Natus Medical Inc Hears a Bright 2017

By Brian Orelli Markets Fool.com

Natus Medical (NASDAQ: BABY) announced fourth-quarter earnings on Wednesday, and while the revenue line wasn't much of a surprise since it fell squarely in Natus' revised expectation of $107.5 million to $108 million that was announced last month, investors got to see how the bottom line income number came in for the quarter.

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Image source: Getty Images.

Natus Medical results: The raw numbers

Metric

Q4 2016

Q4 2015

Year-Over-Year Change

Revenue

$107.7 million

$100 million

7.7%

Income from operations

$14.9 million

$10 million

48%

Earnings per share

$0.31

$0.26

19%

Data source: Natus Medical.

What happened with Natus Medical this quarter?

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  • The GAAP numbers include costs of acquisitions, the remediation efforts at the Seattle facility in the fourth quarter, and a recall during the year-ago quarter. When you back those out, Natus Medical earned $0.51 per share, the same as the year-ago quarter.
  • That $0.51 per share was slightly lower than the guidance of $0.52 to $0.55 per share, which management blamed on a mix of lower gross margin products sold, a higher than estimated tax rate, and an increased research and development spend.
  • Most of the revenue growth came from newborn care, which was up 18.8% year over year. Sales of Natus' neurology products and services were up just 1.3% as the voluntary ship hold for regulatory issues remained in effect. Management said the first product will come off of ship hold by the end of this quarter.
  • Peloton, the company's hearing screening service, signed 23 new hospital contracts in the fourth quarter, bringing the total companies under contract to 127.
  • Natus closed the previously announced acquisition of Otometrics last month.
  • Revenue from the Venezuela contract was $9.1 million during the quarter.

What management had to say

President and CEO Jim Hawkins talked about how combining Natus' and Otometrics' products could help increase operating profits for both sets of products. "In hearing-screening, certainly we are a strong number one position in newborn hearing-screening and they are a solid number two," Hawkins said. "So I think the combination of the two businesses being able to really promote the correct product for the market in each individual country will certainly be a benefit."

Sales in international markets were up year over year thanks to the aforementioned revenue in Venezuela, which is a welcome change from previous quarters where Natus had to deal with currency changes lowering revenue and making its products more expensive compared to its locally made competitors. "We look at coming from headwinds to tailwinds now on the international front which could be a real positive," Hawkins said.

Looking forward

Management is looking for revenue of $122 million to $124 million, including $10 million from the Venezuela contract, in the first quarter and adjusted earnings of $0.32 to $0.34 per share. Full-year guidance is for revenue of $505 million to $510 million and adjusted earnings of $1.80 to $1.85 per share. While more money could come from the contract with Venezuela, management is smartly keeping it out of the full-year guidance beyond the $10 million from the money it's already collected from the Venezuela government.

The midpoint for the annual guidance puts revenue increasing by about 33%, thanks in large part to the addition of Otometrics. Unfortunately not all of those increased revenue will fall to the bottom line. The midpoint of guidance puts adjusted earnings per share going up almost 13% as Otometrics' margins aren't as good as Natus' margins. Fortunately management thinks it can increase operating margins from an expected 10% this year to 20% next year, offering further growth in 2018.

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