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Edited Transcript of BABY earnings conference call or presentation 24-Oct-18 3:00pm GMT

Q3 2018 Natus Medical Inc Earnings Call

SAN CARLOS Oct 25, 2018 (Thomson StreetEvents) -- Edited Transcript of Natus Medical Inc earnings conference call or presentation Wednesday, October 24, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benjamin Drew Davies

Natus Medical Incorporated - Executive VP & CFO

* Jonathan A. Kennedy

Natus Medical Incorporated - President, CEO & Director

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Conference Call Participants

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* Brian David Weinstein

William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst

* David Michael Solomon

Roth Capital Partners, LLC, Research Division - Director & Research Analyst

* Jayson Tyler Bedford

Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and thank you for joining us today to review our results for the third quarter of 2018.

On the call today from Natus is Jonathan Kennedy, Natus' President and Chief Executive Officer; and Drew Davies, Natus' Chief -- Executive Vice President and Chief Financial Officer.

Jonathan will begin today with a business overview of the third quarter and provide guidance for the fourth quarter and full year 2018. Then Drew will discuss the third quarter financial performance. Finally, we will open the call for your questions. (Operator Instructions)

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 results may differ materially from these forward-looking statements. For a description of relevant risks and uncertainties pertaining to our business, please see today's press release and our periodic and annual reports filed with the SEC.

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Jonathan Kennedy, President and Chief Executive Officer of Natus Medical. Mr. Kennedy?

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [2]

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Thank you, Jim. Good morning, everyone. Today, we reported our financial results for the third quarter of 2018. Revenue for the third quarter was $130.6 million, representing 6.5% year-over-year growth. Our non-GAAP operating margin increased 12.1% versus the prior year's quarter. The revenue growth was driven primarily from the addition of our Neuro Surgery business as well as modest organic growth in our neurodiagnostic business. Revenue from Newborn Care and Otometrics tracked expectations throughout the quarter, while the revenue growth in our Neuro business was slightly less than we anticipated. Drew will discuss revenue in further detail in a few minutes.

We also continued to make progress in the regulatory front, successfully completing an FDA audit and our first MDSAP audit in our Seattle facility during the quarter. While the completion of these audits do not relieve the Seattle warning letter, they do show evidence of the significant progress we have made in our Seattle quality system.

During last quarter's call, I mentioned a few of the immediate and long-term opportunities that lie ahead for Natus. In immediate category, I highlighted further integration efforts prioritizing product investments and improving our quality systems as immediate opportunities to improve our products and increase margins.

During the third quarter, we made progress in each of these areas. We made substantial progress in integrating the activities of 3 of our Midwest facilities into 2, reducing our physical footprint and leveraging our existing supply chain capabilities. Very shortly, we will complete our annual planning process, which will give us clarity on our most critical and relevant products and will provide us direction on where we will focus future resources. As I mentioned before, we have made substantial progress improving our quality systems in Seattle and are making similar investments throughout our design teams and manufacturing organizations.

In addition to these achievements, we're making many more modest but meaningful changes in how we operate at Natus and critically challenging everything from how we do business, who we hire and where we spend our limited resources.

In the long-term bucket, we continue to make progress in developing and launching unique products that serve niche markets and offer significant opportunities for growth and profitability.

The third quarter was the commercial launch quarter for Otoscan, and we ended the quarter with more than 50 units installed in the field. Otoscan is a revolutionary device that replaces decades-old messy silicone mold technology with an easy-to-use ear scanner used to fit custom hearing aids. This initial installed base is a very small fraction of the global opportunity that we see for this technology, and we are very excited about its long-term potential for customers, patients and Natus.

We also introduced 4 new neurodiagnostic products during the quarter. These include Quantum 2, a follow- on to our successful Quantum product, and 3 amplifiers used in EEG and sleep diagnostic applications. Each of these products demonstrate our ability and commitment to helping our customers deliver a higher quality of care and improvements in their total cost of delivery.

In Newborn Care, we also made headway on several products that we expect to deliver to the market in the early part of next year.

In summary, we are very encouraged with the performance of the business and the opportunities that lie ahead for Natus. We have market-leading positions in many of our products and markets, and we will continue to focus on the profitability of our businesses with a goal of expanding margins and increasing cash flow.

Now let's turn to our outlook. For the fourth quarter of 2018, we expect revenue of $135 million to $140 million and non-GAAP earnings per share of $0.48 to $0.51.

