Q3 2020 Natus Medical Inc Earnings Call
For.
Our <unk> review of our results for the third quarter of 2020.
On the call today from native.
It's Jonathan can Kennedy Nate Nate this is present.
Incident, and Chief Executive Officer, Andrew Davies, Nadesan Executive Vice President and Chief Financial Officer, Jonathan will begin with a business overview of the third quarter 2020, then drew will discuss the third quarter financial results performance. Finally, we will open the call for your questions.
I want to ask a question. Please press the star button, followed by one on your Touchtone telephone todays call will include forward looking statements within the meaning meaning of the private Securities Litigation Reform Act. These statements include management's beliefs and expectations.
[laughter] about our future results are actually <unk> results may differ.
Differ materially from these forward looking statements for description of relevant risks and uncertainties pertaining to our business. Please see today's press release, and our periodic and annual reports filed with the S. E. C. 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 their related tax effect.
Management believes that the presentation of these non-GAAP measures along with our GAAP financial statements provide a more thorough analysis of our 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.
I'll turn the call over to Mr., Jonathan Kennedy, President and Chief Executive Officer of Natus Medical Mr. Kennedy.
Thank you Corey good afternoon, everyone and thank you for joining us [laughter] during our call today, we will discuss our third quarter 2020 financial results as well as our current business environment before we get started I'd like to thank our employees partners and customers for their commitment and accomplishments during the past quarter.
Today, we reported the results for the third quarter 2020 revenue for the quarter was one of the 2.8 million and non-GAAP earnings per share was nine cents.
Overall, our revenue declined 17% versus the same quarter in the prior year.
Our revenue improved 21% sequentially from the second quarter of 2020.
Disruptions from Cobot continued to negatively weigh in on our results versus the same quarter in 2019.
Our neuro market led the recovery with neuro capital sales increasing sequentially.
Revenue from hearing and balance products also increased sequentially from the second quarter of 2020 as that market begins to recover.
Our newborn care business performed within our expected range during the quarter and once again has not experienced a significant other clos have a decline due to the pandemic [noise].
As we highlighted in our previous calls the fundamentals of our business remain intact.
Health care providers and patients depend on our products and services every day and while the demand for our products remains lower than normal right. Now we remain the market leader in most of our product categories, and we expect our business to fully recovered to normal levels as our customers and patients navigate their health care needs during the pandemic and eventually return to a more.
Our sustainable activity level post pandemic.
We continue to invest across our product portfolio with a number of new and refreshed product launches expected like our new retinal imaging system neuro diagnostic software solutions and a new handheld infant hearing screeners all expected within the next few months.
In addition, we continue to make progress with our cloud based initiatives and believe these investments are critical to maintaining leadership positions over the many years ahead.
Our balance sheet remains strong as we ended the quarter and I net cash position despite.
Despite the pandemic negative impact to revenue and margins, we generated $7.5 million in cash flow from operations during the quarter, resulting in a year to date positive cash flow of $17.2 million.
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.
Our neuro market includes our industry, leading neuro diagnostic solutions as well as our neurosurgery and neuro critical care products well no revenue remains below last year's level. It grew sequentially from the second quarter 2020 by 35%.
Revenue from neuro supplies rebounded even faster than equipment sales during the quarter, but both still lag 2019.
We take the accelerated supplies consumption as an indicator that neurology patients are returning to hospitals for necessary care.
Customers continue to be engaged in capital purchase planning and we believe that we're positioned very well to capture market share as the market recovers.
Our hearing and balance products include devices and supplies used by Audiologists hospitals and E. N T to diagnose hearing disorders, assisting the fitting and tuning in pure in age and for the diagnosis of balance disorders.
Sequentially from Q2, 2020 revenue from our hearing a balanced business rebounded by 27.9% during the third quarter, giving us an indication of improved activity in this market.
However, here in a balanced revenue remains below the same quarter last year as the pandemic continues to affect activity and our customers here in centers.
Natus is market, leading newborn care product family is used by hospitals worldwide.
Major products in this family include our newborn hearing screening solutions neonatal i. imaging and brain injury monitoring video streaming services and phototherapy solutions.
