natus medical\'s (baby) ceo jonathan kennedy on q3 2018 results - earnings call transcript
Third quarter 2018 earnings call October 24, 2018 morning at 11: 00 Good morning everyone, president and director Drew Davis-Executive Vice President and Chief Financial Officer thank you for reviewing your performance with us today in 2018.
Jonathan Kennedy, president and chief executive of Natus, said in a phone call from Natus today;
Drew Davis, executive vice president and chief financial officer of Natus.
Jonathan will start an overview of the third quarter\'s business today and provide guidance for 2018 and the whole year, and Drew will then discuss the financial performance of the third quarter.
Finally, we will open the phone for your question. [
Today\'s call will include
A statement in the sense of the Private Securities Litigation Reform Act.
These statements include management\'s beliefs and expectations of our future results.
Our actual results may be very different from those.
Look at the report.
For a description of the risks and uncertainties associated with our business, please see today\'s press release and our periodic and annual reports to the SEC.
As a reminder, this conference call is being recorded.
I now want to transfer this call to Jonathan Kennedy, president and chief executive of Natus Medical. Mr. Kennedy?
Thank you, Jim.
Good Morning, everyone.
Today, we report on our financial performance for 2018.
Revenue for the third quarter was $130.
6 million represents 6. 5% year-over-year growth. Our non-
The operating profit margin of GAAP increased by 12.
Up 1% from the same period last year.
Revenue growth is mainly due to the increase in our neurosurgery business and the moderate organic growth in our neurodiagnostic business.
Income from neonatal care and Otometrics tracked expectations throughout the quarter, while revenue growth in our neural business was slightly higher than we expected.
Drew will discuss the income issue in more detail in a few minutes.
We also continue to make progress in regulation, successfully completing the FDA audit and the first MDSAP audit at the Seattle plant this quarter.
While completing these audits does not relieve the pressure on the Seattle warning letter, it does demonstrate the significant progress we have made in the Seattle quality system.
During the conference call last quarter, I mentioned several recent and long-term
Opportunities for Natus.
In the direct category, I highlighted further integration efforts to invest in products and improve the quality system as a direct opportunity to improve products and increase profit margins.
In the third quarter, we made progress in every area.
We have made significant progress in integrating the activities of the three facilities in the Midwest into two, reducing our actual footprint and leveraging our existing supply chain capabilities.
Soon, we will complete our annual planning process, which will give us a clear understanding of our most critical and relevant products and provide direction for the focus of our future resources.
As I mentioned earlier, we made significant progress in improving the quality system in Seattle and made similar investments in our design team and manufacturing organization.
In addition to these achievements, we are still making many more modest but meaningful changes, as well as the way we operate in Natus, and posing serious challenges to the way we do business, who we hire and where we use our limited resources. In the long-
We continue to make progress in developing and launching unique products that serve niche markets and provide important opportunities for growth and profitability.
The third quarter is the commercial release quarter of Otoscan, and we installed more than 50 devices at the end of that quarter.
Otoscan is a revolutionary device that uses a simple-to-
Use ear scanners suitable for custom hearing aids.
The foundation of this initial installation is a small part of the global opportunities we see for this technology, and we are very excited about its long-term development.
Potential terms for customers, patients and Natus.
We also launched four new neurodiagnostic products this quarter.
These include quantum 2, the follow-up of our successful quantum products, and three amplifiers for EEG and sleep
Each product demonstrates our ability and commitment to help our customers deliver better quality care and increases the total cost of delivery.
In terms of neonatal care, we have also made progress on a number of products that we expect to be brought to market early next year.
In conclusion, we are very encouraged by Natus\'s future business performance and opportunities. We have market-
Leading in many of our products and markets, we will continue to focus on the profitability of our business with the goal of expanding profit margins and increasing cash flow.
Now, let\'s talk about our point of view.
In the fourth quarter of 2018, we expect revenue of $0. 135 billion to $0. 14 billion.
GAAP earnings per share are $0. 48 to $0. 51.
Throughout the year, we expect revenue of $0. 525 billion to $0. 53 billion.
GAAP earnings of $1 per share. 47 to $1. 50.