For the full year, we expect revenue of $525 million to $530 million and non-GAAP earnings per share of $1.47 to $1.50.

The revenue guidance for Q4 and the full year assumes 2.7% and 6.5% year-over-year organic growth while non-GAAP earnings per share guidance reflects overall earnings growth of approximately 14% to 21%.

Next, I'd like to introduce and welcome Drew Davies to Natus as our Executive Vice President and Chief Financial Officer. Drew comes to Natus with nearly 30 years of public company experience, including roles as CFO, corporate controller and various other positions primarily in the technology and electronics industries with a proven track record of growth, change management and improving financial performance. I look forward to working with Drew, and I'll now turn the call over to him for a review of the financial results. Drew?

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Benjamin Drew Davies, Natus Medical Incorporated - Executive VP & CFO [3]

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Thank you, Jonathan. I'd like to start by saying how excited I am to join Natus. The company has an enviable market leadership position with many of its products and services and has experienced tremendous growth over the years and demonstrated a core competency in acquisitions and integration. I look forward to being part of the team and contributing to the company's performance.

With that, let's review financial results on a GAAP basis as well as a non-GAAP basis. Our non-GAAP results exclude amortization expense restructurings, product remediation costs and certain other charges and their related tax effects. We believe that the presentation of these non-GAAP measures, along with our GAAP financial statements, provide a more thorough analysis of our ongoing financial performance. You can find a reconciliation of our financial results on a GAAP versus non-GAAP basis in today's press release.

I will also point out that we have included gross margin by business unit and geographical revenue in our press release tables to continue to provide more transparency to our financial results.

As Jonathan stated, we reported third quarter 2018 revenue of $130.6 million, a 6.5% increase from the same period last year. The revenue growth was driven by both organic growth in Neuro and the acquisition of our Neuro Surgery business last year.

Revenue from our Neuro business unit was $69.8 million or 53% of total revenue during the third quarter of 2018 compared to $59.4 million or 40% -- 48% of total revenue during the same quarter last year. The 17.6% increase in Neuro revenue is attributable to the newly acquired Neuro Surgery business. However, Neuro also realized organic growth of 2.1% and favorable foreign exchange rates contributed another 0.5%.

Revenue from our Newborn Care business unit decreased 7.3% to 31.2% -- $31.2 million or 24% of total revenue during the third quarter of 2018 compared to $33.7 million or 27% of total revenue during the same quarter last year. The decline in Newborn business is driven by product rationalization and the devaluation of the Argentine peso.

Revenue from our Otometrics business unit was $29.6 million or 23% of total revenue during the third quarter of 2018 compared to $29.6 million and 24% of total revenue during the same quarter last year. The Otometrics business unit achieved revenue growth of 0.1%.

In total, revenue from devices and systems contributed 72% of total revenue in the third quarter of 2018 compared to 64% in the 2017 period, while revenue from supplies and services was approximately 28% of total revenue in the third quarter of 2018 compared to 36% in the 2017 period.

Revenue from domestic sales was approximately 60% for the current quarter of 2018 compared to 56% in the same period of 2017.

Revenue from international sales was approximately 40% for the current quarter of 2018 compared to 46% in the same period in 2017.

On a non-GAAP basis, our gross margin decreased by 51 basis points in the third quarter of 2018 to 60.6% compared to 61.1% in the third quarter of 2017. This decrease was primarily driven by a favorable change in the reserve that was excluded from the non-GAAP results.

Non-GAAP operating expenses increased by $2.2 million compared to the same quarter last year. The increase in OpEx was driven primarily by the addition of operating expenses acquired as part of the Neuro Surgery business as well as additional spending on new product development, including Otoscan and RetCam.

Despite OpEx growth, our non-GAAP operating income -- or non-GAAP operating margin increased to 14% compared to 13.3% for the same quarter last year as a result of positive leverage on operating expenses from higher revenues.

Other income was $0.9 million for the third quarter, driven by exchange rate fluctuations.

Interest expense was $1.6 million during the quarter. We expect interest expense during the fourth quarter to be approximately $1.4 million and annual interest expense to be approximately $6.6 million.

Our third quarter non-GAAP effective tax rate was 24%. We anticipate our overall 2018 non-GAAP tax rate to be 22% to 24%.

On a non-GAAP basis, net loss was $5.6 million or $0.17 per share, a $2.9 million increase from the same quarter last year.

