Natus Medical Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Natus Medical (BABY)

Natus Medical (NASDAQ:BABY)

Q4 2012 Earnings Call

February 28, 2013 11:00 am ET


James B. Hawkins - Chief Executive Officer and Director

Steven J. Murphy - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

John T. Buhler - President and Chief Operating Officer


Chris Lewis - Roth Capital Partners, LLC, Research Division

Brian Weinstein - William Blair & Company L.L.C., Research Division

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division


Ladies and gentlemen, thank you for standing by. Welcome to the Natus Medical 2012 Fourth Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, February 28, 2013, and contains time-sensitive information that is accurate only as of today.

Earlier today, Natus Medical released financial results for the 2012 fourth quarter. If you have not received the news release or if you would like to be added to the company's distribution list, please call Natus Medical in San Carlos, California at (650) 802-0400 or email your request to Investor Relations at This call is being broadcast live over the Internet at, and a replay of the call will be available on the company's website for the next 90 days.

In terms of the structure for today's call, Jim Hawkins, Chief Executive Officer of Natus, will present opening comments. Then Steve Murphy, Vice President of Finance and Chief Financial Officer of Natus, will summarize the company's financial results, and then Jim Hawkins will conclude the prepared remarks with comments about the company's financial guidance for 2013 before opening the call up to questions. John Buhler, President and Chief Operating Officer, will join in answering any questions.

Some of the information to be furnished in today's session will constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those focused on future performance, results, plans and events and include the company's expected results for 2012. Natus reminds you that future results may differ materially from these forward-looking statements due to a number of risk factors. For a description of the relevant risks and uncertainties that may affect the company's business, see its periodic reports on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission.

I would now like to turn the call over to Jim Hawkins, Chief Executive Officer of Natus Medical. Mr. Hawkins?

James B. Hawkins

Thank you, operator. Our fourth quarter results that we released earlier this morning reported revenue of $90.5 million compared to $64.1 million reported last year and non-GAAP earnings per share of $0.29 compared to $0.14 in our fourth quarter last year. I am pleased with our record non-GAAP profitability and improved gross profit in the fourth quarter. We believe our fourth quarter reflects excellent execution by our operating teams and show improved productivity and efficiencies at Natus.

Although delayed orders and softness in some International markets and in our domestic neurology business caused our revenue to come in below guidance, organic revenue growth still grew on a year-over-year basis by approximately 2.3%.

Our non-GAAP earnings came in over our guidance range in the fourth quarter and spending levels were reduced as a percentage of revenues in all departments, and most importantly, our gross profit on a non-GAAP basis showed improvement to 57.7% from 56.4% in our fourth quarter last year.

We expect to continue to show improved gross profits for core Natus in 2013, but as previously mentioned our recent Grass acquisition currently has a lower overall gross profit that will have a small effect on this metric.

In the fourth quarter, we successfully integrated the Nicolet sales organization into Natus to create what we believe is the largest neurodiagnostic sales and service organization in the world.

After entering this market just 7 years ago, Natus is now the worldwide leader. We're very proud of this accomplishment. We believe it puts Natus in a unique position to further drive technological advancement in this market and allows us to better serve our customers.

In the fourth quarter, we also reorganized Natus into 2 strategic business units; Natus Newborn and Natus Neurology. We also implemented Oracle for our corporate and North American operations. As we drive Natus to $500 million in annual revenues, we believe both of these initiatives will add -- will give added focus to our business, as well as bolster our organization and infrastructure to better assure achievement of our short- and long-term goals.

The integration of our recent acquisition of the Nicolet division of CareFusion was completed in the fourth quarter. The people, products and technology we obtained from this acquisition were beyond our expectations. The ability to leverage our product platforms and sales channels in the future will be meaningful. We are very encouraged for the opportunities that lie ahead for our neurology group.

In January, Natus announced and then successfully closed the acquisition of Grass Technology Products Group. These products are clinically differentiated neurodiagnostic and monitoring products. The Grass acquisition expands our presence in certain International markets, adds to our proprietary disposal of product offerings and provides Natus an entrée into the research segment of the neurodiagnostic market. Natus is now the leading provider of products into the worldwide neurodiagnostic market with leading positions in EEG, EMG and PSG technologies in both the United States and abroad.

Our Newborn business remains solid with market-leading positions in newborn hearing screening, phototherapy and brain function monitoring. We remain encouraged with the expansion of our incubator business into the large incubator market in the United States.

