Q4 2020 Natus Medical Inc Earnings Call
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Good afternoon, everyone and thank you for joining us today to review our results for the fourth quarter on 'twenty and 'twenty.
On the call today from Natus is Jonathan Kennedy Natus is.
President and Chief Executive Officer, Andrew.
Andrew Davies matrices executive Vice President and Chief Financial Officer.
Jonathan will begin today with a business overview on the fourth quarter 2020.
On June voltage class at the fourth quarter financial performance.
Finally, we will open the call for your questions.
To ask a question. Please press the star button, followed by 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 our future results.
Actual results may differ materially from these forward looking statements.
For a description of relevant right.
And uncertainties.
We're training to our business. Please see today's press release, and our periodic and annual reports filed with the SEC.
Management's presentation on the financial results will be on a GAAP and non-GAAP basis.
The non-GAAP results exclude amortization expense restructurings.
And searching other true.
And their related tax effects.
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 reconfirmation of our financial results on a GAAP versus non-GAAP basis in today's earnings release.
Yes.
I would now like to turn the call over to Jonathan Kennedy, President and Chief Executive Officer of Natus Medical Mr. Kennedy.
Okay.
Thank you operator, and good afternoon, everyone.
During our call today, we will discuss our fourth quarter 2020 financial results.
Well as our current business environment.
Today, we reported the results for the fourth quarter and full year of 2020.
Revenue for the quarter was $118 7 billion and non-GAAP earnings per share was 39 Jets book.
Revenue and earnings per share exceeded our expectations for the quarter as the pace of business recovery was faster than we expected.
Revenue for the full year was $415 $7 million on non-GAAP EPS was also 39 cents per year.
Yeah.
The dynamic environment in 2020 produce significant and unforeseen challenges for our company. However, our business began to recover in the second half of the year and that recover recovery continued into the fourth quarter with revenues, increasing 15, 5% from the third quarter of 2020.
While the effects of the pandemic had a major impact on our business the strategic decisions organizational changes and cost structure improvements. We've made over the last two years enabled us to manage through this day, many period and emerge a stronger and more efficient company.
These steps helped us generate over $34 million operating cash this year and allowed us to continue investing in new and refreshed products, which will drive our success in the future.
Our focus and commitment to providing new and improved products to our customers was evident in the fourth quarter with the release of our new standard studying pediatric ocular imaging system right can envision.
This was the acquisition of baby B and its patented remote mother to baby communication technology.
Looking ahead to 2020, 'twenty 2021.
We expect to continue to bring innovative new products and solutions to market, including our new handheld newborn hearing screen or cloud telemedicine capability for certain products and a variety of products software enhancements.
As we highlighted in our last call the fundamentals of our business remain intact.
Health care providers and patients depend on our products and services every day and the demand for our products and services continued to increase and are now approaching historically normal levels.
Our fourth quarter results exceeded our guidance with revenue improving over the third quarter of 2020 with disruptions from the Covid pandemic continued to negatively weigh on our results versus the same quarter in 2019.
Revenue from Europe products continued to strengthen with equipment sales increasing sequentially.
Revenue from here and our balance products also increased from Q3 2020 on we're encouraged by the accelerated recovery we saw on the fourth quarter.
Our newborn care business has continued to be the least affected by the pandemic and performed within our expected range and slightly improved over the third quarter of 2020.
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.
Natus is the global leader in neuro diagnostic equipment solutions, our products and services are used by the majority of hospitals and neurologists worldwide.
We have the most comprehensive lineup neuro diagnostic equipment offered by any global manufacturer today offer any full lineup EG EMG and sleep solutions.
Overall, our neuro business declined by about 16% year over year during the fourth quarter and declined about 18 per cent for the full year versus 2019, due mostly to pandemic related disruptions.
The year over year decline for the quarter was driven primarily from lower sales of EEG equipment, and neurosurgery products, while sales of Emg's sleep equipment and neuro diagnostic supplies returned back to 2019 levels during the fourth quarter of 2020.
Overall, we are encouraged by the level of sales activity. We saw during the quarter. We believe that E. G capital equipment will continue to rebound over the next few quarters.
