Natus Medical (NASDAQ: BABY) is gearing up for a strong second half of the year, but the medical device maker's investments in growth and integration of acquisitions have made for a weak start to the year.
Natus Medical results: The raw numbers
Income from operations
Earnings per share (EPS)
Data source: Natus Medical.
What happened with Natus Medical this quarter?
- The year-over-year comparison was hurt by the $10 million sale to Venezuela in the year-ago quarter, although that was more than offset by the recently acquired neurosurgery business. All told, Natus' neurology business increased sales 17.2% year over year.
- Otometrics, Natus' hearing-aid fitting business, is also humming along, with sales increasing 14.5% year over year.
- The one downer -- and it was a big one -- was a 24% year-over-year decrease for the newborn care business, although excluding Venezuela sales, organic revenue only declined about 1.4%. Management noted that the birth rate was rebounding, which is good for the supplies that Natus sells for its machines, but the Food and Drug Administration still placed a ship hold on some of its newborn equipment, which hampered sales on the equipment side.
- The company failed to show an operating income because it's investing money in a sales force for its new neurosurgery business, as well as new products. These products include the Otoscan, which launched last week; it creates a digital image of the ear for hearing-aid fitting.
- Adjusted earnings are a better way to look at the company's long-term prospects because they subtract out one-time costs like remediation of the ship-hold and acquisition costs, but even there, earnings fell year over year due to the aforementioned increased investments.
- Natus is gearing up for a proxy fight with Voce Capital Management, which owns 2% of the company's stock and has announced plans to nominate board members to replace 50% of Natus' board of directors.
Image source: Getty Images.
What management had to say
After a rough fourth quarter of last year, in which sales were pushed into the first quarter, Natus' president and CEO Jim Hawkins seemed a little relieved. But he warned investors that this appears to be the new normal:
While our neurodiagnostic business bounced back nicely in the first quarter, we continue to experience longer sales cycles in the United States. Our pipeline of business is at record levels as overall activity remains robust.
Hawkins noted that Natus isn't losing sales to competitors, and blamed the longer sales cycles on the computer IT departments at hospitals:
IT has gotten very involved in these big systems, big orders where they are really the final gatekeeper at these hospitals, especially on our products where we integrate into the hospital information system. And so they do a lot of testing, they can -- it's really their call and we're at their mercy.
Management reiterated 2018 guidance for revenue of $535 million to $540 million, and adjusted earnings of $1.60 to $1.65 per share. For the second quarter, management is looking for revenue of $129 million to $131 million, and adjusted earnings of $0.25 to $0.27 per share.
Adding in the first quarter, management is looking for revenue of $258.6 million in the first half of the year at the midpoint of guidance, which means revenue will have to accelerate substantially in the second half. The story is even more extreme on the adjusted earnings line, with $0.50 of the $1.60 coming from the first half. Fortunately, the fourth quarter tends to be the company's largest quarter of the year in terms of revenue. And the integration costs for Otometrics are wrapping up, which should help increase operating margins.
If management can hit its 2018 targets, it'll be a nice ramp up into 2019. But the dichotomy of the year arguably adds additional risk to Natus Medical.
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