Natus Medical Incorporated

Good morning, everyone, and thank you for joining us today to review our results for the third quarter of 2021. On the call today from NADIS is Jonathan Kennedy, NADIS President and Chief Executive Officer, and Drew Davis, NADIS Executive Vice President and Chief Financial Officer. Jonathan will begin today with a business overview of the third quarter 2021. Then Drew will discuss the third quarter financial performance. Finally, Drew will return the call to Jonathan for closing remarks. Today's call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include management's beliefs and expectations about our future results. Our actual research meetings were materially from these forward-looking statements. For a description of relevant risks and uncertainties pertaining to our business, please see yesterday's press release and our periodic and annual reports, followed by the SEC. Management's presentation of the financial results will be on a gap and non-gap basis. The non-gap results exclude amortization expense, restructurings, and certain added charges and the related tax effects. Management believes that the presentation of these non-gap measures, along with our gap financial statements, provide a more thorough analysis of our ongoing financial performance. You can find the reconciliation of our financial results on a GAAP versus NANGAP basis in yesterday's earnings release. I would like to turn the call over to Jonathan Kennedy, President and Chief Executive Officer of Natus Medical. Mr. Kennedy.

Thank you, operator, and good morning to everyone. During our call today, we will discuss our third quarter 2021 financial results, as well as our current business trends. Yesterday evening, we reported the results for the third quarter of 2021, and revenue for the quarter achieved the mid-range of our guidance at $113.9 million, and non-GAAP earnings per share was 28 cents. We are encouraged by the 11% increase in revenue in the third quarter of 2021, compared to the same quarter in 2020, despite the recent supply chain constraints. Demand for our products and service continue to improve throughout the quarter. We saw the benefits of our investments in innovation this quarter, with the release of the new RETCAM Envision newborn eye imaging system in the United States. We also saw the first successfully performed clinical case using Natus' newly launched Exactrode family of subdural electrodes, and another quarter of growing sales for our UltraPro EMG device, which was released in the fourth quarter of last year. In a few minutes, Drew will discuss more financial details, but first, I'd like to provide some additional commentary on the quarter and each of our end markets. As you know, Natus is a global leader in neurodiagnostics. Our products and services are used by a majority of hospitals and neurologists worldwide. We have the most comprehensive line of neurodiagnostic equipment offered by any global manufacturer today, offering a full line of EEG, EMG, and PSG solutions. Overall, our neuro business grew by 19% year-over-year during the third quarter. led by EEG and EMG sales, which increased by 27% and 22%, while neurosurgery products increased by 16%. Our hearing and balance products include devices and supplies used by audiologists, hospitals, and EMT to diagnose hearing disorders, assist in the fitting and tuning of hearing aids, and for the diagnosis of balance disorders. Revenue from hearing and balance grew by 6% versus the same quarter last year, led by an 11% increase in hearing assessment product revenue and a 33% increase in our hearing aid fitting product revenue. Supply constraints led revenue from our balanced products to decrease by 52% versus the prior year. Natus' market-leading newborn care product family is used by hospitals worldwide. Major product categories in this family include our newborn hearing screening solutions, neonatal eye imaging, and brain injury monitoring. video streaming services, and phototherapy solutions. Overall, newborn care revenues declined by 5% versus the third quarter of 2020, but primarily from order delays affecting certain international customers that use our newborn hearing screen products. In summary, we're very pleased with the growth that we had during the quarter. We remain focused on our strategy of investing to refresh our market-leading products and deliver new innovations, which we believe will drive our growth and future financial performance. Now, I'd like to turn the call over to Drew Davies, our Executive Vice President and Chief Financial Officer, for a deeper dive into our financial results. Drew? Thank you, Jonathan.