Revenue guidelines for the fourth quarter and throughout the year assume 2. 7% and 6. 5% year-over-
Organic growth, not
The GAAP earnings per share guidance reflects an overall revenue growth of about 14% to 21%.
Next, I would like to introduce and welcome Drew Davis to Natus as our executive vice president and chief financial officer.
Drew has nearly 30 years of experience in listed companies in Natus, including chief financial officer, corporate finance director and various other positions mainly in the technology and electronics industry, with a proven track record of growth, change management, improve financial performance.
I look forward to working with Drew.
I now transfer the call to him to review the financial results. Drew?
Thank you, Jonathan.
First of all, I want to say how excited I am to join Natus.
The company has enviable market leadership, has many products and services, has experienced tremendous growth over the years, and has demonstrated core competencies in acquisition and integration.
I look forward to being part of the team and contributing to the company\'s performance.
With this, let us on the basis of recognized accounting principles, as well as inGAAP basis. Our non-
The GAAP results do not include amortization fees, restructuring, product remediation costs, and certain other expenses and their associated tax implications.
We believe that these
GAAP measures and our GAAP financial statements provide a more comprehensive analysis of our ongoing financial performance.
You can find the reconciliation of our financial results on GAAP and non-GAAP
In today\'s press release, the basis of GAAP.
I will also note that we have listed Gross margin in our press release by Business Unit and geographic revenue to continue to increase transparency in financial results.
As Jonathan said, we report revenue for the third quarter of $2018, $130. 6 million, a 6.
Growth of 5% year on year.
Revenue growth was driven by organic growth and acquisitions in the neurosurgery business last year.
The income of our neural business unit is $69.
$8 million, representing 53% per cent of total income in 2018, compared with $59.
4 million, accounting for 48% of total revenue for the same period last year. The 17.
The newly acquired neurosurgery business has increased nerve revenue by 6%.
But the nerve also achieved organic growth of 2.
1% and the favorable foreign exchange rate contributed another 0. 5%.
Revenue from our neonatal care business unit has fallen by 7. 3% to $31.
Revenue for the third quarter of 2018 was $2 million, or 24% of total revenue, compared to $33.
7 million, accounting for 27% of total revenue for the same period last year.
The decline in new businesses was driven by product rationalize and the devaluation of the Argentine peso.
Revenue from our Otometrics business unit is $29.
Revenue for the third quarter of 2018 was $6 million, or 23% of total revenue, compared to $29.
Total revenue for the same period last year was 6 million and 24%.
The Otometrics division achieved revenue growth of 0. 1%.
In the third quarter of 2018, equipment and system revenue accounted for 72% of total revenue, compared with 64% for the third quarter of 2017,201, and supply and service revenue accounted for about 28% of total revenue, compared with 36% for 2017.
Domestic sales revenue for the quarter of 2018 was about 60%, compared with 56% for the same period in 2017.
International sales revenue for the quarter of 2018 was about 40%, compared with 46% for the same period in 2017. On a non-
Our gross profit margin fell by 51 basis points to 60 basis points in 2018, according to GAAP.
Compared to 61, 6%.
The third quarter of 2017 was 1%.
This decline is mainly driven by favorable changes in reserves excluded from non-reservesGAAP results. Non-
GAAP increased operating costs by $2.
Up 2 million from the same period last year.
The increase in operating expenses is mainly due to an increase in operating expenses obtained as part of the neurosurgery business, as well as additional expenses for new product development, including Otoscan and RetCam.
Despite the growth of operating expenses, our
GAAP operating profit margin increased to 14% compared to 13.
The same period last year was 3%, due to the positive impact of increased revenue on operating expenses.
Other income is $0.
Affected by exchange rate fluctuations, the third quarter was 9 million.
Interest expense is $1.
This quarter was 6 million.
We expect interest spending in the fourth quarter to be about $1.
4 million, the annual interest expenditure is approximately $6. 6 million.
Our third quarter
The actual tax rate is 24%.
We expect 2018 of our total
The GAAP tax rate is 22% to 24%. On a non-
A net loss of $5 is based on GAAP.
6 million, or $0.
