Q3 2019 Earnings Call
On the call today from native as Jonathan Kennedy Native President and Chief Executive Officer, Andrew Davies made us executive Vice President and Chief Financial Officer.
Jonathan will begin today with the business overview of the third quarter 2019.
Venture will discuss the third quarter financial performance and provide guidance for the fourth quarter and full year 2019.
Finally, we will open the call for your question.
To ask a question. Please press the star buttons, followed by one on your Touchtone phone.
Today's call will include forward looking statements within the meaning of the private Securities litigation reform back.
These statements include management's beliefs and expectations about our future results.
Actual results may differ materially from these forward looking statements for a description of relevant risks and uncertainties pertaining to our business. Please see todays press release and our periodic in annual reports filed with the FCC.
I'd now like to turn the call over to Jonathan Kennedy, President and Chief Executive Officer of Natus Medical Mr. Kennedy.
Thank you operator, and good afternoon, everyone.
Today, we reported the results for the third quarter of 2019 revenue for the quarter was $123.5 million and non-GAAP earnings per share was 36 cents both were inline with our previous expectations.
Our third quarter results demonstrate the continued improvement in our business.
Our performance in the quarter drove a significant increase in cash flow achieving $23.9 million in cash flow from operations. After adjusting for divestitures revenue from our neuro and market grew 8% for the second quarter and a route with all major neuro submarkets, making positive contributions to nooros growth, including neurosurgery.
[noise], our newborn care and hearing a balanced markets were down year over year, which had broken phototherapy vision screening and hearing sitting submarkets.
The negative trend was driven primarily by voluntary ship hold in order to address certain product design changes.
We expect these changes to be implemented by early next year.
Overall, we achieved organic revenue growth of 2% after adjusting for divestitures and discontinued products.
During the quarter, we continued to execute our strategic plan focusing our efforts in the central nervous system and century systems markets and achieve significant improvement in operation efficiency.
In addition to the outstanding cash flow generation during the quarter, we reduced our long term debt by $10 million.
As we've discussed before our capital like business has a tremendous ability to generate cash and we look forward to further improvements in cash flow.
Drew will discuss working capital and cash flow in more detail and just a few minutes.
Only nine months ago, we announced our one day this initiative.
The results of this effort have better positioned us for growth increase our product quality and made us a more efficient company.
During the quarter, we added to this progress and our margins and cash flow are evidence of that.
In addition to our year to date achievements, we continue to make progress further integrating our supply chain and operations.
We continue to execute many changes I noticed that we expect to result in sustainable payoffs to our stakeholders in the quarters and years ahead.
I'd now like to briefly describe.
The recently announced transition of our Palatine hearing screening service business to pediatrics.
Pediatrics Medical group and Mednax are the largest network of Neonatologist pediatric hospitalist and advanced practice providers in the United States caring for nearly 25% of neonatal patients.
We're very excited to partner with such an outstanding organization.
The combined scaled native and pediatrics will allow us to accelerate much needed innovation in newborn hearing screening.
The transition will allow needless to focus on delivering technology solutions for pediatrics will focus on the service and patient care aspects of newborn hearing screening.
We expect the transition to be Cleated completed during 2020 and will provide a more detailed update during our year end 2019 conference call.
We do not expect the transition however to have a material effect on the fourth quarter's financial results.
We set out the beginning of this year to redefine needed. So that we can focus our future efforts in areas, where we have strength and compelling competencies.
It's January we completed the divestitures of RG, Andy neural calm and Medix businesses with these exits and now the pellets on transition we have completed the broad strokes of our refocus initiatives.
These accomplishments will allow us to build on our strategic core competencies around the central nervous system and century systems for patients of all ages.
We competed communicated in January for the full year 2019 that we expected the benefit of approximately $4 million as a direct result of immediate efficiencies gained through the one day This initiative.
We have achieved these benefits and continue to expect additional ongoing annual benefits beyond 2019.
We remain confident in our ability to deliver on our near to midterm annual non-GAAP operating margin goal of 15% to 17% and as a reminder, our non-GAAP margins include equity compensation expense.
As you can see from our guidance. We expect continued operating margin improvement during the fourth quarter and continued operating margin expansion toward the mid teens as we finished the year.
In summary, we're very pleased with the performance of the business, thus far in 2019 and the opportunities that lie ahead for Natus, we hold several leading positions in each of our end markets and look to expand that leadership as we grow our business.
