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Oh Baby! Natus Medical Inc. Beats and Raises Guidance

Natus Medical (NASDAQ: BABY) continues its turnaround, hitting its third-quarter revenue guidance and beating its own expectations for adjusted earnings, which were forecast to be in the range of $0.37 to $0.38 per share.

Natus Medical results: The raw numbers

What happened with Natus Medical this quarter?

  • Otometrics accounted for almost all of the year-over-year increase in revenue, since it was acquired within the last year. It's contributing to the bottom line, with management expecting adjusted operating profit margin to exceed its goal of 10% for 2017.
  • Revenue from the neurology business was up 4.6%, while revenue from the newborn care business was down 1.4%, as Natus is getting less revenue per newborn from its Peloton hearing-screening business.
  • The hurricanes in Texas and Florida reduced Natus' U.S. revenues by approximately 1%.
  • The sharp decline in income and earnings had to do with a $10.8 million valuation allowance on Natus' U.S. tax assets. GAAP requires that the company reserve against the assets, although Natus thinks it'll be able to use them up within the 20 years before they expire.
  • Adjusted earnings are a better measure of bottom-line growth, and while earnings didn't grow as fast as revenue, that was to be expected given the lower margins at Otometrics, which Natus is working on increasing from breakeven when it was purchased.
  • Natus continues to add products through acquisitions, including neurosurgery business assets from Integra LifeSciences, which closed earlier this month and will start adding to earnings immediately with similar operating margins. Earlier this week, Natus announced a U.S. marketing deal for the Embrace MRI monitoring system, which is used in imaging of newborns. Natus will get a commission of 20% to 25% of the sales price, which it thinks will start rolling in next year.

What management had to say

While Peloton is generating less revenue per newborn, chief financial officer Jonathan Kennedy shared good news about profits from the business:

"In terms of getting Peloton on track, earlier in the year, Peloton was not profitable, and I'm happy to report that today, we've restructured that, and that business is doing quite well from a margin -- it's actually up above at least the current operating margins."

The Embrace MRI is self-contained, so it can reside in the neonatal intensive care unit (NICU). CEO Jim Hawkins sees this as a big selling point for hospitals to invest in the machine, which will cost $1 million to $1.5 million depending on the configuration:

Looking forward

With the acquisition of the Integra LifeSciences assets closing, management increased revenue guidance to a range of $514.5 million to $516.5 million and increased its adjusted earnings guidance to between $1.72 and $1.76 per share. Breaking out the fourth quarter, the guidance has Natus rounding out the year with adjusted earnings of $0.68 to $0.72 per share, a substantial increase over the $0.51 seen in the year-ago quarter.

Looking into next year, in the first quarter, Natus plans to launch the Otoscan, which takes a picture and creates a model of the inner ear to help with hearing-aid fitting. Natus thinks the annual market opportunity for Otoscan is about $200 million, which would be a meaningful increase in revenue, although obviously it will take years to capture that much of the market.

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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.