$17 per share, $2.
Growth of 9 million over the same period last year. Non-
GAAP net income increased by $0.
Up 3 million from the same period last year. Non-
The diluted GAAP earnings per share are $0. 40.
In the third quarter, we recorded $8.
9 million of the cost of depreciation and amortization, and share-
The base compensation is $9.
Third quarter 7 million.
Now let\'s take a look at the balance sheet and cash flow.
We paid $5 million in outstanding debt in 2018.
As a result, we ended the quarter with a net debt of $60 million.
Business cash flow is $7.
5 million, our number of outstanding days decreased by one day, compared to 2018, to 85 days, mainly due to the decline in outstanding AR in our Otometrics business. Non-
The number of issued GAAP diluted shares increased to 33 shares.
Compared with 5 million shares, 33.
1 million shares in the same period last year.
With that, let\'s start asking questions now. Question-and-
Our first questions came from Brian Weinstein and William Blair.
Your line is now open.
Thank you for answering the question.
Brian, Jonathan Kennedy.
I think we\'re going to start with the Otometrics numbers, a little lower than the numbers I think people are looking for in order.
Could you please talk about some of the dynamics that are working in Otometrics?
I think you talked about something about America last quarter. S.
Orders that were not passed compared to the previous year.
Are we dealing with the United States? S.
One more thing happened here, or is there anything else? Thanks.
So we\'re backwards on your question. The U. S.
Actually, for us, Otometrics is really a quarter, much stronger than the previous and last quarter of last year.
If you look at it for a year-over-
If you remember, the figures for the third quarter of last year, we have implemented-in last October, we implemented the ERP system for all Otometrics outside the US.
So, as a result, we had higher revenue last quarter and then we rolled out from the third quarter-sorry, from the fourth quarter to the first.
So the third quarter of last year was a little lighter than you expected.
So, we won\'t have the motivation to enter this year.
So, the rest-Brian, does that answer your question? Sorry.
Brian WeinsteinWell, yes, I mean, I guess I was just thinking that it doesn\'t look like it even in order.
I mean, is this in line with your expectations for Otometrics for this quarter?
Jonathan Kennedy was in line and it stayed at the low end of what we thought it would come in.
We do have some problems, for example, in Turkey and Iran, in Turkey, the devaluation of the currency, in Iran, in the United States. S.
Sanctions, or lifting US sanctions. S.
Withdrawing from the agreement with Iran has caused problems for us to import products to Iran.
This may not be $1 million yet, but it\'s not far away for what we expect to do in Otometrics.
However, whether or not this will happen in the fourth quarter, we do not believe that these issues will be resolved.
Therefore, it also helps to achieve a lighter-than-expected Otometrics in the fourth quarter.
Brian weinth is treasure.
Then, when it is related to the ear scan, you put 50 units outside.
Can you talk about their business model?
Are these actual sales? What’s the ASP?
Who\'s buying these now?
Jonathan Kennedy. yes.
So these are the first business units we have.
Today\'s business model is unit sales, and I think we \'ve discussed this in the past, we launched this product for the first time, and I\'m going to call it a few hundred units, and we\'re trying to build a market there, and determine how the data will actually move back and forth between the manufacturers between audiologists.
ASP, well, I can disclose ASP, but we have said in the past that this is a $12,000 to $15,000 device.
It can be said that the early ones were a little less than this.
But there are 50 units in Audiology or audiology stores, retail locations, and now they are connected to this system and scanned.
We expect this to continue to grow.
That\'s a little more than I thought we \'d finish in the first four quarters.
So this is a positive aspect, the interest is still high, and we have high hopes for it to enter the fourth quarter and next year.
The details of the time will tell us, but we are very excited about it.
Brian WeinsteinAnd, then my last one, can you please talk to the new board, what are the priorities of the board at this point?
When do you expect to give us some formal updates on how you see this long term
The semester guidance you gave last year, and some more specific details of some of the bigger projects you\'re looking?
Jonathan Kennedy. yes.
I think, as I said in the prepared comments, we \'ve -- we \'ve taken a big part in the annual planning process, and we usually end up in the medium term --
On December, we discussed such matters with the board of directors.