At the same time, we will continue to focus on profitability with the goal of expanding margins and continuing to increase cash flow.
Now I'll turn the call over did your Davies, our executive Vice President and Chief Financial Officer for a deeper dive into our financial results true.
Thank you Jonathan.
Today I'll be discussing our financial results on a GAAP basis in a non-GAAP basis.
non-GAAP results exclude amortization expense restructurings and certain other charges and their related tax effects.
We believe that the presentation of these non-GAAP measures along with our GAAP financial statements provided more thorough analysis.
Our ongoing financial performance.
You can find a reconciliation of our financial results on a GAAP versus non-GAAP basis in today's earnings release.
Jonathan stated, we reported third quarter 2019 revenue of $123.5 million you, 5.4% decrease from the same period last year. The revenue decline was primarily was driven primarily by divestitures and other end of cell products previously announced off.
Said by growth in our neuro market for the quarter.
Revenue from our neuro end market was $72.2 million or 58% of total revenue during the third quarter of 2019 compared to 69.8 million were 53% total revenue during the same quarter last year.
3.5% increase in neuro revenue is attributable attributable to all of our major products within neuro, including E. G. M. G.P.S.G., our sleep study products and neurosurgery.
Revenue from our newborn care end market decreased 21% to $27 million or 22% of total revenue during the third quarter of 2019 compared to $34.2 million were 26% of total revenue during the same quarter last year.
The decline in or newborn care business was driven primarily by end of cell products and the divestiture of medix offset by growth in phototherapy and Retcam.
Revenue from our hearing imbalance in market was $24.3 million or 20% of total revenue during the third quarter of 2019 compared to 26.7 million or 20% of total revenue during the same quarter last year, the hearing and balanced revenue was lower than the previous year due to India.
Sell products and products on hold pending design modifications.
In total revenue from devices in systems contributed approximately 74% of total revenue in the third quarter of 2019 compared to 72% in the 2018 period revenue from supplies and services was 26% of total revenue in the third quarter compared to 20.
<unk>, 8% in the 2018 period.
Revenue from domestic sales was approximately 60% and 40% from international sales and third quarter of 2019, which was the same split in the third quarter last year.
non-GAAP basis, our gross margin increased 74 basis points in the third quarter of 2019% to 61.3% compared to 60.6% in a third quarter of 2018. This increase was driven by lower operations overhead and strengthen our sales of neuro products gap.
Gross margin increased 59 increased to 59.1% in the third quarter of 2019 compared to 59% in the same period last year.
Third quarter non-GAAP operating expense decreased by $2.2 million compared to the same quarter last year. The decrease in operating expense was driven.
Primarily by cost reduction initiatives, including the impact of removing the operating expenses from divested businesses, our non-GAAP operating margin decreased to 13.8 per cent compared to 14%.
For the same quarter last year as a result of lower revenues in the quarter.
non-GAAP other expense was <unk> point $4 million for the third quarter driven by exchange rate fluctuations.
Interest expense was $1.2 million during the quarter, we expect interest expense during the fourth quarter to be approximately $800000 and full year 2019 to be approximately $4.9 million.
Third quarter non-GAAP effective tax rate was 21.6%, we anticipate our overall 2019 non-GAAP tax rate to be between 23% and 25%.
On a GAAP basis third quarter 2019, net income was $8.5 million or 25 cents per diluted share compared to a net loss of $5.6 million. The same quarter last year non-GAAP net income decreased $1.5 million compared to the same quarter last year.
non-GAAP earnings per diluted share was 36 cents.
In the third quarter, we recorded $7.5 million of depreciation and amortization expense share based compensation was $1.9 million during the third quarter.
Now, let's look at some of the highlights from the balance sheet and the statement of cash flow.
We repaid $10 million of outstanding debt during during the third quarter of 2019, which reduces annualized interest by approximately $460000. As a result, we ended the quarter with net debt of $6.6 million.
Cash flow from operations was $23.9 million during the quarter. Our day sales outstanding decreased six days versus the same period in the prior year to 78.8 days driven primarily by improved collections.
Our total net inventory declined by 1.6 million compared to the previous quarter.
non-GAAP diluted shares outstanding increased to 33.7 million shares compared to 33.4 million shares in the same period last year.
Turning to guidance, we expect our revenues for the fourth quarter of 2019 to be between 228 million in $132 million. This guidance reflects the exit of the G.N. de Niro calm and Medix businesses, which contributed $6.4 million to revenues in Q4 last.