Non-GAAP net income increased $0.3 million compared to the same quarter last year. Non-GAAP earnings per diluted share was $0.40.

In the third quarter, we recorded $8.9 million of depreciation and amortization expense and share-based compensation was $9.7 million for the third quarter.

Now let's take a look at the balance sheet and cash flow. We repaid $5 million of outstanding debt in the third quarter of 2018. As a result, we ended the quarter with net debt of $60 million.

Cash flow from operations was $7.5 million during the quarter. And our days sales outstanding decreased 1 day versus the second quarter of 2018 to 85 days, driven primarily by declines in outstanding AR in our Otometrics business.

Non-GAAP diluted outstanding -- shares outstanding increased by -- to 33.5 million shares compared to 33.1 million shares in the same period last year.

With that, we will now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brian Weinstein with William Blair.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [2]

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I think we'll start with Otometrics. Number was a little bit lower than, I think, what people were looking for, down a little bit sequentially as well. Can you talk about some of the dynamics that were at play within Otometrics? I think last quarter, you talked about some [OUS] -- I'm sorry, some U.S. orders that hadn't come through versus the prior year. Are we dealing with the U.S. thing again here? Or is there something else going on?

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [3]

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Sure, this is Jonathan. So work backwards on your question. The U.S. actually was a -- really a quarter for us in Otometrics, much stronger than it was in the prior quarter and also the prior quarter from last year. If you look at it on a year-over-year basis, if you recall -- remember in Q3 last year, we had implement -- well, in October of last year, we implemented the ERP system for all of Otometrics outside the U.S. And so as a result, we had higher revenue in the previous quarter, and then we pushed out from Q3 -- I'm sorry, from Q4 off to Q1. So the Q3 quarter for last year was a little bit lighter than what you'd expect. So then going into this year, we would not have that dynamic. Then what was the rest -- does that answer your question, Brian, sorry.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [4]

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Well, yes. I mean, I guess I'm just thinking just even sequentially, it looks like Otometrics was down. I mean, is this -- was this in line with sort of your expectations for what this quarter was going to be in Otometrics?

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [5]

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It was in line. I'd say, it's in the bottom -- lower end of where we thought it would come in. We did have some issues, for example, in Turkey and Iran where -- in Turkey, you've got the currency devaluation and in Iran with the U.S. sanctions -- or removing the -- the U.S. pulling out of the agreement with Iran. That's caused us an issue with getting products into Iran. That accounts for -- it's probably less than $1 million, but it's not far off for that for what we would have otherwise expected to do, [OUS] in Otometrics. So whether that comes back though in Q4, it's not in our guidance. We don't assume that those problems get resolved and so that's also kind of contributing to maybe a lighter-than-expected Otometrics in Q4.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [6]

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Got it. And then as it relates to the Otoscan, you put 50 units out there. Can you to talk about the business model for those? Are these actual sales? What's the ASP? And who's buying these right now?

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [7]

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Yes, so these are the first commercial units that we have there. The business model today is a unit sale and we're -- and I think we've talked about this in the past. We have this initial launch of the first, call it, a couple hundred units where we're trying to establish the market and identify how the data is actually going to move back and forth between the manufacturer, between the audiologist. ASP, we're not going to disclose ASP, but we talked in the past that this is a $12,000 to $15,000 device. Suffice to say, the earlier ones are a little less than that. But -- So these are 50 units in audiology -- or audiologist shops, retail locations who are now hooked up to the system and doing scans. We expect that to continue to grow. It was a little bit more than I thought we would actually accomplish in the first real quarter, so that was a positive. And the interest remains very high, and we have high hopes for it coming into Q4 and into next year. The details and the time will tell, but we're very excited about it.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [8]

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Now last one for me. Can you just talk about, with the new board in place, what are the board priorities at this point? And when do you expect to be able to give us sort of a formal update on how you guys are viewing that long-term guidance that you gave last year as well as some more specific details on some of the bigger projects that you guys are looking at?