And again begin to grow versus pre pandemic levels.
Our hearing and balance products include devices and supplies used by Audiologist hospitals in N cheese to diagnose hearing disorders assistant Sydney tuning the Purion H and for the diagnosis of balance disorders.
Revenue from hearing a balance returned to pre pandemic levels during the quarter and was comparable to the fourth quarter of 2019.
We shipped 53 outer skin digital ear scanner during the fourth quarter, the industry's only electronic getting your scanner.
We're encouraged by the industry's continued adoption of this new technology and expect it to become the standard of care and helping audiologist deliver custom hearing solutions.
Natus is market, leading newborn care product family is used by hospitals worldwide.
Major product category. This family include on newborn hearing screen solutions.
Neonatal eye imaging and brain injury monitoring video streaming services and phototherapy solutions.
Overall newborn care revenue was slightly favorable to the fourth quarter of 2019.
Declines in the sales of supplies, which are generally directly tied to birth rates were offset by increased sales on hardware and services.
In summary, we're very pleased with the progress on performance.
Of the business in 2020 on the opportunities ahead for 'twenty one.
We continue to hold multiple 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 our strategic plans for growth investing in new products and technologies and achieving operational excellence to expand margins and cash flow.
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 true.
Thank you Jonathan.
As Jonathan stated, we reported fourth quarter 2020 revenue.
$118 $7 million or 15, 5% increase from the third quarter as our business recovers from the impact of COVID-19.
The sequential quarterly revenue increase was attributable mainly to device sales, which improved by 21 five per cent.
Supplies increased sequentially by one 4% mainly in neuro year over year revenue was down nine seven per cent from the same period last year.
Revenue from our neuro end market was $68 2 million or 57% of total revenue during the fourth quarter of 2020 compared to $81 $1 million or 62% of total revenue during the same quarter last year revenue.
Revenue from the neuro business declined 15, 8% compared to the record quarter for neuro last year and remains.
Impacted by COVID-19 by the COVID-19 pandemic revenue from our newborn care end market increased 7% to $28 million or 20.
4% of total revenue during the fourth quarter of 2020, and that compares to $27 $8 million or 21%.
Total revenue during the same quarter last year.
The increase was primarily attributable to photo therapy and there few sales.
Revenue from our hearing and balance end market was $22 $5 million or 19% of total revenue during the fourth quarter of 2020 compared to $22 $6 million or 17% of total revenue during the same quarter last year.
Hearing and balance revenue recovered during the quarter and increased year over year after adjusting for the exit of the sounds on business.
In total revenue from devices and systems contributed approximately <unk> 75 per cent of total revenue in the fourth quarter of 2020 compared to 76% in the 2019 period.
Revenue from supplies and services was <unk> 75 per cent of total revenue in the fourth quarter of 2020 compared to 24% in the 2019 period.
Revenue from domestic sales was approximately 58% of total revenue and 42% from international in the fourth quarter of 2020 compared to 60% and 40% respectively.
For the same period last year.
On a non-GAAP basis, our gross margin decreased by three 9% in the fourth quarter of 2020 day.
$58, one per cent compared to 62% in the fourth quarter of 2019.
One seven percentage points of that.
Decline in gross margin was attributable to lower and lower mix of neuro revenue.
Seven percentage points was attributable to higher freight costs associated with COVID-19, and 1.5 was related mainly to inventory reserves and scrap related to site consolidations.
GAAP gross margin decreased five 9% to 55, 3%.
In the fourth quarter of 2020 compared to 61, 2% in the same period last year the.
The decline in GAAP gross margin was also impacted by site consolidation charges of $1 $3 million or one 1% of gross margin.
Fourth quarter non-GAAP operating expenses decreased by $7 $5 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, our non-GAAP operating margin.
Kris by $2 five per cent compared to the same quarter last year on lower revenues and gross margin and was offset by the decrease in operating expenses.
Other income was $2 $2 million from the fourth quarter, driven by exchange rate fluctuations related to entity consolidation.