While our newborn business has experienced challenges over the last 4 years with birth rates being down in the developed world due to the worldwide recession, we are now becoming optimistic for this business segment as birth rates appear to be stabilizing as economies improve.

Our business model is to combine internal growth with accretive acquisitions. Having successfully completed both the Nicolet integration and the Grass acquisition, we are now laser focused on our goal of having Natus return to our historical financial metric for our core business in 2013 of a minimum 13% pretax non-GAAP operating profit.

For Nicolet in 2013, our goal is 10%. Combined, this equates to a 12% non-GAAP operating profit goal for consolidated results in 2013. Again, this is not guidance, but a goal.

In out years, we look to continue to drive improvement in our non-GAAP operating profit from our current 12% goal to 13% and higher, a range Natus had achieved from 2005 to 2010.

In 2013, we do not anticipate any large acquisitions until the end of the year at the earliest, but we would consider simple tuck-ins if they become available.

In summary, we are very pleased with the Nicolet and Grass acquisitions. These acquisitions have transformed the company as our revenues have increased by 40% in 1 year to a full year revenue run rate of over $360 million along with making Natus the world leader in neurodiagnostic products.

We remain one of the fastest-growing medical device companies in the world. With our strong earnings growth and emphasis on generating cash and delivering organic revenue growth in 2013, we look forward to an exciting year ahead.

With that overview, I would like to turn the call over to Steve Murphy. Steve?

Steven J. Murphy

Thank you, Jim. I will be discussing our fourth quarter 2012 financial results on a basis consistent with Accounting Principles Generally Accepted in the United States, or GAAP. I will also present selected results on a non-GAAP basis that exclude amortization expense and trade name impairments associated with certain acquisition-related intangible assets and certain other charges.

We believe that the presentation of these non-GAAP results aids in assessing the performance of our core business. We provided a reconciliation of our earnings on a GAAP versus non-GAAP basis in our financial results press release issued this morning.

All per share amounts presented today are on a diluted basis, except for our 2011 GAAP results of which we reported a loss. I will also discuss the contribution of Nicolet to our fourth quarter 2012 results. As a reminder, we acquired Nicolet on July 2, 2012.

First, I'll start with our GAAP results. We reported fourth quarter revenue of $90.5 million, representing an increase of 41% or $26.3 million from revenue of $64.1 million for the fourth quarter of 2011 and net income of $4.8 million or $0.16 per share compared with a net loss of $17.3 million or a loss of $0.61 per share for the fourth quarter of 2011.

For the year ended December 31, 2012, we reported revenue of $292 million compared to revenue of $233 million for the same period in 2011 and net income of $3.6 million or $0.12 per share compared to a net loss of $11.7 million or a loss of $0.41 per share for the comparable period in 2011.

On a non-GAAP basis, we reported net income of $8.6 million and earnings per share of $0.29 for the fourth quarter of 2012 compared to net income of $4.1 million and earnings per share of $0.14 in the same quarter last year, and for the full year 2012, net income of $18.4 million or $0.62 per share compared to $14 million or $0.47 per share in 2011.

Our non-GAAP results for 2012 exclude amortization expense and tradename impairment charges associated with certain acquisition-related intangible assets, restructuring charges, direct costs of the Nicolet and Grass acquisitions, the impact of purchase accounting, fair value adjustments to Nicolet inventory and backlog and the accelerated write-off of the carrying basis of our pre-existing ERP.

Revenue from devices and systems contributed to 61% of total revenue in the fourth quarter of 2012 compared to 58% in the 2011 period, while revenue from supplies and services contributed to 37% of total revenue in the fourth quarter 2012 compared to 40% in the 2011 period.

Other revenue, primarily freight, was 2% in both periods.

Revenue from domestic sales was $50.3 million for the fourth quarter of 2012 compared with $35.2 million in 2011 or 56% and 55% of total revenue in the respective periods.

Revenue from International sales was $40.2 million in the fourth quarter of 2012 compared to $28.9 million reported in 2011. Nicolet contributed to $27 million of revenue in the 2012 period.

Looking at revenue for the fourth quarter on a pro forma basis, as if we had owned Nicolet during the 2011 period, our revenue increased 2.3% in the 2012 period.