You weren't care revenue decreased by 4.8% during the quarter versus the same quarter last year, driven by lower equipment sales.
Now I'll turn the call over to drew Davies, our executive Vice President and Chief Financial Officer for a deeper dive into our financial results.
Thank you Jonathan.
Jonathan stated, we reported third quarter 2020 revenue of $102.8 million, a 21.3% increase from the second quarter as our business began to recover from the impact of Cove in 19.
Sequential quarterly revenue increase was attributable to both device and supply sales, which improved by 21% and 26% respectively year over year revenue was down 17% from the same period last year.
Revenue from our neuro end market was $58.7 million or 57% of total revenue during the third quarter of 2020 compared to 72.2 million were 58% of total revenue during the same quarter last year.
The 18.6% decrease in neuro revenue resulted from <unk>.
Slowing demand attributed to the impact of the COVID-19 pandemic revenue from our newborn care end market decreased 4.8% to $25.7 million or 25% of total revenue during the third quarter of 2020 compared to $27 million.
Were 22% of total revenue during the same quarter last year. The decrease was primarily attributable to the exit from our POLATOM business in 2019 revs.
Revenue from our hearing and balance end market was $18.4 million or 18% of total revenue during the third quarter of 2020 compared to $24.3 million or 20% of total revenue during the same quarter last year.
The hearing and balance revenue was lower than the previous year, primarily due to the decline in demand from Audiologists offices, and retail hearing centers related to kill the 19.
In total revenue from devices and systems contributed 73% of total revenue in the third quarter of 2020 compared to 74% in the 2019 period revenue from supplies and services was 27% of total revenue in the third quarter compared to 26% in the two.
2019 period.
Revenue from domestic sales was approximately 62% of total revenue and 38% from international in the third quarter compared to 60% and 40% respectively from the same period last year.
On a non-GAAP basis, our gross margin decreased 5.3% in the third quarter, 2020% to 56.2% compared to 61.5% in the third quarter of 2019.
1.5% of the decline in gross margin was attributable to higher freight costs associated with Cove in 19 do.
2% was attributable to a lower mix of neural revenue, 1.3% lower manufacturing overhead absorption and one time cost of deploying hearing screeners to pediatrics and other fluctuations in cost of goods sold made up the balance of the decline.
Gross margin decreased 13.2% to 46.2%.
In the third quarter of 2020 compared to 59.4% in the same period last year. The decline in GAAP gross margin was also impacted by noncash write down of intangibles for discontinued product of $6.4 million or 6.2% of gross margin.
Third quarter non-GAAP operating expenses decreased by $6.1 million compared to the same quarter last year. The decrease in operating expense was driven primarily by cost reductions and travel trade shows.
Employee and certain discretionary expenses offset by an increase in R&D expenses higher R&D included spending on remediation and the medical device regulation for Europe.
In September we completed the final Seattle product remediation. This.
This will free up spending for new products and reduce operating expenses going forward or.
Our non-GAAP operating in March margin decreased by 9.1% compared to compared to the same quarter last year on the lower revenues and gross margin and that was offset by the decreased operating expenses.
Our <unk> our other expense was $200000 for the third quarter driven by exchange rate fluctuations <unk> interest expense was $1.1 million during the quarter and we expect interest expense during the fourth quarter of 2020 to be approximately $700000 in full for the full year.
Were approximately $3.1 million.
Our third quarter non-GAAP effective tax rate was 14%.
The tax rate was lower due to discrete tax adjustments made during the quarter related to prior periods.
We anticipate our Q4 non-GAAP tax rate to be between 20 and 23%.
Net income on a GAAP basis, our third quarter 2020, net loss was $9.3 million or 28 cents per share compared to net income of $8.2 million the same quarter last year non-GAAP net income.
Reached $8.7 million compared to the same quarter last year non-GAAP earnings per share was nine cents.
In the third quarter, we recorded $14 million of depreciation and amortization expense, which included $6.7 million for impairment of intangibles.
Share based compensation was $2.3 million during the third quarter.
And now let's take a look at some highlights from the balance sheet in the statement of cash flows.
Our outstanding debt decreased in the third quarter, as we repaid $20 million.
