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Natus Medical Inc. Serving Up Earning Growth

By Brian Orelli, PhD - Jan 27, 2016 at 5:05PM

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Growth in its services businesses is key for the medical-device maker.

When Natus Medical (NTUS) released earnings on Wednesday, there wasn't much of a surprise on the revenue side, since the company had already released a preliminary tally of "approximately $100.0 million" in revenue for the fourth quarter.

Revenue was actually $99.951 million. Thank goodness for rounding rules.

Fourth-quarter revenue increased only 6.4% compared with the year-ago quarter, but the company continued to drive margins higher and taxes lower, so earnings growth outpaced revenue growth by a wide margin. Fourth-quarter adjusted earnings per share increased 27.5% year over year to $0.51 per share.

Part of the increased margins has to do with a shift in revenue away from devices and systems and toward supplies and services.

Revenue Source

Fourth Quarter 2014

Fourth Quarter 2015

Devices and systems

64%

60%

Supplies and services

36%

40%

SOURCE: COMPANY CONFERENCE CALL.

ALGO HEARING SCREENER.
SOURCE: NATUS MEDICAL.

In addition to the higher gross margins, increasing supplies and services is also nice, because the category is generally recurring revenue. While Natus Medical may have to wait for the next upgrade cycle to sell another device or system to a customer, it's reordering supplies constantly or under contract for services, creating revenue quarter after quarter.

Natus Medical doesn't break out supplies and services further, but it's pretty clear that services -- namely Peloton, NicView, and Global Neurodiagnostics -- are a growing percentage of the business.

With the addition of 17 hospitals in the fourth quarter, its hearing-screening service, Peloton, is now in 90 hospitals. Natus plans to keep at the same pace of additions with "hopes of getting 60 or more new hospitals next year for Peloton," according to CEO Jim Hawkins.

NicView, which allows family and friends to see babies in the neonatal intensive care units through the Internet, is now in 80 hospitals in the U.S., and Natus expects to receive its first international order in the first half of 2016.

Global Neurodiagnostics is a misnomer, because when Natus bought it last year, the company's footprint was primarily in Texas and wasn't close to being "global." Natus has since expanded the brain-testing outsourcing business to 14 states and expects to expand to another five to eight states this year. That'll put it in only about half the states, offering plenty of growth potential in that business as well.

Natus also has a recently renewed contract with California to coordinate infant hearing tests. The company is hoping that other states will also be interested in outsourcing the work, which Natus would be in a good position to pick up with its Peloton business and its experience working with California.

Natus is in good shape to serve up growth this year, with adjusted earnings expected to grow at least 18% year over year.

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.

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