Interest expense was <unk> $9 million during the quarter, we expect interest expense during the first quarter of 2021 to be approximately half a million dollar share for the full year.
Of 2021 to be approximately $1 $5 million.
The fourth quarter and on our non-GAAP.
Effective tax rate was 22, 9%, we anticipate our overall 2021 non-GAAP tax rate to be between 21 and 24%.
On a GAAP basis, our fourth quarter 2020, net income was $5 $2 million or <unk> 15 per share compared to net income of $3 million for the same quarter last year non.
Non-GAAP net income decreased $2 six.
Compared to the same quarter last year non-GAAP earnings per share was 39 cents.
In the fourth quarter, we recorded $7 $1 million of depreciation and amortization stock based compensation was $2 $4 million during the fourth quarter.
Now, let's look at some highlights from the balance sheet and statement of cash flow.
Our outstanding debt decreased in the fourth quarter, as we repaid $10 million.
We ended the quarter with $82 $1 million on cash and $57 million on debt.
Cash flow provided by operations was 60 was $16 $3 million during the quarter on.
Our days of sales outstanding decreased three days versus the same period in the prior year to 82 days non-GAAP shares outstanding increased to $33 9 million shares compared to $33 8 million shares in the same period last year.
Now turning to guidance our.
Our business historically sees yearend cyclicality and strength in the fourth quarter and some sequential decline in the first quarter. We expect our revenues to continue to recover from the pandemic in the first quarter of 2021 and to be in a range similar to the revenues in the first quarter.
Last year, which experienced COVID-19 related softness in the last few weeks of the quarter.
With this in mind, we expect our revenues for the first quarter of 2021 to be between $108 million and $112 million.
GAAP net income is expected to be.
Range from a loss of $600000 to a profit of $1 $7 million for the first quarter of 2021 or a loss of two cents per share to a profit of <unk> <unk> per share.
Non-GAAP net income is expected to be in the range of $3 $9 million to $6 $2 million or 11 to 18 cents per diluted share.
And with that we'll now open the call for questions.
As a reminder, ladies and gentlemen to ask a question. Please press the star button, followed by one on your Touchtone phone.
This fire one on your Touchtone phone.
Our first question is from Jason Bedford with Raymond James Your line is open.
Hi, guys congrats on that.
Cover that you guys are seeing in Mt.
So regarding the.
Guidance I just want to.
Kind of a little breakdown on.
Do you see between the three segments that newborn Euro engineering.
What kind of revenue growth to approximate each one of those segments.
Yeah, we see our our our newborn care business holding up and.
And continuing where it's been I think the compared to the same quarter last year for it to be.
Pretty similar.
And hearing and balance is recovering and should be a similar level to last quarter as well, we're seeing a little bit slower recovery in neuro U S.
That's that's where we saw the softness or for the the comparable lower revenue compared to last year was was in U S. Neuro and we would expect that.
On to kind of recover slower in in the first quarter as well.
That's helpful. Thank you.
And regarding full year, just I know you guys haven't given out guidance on full year 2021.
Is it fair to think that rough like in terms of where it was back in 2019 is there any kind of fob.
And that you guys can provide us for that for you.
Yeah, we didn't give specific guidance, but we think that our.
Are you know each quarter. This year, if you kind of look at the guidance that we gave for Q1.
We've got a quarter debt is is potentially a little bit better than Q1 last year, we would definitely expect to be better than Q2 last year, which was the lowest quarter of the year.
And then we believe with continued.
The improvement in the Covid situation around the world and the economy that Q3 and Q4.
We will be better than last year as well.
Okay. That's helpful.
Do you anticipate by the end of the year on that business will recover to.
Pre pandemic better or.
I decided that.
The guidance on that.
Yes, I mean, there's still some lack of visibility in the full year debt really prevented us from getting the guidance normally we would give guidance, but we see.
The first quarter recovering nicely, we saw it in Q4, but to be honest.
We didn't feel comparable with the volatility out there and giving further guidance for the rest of the year.
Okay.
And in terms of within.
I mean, I guess neither were all at the end of February.
How have you guys seen recovery in the business this month versus like Jan in December or How's that.