We ended the quarter with $75 million in cash and $66 million in debt, we expect to be free cash flow positive again in the fourth quarter.
Cash flow provided by operations was $7.5 million our day sales outstanding decreased seven days versus the same period in the prior year to 72 days not.
Non-GAAP shares outstanding increased to 33.8 million shares compared to 33.7 million shares in the same period last year.
Now turning to guidance.
As indicated in our earnings press release, we expect our business to continue to recover in the fourth quarter demand for both our devices and supplies is increasing and our customers' activity and hospital procedures related to our business it appear to be steadily improving.
With this in mind, we expect our revenues for the fourth quarter of 2020 to be between 104 million and 114 million.
GAAP net income is expected to be in the range of $2.3 million to $6.3 million for the fourth quarter.
Or seven to 19 cents per share non-GAAP net income is expected to be in the range of 6.6 million to $10.5 million or 19 to 31 cents per share.
The guidance for the fourth quarter assumes a steady but gradual increase in our business and does not consider the potential of the significant COVID-19 resurgence and its possible impact on any.
On.
If any on our on the economy or our customers.
And with that I will now open it up for questions.
Again, if youd like to ask a question. Please press Star then the number one on your telephone keypad you do have a question from Jason Bedford.
Oh from Raymond James.
Jason Your line is open.
Hi, Good afternoon can you hear me okay.
Yeah, Hey, Jason Hi, Jim.
Hey, So I guess a few questions for me.
As we look at the quarter and specifically capital can you just give us any kind of discernible trends from a customer perspective, meaning or is it is.
Are they more receptive in any of the three segments are there any geographic trends within capital purchases or even geography, I'm just kind of wondering.
You know where the relative strength is in capital and where is that relative weakness.
Sure, It's Jonathan Hi, Jason.
Jason so relative strength in.
The high end neuro capital U.S. has been yes.
Probably the most positive capital side of the three three product families.
Outside the U.S.
We it's come up but not as quickly and you know our our level of.
What's the word our level of you know just question is you know.
Well as Europe starts to go through.
Increased koby cases, and us lock down here and there are concerned there is perhaps it stays kind of where it is and doesn't continue to grow that's all in <unk>, It's all encapsulated in our guidance, but it.
It is something that we still have a little question Mark on but the U.S. neuro has been stronger.
Newborn care been flat more or less across the board all regions we.
We had a DC remember from last quarter, we shipped a backlog of Nick you cameras, and so that kind of came out this versus last quarter and then versus last year, we had a pretty good capital quarter Q3 last year and that didn't repeat tore down a little bit in Europe newborn care, we don't see the mega trends.
They are a little bit down on supplies, the probably tracks birth rates coming down.
As you probably see elsewhere, and then in hearing and balance.
Capital most of that business is a bigger business for us in Europe to begin with and earlier in the quarter that started to rebound pretty good continues to strengthen but again, our you know our intent or up on making sure that that business.
Rises and we probably sort of the rise rate flattens, a little bit going into the winter months here with what the rise in Cove, it and locked on what we've seen anecdotally with hospitals is that they are operating as normal.
As they can be in other words it doesn't it doesn't appear to be a repeat of Q2, where they were really focused on covered response, an overflow. They are now able to operate the rest of their business at the same time and that's a good sign for us and we see that in our supplies as I said in my prepared remarks.
The supplies business has been rebounding faster and neuro, but that's actually true in here in a balance as well, though it's just a smaller until the small business to begin with but that increasing supplies business leads us to believe that normalcy.
It is you know is returning although definitely not returned.
Right and just on neuro.
So a little surprised that down 19% year over year, maybe that's a tough call, but any idea if you give us if supplies as a true gauge of procedures.
What were supplies in neuro just to give us a little little context down 19 quarter.
No I think supplies were down low double digits, I want to say 11, or 12% versus last year and neuro supplies of loan that equates to probably $3 million ish I'm just trying to think of them whether its numbers were about 3 million bucks versus last year.
In comps and I would say that.
Normally we don't have a difficult comp on the supply side, you just don't have that sort of volatility and less theres pandemic on the hardware side, we do have a pretty strong comp to compete with last year was a really good year for us in Europe your call and so it's tough to.
Tough to say, hey that would've continued although.