This year on a combined basis.
We expect to continue to operate the pull time business for the full fourth quarter.
GAAP net income is expected to be in the range of 8.2 million to $10.2 million for the fourth and first quarter of 2019 or 24 to 30 cents per share.
non-GAAP net income is expected to be in the range of 14.9 million to to $16.9 million or 44 to 50 cents per share.
For the full year 2019 revenue guidance was revised to a range of $492 million to $496 million with full year non-GAAP earnings per diluted share narrowing to a range of $1.23 to $1.29.
We also expect full year GAAP loss per diluted share of 21 to 27 cents.
Expected non-GAAP earnings exclude $22 million of amortization of intangibles and $15 million to $18 million, a restructuring and other charges.
With that I will now open the call up for questions.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or are you wish or move yourself from the Q. Please press the pound.
Once again to ask a question. Please press Star then one now.
And our first question comes from Jason Bedford from Raymond James Your line is open.
Hi, good afternoon, Thanks for taking my questions and congrats on the.
On the progress I guess I wanted to start with.
Neuro, which seems to be a growing quite well and I. Appreciate the disclosure around all aspects of that business is growing any chance you can give us an idea as to how quickly. The GE portion of the business is growing that seems like it's been driver at least in the first half of their.
Yeah the EG.
Jason is obviously the biggest piece of the business I want to say it was up double digit low low double digits for the year per quarter over quarter, and that's been a really big big win for us over the last couple of years as we've taken we believe taking market share in the U.S. and outside the U.S. and continues to be a really solid product line for us.
Just a can you just remind me how big is that business either as a percentage of total or maybe just neuro.
Yeah right for Justy E. G is about a it's about a $30 million quarter business for us okay. Okay.
And then I guess I had a question on the ship pool.
I think you had about 2.8 million or products ownership pulled in to Q that you're carrying did you recognize that at all and in the third quarter.
No on a net basis were still our shippable backlog. If you will continues to grow although I wouldn't call. It a backlog as much as I wouldn't opportunities and we don't welcome if we're not shipping.
And so it continues to grow and there's an area of of.
I've been proven for us to be had here coming up over the next couple of quarters I said in my prepared remarks, but there's definitely some so something that is a headwind to revenue for the last quarter and also gumming up into Q4 is a bit of a headwind for us as well.
Hi, Jonathan is this.
Something of that it's new for some reason I thought we entered the year about 6 million I thought that would've been exhausted by now are there new ship hold and just maybe a little detail what's going on there.
Yes, there are new ship bolt.
As I said in my prepared remarks, I last couple of quarters, and we've really tried to step up our quality game nadesan, sometimes that you know traps things that otherwise wouldn't have been trap and so we've got we've just been a lot more disciplined about what goes out the door and so I'm here beginning in the last they're beginning to the third quarter.
We found some products, mostly in the new hearing screening hearing not hearing screening and then in the newborn and hearing.
And balanced business that.
We're meeting our quality expectations and so we put on ship hold it was a material amount for the quarter in terms of marginal revenue but.
It was something we felt like we needed to do.
Okay.
Maybe you cannot.
Right.
No I was on.
Can you give us an update on the timing of new products I know, there's a there's a few in the works can you just kind of maybe outline. The next 12 to 18 months in terms of new product flow.
Yeah, So weve, but we expect to release, our new Nicview to camera here towards later year.
That's a several million dollar your product for us we have a number of those cameras on backlog.
My numbers I mean hundreds.
On backlog and then we have a art our retcam.
RP screen device that comes out probably this time next year.
In terms of release and then we've got a new software system, a new software revision for our IGI products that comes out about this time next year as well.
And then on top of that a number of other product line extensions and things like things that extend the life of some of the products. We haven't had new features.
Okay and just lastly from me then I'll jump back in Q.
I didn't hear the.
Mentioned auto scan any update there in terms of business model development partnerships et cetera.
Oh, no update other than what we've already announced that the product continues to get.
Yeah. Good reviews. It Unfortunately as well was on ship hold this quarters on issue with the the lens that that is on the tip of the camera that and keeping that lends in place. So we put on couple for a product for a quality issue.
We expect to get that off as well towards the end of the year here, but probably won't.
Presumed material shipments.
Until Q1.
But the demand for it is still pretty high end.
As we've announced we've established partnerships with some of the major here in new manufacturers and it continues to chug along.
Alright, thank you.
Thank you and again, ladies and gentlemen to ask a question. Please press Star then one now.