Trends.
Within the quarter.
Yes, I think.
Youre right its late in the quarter. We've got another few weeks to go here and the strength has continued through Q1, we ended the quarter the fourth quarter with a pretty decent backlog, so that gives us confidence a little more confidence than normal.
For Q1, but as you know our capital business can be pretty backend loaded we're entering that period of the quarter, where the capital orders start to come in at.
And we kind of finish strong with that so I do think that the strength definitely continued through the first couple of months here certainly on supplies.
And on a smaller level capital has a.
It started to return to normal maybe back in 2019, but we still have.
Some recovery left to go and then neuro.
Equipment business, especially on the U S where that hasnt been as strong as we saw on 19 yet.
Okay.
So in the.
The fourth quarter.
The bulk of the orders that you guys.
That from deferred from third.
Backlog of pent up demand from Q2.
The second and third quarter or was that.
New orders that were that were not previously from.
No we're not from previous quarters.
I think on the hardware side you know the sales cycles are pretty long. So it's probably safe to say that there was some deferral from the.
Second quarter third quarter debt that pushed into Q4, and probably continue to push into Q1 and beyond on the supply side and on smaller purchase I think that is new orders more turns type business for us.
It's more real time so on.
Hopefully that answers your question I think on the hardware side.
There is delay but on that more day to day services and supplies I think we're on a real time level.
Okay.
And within the capital up sales are you seeing is it mostly normal size ordering patterns are there more large orders are smaller orders.
So we can kind of gauge out what level of activity.
Thanks.
I'd say, it's on the normal range.
As usual, we usually have a handful of larger capital deals that are in the pipeline on any given time that are closer to finishing and we have that today it.
So the backlog is decent so that's going to help.
Drive little more confidence here in the first quarter.
You had that continues going into Q2 Q3 et cetera.
On the on the supplies in smaller less expensive pieces of capital.
It's pretty normal to normal pace I don't think on.
On the smaller pieces smaller hardware and supplies as we said I think we're more of a real time state there today.
You guys laid out we started with the pipeline can you give us an update on where that.
<unk> devices, and if theres any other products.
That are coming in the pipeline that we should look forward to in 2021.
Sure. So the rec human vision, we launched in the market in December and we sold.
A few of those in Europe, where it's approved we filed for the 500 10-K in the U S and expect to get that here in the next.
Two to three months.
And at that point, we'd start marketing and selling that on the U S.
Four.
What we have.
Closer to release now that has not yet released is our algo seven which will be on.
International.
Destined handheld hearings screener will that will replace our I'll go to <unk>. We also have a pretty significant upgrade to our neuro of software Thats coming out soon and then much later in the year, we expect to.
Possibly release our baby.
Mother child communication device.
Thanks, that's helpful up regarding what kind of revenue contribution now should we expect from <unk> in 2021.
<unk> is typically a $15 million $16 million business I think as we rollout the upgrades. It should go from there from just driven from upgrade cycle.
I don't think we put a forecast by product out there that.
We'd be comfortable with but I can tell you historically, it's about that $15 million to $16 million angle and I think a gross from there.
Okay, that's helpful and that.
You guys touched on what weighed on gross margin from the fourth quarter.
Is there.
Guidance that you guys still comfortable regarding gross margins going forward for <unk> of 'twenty one.
Yeah, I think I think our gross margins are going to.
They'll continue to improve a bit as we go we've got some continued savings from.
From the site consolidations that we're doing so.
The EPS guidance that we've given is based on.
Yeah, Hi, 50.
Two to around 60% gross margin.
So.
Just just over 60 or below $60 kind of kind of the range that we have to get to that EPS guidance.
Okay.
Regarding geographic trends should we expect roughly the same as 'twenty, one 'twenty or.
Any kind of shift within that geography.
Jack geographies in 'twenty one.
I think it'll be it'll be similar it'll be largely the same that it's been historically kind of that 60 to $4 60, 40, 60 domestic 40 international that usually fluctuate a few percentage points each quarter, but it'll it'll be in that range. You know I'd pointed out to you that.
