Q2 2020 Natus Medical Inc Earnings Call

For your patience simply because he has a standby your conference call begin momentarily. Thank you for your patience I'm pleased to viewed by.

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Our results for the second quarter of 2020.

On the call today from native there's Jonathan Kennedy Davis, President and Chief Executive Officer, Andrew Davies, It's like Davis, Executive Vice President and Chief Financial Officer.

So again today with the business overview of the second quarter 2020.

Andrew will discuss the second quarter financial performance.

Finally, we will open the call for questions.

That's good question. Please press the star button.

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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.

Actual results may differ materially for these forward looking statements.

A description of relevant risks and uncertainties, which ends where our business. Please see today's press release and our periodic an airport filed with the FCC.

This presentation the financial results will be on a GAAP and non-GAAP basis.

The non-GAAP results exclude amortization expenses.

Restructurings and certain other changes charges and their related tax effects.

Management believes that the presentation of these non-GAAP measures along with our GAAP financial measures.

Statements provided more thorough analysis of our ongoing financial performance.

You'll find a reconciliation of our financial results on a GAAP versus non-GAAP basis in today's earnings release.

Nice to turn the call over to John Candy, President and Chief Executive Officer of Natus Medical Mr. Kevin.

Thank you Michelle.

Good afternoon, everyone and thank you for joining us today.

During our call today, well discuss our second quarter 2020 financial results as well as our current business environment and how we expect to covert I'd seen pandemic genpact her business over the near term.

Before we get started I'd like to thank our employees partners and customers for their commitment that puts during the past quarter.

Well, we will discuss our current business dynamics, we will not provide.

Interest I'd say at this time as visibility into demand remains just to answer.

The fundamentals of our business remain intact health care providers and patients depending on our products and services everyday and while the demand for our products remained lower than normal during the pandemic response, we remain market leaders and most of our product categories.

We continue to invest in our product portfolio with a number of new and refresh product launches expected within the next several months.

Additionally, we are making progress for their cloud based data management initiatives and believe these investments are critical to maintaining leadership positions over the long term.

Our balance sheet remains strong and despite lower than normal revenue due to the pandemic.

We continue to expect positive cash flow from operations for the full year 2020.

As we discussed last quarter, our investments in inventory havent shirt, our ability to mitigate potential supply chain disruptions and our efforts to quickly reduce cost have reduced our annual operating expenses by approximately $20 million.

And we'll continue to prioritize spending on investments in products and services that are key elements of our strategy for profitable growth any years ahead.

In a few minutes drew will discuss more financial details, but first I'd like to provide some additional commentary on the quarter and each of our end markets.

Today, we reported the results for the second quarter 2020.

Revenue for the quarter was $84.8 million and non-GAAP loss per share was 13 cents.

Overall, our revenue declined 32, like 5% versus the same quarter in the prior year.

As expected we saw significant impact from covert 19 during the second quarter.

Our neural market was impacted by the decline in spending that many hospitals and hearing a balanced revenue declined due to reduced activity in audiologist opposite and retail hearing centers.

Our newborn care business performed well during the quarter revenue, increasing 1% compared to the second quarter last year as Burps continue that expected rates and we benefited from the release of our new direct you to camera video streaming product.

Now, let's look at some more details around the end markets.

Our neural market, which includes our industry, leading neurodiagnostic solutions as well as our neurosurgery and neural critical care products experienced a 39.2% reduction in revenue compared to the same quarter last year.

This decline affected capital purchases as well as demand for supplies almost equally on a percentage basis. However, we did see it pick up that supplies at the end of the second quarter got so far has continued into the third quarter.

Our hearing it balanced products include devices and supplies used by Audiologist hospitals and he is he's to diagnose hearing disorders, assisting the sitting intuniv hearing AIDS and for the diagnosis a balanced disorders.

Revenue from this product family declined 47.6% from the same quarter last year due to reduced activity in our customers hearing centers, while we have seen some increased activity in this market, we remain cautious on us near term outlook.

Natus is market, leading newborn care product family is used by hospitals worldwide.

Major product categories and this family include our newborn hearing screening solutions neonatal I imaging and brain injury monitoring video streaming services and phototherapy solutions.

You work your revenue improved by 1% during the quarter versus the same quarter last year.

We're very pleased with these results as our newborn care business, it's beginning to show success with its revamped portfolio.

Before I turn the call over to drew I want to again, thank all of our employees customers and partners for their commitment and results during these challenging times.

Now I'll turn the call over to Jude Davies, our executive Vice President and Chief Financial Officer for a deeper dive into our financial results true.

Thank you Jonathan.

Jonathan stated, we reported second quarter 2020 revenue $84.8 billion, 32.5% decrease from the same period last year.

Moving decline was driven primarily by the impact of carbon 19, and demand partially offset by growth in our domestic newborn care device sales.

