3%. Some of the decrease was from previously announced decisions to stop selling some products, and the devaluation of the Argentine peso also hurt revenue growth for the division.
  • The Otometrics hearing-aid fitting business, which makes up another quarter of sales, was basically flat year over year with the unit registering revenue growth of 0.1%. Sales in the U.S. grew, but there were some issues overseas, especially in Iran due to sanctions, and in Turkey, where the currency has been devalued, making foreign products too expensive.
  • The new Otoscan machine that scans the inside of the ear to create a digital image for fitting hearing aids launched during the quarter with more than 50 units installed in the field. The company also introduced four new neurodiagnostic products during the quarter.
  • Natus continues to make headway in reducing costs, including eliminating one of its three Midwest facilities to help make its supply chain more efficient.
  • Adjusted EPS factors out one-time issues such as restructuring costs, which is a better way to look at the overall health of Natus' underlying business.
  • Infant in mom's arms in a hospital room with dad and baloons

    Image source: Getty Images.

What management had to say

The Otoscan launch is off to a solid start, and CEO Jonathan Kennedy sees a lot of potential for the technology.

"This initial installed base is a very small fraction of the global opportunity that we see for this technology," Kennedy said, "and we are very excited about its long-term potential for customers, patients, and Natus." Later, he cautioned to expect the launch to "go at a slow-to-modest pace in the next couple of quarters," before he hopes to see it accelerate.

Drew Davies, the new chief financial officer, who took over for Kennedy when he became president, highlighted his plans to increase operating margins and become more efficient: "I think now that I've joined the company, that's one of the things that I've kind of had the opportunity to work on at my last company and some of the other places I've worked -- really focus on gross margin and a lot of areas. I did a lot of work in cost, in inventory, in the early part of my career, and ... those are areas that I'm going to focus on as the year goes on here."

Looking forward

Management forecasts revenue to come in at the low end of previous guidance, lowering the top end of the guidance to a range of $525 million to $530 million from the previous range of $525 million to $535 million. Adjusted EPS guidance was also lowered to $1.47 to $1.50, from a range of $1.50 to $1.60.

Looking into next year, Otoscan and the new neurology products -- as well as the launch of a few newborn-care products -- should help drive revenue growth while Natus becomes more efficient, trying to grow profits even faster.

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.