There were still quite a bit upgrading to do with Windows 10, and we had been optimistic going into 2020, but.
That is the bigger pieces the hardware, but I will tell you that as I said in my prepared remarks customers are still very engaged we.
We have a number of deals weve closed in the quarter in a number of deals that are continuing to be worked in a in a diligent fashion that our large deals for us and a large deals you know for US as you know five 600000 up to two or $3 million for a given deal and those deals continue to to evolve and hospitals have.
You know maintained their activity with us on us.
Okay. Thank.
And I guess just looking at the implied.
Slide growth fourth quarter guidance, it seems like the year over year growth down 17 ish is similar in the fourth quarter to third quarter and it seems like you're building a backlog so.
Is there some.
In the guidance are you factoring in some hesitation around cobras flare ups I'm, just wondering why you wouldn't see a little bit more progress into the fourth quarter.
Well, we you know we wanted to give some guidance one month into the quarter. We only we really only have to predict the next two months and so we have a pretty good view to where the guidance is.
But we also see what you see in terms of covert flare ups and just uncertainty in the world but.
So we put out numbers that we felt.
You know represented realistically what we see based on our sales calls based on the roll up internally with universally know filter on it and it's even if we achieve the guidance Q4 still substantially lower than we would normally see in a quarter. So I think there's already that they again, but it's what we see you know transparently transparently, what we see.
In the market as we sit here today, we didnt want to continue to go no guidance because the truth of the matter is as we've actually.
We have a pretty good line of sight for the next 60 days, which includes a holiday period right. So in the in the Grand scheme of things, you're predicting maybe six or eight weeks.
Total of business.
Right Okay. Okay.
The new products that you announced over the next or you are going to roll out over the next few months, we would product will have the biggest impact on the business in your view.
Well I think they're all very important depend on which customer you ask I think from a financial perspective.
The new the rollout of our new Retcam, which we've been talking about for a little while now probably represents the biggest opportunity from a steep right that the retcam. That's out there today is a market leader, but it's been in the field for quite some time and I think there's an opportunity to for a replacement market. But then also to drive customers, who maybe using the manual monocular method.
To upgrade to a digital imaging system, and so thats pretty exciting art are upgrades to our neuro software is a major upgrade that I think customers will really enjoy and all that is just a bigger business in total.
It probably represents something that grows more slowly than the release of a brand new retcam, because that's a kind of a software upgrade and then a hearing screener. This is a a handheld one where we also are working on it.
A bigger platform for hearing screeners, but this one that will launch here in the next.
Couple of months or so represents one of our new handheld hearing screener that we haven't had for a long time and there is quite a bit of pent up demand for such a device that will have some new features that will be important to our hearing screen customers. All three are important Jason they all they all tied together to our strategy of data collection and modern.
Modern operability and and you know.
Products that are our feature rich that that improve our customers' workflow.
Yeah, I didn't mean to.
Ask you to pick your favorite child there.
[laughter] well depends on.
You know I think it matters, he who the customer is and.
I love them all.
Yeah direct Kim will be the biggest one and not and that we'll be happy for.
Okay, and I guess, just maybe last one for me just given your market position.
Yes. The business is has historically benefited from some pricing power and as you think of a new products coming out is is price a little harder to take in this environment.
Well.
I would say pricing is always subject to negotiation for like Gpos of course, that's a price sensitive aspect to the market we.
We try not to be.
Opportunistic when it comes to pricing we look at what are we offering for value and when we offer new products, we try to get the price on that in some cases, you can get price in certain markets, where you just clearly have a better device. So I would say that that the pricing environment is probably unchanged versus normal times, even though.
The there's a pandemic and our cost on a volume basis go up because we have lower volume.
Okay.
Okay. That's great I appreciate the time guys.
Yeah, Thanks, Jason Thanks, Jason.
Your next question comes from the line of Michael Vermin from Newland capital.
I call. Your line is open.
Hi, guys how are you doing.
Good Mike how are you excellent nice to see the progress here.
Two quick ones so.
As we progress through the fourth quarter here in the next year I.
I know this is a hard thing to say, we get back to normal in your opinion is.
Is there a point where.
If you go to the hospital, they got to get the hearing and.