I think once we have done this, we will have a clearer understanding of the priorities in the neighborhood
What are the deadlines and long-term prioritiesterm.
It\'s a little early now.
We \'ve been doing it for a few weeks, but it\'s too early to give the new board too many priorities. We’ve done on-
Boarding and the new board have some learning to do on Natus and similar things.
So the process is not easy, and as you would expect, it will be distracting to run only the business.
But I think we have a solid foundation right now.
Once we have completed the planning process, we will have some clear understanding of the future.
On top of that, I mean, I \'ve outlined it in my script, and then last quarter, I talked a lot about what the short-term goals are and what our long-term positions are --term.
Nothing has changed than these.
The next question comes from David Solomon and rose Capital Partners.
Your line is now open.
Guys, David solomeng.
Thank you for answering my question and congratulating you on the new position.
Thanks, drew David.
Welcome to David solomeng.
So, I guess, I just wanted to follow up on Brian\'s situation about ear tests, and I\'m glad to hear that we \'ve made some progress with ear tests.
In the past, we have heard that this could be a market opportunity of more than $0. 2 billion.
Obviously you\'re building the market and it\'s just-it\'s understandable, it\'s not linear.
I guess, I just wanted to have a little color on your idea of the ramp track?
And then what we heard recently about the excessesthe-
Anti-hearing aids, then Bose and some of them, like how this works in your strategy, what are our expectations for ear scans, then there\'s the organic general in the Otometrics section?
So, I started with things like Otoscan, ramps, etc.
It\'s hard to say, I mean, there are thousands of audiology stores that can use this device.
The path to these markets could affect early adopters, big company stores, and things like that.
First of all, I expect this to be a meaningful growth in the coming quarters.
Besides that, it will be hard to say.
We\'ll see if this is something that is widely adopted in small stores, faster or slower, we just don\'t know, it\'s a new product and a new market, and there\'s no other analogy in the field of Audiology.
So, we\'re excited about it.
At the trade show, it has received a lot of attention, and customers are definitely interested in this equipment, and they are interested in it economically.
So, we are working on this, and then we have built an ecosystem between audiologists and ear mold manufacturers and hearing aid manufacturers to ensure that this ecosystem works well.
I guess the answer is, you\'re really on a track and we\'ll think it\'s going on slowto-
Our pace is modest in the coming quarters, but as technology evolves, we may accelerate growth.
Thank you for the color.
Then I\'m following up.
My understanding is that there is a large group of people in this market-there are more people in the elderly community who do not seek hearing aids.
I\'m curious to hear your thoughts on ear scans, how does this increase penetration and then
Through the market overthe-
Anti-hearing aids, whether it is possible for you to expand the target market, and then this share, how are they likely to take a share, what kind of threat do you see in it?
Jonathan Kennedy please keep in mind that whether it\'s ear mirror scanning or any other product that Otometrics offers to the market, we are very focused on the high-end Hearing Aid Market, this is achieved through the market for audiologists and hearing aid distributors, as well as through hospitals and markets around the world.
The entry or creation of this newly defined excessive marketthe-
Anti-hearing aids, we don\'t think this must be a direct competition with superiors.
End hearing aids.
We think this may be an extension to people who actually use hearing aids.
So, maybe by the time you\'re in your 60 s or 70 s, the hearing aid may exceedthe-
The counter-solution has pulled the situation to people in their 40 s and 50 s.
We have not yet seen a significant impact on our market.
The trend now is that we have to see how it is.
You see-yes, you mentioned Bose, and Bose has a hearing aid device that they just launched.
I think it\'s interesting, but for us, the custom hearing aid market is a more costly device for patients.
The installation and customization of these things is more like a subtle product.
We haven\'t seen this effect so far.
We\'ll see how time pulls it out.
But our overall view is that as long as the high-end market is expanded,
As people get used to and comfortably wear things in their ears, the hearing aid ends.
Very helpful David solomeng.
Finally, about the income statement.
First of all, with regard to gross margin, it seems to be a little lighter than we had predicted.
I just wanted to know what you would think in the next few quarters.
