Q4 2019 Earnings Call
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Call today from Needham.
It's Jonathan Kennedy Natus is president and Chief Executive Officer, Intrude babies, Neatest, as executive Vice President and Chief Financial Officer.
Jonathan will begin today with a business overview on the fourth quarter 2019.
Then who will discuss the fourth quarter financial performance and provide guidance for the first.
Order in full year 2020.
Finally, we will open the call for your questions to ask a question. Please press the star buttons, followed by a one on your Touchtone phone.
Today's call will include forward looking statements within the meaning of the private Securities Litigation Reform Act.
These statements include management's beliefs.
And expectations about future results.
Our actual results may differ materially from these forward looking statement.
For a description of relevant risks and uncertainties pertaining to our business. Please see today's press release and our periodic an annual reports filed with the FCC.
Management's presentation of the.
Financial results will be on a GAAP and non-GAAP basis.
The non-GAAP results exclude amortization expense restructurings and certain other charges and the related tax effects.
Management believes that the presentation of these non-GAAP measures along with our GAAP financial statements provided.
Vida more thorough analyst <unk> ongoing financial performance.
You can find a reconciliation of our financial results on a GAAP versus non-GAAP basis in todays earnings release.
I would now like to turn the call over to Jonathan Kennedy, President and Chief Executive Officer of Native Medical Mr. Kennedy.
Thank you operator.
Good afternoon, everybody today, we reported their results for our fourth quarter full year 2019.
Revenue for the quarter was $131.8 million a non-GAAP earnings per share was 46 cents.
Revenue for the full year was $495.5 million.
Non-GAAP earnings per share was $1.24.
Both the quarter and the full year were in line with our previous expectation.
Maybe just the global leader in neuro diagnostic equipment solutions. Our solutions are used by the majority of hospitals and neurologist worldwide.
We have the most comprehensive lined up neurodiagnostic.
Equipment offered by any global manufacturer today offering a full line of EG Mg and P.S.G. sleep solutions.
During the fourth quarter, we continue to see strong growth across our neural product family.
Overall, our neuro business grew by 15% year over year during the fourth quarter and grew 8% for the full.
Full year versus 2018 after adjusting for the divestiture of GE Andy.
The strength in neuro ready for the quarter and full year was driven primarily by the domestic sales of EG equipment, where cyber security concerns new features and Windows 10 upgrades led demand for a robust upgrade environment.
We believe that we're in the final phase of this upgrade cycle and expect greatly E G to level off during 2020 [laughter].
Our PSG or sleep diagnostic hardware business also had strong growth during the quarter and the full year as we continue to me the market leader and high end diagnostic sleep labs.
Neurosurgery.
Real critical care grew modestly during the quarter as new investments in our sales efforts are beginning to result in additional revenue. However, the product group was down slightly for the full year.
Sales of Mg hardware were down slightly during the quarter and relatively flat for the year.
Hi. This is also a global leader in hearing a balanced.
Agnostics are hearing and balance products are composed of devices.
Supplies use by Audiologist hospitals any into used to diagnose hearing disorders.
Just in the sitting in Tunisia of hearing AIDS and for the diagnosis a balanced disorders.
This product group includes are well known Otometrics Madsen Oracle a biologic brands.
After adjusting for discontinued products revenue from our here in a balanced product family declined 25% from the fourth quarter last year, an 8% for the full year due mostly to the timing of quality related ship hold on certain products, we expect to resumed shipments during 2020.
Hey, this is market leading newborn care.
Your product family is used by hospitals worldwide.
Major product categories, and this family suit, our newborn hearing screening solutions.
Neonatal I imaging and brain injury monitoring video streaming services and phototherapy solutions.
You weren't care revenue declined 8% after adjusting for.
Jersey and discontinued products during the fourth quarter versus the same quarter last year and declined 6% for the full year 2019 versus 2018.
The timing of certain quality related ship hold also impacted newborn care revenue and we expect to resume the shipments as well during 2020.
Next I'd like.
The update you on the progress of the one day. This restructuring project, we announced last January.
During the year, we completed all the organization restructuring that we expected, reducing our head count by 32% in total and 8% after adjusting for reductions related to divestitures.
We also completed a comprehensive strategic plan focusing the company.
On the central nervous system and century system for patients have all ages.
And following our strategic plan and financial goals.
We divested or exited multiple noncore and local <unk> products and businesses.
While these divestitures reduced revenue our margins and cash flow have increased significantly.
On the operations front, we consolidate our distribution centers from 12 to just to reducing our inventory simplifying operations and increasing customer responsiveness we.