As we move towards a strategic business unit structure, we will begin reporting revenue based on that structure. In the fourth quarter 2012, revenue from the neurology and newborn units as a percent of total revenue was 63.7% and 36.3%, respectively, compared to 48.8% and 51.2% in the 2011 period.

I will note that fourth quarter revenue from supplies used with our hearing screening products was up 11.8% on a year-over-year basis and revenue from all of our newborn supply and disposable products was up 9% on a year-over-year basis to $12.6 million in the 2012 period.

Jim will present our 2013 revenue guidance in a minute, but for the full year 2013, taking into account the contribution of Grass, we expect that the mix of revenue from neurology and newborn will be approximately 63.6% and 36.4%, respectively.

With this new structure, we will no longer breakout freight revenues separately.

I will discuss our metrics for gross profit, operating expenses and the tax provision based on our non-GAAP results, which exclude the items mentioned earlier.

Our gross profit margin was 57.7% for the fourth quarter of 2012 compared to 56.4% reported last year and operating expenses were 44.8% of revenue for the fourth quarter of 2012 compared to 47.8% of revenue in the fourth quarter last year.

The tax provision on our 2012 fourth quarter non-GAAP results was significantly impacted by a reduction in the estimated annual effective tax rate from September 30 to December 31.

The reduction in the annual tax rate to 31.3% from around 34% at September 30 resulted in an actual tax rate of about 20% for the fourth quarter.

During the 3 months ended December 31, 2012, we recorded approximately $3 million of depreciation and amortization expense including $1.6 million of amortization of intangibles associated with our acquisitions.

We also recorded a $560,000 noncash impairment charge of trade names associated with prior acquisitions, and we recorded $1.4 million of stock-based compensation expense.

At the midpoint of our 2013 annual non-GAAP guidance, we are modeling a gross profit margin of about 58% and operating expenses of about 47% with these metrics improving throughout the year. We expect our effective tax rate will be 31% to 32% absent discrete items.

We expect the depreciation and amortization expense will be approximately $11 million, including approximately $5.3 million of amortization expense associated with inquired (sic) [acquired] intangibles. We expect stock compensation expense will be approximately $5.8 million, and we expect about $800,000 of interest expense.

Our earnings per share guidance is based on an expected diluted share count of approximately 30,600,000 shares.

And with that, I'll turn the call back to Jim.

James B. Hawkins

Thanks, Steve. Before opening up the call to questions, I would like to review our financial guidance for our first quarter and full year 2013, all on a non-GAAP basis, and make a few closing comments.

For the full year 2013, we expect to report revenue of $362 million to $367 million and non-GAAP earnings per share of $0.81 to $0.84.

For the first quarter of 2013, we expect to report revenue of $83 million to $85 million and non-GAAP earnings per share of $0.09 to $0.10.

Our non-GAAP earnings per share guidance excludes charges for amortization expense associated with acquired intangible assets.

In addition, our non-GAAP earnings per share guidance excludes the effects of restructuring charges that we expect to incur in 2013 associated with recent acquisitions, the amount and timing of which have not yet been determined and acquisition-related expenses associated with the Grass Technologies acquisition. We are not, at this time, providing GAAP earnings per share guidance because of the uncertain nature of the restructuring charges. I note that our non-GAAP guidance excludes the impact of any future acquisitions that might have on our results of operations.

In summary, we continue to execute on our business model and build a world-class franchise in both Newborn Care and Neurology. We are very excited about our opportunities in 2013 and look forward to delivering strong earnings, growing revenues and significant cash generation throughout the year.

With that, we will turn the call over to questions. Operator?

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Matt Dolan, Roth Capital Partners.

Chris Lewis - Roth Capital Partners, LLC, Research Division

This is Chris Lewis on the line for Matt. First question just relates to your 2013 revenue guidance, You're coming off a quarter here where you came in a bit below your expectation, but you've kept your 2013 guidance intact. So can you just discuss what you've seeing so far this year that makes you believe that 2013 guidance range is still achievable and what factors give you confidence to maintain that guidance at this point?

James B. Hawkins

Well, Chris, I think when we put our guidance together for Q1, we did really sharpen the pencil and try to make sure that our revenue forecast -- I don't want to say conservative because it's never conservative in this world environment the way the economies are, but we certainly did it in such a way that if we were going to err, we try to err maybe on the conservative side. With that said, it is a tough worldwide economic environment out there and -- with Europe being the way it is and some countries in Latin America, it is very tough to forecast. We are also giving extra focus on really our forecasting methods and maybe, John, I'll pass it on to you and you can touch on some of that.