On the other hand, the operating expenses seem to be lighter than we predicted, and it seems that some of the integration work you are trying to do is, there is some progress, I just wanted to find out what we expect for 2019 of our operating expenses?
It looks like our prediction is that at least my prediction may be a little higher than if you continue with this integration.
So want a little color too?
Thank you for answering the question. Drew DaviesYes.
Hi David, this is Drew Davis.
So we expect our gross margin for the fourth quarter to return to the second quarter between the third and second quarters.
In the third quarter, we had a reserve that we didn\'t have-which benefited GAAP earnings, but we didn\'t
GAAP earnings, we took it out because we took it out when we pulled the prep gold in the last quarter.
So, that makes our profit drop a bit, but we expect it to pick up in the fourth quarter.
Then, in terms of operating expenses, we will continue to focus on this, on our operational efficiency, and look for opportunities there.
I think since I joined the company this is one of the things I have had the opportunity to do in my last company and some other places where I have worked, I am very concerned about gross margin and many areas.
In the early days of my career, I did a lot of work on inventory costs, that is, as this year continues, I will focus on those areas.
Just a quick follow-up-up on that.
You think we can see
The general accounting business costs another 60 million less than $1/4, probably back in 2019, or is that a new benchmark, in your opinion?
I just want to know what a fully integrated company with these three departments will look like?
Jonathan Kennedy. yes.
I think it\'s hard to say at this point, David.
I think our annual plan has started now.
You asked or Brian asked when you could hear this.
We released our annual earnings announcement at the end of January.
I think it\'s a timeline where we can talk about the model and where we see the company go beyond where we are today.
But at this point, we didn\'t really put anything into it in 2019.
This will be a timeline looking forward to seeing this.
Thank you very much for answering my question.
Thank you, David.
Thank you. [
The next question comes from Jason Bedford with Raymond James.
Your line is now open.
Thank you for answering the question.
Only a few of them are similar
About the previous question
On Otometrics, the growth of the business has changed the most here.
Sounds like America. S.
That means the international market is a bit weak and I\'m just curious why.
Is there a foreign exchange impact affecting the business?
Jonathan Kennedy. yes.
Forex is the smallest.
I mean, we did this analysis last week, very little.
As I said, we do delay or really stop shipping to Turkey and Iran because of their ability to pay.
This cost us about $1 million a quarter.
So this is part of it.
The rest is, except as you pointed out-as you asked about the US market, we can\'t see any major changes in the market. S.
We do have an extra-we have a really good quarter in the USS.
Jonathan, the $1 million impact, will this continue in the next three quarters before we mark it?
I\'m not sure if this is the first quarter of the impact.
This is the first quarter of Jonathan Kennedy.
It will continue until we resolve the Iranian and Turkish issues.
My guess is that when we figure out what the supply chain looks like to bring medical devices into Iran, Iran may be resolved first.
I believe it will happen.
Just a little more complicated than before.
Then in Turkey, you-anyone can guess when Turkey\'s currency will become the currency they can buy and import products.
Their Turkish lira has fallen by 40% or 50%, so as their costs have risen so high, they have almost stepped out of the ranks to buy international products and doubled.
Overall, I apologize if I missed this.
What is the impact of foreign exchange on the overall business this quarter?
Overall, Jonathan Kennedy is the smallest, probably less than a few hundred dollars net.
The gross profit margin of Otometrics looks like a quarterly decline. on-
A similar income base.
Is ear scan reflected?
Jonathan kendyi means that Otoscan does not have the highest profit in the book.
They may be close to 60%.
So they\'re a little lower than the average incremental gross margin, so they won\'t do that.
We have the inventory adjustment that drew mentioned, it\'s a benefit and we won\'t
So it hurts profit margins.
Drew David\'s overall profit margin.
I think, as Jonathan pointed out on Otoscan, the initial ASPs were a bit lower than we expected because it was some introductory pricing.
Jonathan Kennedy your gross margin does rebound a bit based on the number of products we sell and the product mix, and our guidance is a little weaker than we expected.
Shipments of neurodiagnostic products, of which Profit Margin-Gross margin is our highest.