We consolidated 10 manufacturing centers into seven and are executing further consolidation plans that will bring that count before by the end of 2020 further enhanced margins and.
Simplifying our supply chain.
The completion of our one day. This project has now been able to us to focus on growing our business.
Before I turn the call over to drill I want to address how we believed <unk> wrote a virus outbreak will affect needed.
So far we've seen some negative impacts a native somewhat lower than normal sales activity.
And some indications of supply disruption both related to restrict your travel within China post the lunar new year holidays.
Well, we hope this outbreak runs its course quickly we're obviously uncertain as to how long will last drew will discuss in more detail about how we factored this into our Q1 guidance.
In summary, we're very pleased the progress and performance of the business in 2019.
And the outlook for 2020.
We hope several leading positions in each of our end markets and look to expand out leadership as we grow our business.
At the same time, we'll continue to focus on our strategic plans for growth cash flow and profitability with the goal of expanding our annual non-GAAP operating margins to our target range of 15% to 17%.
Now I'll turn the call or did you Davies, our executive Vice President and Chief Financial Officer for a deeper dive into our financial results drew.
Thank you Jonathan.
As John stated, we reported fourth quarter 2019 revenue of $131.8 million, a 6.6% decrease from the same period last year.
Revenue decline was driven primarily by the divestitures and other end of cell products previously announced offset by growth in our neural market.
Revenue for neuro end market was $80.9 million were 61% of total revenue during the fourth quarter of 2019 compared to 73.7 million.
I mean were 52% of total revenue during the same quarter last year, the 9.8% increase in neuro revenue is attributable to growth in the E G and P.S.G. sleep study and neurosurgery product lines.
Revenue from our newborn care and market decreased 21.
Were sent to $27.8 million or 21% of total revenue during the fourth quarter of 2019 compared to $35.2 million were 25% of total revenue during the same quarter last year. The decline was primarily attributable to the divestiture of.
Metrics and the end of sale of neuro come balance products offset by growth in our neonatal brain monitor twox revenue from our hearing imbalance and market was $23.1 million or 18% of total revenue during the fourth quarter of 2019 compared to.
30.
$2.2 million were 23% of total revenue doing during the same quarter last year.
Hearing imbalance revenue was lower than the previous year as anticipated due to end of cell products and products on the whole pending international product registrations.
In total revenue from devices and systems.
Approximately 76% of total revenue in the fourth quarter of 2019 compared to 774% into 2018 period.
Revenue from supplies and services was 24% of total revenue in the fourth quarter of 2019 compared to 26%.
In the 2018 period.
Revenue from domestic sales was approximately 60% of total revenue and 40% from international for the fourth quarter of 2019 compared to 56% domestic and 44% international for the same period in 2018.
On a non-GAAP basis, our gross margin increased by 390 basis points in the fourth quarter, 2019% to 62.1% compared to 58.2% in the fourth quarter of 2018. This increase was driven by strength in sales of neuro products lower operations.
Overhead and the exit of lower margin businesses GAAP gross margin increased 440 basis points to 61.3% in the fourth quarter of two net 2019 compared to 56.9% in the same period last year.
Fourth quarter non-GAAP operating expenses increased.
Crease by $600000 compared to the same quarter last year. The increase in operating expense was driven primarily by an increase in R&D expenses related to remediation in preparation for the medical device regulations in Europe, offset by cost reduction initiatives, including the impact of removing.
The operating expenses from divested businesses, our non-GAAP operating margin increased to 15.3% compared to 14.9% from the same quarter last year Unbilled revenues as a result of the increase in gross margin.
Non-GAAP other income was 100000.
$1 for the fourth quarter, driven by exchange rate fluctuations interest expense was $900000. During the quarter. We expect interest expense during the first quarter of 2020 to be approximately $600000 and full year 2020 to be approximately $2 million.
Fourth quarter non-GAAP effective tax rate was 20.3%, we anticipate our overall 2020 non-GAAP tax rate to be between 23% and 25%.
On a gap.
Basis fourth quarter 2019, net income was $3.2 million.
Or 10 cents per share compared to a net loss of $11.6 million. The same quarter last year non-GAAP net income increased $900000 compared to the same quarter last year non-GAAP earnings per diluted share was 46 cents.
In the fourth quarter, we we recorded.
$7.3 million of depreciation and amortization expense.
Share based compensation was $2 million during the fourth quarter.
Let's look at some highlights from the balance sheet and statement of cash flow.
We repaid $50 million of outstanding debt in the fourth quarter of 2019, and a total of 50 million.
In dollars for the full year as a result, we ended the quarter with net cash for the first time since fourth quarter of 2016.