Neuro capital business continues to strengthen that generally favorable gross margin and also.
The U S market.
Got it.
Regarding the regarding geographic mix out there.
On a FX impact.
We've seen a lot of companies that are reporting a decent tailwind from FX that.
Our net for 2021, but is there some kind of Opex guide that you guys are comfortable with.
Well, we don't we don't we don't generally forecast foreign exchange, but we have seen we have seen some some softness lately just in our operating expenses or we've seen I guess I should say a negative impact in our operating expenses in Europe and we've had.
We've had.
That that impact there, but we do have some revenue in euros and some some.
Some revenue in Danish kroner, where we have our factories. So we have a little bit of a natural hedge there, but we've had a few hundred thousand dollars. The last couple of quarters in negative impact and that could that can continue to happen. If the dollar doesn't strengthen against the euro and the kroner, we do have.
Some exposure.
From an operating standpoint in Canada, as well, but it's it's usually pretty stable.
We did have we did have an item this quarter, we were consolidating some managing entities and there was some accumulated foreign exchange that that hit the P&L this quarter, but that we wouldn't expect that to happen again.
You guys mentioned you guys saw about 50 15, the auto scan unit.
And for Q.
Can you talk.
On more about what.
Hello.
Yes, sorry.
353 units yeah.
<unk> 30, 53 units yes.
Thank you for the correction.
Just talk about what's required from broader adoption of our auto scan.
Well I think we're seeing some some increasing I think we sold 30 last quarter.
<unk> three this quarter are there several hundred out there, you're probably $3 50 or something.
Gas here.
Broader adoption really is.
As the market realizes the benefits.
A better patient experience faster cycle time within the office and a better fit for the hearing aid as that becomes more and focus I think youll see broader adoption.
Hi.
The first 53 is less can you I mean, I can look at on Virginia compared to how it was then.
Fourth quarter of last year.
We were actually in fourth quarter last year I believe we didn't have that in the market. We had a quality issue that we're working on so we didn't have in the market.
We were kind of we've kind of been going along about 30, a quarter either high <unk> or just over 30%.
In Q I think it was Q1 this year.
We had nine we sold nine EBITDA was because we had been out of the market for three quarters. So it kind of averaged out to that 30 per quarter. When we came back in the market.
So this is a good quarter for us on where.
We've got over.
Well over 300 units in the in the market now.
That's very helpful actually.
I think that some on the 53 weeks.
Debt 95, <unk> <unk> 2020, do you think some of these 33 unit backlog most of them on new order.
No. This is.
I think we're back to current orders now I mean, maybe there was a little bit of.
A little bit of catch up from.
You know from people delaying purchases due to COVID-19 and some of the hearing centers, the audiology audiologist offices being shut down or having less traffic but.
You know that we were we were back to selling about 30, a quarter and so this is a nice step up and we think that this continues to get them.
Momentum in the installed base gets bigger and the standard in the industry has to do with digitally.
We could see acceleration in sales going forward.
And what was the New York surgery for Us.
James.
You had neurosurgery declined in <unk> versus last year.
Okay.
And one final question here.
Yes.
Do you guys have any capital allocation.
Priorities for 2021.
Thank you guys plan on doing with the cash.
Yes, I think.
Primarily the easiest thing to do for us is to pay down our revolving credit line.
That debt de levers and reduces interest expense and.
<unk> continues to keep our cash available via that revolving credit line second to that we do anticipate making some strategic acquisitions.
Throughout the coming quarters things like our day ABB.
Things that are a little bit larger than that but that would be second and then third we deal. We do still have an open share buyback program that we've exited COVID-19 here.
We'll start to reconsider how we might best deploy that program.
Alright, Thank you very much guys I appreciate it.
You're welcome thank you.
Yes.
I am show I am showing no further questions at this time I would now like to turn the call back to Mr. Kennedy.
Okay. Thank you.
Thank you for joining us today.
I'd like to thank all of our employees and partners and customers for their outstanding efforts and achievements throughout the year. The Natus team has successfully executed on several strategic initiatives 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 have a good day.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect have a great day and spacing.
Okay.
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