Revenue from our neural end market was $43.5 million or 51% total revenue during the second quarter 2020, compared to 71.6 million or 57% total revenue during the same quarter last year, the 39.2% decrease no revenue resulted from a decline.

Both capital spending for <unk> for no hardware and supply.

Revenue from our newborn care and market increased 1.3% 26.9 million or 32% of total revenue during the second quarter of 2020 compared to 26.6 million were 21% of total revenue during the same quarter last year.

The increase was primarily attributable to the shipment of the backlog of next be devices.

Revenue from our hearing embellish on market was $14.4 million or 17% of total revenue during the second quarter 2020, compared to 27.4 billion or 22% of total revenue during the same quarter last year.

During imbalance revenue was lower than the previous year.

Hi, primarily due to a significant decline in demand from ideologists offices and retail hearing centers related to the coven 19 pandemic.

In total revenues from devices and systems contributed 73% total revenue in the second quarter 2020, compared to 74% in the 2018 period revenues from supplies and services was 27% total revenue in the second quarter compared to 26.

Percentage in the the same period in 2019.

Revenue from domestic sales was approximately 60% of total revenue and 40% from international in the second quarter 2020, compared to 59 and 41% respectively for the same period last year.

On a non-GAAP basis, our gross margin decreased 7.6% in the second quarter, 2020% to 51.5% compared to 59.1% in the second quarter of 2019.

Lower neuro revenue made up approximately 1% decrease.

Your freight costs related to cope in 19, approximately 2% onetime costs at deploying here in screeners to pediatrics, 1.4%.

Lower manufacturing overhead absorption as result of lower revenues made up 1.8% and the other fluctuations in cost of goods sold made up the balance of the decline.

GAAP gross margin decreased 9.1%.

47.8% in second quarter of 2020 compared to 56.9% in the same period last year.

Second quarter non-GAAP operating expenses decreased by $9.9 million compared to the same quarter last year. The decrease in operating expense was driven primarily by cost reductions in travel trade shows.

Employee and certain discretionary expenses offset by an increase in R&D expenses.

R&D higher R&D included spending on remediation and the medical device regulation for Europe, only two of the 15, Seattle remediation products projects remain and are expected to be completed in this quarter.

Our non-GAAP operating margin decreased by 18.2% compared to the same quarter last year, no revenues and gross margin and offset by a decrease the decrease in operating expenses.

Non-GAAP other income was $200000 for the second quarter, driven primarily by exchange rate fluctuations.

Interest expense was $1 million during the quarter, we expect to interest expense during the third quarter of 2020 to be approximately $800000 and so for the full year approximately $92.9 million.

Our second quarter non-GAAP effective tax rate was 19%, we anticipate overall 2020 non-GAAP tax rate to be between 20 and 22%.

On a GAAP basis, our second quarter net loss was $8.9 million or 26 cents per share compared to net income of $3.5 million or 10 cents per share. The same quarter last year non-GAAP net income decreased $50 million compared to the same quarter last year non-GAAP loss per share.

It was 13 cents.

In the second quarter, we recorded $6.9 million depreciation and amortization.

Stock based compensation was $2.4 million during the second quarter.

Now, let's look at highlights from the balance sheet and the statement of cash flow are outstanding debt decreased in the second quarter as we repaid $13 million, we ended the quarter with $85 million in cash and at this time expect to remain cash flow positive for the year.

Cash flow used in operations during the quarter was $7.8 million.

Our days sales outstanding decreased four days versus the same period in the prior year to 72 days driven primarily by the decline in revenues.

Non-GAAP shares outstanding increased 33.8 billion shares.

Compared to 33.7 shares in the same period last year.

As indicated in our earnings press release sick significant amount of uncertainty still exist in our business as result of the Coven 19 pandemic with this in mind the company will not provide detailed guidance at this time.

However, we do expect revenues and margins to improve compared to the second quarter, but remain below historical levels similar to the second quarter, we expect the demand newborn care products and services to be the lease impacted by the pandemic, we believe our neuro and hearing a balanced businesses will show some income.

General improvements in the third quarter, but again remain below the same quarter last year.

In the early part of the second quarter orders of supplies across our businesses had declined significantly.

In the last two weeks of Q2 and continuing into this third quarter, we've seen a pickup in supplies orders. We believe this is a leading indicator of improvement in demand.

In Q2, we took several actions to reduce spending which in which will continue into the third and fourth quarters reductions include minimal travel canceled trade shows reductions in employee expenses discretionary spending and reductions in outside service.

Yes.

The annualized benefit of these actions is in excess of $20 million.

We look forward to providing quarterly and annual guidance when revenue visibility and produce predictability stabilizes in the coming quarters.

And with that we will now open it up for questions.

As a reminder to ask a question you will need to press Star then one on your telephone.

Withdraw your question press the pound Keith.