Second quarter so.
We are going.
Back to normal if you had to take the best guess.
Hey, Michael Jonathan.
It's impossible to know I mean, here's here's how I would make that analysis.
The products that we sell are not optional products ready of hearing issues you need to see you're hearing specialist and that specialist needs to use our devices. So.
That business.
You know is dependent on the hearing specialists feeling comfortable to buy new capital.
And the same thing for neuro and the same thing for for our newborn care. When it comes back to normal I think really equals when patients, especially the older patients feel really comfortable going back out into the market.
Physically going out and doing normal life, but I would say that there is a lot of pressure on you know patients to get things done. So if you've got epilepsy, you you can't wait.
To get your EG, if you've got hearing issues, you'll need your hearing AIDS tuned or batteries are placed or new hearing aid et cetera. So I think that there's a natural desire for our customers and their patients to get back to normal maybe more than just desire, but I need one.
When does that happen, it's really hard to tell and I hate to give you a non answer here, but we just don't know I believe you know that that it's probably.
You know in the foreseeable.
Coming quarters, but I don't know enough about.
This resurgence will will there be a resurgence in somehow that.
Causes.
Hospitals to go back into sort of a conservation mode or.
And then just deal with it now they learn how to do it and it really doesn't impact the vast majority hospitals I think thats the the other alternative that.
Would probably support a faster recovery.
<unk>.
That's helpful and then yeah that is helpful.
Hopefully within the next few quarters so something.
Balance sheet, you've done a great job through this with the balance sheet net cash now.
Our stock is down.
Pretty much 50% from where it was trading over the past five years.
When do we look at the point of this.
This is an opportunity every probably won't have for a long to start.
Buying some stock here I'm.
I'm not so sure what else do you do with the cash versus looking at.
We've been cut in half and and now we're on the mend and next quarter is looking a lot better and probably 2021 looking a lot better we'll probably never have another shot.
At these levels is where you say, okay, let's let's think about going in there buying stock at 50% off.
Yeah, I can't predict that for you, but I can tell you that it's a you know front center to our discussions internally.
Internally and I agree with you that the valuations we look out today. They certainly do look good over versus the most recent past and.
And as liquidity comes back up you saw this quarter, we generated cash flow and we do believe next quarter with the reductions in working capital generating more I think that.
Yeah, it looks more favorably on a buyback or reinvestment through acquisition or both but I think.
The topic is is definitely well covered internally, we do have an open share buyback program today, that's got $40 million left on it and probably year and a half left of life on approval at least at the board level and I think it's a matter of.
Kind of ties into your first question when do we feel like this is normal maybe not necessarily recovered, but but a point where the volatility has removed from our business I think that's when you look at a strong I'd say, hey, if we're still.
In a position, where we think buying back shares makes a lot of sense. Then we probably would I think the last tranche, we did about $10 million. We got in on about $21. We still feel really good about that but you are right at $18 it looks better than 21.
Right and so by not forgetting about anything.
Great onto the alternatives Ray is that it's hard to see that there are other acquisitions out there that are better than buying your own stock.
And also it's a good thing if we are going to get back to normal than the next two or three quarters why wait for that to happen versus yeah. Here. We're not we're not in a precarious balance sheet issue. We have the cash we have the balance sheet.
I'll do it when you can.
Right right.
Yes, I mean, I think I, probably don't have any more to add to the topic. Other than you know you you make some points that we generally have been.
Very aware of and I'll leave it at that great. Okay. Thanks, guys and good job.
Thanks for the questions Mike Thanks, Mike.
There are no further questions at this time I will turn it back to the speakers for any closing remarks.
Okay. Thank you Corey I want to thank all of our employees customers and partners for their commitment and their results during the quarter. Our long term focus remains on innovation and support of our products and solutions for our customers and patients.
We have achieved significant progress in executing on our CNS and sensory system strategic plan. Despite the pandemic, we've continued to strengthen our balance sheet and improve our cash flow. These achievements have us well positioned for future recovery and growth.
Thank you for joining us on today's call and have a good day.
Ladies and gentlemen, thank you for that.
Does conclude today's conference call. Thank you for your participation you may now disconnect.
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