John T. Buhler

Yes, certainly. I guess, I'll -- first I'll comment, Chris, and suggest that the run rates of orders in the fourth quarter, albeit we didn't get to the guidance level we had provided, looks significantly improved and some of that came in extremely late within the quarter, so unfortunately, we were unable to process that. But to Jim's perspective by a comment relative to sharpening the pencil or at looking at forecasting by splitting the business into business units and breaking down the forecasting methodologies now into discrete buckets, we think we can do a better job of really diving into those details and coming up with the volume of, if you will, funnel type. We'll feed into that forecast. I think that gives us greater confidence in 2013.

Chris Lewis - Roth Capital Partners, LLC, Research Division

Okay. That's very helpful. And then turning now to the non-GAAP operating margin goal of 12% for the year. We have you right around that for this quarter, which is seasonally strongest, so I guess, can you just talk about how you feel you're tracking relative to your expectations related to that 12% number? And how should we expect that number to trend throughout 2013?

James B. Hawkins

Yes, certainly, it is a big goal at our company to get back to our historic earnings metrics and we feel we are on target to do that. What was the other part of your question, Chris?

Chris Lewis - Roth Capital Partners, LLC, Research Division

Kind of how should we expect that to trend throughout 2013?

James B. Hawkins

Yes, the trending, we expect to see consistent improvement throughout the year, especially when you look at the seasonality of our business. Q1 revenues always drop off, and we've guided that way accordingly this year as well. But as you've seen in the last couple of quarters, if you look at Q3 and Q4, I think you'll see improvement and we expect that improvement to continue. Again, with that said, at the lower revenue base in Q1, we've guided earnings appropriately to those expected revenues.

Chris Lewis - Roth Capital Partners, LLC, Research Division

Right, okay. And then just last one here. Given we've been through a couple months here in 2013, can you provide some color on what you're seeing in hospital, in capital spending environments in the U.S. and Europe and maybe Latin America? And what's been the receptivity to the pricing so far this year?

James B. Hawkins

Sure, just in a -- try to be brief on this. I would say overall, the United States is stable. We have forecasted in our model, I think, a couple of percent growth, and I think we feel comfortable with that. Europe is -- continues to be a concern, although business does seem to be stable there, but it is a concern. Other parts of the world, Pac Rim seems to be doing fine. Latin America we've seen pockets of strength and weakness and that continues, and the order down there tend to be a little lumpy, and so we're anticipating some good business down there that we hope to receive. So overall, I would say since we put our guidance out at the beginning of the year, it's pretty much as we expected almost 2 months ago. John, do you have any color on that?

John T. Buhler

Yes. I think it's an accurate depiction of kind of how we're seeing order flow across the geography of the world. I do agree with Jim. The Latin American market is lumpy. It looks like there's some nice opportunities, but they come in spurts, so it's -- predicting is difficult. U.S. has settled out a bit and we've started to, I think, get into a better rhythm in the back half of 2012 that we see carrying in 2013. So I think that gives us some confidence around the guidance we've put out so far.


Our next question comes from the line of Brian Weinstein, William Blair.

Brian Weinstein - William Blair & Company L.L.C., Research Division

First question is on your comments around softness in the International markets. Can you talk a little bit -- specific markets where you're seeing weakness in specific products there. And then on the domestic neurology side, which is the other thing that you called out in the quarter, can you talk a little bit about the dynamics there? Is this just capital spending being kind of pushed out? Is this a competitive situation? Can you just make some comments on that?

James B. Hawkins

Sure, I'll start off and I think on the International side, it's pretty much the trend we've been seeing, really, over the last couple of years but certainly, the decrease we believe has gone down. I think we ended up last year overall showing about a 6% or 7% decrease in Europe, and we certainly don't expect that kind of decrease this year. I think we're, in our model, we're showing an additional 2% to 3%, and for the most part, everywhere else in the world, we're showing flat to up. So we do see the stability. As far as our Newborn business, I gave a little comment on that, that we have seen some stability there. There is obviously, a 9-month lag from where the birth happen as the economies improve, but we're, certainly, have seen that headwind that we were facing for a number of years appear to be going away. John, do you have any added color?