And our next question comes from Brian Weinstein from William Blair. Your line is open.
Hey, guys just a couple from me I'm just to piggyback on that last one just on the revenue guidance for the full year. The reduction of I think 4 million at the high end that's related to these new ship holds in newborn care and and hearing imbalances that writers or was there something else.
No that that's it that's definitely a headwind for us, but also just as we progressed to the year, Brian just narrowing the range, where we think we're going to be we're still well within the range that we started with the began the year. We'll just continue to tighten that as we have more visibility and clarity into the quarter.
Okay, and then just a couple that our longer term in nature, but you talked about 4 million dollar benefit from efficiencies with the one need us having been achieved now you said you expect additional benefits beyond 2019, Hi can you comment about.
He.
Any additional detail that you're willing to just to give us just kind of what that what that could potentially look like and do you know when we'll hear about some of those additional benefits.
Well I think they that that $4 million was a cumulative amount that we had anticipated for the year, obviously that.
Is there a run rate to that we achieved sometime in the middle of the year and so just from the the Annualization of that probably goes from four to to aid and beyond going into next year and that's that's versus the stand the starting point the beginning of the year.
We havent really prepared to give guidance beyond the end of this year, so I'm hesitant to to get too far out there, we'll do that in January but suffice to say, we felt really good about achieving the the 15% to 17% long term goal or mid term goal that we put out sorry mid term and we Oh, we'll achieve that run rate.
Q4 of according to guidance and we feel pretty good about being able to layer that in and have that be somewhat of a.
Our goal for 2020.
Just to be sure just saw an incremental 4 million dollar benefit potentially 2020 off of where you guys are in Q3 from from an expense standpoint is that what you're trying to say.
No no I meant for the full year. So we you know the $4 million for one day, that's benefits, we tabulated would be a cumulative for 2019 and I would expect that to be $8 million to $10 million accumulated for 2020, but having said that I'll caution you. We haven't really put together the full guidance plan for 2020, so if it's more than that are less than that.
That would come out in 2020.
Great and then it would come out with the guidance.
Got it and then.
Where are you know I was thinking that kind of like long term growth for kind of your end markets. At this point I mean, where do you see all of these end markets over the next several years as far as what they're able to do.
In terms of growth and I assume that you think that you are a share gainer in most of these markets is that correct.
I would agree with that I think if you look at the markets themselves. The growth rates are in that low single digit range like we did 2% this quarter.
Which historically based on Historics is actually pretty good for Natus I think that's the end market, but I think in a longer term model, Brian there's a demand for new products upgraded products products that are connected and products that have better cyber security in fact, I would say one of the things driving EG right now is cyber security and hospitals needing to be on later versions of.
Software and more cyber secure devices and I think over time, the end markets will will demand more of this technology and to the extent that made it provides that I think we will be a share taker in terms of solutions for what our products do.
Okay No restaurant for me how you guys are paid down the debt you guys are showing some decent cash flow.
So you clearly have you even had capabilities before this but M&A had seemed like it was back on the table you haven't financial capability to do it you're in a better position from a structural organ or an organizational standpoint can you just talked about where you guys are as far as kind of processing through different ideas and opportunities.
Appetite for doing something there thanks.
Yeah sure Thanks, Brent for the questions.
So you know we tried really hard to do this year was really define natus and put together strategic plan that defined the markets, we're going to operate in and why like I said in my prepared remarks, where where do we have a a compelling value to add and the output of that is the central nervous system and century system disorders for for all patients and so I don't.
Maybe the area that we focus our efforts and so within that you've got neuro that there's a squarely in the central nervous system, you've got some aspects of balance that are in the nervous system butter, but are also.
Some aspects that are in periphery or sensory system same with hearing.
Sensory systems and then in newborn care had been in a Nick you newborn care is really about the brain and preserving and protecting the newborn spraying and so that also fits squarely in that central nervous system, but I wouldn't expect us to be interested in those markets.
Expect us to be interested in in markets that or businesses that.
Enable us to connect our devices and enable us to clean data from a those devices and patients and sort of moved up the chain in terms of analysis and research and availability of central nervous system data brain data hearing data, that's where thing.
Alright. Thanks.
Thank you bye.
Thank you and I am showing no further questions from our phone lines I now like to turn the conference back over to Jonathan Kennedy for any closing remarks.
Thank you operator that concludes the program for today's call. Thank you for join US and have a nice day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect everyone have wonderful day.