Q3 2021 Natus Medical Inc Earnings Call

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Good morning, everyone and thank you for joining us today to review our results for the third quarter of 2021 on the call today from Netease is Jonathan Kennedy Natus, President and Chief Executive Officer, Andrew Davis, Executive Vice President and Chief Financial Officer.

Jonathan will begin today with a business over B after third quarter 'twenty 'twenty. One then drew will discuss the third quarter financial performance.

Finally drew will then turn the call to Jonathan for closing remarks.

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.

Our actual results may differ materially from these forward looking statements.

For a description is relevant risks and uncertainties pertaining to our business. Please see yesterdays press release and our periodic in animals ourselves before it's filed with the SEC.

Management's presentation of the financial results will be on a GAAP and non-GAAP basis.

And then GAAP results exclude amortization expense.

Structuring uncertain at of charges and their related tax effects.

Management believes that the presentation is these non-GAAP measures along with our GAAP financial statements provide a more thorough analysis, if I wasn't going to financial performance.

You can find the reconciliation of our financial results.

On a GAAP versus non-GAAP basis in Yesterdays earnings release.

I would now like to turn the call over to Jonathan Kennedy, President and Chief Executive Officer of Natus Medical Mr. Kennedy.

Thank you operator, and good morning to everyone.

During our call today, we will discuss our third quarter 2021 financial results as well as our current business trends yes.

Yesterday evening, we reported the results for the third quarter of 2021 and revenue for the quarter achieved the mid range of our guidance at $113 9 million.

Our non-GAAP earnings per share was 28.

We are encouraged by the 11% increase in revenue in the third quarter of 2021 compared to the same quarter in 2020, despite the recent supply chain constraints.

And for our products and service continuing to improve throughout the quarter.

We saw the benefits of our investments in innovation this quarter with the release of a new Rep can't envision newborn I imaging system in the United States.

We also saw the first successfully perform clinical case using maintenance with newly launched exact true family a subdural electrodes.

And another quarter of growing sales of our ultra pro EMG device, which was released in the fourth quarter of last year.

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.

As you know natus as the global leader in neuro diagnostic.

Our products and services are used by a majority of hospital and neurologists worldwide.

We have the most comprehensive line.

Equipment offered by any global manufacturer today offering full mining E G.

Mg and PSG solution.

Overall, our neuro business grew by 19% year over year during the third quarter led by EEG, and EMG sales, which increased by 27% and 22%.

While neurosurgery product <unk>.

Increased by 16%.

Our hearing <unk> balance products include devices and supplies used by Audiologist hospitals, and E&P to diagnose hearing disorders assistant sitting in Tunisia puny.

And for the diagnosis of balance disorders.

Revenue from hearing and balance grew by 6% versus the same quarter last year led.

Led by an 11% increase inherent assessment product revenue and a 33% increase in our hearing aid fitting products revenue.

Supply constraints led revenue from our balance products decreased by 52% versus the prior year.

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

Major product categories. In this family include our newborn hearing screening solution neonate.

Neonatal eye imaging and brain injury monitoring CTO.

Video streaming services and phototherapy solutions.

Overall newborn care revenues declined by 5% versus the third quarter of 2020 are primarily from order delays affecting certain international customers that use our newborn hearing screening products.

In summary, we're very pleased with the growth we had during the quarter.

We remain focused on our strategy of investing to refresh our market, leading products and deliver new innovation, which we believe will drive our growth and future financial performance.

Now I'd like to turn the call over to drew Davies, our executive Vice President and Chief Financial Officer, Craig deeper dive into our financial results drew.

Thank you Jonathan.

As Jonathan stated, we reported third quarter revenue of $113 $9 million, an 11% increase from the third quarter of 2020.

Supply constraints did impact our revenue results. This quarter. However, we believe demand for our products remains healthy as evidenced by our backlog quarter of $25 $6 million.

Revenue from our neuro end market was $70 million or 62% of total revenue during the third quarter of 2021.

Third to $58 8 million or 50% of total revenue during the same quarter last year.

Revenue from the neuro business increased 19, 2% compared to the same quarter last year, the increase was driven by growth.

And devices supplies and service.

Revenue from our neuro from our newborn care end market decreased four 8% to 24, 5% or 21% of total revenue during the third quarter of 2021 compared to $25 $7 million or 25% of total revenue during the same quarter last year.

The decrease was primarily attributable to lower revenue from supplies related to the number of burst.