So this could have had the most impact on the quarter, followed by this adjustment that Drew was talking about, and then he noticed that the degree was much smaller, the lower edge mixture scanned by the ear.
I mean, I don\'t want to say Otoscan is nothing, but it\'s very close-it\'s not really a problem with gross margin just because of its volume.
In terms of the new business, it is clear that the business has been under some pressure for some time.
Just trying to measure the impact of new products.
Will these new products launched in early 2019 have an impact on growth?
Jonathan Kennedy believes they will.
Very exciting, by the end of next year, we will have a new hearing filter, faster than this, and we will have a new RetCam device, this is our screen device that we see in newborns.
That product is 15 years old.
This will be the first new product RetCam has launched for RetCam over the years.
Old products have a lot of things to need in connection to the hospital network, camera quality, equipment size, etc.
Therefore, we are pleased to be able to push forward the upgrade plan in the United States.
As a result, more than 1,000 RetCam devices belong to that era in the United States.
Therefore, it is reasonable to expect the upgrade cycle of RetCam to last for several years.
RetCam is very profitable for us and is a big chunk of the newborn care portfolio.
On top of that, we also have a new NICVIEW camera, which is our baby camera and parents, friends and family can see the baby from the outside.
We have a new release that we think will help drive more adoption and upgrades for hospitals that already have them.
In the first two years, the new baby screening person RetCam requires 510 (k)
Not the camera. is that fair?
This is correct.
510 required for RetCam (k).
It may take 510 to filter the program (k).
I don\'t want to say it\'s for sure, I\'m not sure we\'re 100% people there.
But the camera is not such a medical device.
So it does not require any FDA approval.
Finally, in neurosurgery, it\'s just an attempt to triangulate some of your comments about nerve growth.
It looks like it\'s down about $1 million in a row.
Is it at the baseball stadium?
Jonathan Kennedy. yes.
Jason BedfordOkay. Thank you.
Welcome Jonathan Kennedy. Thanks, Jayson.
The next question comes from Brian Weinstein and William Blair.
Your line is now open.
I just want to make sure I understand.
So you wrote down the income guidance and EPS guidance a little.
But I\'m not sure if I understand the fundamentals of it.
What you see in the fourth quarter is what you mentioned in terms of income Iran, Turkey?
It looks like this is the direct reason for the decrease in EPS.
But I just wanted to clarify. Thanks.
Jonathan Kennedy. yes.
It is clear that Iran and Turkey are part of it, and that is what we know.
Our income is lighter than guidance, and we think we will enter the third quarter.
So we \'ve been pushing this easy for the rest of the year, in other words, more or less keeping the fourth quarter similar from an income point of view, but falling in total annual revenue.
Then in terms of profitability, we also-we put more into R & D organizations, which is related to the reconstruction of the quality system.
Then, maybe it\'s still possible to get back to income recovery, and we\'re continuing to depreciate in Argentina, which is hurting the newborn care business and worse than we expected for the third quarter.
So I want to say that these three things, Argentina, just have a decrease in total revenue in the third quarter, and then know that our R & D spending in the fourth quarter is a little more than we expected, I took those as the culprit of the lighter guide.
The last thing for me is, can you give an update on Peloton?
I gave it to you. Thanks.
Peloton is still a solid business for us.
We have about 130 hospitals offering hearing screening services.
We \'ve been through a while and have experience with accounts receivable and even in this quarter we have $1 left.
5 million the receivables adjustments we made to Peloton, which have accumulated over the past few years, we just did not receive payment from certain hospitals in certain states.
So again, we went through this annual planning process to decide where we stand with these states where payments cannot be made to the level you need.
Some of these contracts have been converted to pay service fees directly to the hospital.
So it\'s just a simple outsourcing project and we\'re not actually trying to charge the payer.
We would like to see this adoption more often, but you are dealing with the financial capacity of the hospital, whether or not they can do it or not.
So, it\'s a growing business and I would say that it keeps us in close contact with our favorite customers, but in the last few quarters, we have also raised some challenges.
I have not raised any further questions now.
I would now like to transfer this call to Jonathan Kennedy for further comment.
Thank you, operator.
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Thank you all for attending today\'s meeting.
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