Cash flow from operations was $12.7 million during the quarter. Our day sales outstanding decreased two days versus the same period the same period the prior year to.
85 days, driven primarily by increase collections, our total inventory declined by $8.5 million compared to the previous quarter.
Non-GAAP diluted shares outstanding increased to 33.8 million shares compared to 33.5 million shares in the same period last year.
Turning to guidance, we expect our revenues for the first quarter of 2020, TB between 113 million and $117 million.
GAAP net income is expected to be in the range of 2 million to $3.9 million for the first quarter of 2020 were six to 12 cents per share.
Non-GAAP net income is expected to be in the range of $16.6 million or $18.6 million or 19 to 25 cents per diluted share.
Q1 revenue and earnings guidance does not include the possible impact for the Corona virus in China or sales.
China ranged from 5% to 7% of total sales and a portion of our supply chain originates in China.
We will provide further updates to guidance during the quarter, if and when we believe revenue and earnings are anticipated to be negatively impacted by the health issues.
For the full year.
<unk> of 2020, we expect revenue to be between 480 million and $490 million.
Full year non-GAAP earnings per diluted share the dollar 45 to $1.55.
We also expect full year GAAP profit per diluted share of 89 cents to 99.
That's.
Expected non-GAAP earnings exclude $18 million of amortization intangibles, and $1 million to $2 million of restructuring and other charges.
Well, while our full year revenue guidance adjusted for divestitures is relatively flat or full your earnings per share guidance.
At the midpoint represents a 21% increase in earnings compared to 2019.
And with that I will now open the call for questions.
Thank you as a reminder to ask a question you want me to press Star one on your telephone to withdraw your question. Please pass.
<unk>. Please stand by while we compiled the Q and a roster.
We do have a question from Jason Bedford with Raymond James.
Good afternoon Ive a few questions. If you don't mind just for clarity.
Drew your.
First quarter guidance does not include.
And any impact from Corona buys did I hear that correctly.
Yeah, that's right look kinda, we will monitor it you know it it's China is about you know by 7% of sales approximately and will kind of watch it during the quarter. We've already had you know.
Sales in the quarter. So you know it's a it's certainly isn't going to be impacted by the full amount, but we'll keep watching in here and obviously the supply chain as with a with most companies that with electronic components.
There is a supply chain impact with China, but we've got.
You know we've got a lot of inventory on hand, a probably in most cases, we've got already got the inventory for Q1.
So we're we're just monitoring right now and if it looks like there'll be a significant impact during the quarter. We'll we'll we'll come out in the give everyone an update on that.
Okay. Okay.
Actions on 2020.
Gee was was the big driver for the business in 19, I think you mentioned on the call that GE will level off to some extent in 2020 can you just talk about what gets better and to the extent that you can give us some direction.
On segment growth rate expectations, and 2020 that would be helpful.
Yeah, It isn't as Jonathan.
Yeah, clearly we had a really strong year last couple of years have been fairly good EG like I said in my call really driven by cyber security Windows 10, and that sort of thing on these devices.
This is connected to hospital networks.
So that you know that really was a positive force as you're on the negative side of the pointed out my prepared remarks, but newborn care imbalance and here in the balance or were negative growth in most of the negativity on the growth there growth was driven by our our quality related ship holds.
We've talked a bit.
You know for the last year about the ship multi pad and.
How we expect us to come off so I would expect job growth rates in the neuro space to be in the you know in the flattish range, because we're coming off of such a good good year 19, I'd expect a hearing imbalance and newborn care to be in the more modest range because well have.
Coming back from the market that have.
Year to date been off for the last several months that should drive growth for that reason.
So in terms of rates I think our guidance has the overall company rate around 1%.
Can do the math if narrow is flat.
You know then then we need to see the of the.
The two kind of coming up.
Okay.
In terms of visibility.
These products off ship hold what's the timing, but we're looking out for 2020.
Yeah. So it kind of if the obviously varies by product, but we've got.
In newborn care, we've we've had Neal blue and we've got a new nicview product that we thought would be on the market that that will yeah, it'll it'll take over the sales of the existing nicview product and those are expected to be out in Q1 and so.
We should have them for the majority of the year on the hearing imbalance side. We've had our older scanned product has been out of the market and that's expected to be back on the market. This this quarter is well more towards the ended the quarter and 'em, we should see that I'm going back.
Ramping for the rest of the year, we had another fitting product called charter EPA that was out and that is expected a it's partially back in the market, but the it'll be fully back in the market in Europe at the end of or end of Q1 in Q2. So we're getting we're getting several.
These back on the market kind of in late it late Q1, and we shouldn't should have the benefit for them for most of the year.