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [9]

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Yes. I think, as I said in my prepared remarks, we have -- we're a good part of the way through our annual planning process, which we typically conclude in mid-December where we go over with the board and that sort of thing. I think once we're completed with that, we'll have more clarity on what are the priorities for the near term and what are the priorities for the longer term. It's a little early to tell. We've been at this now for a number of weeks, but it's a little bit early in the process to have -- the new board have too many priorities. We've done onboarding, and the new board had some learning to do on Natus and that sort of thing. So that process isn't easy, and as you would expect, causes a distraction from just running the business. But I think we're all on solid footing now. And once we complete that planning process, we'll have some clarity on what the future comes. Beyond that, I mean, I've outlined in my script and then also last quarter, I talked quite a bit about what the immediate-term objectives were and where we stood for long term. Nothing's changed from those.

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Operator [10]

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And our next question comes from David Solomon with Roth Capital Partners.

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David Michael Solomon, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [11]

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And Drew, congrats on the new position.

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Benjamin Drew Davies, Natus Medical Incorporated - Executive VP & CFO [12]

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Thank you.

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David Michael Solomon, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [13]

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So I guess I just want to follow up on Brian regarding Otometrics. Glad to hear that we have some progress with Otoscan. In the past, we've heard that this could be upwards of a $200 million market opportunity. Obviously, you're building the market out, and it's understandably not going to be linear. I guess I just want a little color on your thoughts on what the ramp trajectory could look like. And then how the recent news that we've been hearing regarding over-the-counter hearing aids and then Bose and some of those other things. How that plays into your strategy. And what our expectations can be for Otoscan and then as well as the organic growth opportunities for Otometrics segment in general.

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [14]

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Sure. So I'll start with Otoscan and the ramp and that sort of thing. It's hard to say. I mean, there's thousands of audiology shops that could use this device. The ramp into those will probably take a trajectory that hits the early adopters, the big corporate stores, that sort of thing first. I would expect that to be a ramp that has a meaningful growth throughout the next several quarters. And then beyond that, it's going to be hard to tell. We'll see if that's something that gets wildly adopted with the smaller shops quicker or slower. We just don't know. This is a new product and a new market. There aren't any other analogies out there in the audiology space. So we're excited about it. It gets a lot of attention at trade shows. Customers are definitely interested in the device. Economics play into it, so we're working through that. And then we have the ecosystem between the audiologist and the earable makers and the hearing aid makers to make sure that gets built out, and that works really well. [I guess] the answer really on a trajectory. We would think it continues to go at a slow to modest pace in the next couple of quarters, but the upside a little farther out would probably accelerate as the technology gets out there.

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David Michael Solomon, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [15]

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Great. And then just following up. It's my understanding that in this market, there's a larger population of people who don't seek hearing aids in the elderly community than do. And I'm curious to hear your thoughts on the Otoscan, how that could increase penetration in the non-adopted market versus over-the-counter hearing aids, whether or not you could potentially expand the target market versus -- and how the share -- and how they could potentially take share and what kind of threats you guys are seeing in there.

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [16]

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Keep in mind that whether it's Otoscan or really any of the other products that Otometrics provides the market, we're really focused on the higher-end hearing aid market that's -- through the audiologist and the hearing aid dispenser market and hospital and the markets globally. The entrance or creation of this new defined market of over-the-counter hearing aids, we don't see that necessarily as competition directly with the higher-end hearing aids. We see it as an expansion of perhaps the people that actually use hearing aids. So maybe waiting till you're in your 60s or 70s for hearing aids, perhaps have an over-the-counter solution pulls that down into people in their 40s and 50s. We haven't seen that materially impact our market. The trend is we'll have to see how it goes. You saw -- you guys -- you mentioned Bose. Bose has a hearing accessory device that they just launched, and I think that's interesting. But for us, the custom hearing aid market is a significantly more costly device for patients. The installation and customization of those things is a little more of a nuanced product. And so far, we haven't seen that as an effect. We'll see how time pulls that out. But our overall view is that, that just expands the ultimate market for higher-end hearing aids as people get more used to and comfortable wearing things in their ears.

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David Michael Solomon, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [17]

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That's very helpful. And then just, lastly, regarding the income statement. First, regarding gross margins. It seemed like it was a little lighter than we were forecasting. I'm just wondering what your thoughts are going forward in the next couple of quarters on that. And then on the other hand, operating expenses seem to have been lighter than we had been forecasting, and it seems like some of the integration work that you're trying to do is -- there's some progress there, and I just want to get a sense of what kind of OpEx expectations we can have going into '19. It seems like our forecasts are -- or at least mine are a little higher than what you could potentially be if you continue this integration. So I just want a little color on that as well.