And the end device supply constraints.

Revenue from our hearing <unk> balance end market was $19 4 million or 17% of total revenue during the third quarter 2021, compared to $18 3 million or 18% of total revenue during the same quarter last year.

Hearing assessment and hearing fitting devices led to year on year increase in hearing and balance.

In total revenue from devices and systems contributed 74% of total revenue in the third quarter of 2021 compared to 71% in the 2020 period.

Revenue from supplies and services was 26% of total revenue in the third quarter of 'twenty, one compared to 29% in the 2020 period.

Revenue from domestic sales was approximately 63% of total revenue and 37% from international sales in the third quarter of 2021 compared to 62% and 38% respectively for the same period last year.

On a non-GAAP basis, our gross margin increased by four eight percentage points in the third quarter of 2021% to 61% compared to 56, 2% in the third quarter of 2020.

The increase in gross margin was attributable to the higher mix of North American neuro sales lower operations overhead and the increase in revenue compared to the third quarter last year offset by increases in materials cost.

GAAP gross margin increased 13.3 percentage points to 59, 5% in the third quarter of 2021 compared to <unk> 46.

Care to 46, 2% in the same period last year the increase in GAAP gross margin was also impacted by an intangible asset impairment in the prior year that did not repeat this year.

Third quarter, non-GAAP operating expenses increased $2 $8 million compared to the same quarter last year. The increase in expenses was driven by higher incentive pay related to the increase in revenues and the savings last year from required from required time off that did not repeat this year.

Our non-GAAP operating margin increased by <unk>.

7.4% compared to the same quarter last year on the increases in revenue and the improvements in gross margin.

Other expense was $700000 for the third quarter of 2021, driven by exchange rate fluctuations.

Interest expense was 300000 during the quarter, we expect the interest expense in the fourth quarter of 2021 to be the same and for the full year to be approximately $2 million.

Our third quarter of 2021, non-GAAP effective tax rate was 24, 9%, we anticipate our overall 2021 non-GAAP tax rate to be between 21 and 25%.

On a GAAP basis third quarter 2021, net income was $5 6 million or <unk> 16 per diluted share compared to a net loss of $9 $3 million in the same quarter last year non.

Non-GAAP net income increased $6 $1 million to $9 $3 million compared to the same quarter last year non-GAAP earnings per diluted share was 28.

In the third quarter of 2021, we recorded $7 million of depreciation and amortization expense.

Share based compensation was $2 $6 million during the third quarter of 2021.

And now let's take a look at some of the highlights from the balance sheet and cash flow.

We ended the quarter was $68 $8 million in cash cash flow provided by operations was $7 $1 million during the quarter.

Our days sales outstanding increased five days versus the same period in the prior year to 77 days non.

Non-GAAP diluted shares outstanding increased to $33 9 million shares compared to 38, 33 8 million shares in the same period last year.

Now turning to guidance compared.

Compared to last year, we've seen demand for our products and services an increase in every quarter. This year.

Historically, we experience our highest quarterly revenue for the fourth quarter, and we expect that to hold true this year.

With increases in revenues, we also expect to benefit from positive leverage resulting in higher gross margin and income.

With this in mind we.

We expect our revenues for the fourth quarter of 2021 to be between one.

Hundred and $24 million and $128 million.

GAAP net income is expected to be in the range of $9 5 million to $11 $6 million for the fourth quarter of 2021 or 28 to 33 per diluted share.

Non-GAAP net income is expected to be in the range of $13 $8 million to $15 $5 million or <unk> 41.

<unk> to <unk> 46 cents per diluted share.

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

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

On your question press, the pound or Heskey thinking.

Your first question concerns the line of Jason Bedford of Raymond James. Please go ahead.

Hi, good morning, guys.

I guess just.

Yeah.

Two quick questions.

First on the supply constraints. It was mentioned a few times specifically on balance so if there's any way you could detail kind of.

What is the issue that youre seeing out there and when will it be alleviated.

Yeah, We've got a R. R R.

Our balance product.

Ics impulse, we've got some supply chain delays there.

And we expect to see.

Started getting more supply late in the fourth quarter or in the first quarter next year.

Okay.

Okay.

Drew maybe how big is that business I think you said it was balance something like 55% I'm not sure what the impact of that was frankly.

The supply constraints are it's really confined to balance are they impacting revenue in the other areas of the business.

Hey, Jason it's Jonathan that's about a $2 $5 million quarter business.