Okay. That's helpful. Maybe just shifting over to.
The rest of the piano here gross margin expectation in 2020.
Yeah. We've you know we had a nice increase here in the gross margin. The last couple of quarters and really we're seeing the full benefit from the one natus and the consolidations that we've had and I'm also the full benefit of some of the divestitures that we've taken.
Okay, and you know we expect that you know to still have that benefit.
Throughout the year and see our gross margins you know in that you know that range being north of 64 2020, I mean, we finished this year.
Your north of 60 on a on a non-GAAP basis for the full year, but should be between 61 and 63 for for 2020.
Oh, okay. Okay.
R&D looked like it was a it's certainly stepped up in the fourth quarter.
Is that what we should expect into 2020 and I haven't done all the math, but what is the implied operating margin in 2020.
So were you know, we're trying to get to that that target of being 15% for 2020 D.
20, we 15% to 17% I think you know as we've been talking most recently, we've said that we're probably going to be closer to the lower into that range and and really that's driven by a really putting our foot on the gas to get a these remediations complete we've made a lot of.
Yes, we got over half of Ah the sat Seattle Remediations done in 2019, we have a few more and we want to get those done by approximately mid year or or in the third quarter and then we've got some spending on the medical device regulations in Europe and that's.
Ben that's that's driven some additional R&D spending.
And then as as we get over we get we get those finished we should see some some R&D improvements as as we move along through the year, but were you know the other thing we've said is it.
The reason, we're staying at the lower end of the the.
Operating target range is we have been.
We've been focusing on.
Investing in some of the existing products that we had and putting R&D in bringing out refreshed products and in our existing lines.
And so that that's keeping us more close closer to the lower end of the range.
Okay.
Just one for me, Jonathan maybe just bigger picture.
You've you've done a lot you've accomplished a lot here in the certainly on the cost side streamlining the portfolio.
With one native.
Outside of the manufacturing the for manufacturing consolidation that you will accomplish this year, what's left and kind of where do your priorities focused now.
Yeah, I mean, the the one day this initiatives are largely done or set in motion such that.
You know their.
You know objectives.
Over simplified it I'm sure, but that from a big picture that's true so where we're focused today is growing the business as I mentioned in my prepared remarks. We've created this is strategic plan that you know ties the products together, we will be working on yeah. The connectedness.
First of all of our products to the you know to the cloud and managing the the data flow products I think that's the only natural place for a portfolio like ours to go from a technology perspective.
We for the last couple of years, we focused on you know really remediation and cleaning up the product portfolio from a from a.
You know technical perspective, we're very close to having that completed will be mostly through that this year and we've turned our attention to this strategic plan of of really trying to figure out what to do to modernize the portfolio to drive growth. One thing you'll note when we released new products in our in our respective niches.
The revenue goes up and that's because the products are quite old in many cases, where there's new technology that they just haven't jumped onto so we see a huge opportunity in modernizing the product portfolio in connecting it to the cloud and being able to do things like remote management or do things like data management or move data.
And information within a health records systems, and the like and so as we go over the next two to three years, you'll see more and more that we already do that today with our oldest scan we already deal with Nicview and our neo metrics data management system is already all connected and and sharing.
Data and streaming to the cloud so we aim to put the rest of the portfolio onto a similar systems. So that you know health care providers will have a more modern set of devices will have less R&D as the portfolio towards <unk> turns more into a software product and lots of hardware and so that's where we focus internally and then externally it's adding.
That portfolio with some of the unique technology that we see out there whether that's through acquisitions worked through you know hiring of teams of people that can help us go there, but that's what the strategy is telling us to do and that's what we tend to pursue.
Perfect. Thanks, Jonathan.
Thanks, Jason.
Thank you. Thank you I'm showing no further questions.
Questions in the queue at this time I will now turn the call back over to management for any further remarks.
Thank you operator.
We communicated in January last year that we would restructure need us where they focus on cash flow profitability and a focus on our core capabilities.
I'm happy to report that we've achieved those objectives for 2019.
Team and I was our guidance implies we expect to achieve further expansion of margins throughout 2020.
At the midpoint of our guidance, we expect to increase our annual non-GAAP earnings per share by over 20%.
And finally I'd like to thank all of our employees for their outstanding efforts and achievements throughout 2019.
The Natus team successfully executed a significant restructuring and continue to serve our customers every day throughout the year.
We truly have one of the best teams in the industry.
Thank you operator that concludes our program for today's call and thank you for joining us and have a nice day.
Ladies and gentlemen, this concludes today's conference call.
Thank you for your participation you may now disconnect.
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