The challenge facing every business is how to balance the desire for current profits against the promise of faster growth. For NuVasive (NUVA), helping patients with spinal conditions live better lives has led to early success, and it's now in a position in which it has to decide how quickly to try to grow and how it can evolve to help as many people as possible with its life-changing medical technology.
Coming into Tuesday's third-quarter financial report, NuVasive investors expected to see solid gains in both revenue and earnings. Top-line growth was no problem for the spinal surgical specialist, but NuVasive decide to sacrifice current income in order to boost its investment in its business prospects. Whether that bet will pan out could be a big part of how NuVasive turns out in the long run.
Image source: NuVasive.
How NuVasive has stood up straight
NuVasive's third-quarter results were mixed in casual investors' eyes. Revenue growth was up nearly 10% to $271.3 million, which was faster than the 7% growth rate that most of those following the stock were expecting to see. However, adjusted net income was higher by just 11% to $29.5 million, and the resulting adjusted earnings of $0.56 per share fell well short of the consensus forecast among investors for $0.62 per share on the bottom line.
NuVasive got relatively balanced contributions from all of its business segments. The surgical support division did the best in terms of top-line growth, with segment revenue jumping 17% compared with the third quarter of 2017. The acquisition of SafePassage contributed to those gains, but NuVasive also enjoyed success from its biologics business. Elsewhere, the spinal hardware segment put up respectable numbers, as sales gained 7%. NuVasive's international business also did well, with an 8.5% rise in revenue that took about a 2-percentage-point hit because of adverse currency moves.
However, cost-related fundamentals were mixed. Gross margin fell by seven-tenths of a percentage point, mostly because of acquisition-related issues, and higher overhead costs and bigger investments in research and development caused a nearly 2-percentage-point drop in operating profit margin to 15.6%. When you take out the impact of stock-based compensation, however, the numbers look a lot better, with pre-tax adjusted operating margin picking up almost 2 percentage points from year-ago levels.
CEO Greg Lucier was happy with the company's performance, and he explained decisions that weighed on profit growth. "With the sense the overall U.S. spine market is trending healthier," Lucier said, "we made strategic investments this quarter on the heels of this momentum in key R&D initiatives, additions to our commercial sales force, and infrastructure upgrades to improve set fulfillment -- all to support a strong start to 2019 and beyond."
Can NuVasive build momentum?
A big part of NuVasive's future prospects will come from its recent efforts to bring more of its manufacturing in-house. The improvement of its facility in West Carrollton, Ohio should boost margin figures by another 1.3 to 1.5 percentage points in 2019, and as Lucier described it, the facility "will become a business advantage, both to drive a competitive cost position and to control the quality required to produce ever more complex implants."
Yet some of the changes that NuVasive made to its guidance for the full year didn't seem to reflect that optimism. Although the company boosted its sales projections by $5 million to $10 million to come up with a new range of $1.105 billion to $1.11 billion, NuVasive cut its adjusted earnings guidance by $0.17 to $0.22 per share, setting a new range of $2.15 to $2.23 per share. The reason given was that the company expects to accelerate investments in infrastructure and its commercial sales force in order to build momentum going into the new year -- even if it comes at the expense of current-year bottom line performance.
NuVasive investors weren't entirely comfortable with that decision, and the stock dropped 4% in after-hours trading Tuesday following the announcement. Yet for a company that's on the cusp of finding new growth opportunities, optimistic shareholders can hope that by sacrificing some profit growth now, NuVasive will be able to deliver even better results in the years to come.