Okay.

Quarter for that business and so half of that is.

We do have sporadic both supply constraints in logistics and.

Bright constraint and logistics constraints of other sports that.

Just built our backlog and our.

I think everybody is seeing in the market.

Is it that way.

We have a few products that a few sub components that are unique and we've had some issues with them as well and that keeps us from being able to ship the balance products.

We do believe though that we have a pretty good line of sight of when that will come back and as drew said probably late fourth quarter early in the first quarter, we should be able to get those back in and shipping mode.

Okay. So it sounds like balance is kind of the only area of the business that's being impacted.

Revenue generation standpoint, I realize sometimes assuming there's probably some cost pressure on the expense side, but from a an ability to ship product and generate revenue. The only supplier constraint seems like it's on the balance is that fair.

Our balance sheet is one of the bigger pieces, but we do have a few others.

Andy.

And hearing diagnostics in.

And hearing aid fitting that are there.

There are less impactful, but we do have if you look at our warehouse.

Orders are that we were unable to ship in the quarter that growth wasn't here and a balance of to some extent.

Newborn care neuro, we've been pretty good we manufacture those.

Products and keep a pretty good lead of inventory.

In those areas, but.

But if you think of like hearing a balance its a little more of a supply and a larger flow in larger volume and so it's a little bit more impacted by either.

Shipping constraints or supply constraints, but it's a little more of an ongoing business as opposed to.

Hardware heavy where you can stop inventory and ship it when you're ready.

But.

Anyway to.

Quantify the contribution in the quarter.

Because the demand profile going forward for the new device.

Yeah, we got the we got the the.

The red can back in the market during the quarter we were.

We were constrained on the the lenses, we got the lens fixed and we got them back into the market during during the quarter and they began shipping again, but we could've had we had more lenses, we could have shipped more.

We did.

Envision in total.

We usually do anywhere from $3 million to $5 million a quarter and this.

This last quarter, we did about $2 $7 million envision for the for the quarter. So we you know we could've could've definitely had higher revenue had we add more lenses and we've got.

<unk>, a nice backlog in and the customer.

Acceptance and customer interest in that product is very high.

Okay.

I'd have to go back to my notes here, but I don't think the word Covid was mentioned which was refreshing.

And I realize that the supply constraints are kind of knock on effects of that but I guess the question here is.

When you look at.

The end market for your products up there was there a disruptive impact from the flare up.

A delta in the U S. And then just how is the end market feeling today versus where it was second and third quarter.

You know there was a little bit of noise about that.

I would be hesitant to point to a material impact from delta and they get clogged up at hospitals during the third quarter that impacted us anyway.

<unk>.

Since you mentioned it yet COVID-19 definitely it has a lot of follow on effects that we described in the supply constraints.

Logistics issues, but in terms of hospital sentiment I think we we are in now.

And a fairly decent place I will say the one thing that still remains unusual versus maybe times past.

It's access to customers. So that's still virtual there's there's still less than times past of face to face customer interaction. We've moved a lot of that online.

Two webinars and all the virtual as you do it and that has seen just a fight but I think that's the piece. That's that's finally missing that we don't know, where we'll see that coming back to normal, but it definitely not yet.

Okay.

And then I guess.

Just lastly.

Your balance sheet.

Really good spot here.

What.

What are the priorities in terms of capital allocation at this point.

Yeah. Thanks for the compliment on the balance sheet now we've worked really hard to bring working capital down and cash App we have.

Cleared all the depths of where the cash you see there is unencumbered cash.

Our priorities remain you'll still have.

And interest in building the business and acquisitions, there's a few product for you.

Opportunities in the pipeline that we continue to evaluate and charter tuck in is.

Tuck in businesses that would be complementary to what we already do.

Second to that.

Opportunities to return shareholders cash through share buybacks and it's probably the next rung down and something that we had done prior to Covid and pulled back as we faced some uncertainties, but something that we would be willing to discuss.

And over time here in the U S as the business recovers.

Okay.

Alright, great. Thanks, guys.

Thanks, Jay Thank you Jason.

It's all the question, we have I would like to hand again for inspecting Mr. Kennedy.

Thank you operator.

I'd like to thank all of our employees partners and customers for their outstanding efforts again during the quarter and.

I look forward to finishing the year in <unk>.

Wei Thank you everybody and have a great day.

This concludes today's conference call. Thank you for participating you may now disconnect.

Yes.

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