Why Natus Medical Inc. Sank Today

What happened

Natus Medical (NASDAQ: BABY) is down 12% at 12:06 p.m. EDT after reporting first-quarter earnings this morning.

So what

Revenue was up 43% year over year, which isn't something you'd normally see from a company suffering a double-digit decline. But the increased revenue was external growth from the acquisition of hearing aid-fitting specialist Otometrics, and investors are more focused on the adjusted earnings line, which fell year over year from $0.34 per share in the year-ago quarter to $0.30 per share in the first quarter of 2017. The earnings missed management's guidance of $0.32 to $0.34 per share.

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Management blamed lower birth rates and lower reimbursements from a shift by government payers, which resulted in lower margins on its newborn care businesses and its hearing services business, Peloton.

The weak first quarter led management to drop its adjusted earnings guidance for 2017 to $1.70-$1.75 per share from $1.80-$1.85 per share, although it kept revenue guidance the same at $505 million-$510 million.

Now what

Natus Medical plans to reduce costs to bring margins back up. It's also trying to expand services offered by Peloton as well as the number of payers, which should also help increase margins.

Management noted that it was ahead of schedule with its plans to achieve a 10% adjusted operating profit for Otometrics this year. If it can hit its goal of 20% adjusted operating profit for the new segment next year while growing revenue by 5% to 10% annually, the diversification through the acquisition will look like a good move a few years from now, especially if the birth rate stays low.

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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.