Without any large acquisitions to help artificially boost sales as we've seen in the past, Natus Medical (NASDAQ:BABY), a purveyor of medical devices specializing in neurology and care for newborns, keeps chugging along.
Revenue in the first quarter increased 4.4% compared to the year-ago quarter. Part of the slow growth comes from the stronger dollar -- you're going to hear that a lot this earnings season. At constant currencies, revenue would have been up about 6.8% year over year.
Natus Medical is also making baby steps with its margins. In the first quarter, adjusted gross profit increased 120 basis points to 60.7%. The increase helped boost adjusted operating profit margin of 16.9%, close to the company's goal of 18% for the year.
Add the two baby steps -- small revenue growth and increasing margins -- together and the bottom line took a decent sized jump. Adjusted earnings increased 24% year over year to $10.3 million. That works out to $0.31 per share, only a 19% increase over the year-ago quarter because there were more shares outstanding.
Despite the moderate revenue growth, the first quarter revenue was at the top of the company's guidance, allowing management to increase the guidance by $3 million on each end of the range to $376 million to $378 million. Earnings guidance for the year was also increased to $1.47-$1.51 per share from a previous guidance of $1.42-$1.46 per share.
Accelerated growth ahead
While the revenue growth is relatively modest, Natus Medical's move into service-based industries should be a source of larger growth in the coming years.
Natus is still ramping up its newborn hearing testing service called Peloton that contracts with hospitals to run hearing tests on babies. There's potential for Natus to book 10 times or more revenue per test administered via Peloton, as compared to the hospital performing the test and Natus only receiving revenue from the disposable products used during the test.
Earlier this year, Natus Medical purchased two other service-based companies: Global Neuro-Diagnostics, which runs video electroencephalogram, or EEG, tests in patients' homes or physician offices, and NicView, which provides video monitoring in neonatal intensive care units. Both companies were relatively small -- Natus didn't even bother disclosing the acquisition price in the press releases -- but have potential to grow given their respective markets.
Unfortunately Natus Medical doesn't break out sales of its different divisions so we don't know how much revenue the new service-based businesses are generating. President and CEO Jim Hawkins did say that the service-based businesses "reported revenues beyond our expectations in the quarter," but I'd guess those expectations are still relatively low.
And, of course, with debts paid off, there's always the potential that Natus Medical gets back in the habit of making large acquisitions, creating a large boost to revenue. On the conference call, though, management made it clear that it feels the opportunities for organic growth mean that Natus Medical doesn't have to make a large acquisition, adding that if the right opportunity were to present itself, the company would certainly jump at the opportunity.
It appears this toddler has multiple opportunities to run.
Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Natus Medical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.