As Jonathan stated, we reported third quarter revenue of $113.9 million, an 11% increase from the third quarter of 2020. Supply constraints did impact our revenue results this quarter. However, we believe demand for our products remains healthy as evidenced by our backlog quarter of $25.6 million. Revenue from our neuroend market was $70 million, or 62% of total revenue, during the third quarter of 2021, compared to $58.8 million, or 50% of total revenue during the same quarter last year. Revenue from the neuro business increased 19.2% compared to the same quarter last year. The increase was driven by growth in devices, supplies, and service. Revenue from our newborn care end market decreased 4.8% to 24.5%, or 21% of total revenue during the third quarter of 2021, compared to $25.7 million, or 25% of total revenue during the same quarter last year. The decrease was primarily attributable to lower revenue from supplies related to the number of births and device supply constraints. Revenue from our hearing imbalance end market was $19.4 million, or 17% of total revenue during the third quarter of 2021, compared to $18.3 million, or 18% of total revenue during the same quarter last year. Hearing assessment and hearing fitting devices led to year-on-year increase in hearing imbalance. In total, revenue from devices and systems contributed 74% of total revenue in the third quarter of 2021 compared to 71% in the 2020 period. Revenue from supplies and services was 26% of total revenue in the third quarter of 21 compared to 29% in the 2020 period. Revenue from domestic sales was approximately 63% of total revenue and 37% from international sales in the third quarter of 2021, compared to 62% and 38%, respectively, for the same period last year. On a non-GAAP basis, our gross margin increased by 4.8 percentage points in the third quarter of 2021 to 61%, compared to 56.2% in the third quarter of 2020. The increase in gross margin was attributable to the higher mixed of North American neurosales, lower operations overhead, and the increase in revenue compared to the third quarter last year, offset by increases in materials cost. GAAP gross margin increased 13.3 percentage points to 59.5% in the third quarter of 2021, compared to 46.2% in the same period last year. The increase in GAAP gross margin was also impacted by an intangible asset impairment in the prior year that did not repeat this year. Third quarter non-GAAP operating expenses increased $2.8 million compared to the same quarter last year. The increase in expenses was driven by higher incentive pay related to the increase in revenues and the savings last year from required time off that did not repeat this year. Our non-GAAP operating margin increased by 7.4% compared to the same quarter last year on the increases in revenue and the improvements in gross margin. Other expense was $700,000 for the third quarter of 2021, driven by exchange rate fluctuations. Interest expense was $300,000 during the quarter. We expect interest expense in the fourth quarter of 2021 to be the same. and for the full year to be approximately $2 million. Our third quarter of 2021 non-GAAP effective tax rate was 24.9%. We anticipate our overall 2021 non-GAAP tax rate to be between 21 and 25%. On a GAAP basis, third quarter 2021 net income was $5.6 million or 16 cents per diluted share compared to a net loss of $9.3 million in the same quarter last year. Non-GAAP net income increased $6.1 million to $9.3 million compared to the same quarter last year. Non-GAAP earnings per diluted share was 28 cents. In the third quarter of 2021, we recorded $7 million of depreciation and amortization expense. Share-based compensation was $2.6 million during the third quarter of 2021. And now let's take a look at some of the highlights from the balance sheet and cash flow. We ended the quarter with $68.8 million in cash. Cash flow provided by operations was $7.1 million during the quarter. Our day sales outstanding increased five days versus the same period in the prior year to 77 days. Non-GAAP diluted shares outstanding increased to 33.9 million shares compared to 38.9 33.8 million shares in the same period last year. Now turning to guidance. Compared to last year, we've seen demand for our products and services increase in every quarter this year. Historically, we experience our highest quarterly revenue for the fourth quarter, and we expect that to hold true this year. With increases in revenues, we also expect to benefit from positive leverage resulting in higher gross margin, and income. With this in mind, we expect our revenues for the fourth quarter of 2021 to be between $124 million and $128 million. Gab net income is expected to be in the range of $9.5 million to $11.6 million for the fourth quarter of 2021, or 28 to 33 cents per diluted share. Non-GAAP net income is expected to be in the range of $13.8 million to $15.5 million, or $0.41 to $0.46 per diluted share. And with that, we will now open it up for questions.