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Benjamin Drew Davies, Natus Medical Incorporated - Executive VP & CFO [18]

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Yes. David, it's Drew Davies. So I -- we expect our Q4 gross margins to get back closer to where they were in Q2, kind of in between Q3 and Q2. In Q3, we had a reserve that we didn't -- that benefited the GAAP earnings, but we didn't take the benefit in the non-GAAP earnings. We took that out because we had taken it out when we took the reserve in the prior quarter. So that brought down our margin a little bit, but we expect that margin to come back up in Q4. And then on operating expenses going forward, we're continuing to look at that, look at our operational efficiency, look for opportunities there. I think now that I've joined the company, that's one of the things that I've kind of had the opportunity to work on at my last company and some of the other places I've worked, really focus on gross margin and a lot of areas. I did a lot of work in cost and inventory in the early part of my career. And that's -- those are areas that I'm going to focus on as the year goes on here.

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David Michael Solomon, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [19]

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Excellent. Just one more quick follow-up on that. Do you think that we could be seeing non-GAAP operating expenses go back below $60 million a quarter, potentially as early as 2019? Or do you think that this is kind of the new baseline? I'm just trying to get a sense of what it could be with the fully integrated company with all 3 segments.

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [20]

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Yes. I think it's hard to say at this point, David. Like I said, we've got our annual planning process going on now. You'd ask -- or Brian asked as well about when you can hear about this. We have our annual earnings announcement that we do at the very end of January. I think that's a time frame whereby we can talk about the model and where we see the company going beyond where we are today. But at this point, we haven't really put anything out there for 2019. That'd be the time frame to expect to see that.

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Operator [21]

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(Operator Instructions) Our next question comes from Jayson Bedford with Raymond James.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [22]

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Just a few, and some of them are kind of follow-ups to earlier questions. On Otometrics, the growth profile of that business changed the most here. It sounds like the U.S. was strong, implying the international market was a little weaker, and I'm just curious as to why. And was there an FX impact that affected the business?

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [23]

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Yes, the FX was minimal. I mean, we went through that analysis last week. Very minimal. Like I said there, we do have delays or really a stop in shipments to Turkey and Iran over their ability to pay. And that hurts us about $1 million a quarter. So that was a piece of it. The rest of the business, we don't see anything major changes in the market other than like you pointed out -- like you asked with the U.S. We did have an extra -- we'd have a very good quarter for the U.S.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [24]

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Okay. And Jonathan, this $1 million impact. Is that going to continue for the next 3 quarters until we anniversary it? I'm not sure if this was the first quarter of this impact.

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [25]

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This was the first quarter of it. It will continue until we resolve Iran and Turkey. My speculation is that Iran probably gets solved first as we figure out what the supply chain has to look like to be able to get medical devices in Iran. I do believe that'll happen. It's just a little more complicated than it was. And then with Turkey, it's your -- anybody's guess as to when the currency in Turkey becomes something that they're able to buy -- import products. They have 40% or 50% decline in the Turkish lira, so that pretty much pulls them out of buying international products because of the cost to them has gone up so high, doubled.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [26]

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Okay. And just in general, I apologize if I missed this. What was the impact of FX in the quarter on the total business?

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [27]

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For the total, it was minimal. It was probably less than a couple of $100,000 net.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [28]

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Okay. Gross margin on Otometrics. It look like it declined quarter-on-quarter off a similar revenue base. Is that reflective of Otoscan?

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [29]

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I mean, Otoscan doesn't have the highest margins in the book. They're probably closer to 60% as they're a little bit lower than the average incremental gross margin. So that wouldn't have done it. We had this inventory adjustment that Drew mentioned that we not -- it was a benefit that we would have taken that we non-GAAP-ed so that hurt the margins.

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Benjamin Drew Davies, Natus Medical Incorporated - Executive VP & CFO [30]

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The overall margin. And as Jonathan pointed out, on Otoscan, the initial ASPs are a little bit lower than what we expect going forward as there was some kind of introductory pricing with some of that.

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [31]

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I think we have -- our margin -- our gross margin does bounce around a little bit based on the number of what we sell and mix of the products. And we also had a little bit weaker than we expected in our guidance, shipments out of Neuro for neurodiagnostics where the profit margins -- the gross profit margins are highest, and so that probably had the biggest impact on the quarter. Followed then by this adjustment that Drew talked about, and then to a much lesser extent, the lower margin mix coming out of Otoscan. I mean, I don't want to say that Otoscan was nothing. But it was pretty close to not really an issue for the gross margin just because of the volume of it.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [32]

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Okay. On the Newborn business, the business has obviously been under a bit of pressure here for a while. Just trying to gauge the impact of the new products. Will these new products you'll introduce in early '19 have an impact on the growth profile?

