It was another fine quarter for Natus Medical , especially for the bottom line.
Revenue from the medical-device maker wasn't anything to get too excited about. While the company exceeded its revenue guidance for the quarter, revenue was up only 5.2% year over year. That increase included a hit from the stronger dollar; at constant currency, revenue would have increased 6.7%. The increase is solid, but certainly not the hyper-growth we've seen previously when the company was in acquisition mode.
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Adjusted earnings, on the other hand, looked fantastic with a 21.7% year-over-year increase. Adjusted earnings per share were up an equally impressive 18.1%.
The discrepancy (times two)Earnings increased faster than revenue for a couple of reasons. First, margins have increased as the company has integrated past acquisitions, and Natus Medical can use its larger size to leverage its sales. Despite growing sales by almost $5 million, operating expenses decreased by about $0.40 million. All of that extra revenue flows down to the income line.
Put another way, in the third quarter, Natus Medical's adjusted operating profit margin hit 20%, putting the company well on its way to reaching its goal of 18% this year. As you'll recall, the company's long-term goal is to have a 20% adjusted operating profit margin, which it appears Natus will be able to hit next year.
The other obvious line on the profit and loss statement that changed between the two quarters was a $1.4 million "other expense" in the third quarter of 2014, which was $7,000 in "other income" for the most-recent quarter. According to the 10-Q for the third quarter of last year, "other expenses" break out like this.
Yes, that's an "other" expense inside an "other expense" category on the profit and loss statement. We'll have to wait until the 10-Q comes out for this quarter to see what changed, but it's unlikely to alter anyone's feelings about the underlying business. Not losing money on foreign currency is great, but isn't sustainable as a business model for growing earnings.
Looking forwardManagement remains excited about its new brain-mapping Quantum high-channel amplifier, mentioning that revenue had already met internal sales goals for the year, with two months left to go.
Source: Natus Medical.
Natus' new service business should help drive growth and margins in the future. Peloton, Natus' newborn hearing screening outsourcing service, is progressing. NicView, which allows friends and families to see the baby in neonatal intensive-care units over the Internet, is now in more than 64 hospitals, up from "more than 50" last quarter. Natus is shooting for launching the service outside of the U.S. in the fourth quarter.
And the company has announced a couple of government awards that should add revenue in the future. California renewed its hearing screening contract with Natus Medical at a higher rate, and the company recently announced a $232.5 million, three-year agreement between its Argentina subsidiary, Medix, and the Venezuelan Ministry of Health.
Investors can expect more leveraging of margins next quarter. Natus Medical increased its revenue and earnings guidance for the year. The company expects revenue of $102 million to $105 million in the fourth quarter, which would be an 8.5% to 11.7% increase over the $94 million seen in the year-ago quarter. On the bottom line, management is guiding for fourth-quarter adjusted earnings of $0.47 to $0.49 per share, a 20% increase at the midpoint.
The article Natus Medical: This Baby Can Leverage originally appeared on Fool.com.
Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Natus Medical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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