We have a question from Jason Bedford Raymond James Your line is open.

Hi, good afternoon, and thanks for a thanks for taking the questions I guess I have a few.

I guess just to start with the capital trends.

Are you seeing any difference between kind of lower price and higher priced devices.

Additionally, have you seen any kind of geographic it looked like the U.S. international businesses down pretty similarly, but I'm, just wondering where are you seeing pockets of vivek strength or weakness in certain geographies.

Yeah there.

Jason as Jonathan did there are definitely is different.

Right.

So then maybe this smaller ones and we still ship.

And sold a number of nice deals in the quarter just not at the volume that we didn't let me do for quote for capital and I would definitely points out that Europe as a stronger.

Versus normal versus first of the U.S. as a better market getting sort of recovering faster and China as well as.

Then a little bit better this quarter than what the prior quarter. So if we have to look at just our numbers you'd see better improvement in Europe and Asia over that you asked the U.S. still remains weak, but that is about major market for us.

[laughter] [noise].

And just on the capital side have you seen outright cancellations or do you get the since it these are more deferrals.

Well good question and we ask that question quite frequently.

News from customers this deferral and.

So I think hospital still remaining interest it ends and somewhat committed to developing their capital and the neuro space and to a lesser degree a newborn care and.

And hearing but.

It is deferrals are they talk about now whether that moves from deferral to cancellations, we haven't seen that yet certainly on a wide scale, but that is what we see today.

Okay and your commentary around a pickup in late June July.

That was specifically on the supply side can I assume that you haven't seen a commensurate increase or pick up in can capital.

June early July.

There's more evidence on the supplies than there is on the capital, but the capital has been.

It has been better than it was.

Most of Q2, so I would say you know that in the the the spectrum that supplies as we feel a little bit more leading because it's a little more.

Excellent, but the capital at sort of.

That's helpful I would put in that category, but not so much that we felt confident remarking on it.

Okay not work on the comp.

Okay on the capital side can we make the assumption that June was it was better than me.

Yes.

Okay.

On the neuro side over the little surprise, the thought that business could hold in there a bit better.

You referenced some new products over the next to think you said few months, maybe a few quarters I forget exactly the term you used to can you maybe just talk about the new product pipeline.

And is that a driver for stabilization in the neural side.

No we've been that wasn't the intent to the comment there was really to identify so many opportunities we have the pipeline. They weren't just neuro, we have new retcam device coming out at the end of the year, we have a new here in screener.

Mostly international market hearing screening that comes out but into the year, we have a major right to our no.

Software, which is a neuro.

Oh by the end of the year as well and so thats, what I referred to so kind of a mix across the board.

Question, we've got our Otis can't product that actually did quite well this quarter all things considered we sold another 30 units of voter scan during the quarter.

So there is still good interest there. So I really wanted to kind of pointed out we continue to go full speed ahead with not just product development that product introductions as well.

Okay. That's helpful just on the.

Newborn side I think that was clearly an area of stabilization and strain.

Is there any way you can kind of quantify the impact of the new.

Few video streaming device.

Yes, Hi, Jason it's true, yes, it didnt just under $10 for the quarter. So we and it was it was we called it backlog. It was the product was being released Nick you too and we had we had built up a number of orders overtime and we were able to get those into the market and.

It did really well during the quarter.

And I apologize drew at least on my end or be kind of.

Blanked out there on the from the number was what was the dollar value.

Yeah, I was just under $3 million 3 million okay.

Okay and then.

Terms of.

Capital and use of capital obviously this is a difficult.

Environment.

Are you seeing any opportunities for either tuck in M&A or creative uses.

Cash.

We do we have been up.

Slowly, but surely rebuilding our M&A pipeline and there are number of tuck in technology, we've spoken out so I think.

Yes, the opportunity.

Interested and looking at those things and.

Hopefully find something that fits in the portfolio that can be accretive to future earnings.

And then I appreciate you're not giving guidance, but is there any way you can.

Give us some sense as to when the business can return to show revenue growth.

Yeah, it's tough to predict revenue growth I guess depends on which period you're comparing from you know we did say, we thought Q3 will be better than Q2.

But probably not as high as historical levels was that kind of the range that we put it in I think that's about all we are able to you at this point, it's just tough to now because we are dependent at the margin on this hardware sales for multi turnaround.

Okay.

That's that's it for me guys I'll, let someone else asked if there any.

Thanks, Jason Thank you Jason.

There are no further questions like to turn call back over to name is.

Okay. Thank you so much.

We are doing our best to keep the people that make need us work safe and productive.

Dynamic and dedicated global organization, driven by the needs of our patients and our business is fully operational and most importantly, we have the commitment and financial strength to support our customers and succeed during this challenging environment. Thank you for joining us on today's call and have a good day.

Ladies and gentlemen. This concludes today's call you may now disconnect everyone have a great day.

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