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Natus Has Some Growing Up to Do

Brian Orelli, The Motley Fool

Natus Medical (NASDAQ: BABY) posted solid fourth-quarter revenue, which slightly beat the guidance management gave last quarter. Granted, it was a jump over a lowered bar, but the $530.9 million in revenue for the year fell smack in the middle of the old guidance of $525 million to $535 million.

The picture for the bottom line wasn't as pretty. The company was shooting for adjusted earnings of $1.47 to $1.50 per share for the year, which actually came in at $1.42 per share. Investors were none too thrilled, especially given the outlook for the year ahead.

Natus Medical results: The raw numbers

Metric

Q4 2018

Q4 2017

Year-Over-Year Change

Revenue

$141.0 million

$131.4 million

7.3%

Income from operations

($15.1 million)

$5.1 million

N/A

Earnings per share (EPS)

($0.35)

($0.22)

N/A

Adjusted EPS

$0.43

$0.42

2.4%

Data source: Natus Medical.

What happened with Natus Medical this quarter?

  • Revenue from the neuro business, which makes up about half of total revenue, increased 7.7%, driven by sales of neurodiagnostic products.
  • Sales from Otometrics, the company's hearing-aid business that makes up a quarter of revenue, was up 25%. The launch of Otoscan, a machine that scans the inside of the ear to create a digital image for fitting hearing aids, is going well, with shipment of machines doubling quarter over quarter. The company now has 180 devices in the field.
  • Revenue from the newborn care unit, which makes up the final quarter of sales, dragged down overall revenue with an 8.6% decline. The Peloton service, where the company performs newborn hearing tests for hospitals, continues to struggle, as did some newborn vision products.
  • The company is exiting its NeuroCom Balance product line and its ambulatory EEG video service called Global Neurodiagnostics (GND). Neither was expected to be profitable this year, so while it'll hurt the revenue line, it should help earnings.
  • The adjusted earnings miss came from a decrease in adjusted gross margin for the fourth quarter, which was down 2.2 percentage points, to 58.2%. Management blamed increased manufacturing overhead, inventory reserves, and warranty expense for Otometrics products for the decrease in gross margin.
Mom attached to monitoring machine holding a newborn in a hospital bed.

Image source: Getty Images.

What management had to say

Natus' president and CEO Jonathan Kennedy explained the benefits of the company's restructuring to bring its business units together in an initiative dubbed One Natus:

We expect to benefit during the full year of 2019 of approximately $4 million as a direct result of immediate efficiencies gained through the One Natus initiative and additional ongoing annual benefits beyond 2019 that allow us to achieve an intermediate target model of 15% to 17% non-GAAP operating margin. For 2019, we expect operating margin improvement to be visible beginning in the second quarter, but most of the annual benefits to be reported during the second half.

Looking forward

Management issued 2019 revenue guidance for between $490 million and $510 million in sales, which is substantially below the $530.9 million from last year. About $19 million of the difference is due to the exit of GND and NeuroCom businesses, and there's $6 million in sales of newborn-care products that are ready to be retired. But Natus also expects there will be about $13.7 million in declines of sales of other products this year, which will be partially offset by $7.2 million in growth of other products like the Otoscan.

On the bottom line, management thinks adjusted earnings per share will fall between $1.12 and $1.49, which is a pretty wide margin. At the top end, it would signify substantial expansion of margins, given the declining revenue, a clear sign going into 2020. At the bottom end, it's a substantial drop from last year's $1.42 per share.

Either way, it's clear 2019 is going to be a rebuilding year for Natus Medical.

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Brian Orelli has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Natus Medical. The Motley Fool has a disclosure policy.