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [33]

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I believe they will. It's pretty exciting. We will have a new hearing screener by the end of next year. More sooner than that, we'll have a new RetCam device, which is our ROP screening device that we see in newborns. That product is 15 years old. This will be the first new product that RetCam -- for RetCam in many, many years. The old product has a lot of things to be desired in terms of connectivity to the hospital's network, the quality of the camera, the size of the device. So we're excited that, that could drive an upgrade program in the United States. So there's over 1,000 RetCam devices in the United States that are of that age. So it would be reasonable to expect an upgrade cycle that could last for several years from RetCam. And RetCam is extremely profitable for us and turned out to be -- it's turned out to be a very big piece of the Newborn Care portfolio. And then on top of that, to a lesser extent, we have a new NicView camera, which is our infant camera that is accessible from the outside, so parents and friends and family can see babies in the NICU. We have a new one of those coming out, and we think that will help drive more adoption and some upgrades that our hospitals -- for the hospital that already have them.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [34]

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Okay. And the first 2, the new RetCam and the new infant screener, they require 510(k), the camera does not? Is that fair?

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [35]

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That is correct. The RetCam will require a 510(k). The screener will likely require a 510(k). I don't want to say that's for sure. I'm not sure we're 100% there. But the camera is not a medical device in that way, so it doesn't require any sort of approval by the FDA.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [36]

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Okay. And then just lastly, on Neuro Surgery, just trying to triangulate some of your comments around Neuro growth. It looks like it was down about $1 million sequentially. Is that in the ballpark?

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [37]

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Yes.

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Operator [38]

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And our next question comes from Brian Weinstein with William Blair.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [39]

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I just wanted to make sure that I understood. So you guys took down revenue guidance a little bit and EPS guidance as well, but I'm not quite sure that I understood kind of what the rationale was there. Is there something that you're seeing in Q4? Is this kind of the Iran, Turkey stuff that you were referring to on the revenue side? And I'm -- it looks like that's what -- fall straight through to the EPS reduction but just wanted some clarity on that.

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [40]

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Yes, so the Iran piece and Turkey piece is obviously part of that. That's something we know. We were lighter on revenue than we -- than guidance and where we thought we'd be going into the third quarter. And so we kind of pushed that lightness all the way out through the rest of the year. In other words, more or less kept Q4 similar to what it was from a revenue perspective but took the revenue down on the total year. And then on the earnings side, we also -- we're investing a little bit more into the R&D organization, which has to do with this quality system rebuild. And then also, maybe go back to revenue for a second, we've got continued devaluation in Argentina, which is hurting the Newborn Care business even more so than we thought it would going into the third quarter. So I'd say those 3 things. Argentina, just sort of lighter revenue in total in Q3 and then knowing that we're spending a little bit more on R&D in the fourth quarter than we anticipated going into the third. I'd put those as the culprits for the lighter guide.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [41]

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Okay. And then last thing for me was, can you just give an update on Peloton, and that's it for me.

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [42]

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Sure. Peloton remains a solid business for us. We've got about 130 hospitals that we do the hearing screen service for. We've gone through time and had experience on the receivables on that side. Even this quarter, we had another $1.5 million receivable adjustment that we took for Peloton from -- over -- that accumulated over the last several years where we're just not getting payment from certain hospitals [and] certain states. So we're, again, going through this annual planning process to decide where do we stand with some of these [dates] that you just can't quite get payment to the level you need to. Some of those contracts is converted to just direct payment for fee-for-service directly to the hospital. So just in a simple outsource program where we're not actually trying to bill payers. We'd like to see that adoption more often than not, but you're dealing with the economic ability of the hospital whether or not they can do those sorts of things. So it's an evolving business and I would say one that keeps us close to our customers, which we like but also one that we've had some challenge with over the last several quarters.

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Operator [43]

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Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Jonathan Kennedy for any further remarks.

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Jonathan A. Kennedy, Natus Medical Incorporated - President, CEO & Director [44]

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Okay. Thank you, operator. And I wanted to tell everybody thank you for joining today. This concludes our program today, and have a good day.

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Operator [45]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.