John T. Buhler

I think you're right. In Europe, look, the bigger countries have been the drivers for some of the slowdown for us. Germany, in particular, being one that was cautious last year, and we're hopeful that we're starting to see some rebound there. In the domestic market, I think yes, the question a little bit about competition on the neuro side, I don't think we're really losing to competition at all. I think we've just seen the general dynamics of hospital spend relative to capital purchasing, and hopefully that improves or at least doesn't change much in the way of from a planning perspective in 2013.

James B. Hawkins

Yes. And then to follow up on what John had mentioned earlier, we did, on a reported purchase, certainly the Neurology business was below our guidance, but we did have orders come in at the end of the year that we just weren't able to ship. So the overall tone of the business wasn't necessarily negative.

Brian Weinstein - William Blair & Company L.L.C., Research Division

Okay. And then we think about this goal that you have of the 12% pretax margin, by my calculation that would get you to about $0.95. So just trying to understand the difference between the goal and the guidance. What specifically on the revenue side would have to go right to hit that goal with specifically on the margins, be it gross and operating margin side, would have to go right in order to achieve that goal in 2013?

James B. Hawkins

Sure, Brian. Well, we established these goals as we've done at Natus for a number of years because we think it's important to let our shareholders know where we're trying to take the business. Rather than just looking quarter-by-quarter what our guidance is, we think giving more of a longer-term approach to what we're looking to drive the business, we think that's different than guidance. And so that is the reason we do that. When we look at being able to achieve our goals this year, a lot of it had to do with the work that was done in 2012 and we're happy to report a lot of that was done as far as the strategic business units, setting, integrating the Nicolet sales force into Natus and making it 1 neurology group, getting Oracle. If I didn't mention that, certainly, is -- was a lot of work and sets up for some real opportunities for us. As far as the revenue side, I think if we can come in at the mid or high range of guidance and if all goes well and we're able to implement everything and margin pressures hold, we're able to get our price increases and margin improvements that we want, we think we have a real shot at hitting our goals, but with that said, we don't want to make a guidance.


Our next question comes from the line of Jayson Bedford, Raymond James.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Just a few, just on Nicolet, I think you said it added $27 million in the fourth quarter and you also mentioned the organic growth of about 2%. And doing the math, can I just assume this is a pro forma number, meaning if you would’ve had Nicolet in the fourth quarter '11, that's the comparison? Is that fair?

James B. Hawkins

Yes, that's exactly right. When we do that, because it is the only fair way to do it, we think, once we buy the company we started integrating things and -- because sales forces were combined and whether our salespeople sell the Nicolet EEG product or the Natus EEG product, we really don't care. And so if you would have taken what Nicolet did in Q4 of last year, and I don't know if Steve gave that number. It was somewhere in the, let's say, $24 million range, and added that to our existing $64.1 million in revenues, that's the 2.3%.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Okay. That's helpful. And what are you looking for, for Nicolet in '13?

James B. Hawkins

We do not break it down that way, especially since they're combined. It just is Natus.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Okay. And you mentioned earlier the price increase. Can you just talk about how much of it you expect to hold? And how much did you raise prices?

James B. Hawkins

We hate to talk publicly about price increases, but we certainly did have a price increase, really, the last -- later part of 2012. Of course, we don't expect it all to stick because we do have GPO contracts and orders on the books and different commitments, but overall, we certainly look for that price increase to cover the vast majority of that medical device tax.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Got you. And the gross margin guidance, I think Steve mentioned 58% at the midpoint. Is that the base business? Does that include Grass?

James B. Hawkins

Say that again, Jayson.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Yes. I think Steve mentioned gross margin at the midpoint of 58%.

Steven J. Murphy

58%, yes.

Steven J. Murphy

That includes Grass.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

That includes Grass. Okay. It seems to imply a nice year-over-year jump. What kind of drives the improvement in gross margin in '13?

James B. Hawkins

Well, I think it's a couple of things. We just talked about price increase. If we're successful there, that will certainly help. And again, it's going back to the operation efficiencies and integrations that really took place in 2012. It took a lot of hard work, and our people did a great job in doing that.


[Operator Instructions] And at this time, I'm showing no questions.

James B. Hawkins

Okay, well, I'd like to thank everyone for participating in our Q4 2012 Year End Conference Call. We remain very excited about 2013. We've been working towards this for a good year, 1.5 year, to do these acquisitions, get them integrated and get the efficiencies and sales force to really take Natus to the next level, both on revenues and earnings. Thank you very much.


Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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