Natus Medical Incorporated
Q1 2018 Earnings Call Transcript

Published: 25 Apr 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Natus Medical First Quarter 2018 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, April 25, 2018 and contains time-sensitive information that is accurate only as of today. Earlier today, Natus Medical released financial results for the first quarter 2018. If you have not received the news release or if you would like to be added to the Company's distribution list, please e-mail your request to [e-mail]. This call is being broadcast live over the Internet and on the Company's website at natus.com, and a replay of the call will be available on the website for the next 90 days. The agenda for today's call will be as follows; Jim Hawkins, President and Chief Executive Officer of Natus, will be present opening comments. Then Jonathan Kennedy, Executive Vice President and Chief Financial Officer of Natus, will summarize the Company's financial results. And then, Jim Hawkins will conclude the prepared remarks with comments and the Company's financial guidance for 2018 before opening the call upto 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 2018. 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 it's periodic reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission. I would now like to turn the call over to Jim Hawkins, President and Chief Executive Officer of Natus Medical. Mr. Hawkins?

[Jim Hawkins:]

Thank you, operator. Our first quarter results that we released earlier this morning reported revenue of $128.6 million compared with $124.6 million last year. We also reported non-GAAP earnings of $0.24 compared to $0.30 in our first quarter last year. In the first quarter, we reduced our bank debt by $25 million. Please note, our results in the first quarter last year included approximately $10 million in revenue from one-time order from Venezuela. I am very pleased with our first quarter results; our revenues exceeded our guidance and our non-GAAP earnings per share came in at the high end of our guidance. We achieved organic revenue growth of 3% in the quarter. Newborn Care reported a strong first quarter while Otometrics and our Neuro business, each reported record revenues in the quarter. As planned, we invested during the first quarter in Otoscan, our revolutionary hearing aid fitting product. Otoscan was formally introduced last week at the American Academy of Audiology Conference, the world's largest gathering of audiologists. We will continue to investment in Otoscan throughout 2018 and anticipate Otoscan revenue to start in the second half of this year. While our neuro diagnostic business bounced back nicely in the first quarter, we continue to experience longer sales cycles in the United States. Our pipeline of business is at record levels as overall activity remains robust. We remain encouraged that 2018 will be a strong year for our neuro diagnostic business segment. I'm also pleased we again achieved year-over-year revenue growth in our international neuro diagnostic business as the weaker dollar has again leveled the playing field in our international markets. Our international business has been under pressure in the past years as the dollar went from $1.40 to $1.05 against the euro. With the dollar now in the low to mid-$1.20, we are very competitive again. We continue to be pleased with our recently acquired neurosurgery business. In the quarter we hired and trained a new neurosurgery sales force combined with the excellent sales management and clinical team that were part of the acquisition; we will not only continue to seamlessly service our new customers but also -- it also gives us the ability to grow this business segment in the future. Our newborn care business had a very good first quarter that exceeded our expectations. As mentioned, revenue was down year-over-year due to the $10 million in products that we shipped to Venezuela in the first quarter last year. Also noteworthy in the quarter, our newborn care supply business increased; this leads us to believe both birth rates -- that we believe that birth rate increased in the quarter which would obviously be a positive for our newborn care business if this trend continues. We had been experiencing reduced birth rates over the past quarters. We continue to work on product remediation of our newborn care facility in Seattle to clear the warning letter from the FDA. While much work has been accomplished, additional work continues. I'm pleased to report that Otometrics reported record first quarter revenue. We believe the growth of hearing diagnostic and hearing aid fitting will be a solid grower for the foreseeable future as the worldwide market for these products continue to expand. Otometrics has an exciting new product pipeline as well. All of these factors give us confidence to believe Otometrics will achieve revenue growth of over 10% in 2018. Otoscan represents a large opportunity for Natus in the growing worldwide hearing aid fitting market. Today there are approximately 8 million high-end hearing aids sold that would be eligible for an Otoscan digital image. This translates to an annual market opportunity of approximately $200 million. This would be attained through a combination of Otoscan hardware sales and an upload/download data and cloud charge. We believe Otoscan has the same opportunity as inter-oral scanner that revolutionized the dental digital impressions market in the dental office. We believe the digital impression of the ear is compelling to audiologists, hearing aid manufacturers and dispensers as it is safer and more comfortable than a silicon impression and it saves days in the process as well as greatly reduces the risk of human error. We also believe it can reduce the number of revisits by customers that are unsatisfied with their hearing aid fitting as well as patients that continue to use hearing aid as many stop due to fitting factors. As I mentioned earlier, we officially launched Otoscan at the AAA Conference in the United States last week. The reception went very well as the product received great interest from the industry. From the field trials that we have been running and the dialogue with customers last week, it is clear to us that Otoscan along with giving a better and more comfortable hearing aid fitting also gives the hearing care professional a great way to attract and engage new and returning patients as soon as they walk in the clinic or store. The way the hearing care professional can show and illustrate the ear canal with Otoscan gives a wow factor in the counseling process. This means that Otoscan can be used to excite patients and influence their need for hearing aids that will grow the patient base. Of course getting adoption of new technology and creating a market will take coordination and time. We are currently preparing a limited launch in a few selected markets; United States, Spain, Germany and France with a few selected customers and at the same time ensuring that the larger ear mold manufacturers and custom hearing aid manufacturers are ready to receive orders. All with the focus on having a full global launch by the end of the year, a big opportunity ahead for Otometrics. In the first quarter, we hired two new leaders for our newborn care business and Otometrics; Leslie McDonnell in newborn care and Cartson Bull [ph] at Otometrics, both joined Natus in February. Both Leslie and Cartson are experienced medical device executives that I'm confident will greatly contribute to the future success of these businesses and to Natus. In summary, we are very pleased with the growth of our businesses and the opportunities that lie ahead for Natus. We have market leading positions in the majority of our products and markets. While acquisitions will not be our primary focus in 2018, we do plan to continue to acquire and partner with companies and products in the future to strengthen and expand our markets. We also look to improve our profitability in the second half of 2018 as we integrate Otometrics with Natus along with the added neurosurgery products. I will now turn the call over to Jonathan Kennedy, our Chief Financial Officer, for a review of the financial results. Jonathan?

[Jonathan Kennedy:]

Thank you, Jim. Today I'll be discussing our financial results on a GAAP basis as well as a non-GAAP basis. Our non-GAAP results excluded amortization expense, restructurings, product remediation cost 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. As Jim stated, we reported first quarter 2018 revenue of $128.6 million, a 3.2% increase from the same period last year. The revenue growth was driven primarily from organic growth of our Otometrics business unit which increased over 14% year-over-year. For comparison sake, recall that Q1 2017 revenue included about $10 million from our contract with Venezuela which did not recur in Q1 of 2018. However, Q1 of 2018 included the addition of our recently acquired neurosurgery business which more than offset the loss of Venezuela business. Revenue from our neuro business unit was $65.9 million or 51% of total revenue during the first quarter compared to $56.3 million and 45% of total revenue during the same quarter last year. The 17.2% increase in neuro revenue is attributable to the newly acquired neurosurgery business. The core neuro diagnostic business remained approximately flat to last year. Revenue from our newborn care business unit decreased 24% to $30.9 million or 24% of total revenue during the first quarter of 2018 compared to $40.6 million or 33% of total revenue during the same quarter last year. And as I stated earlier, last year's first quarter revenue for newborn included about $10 million from shipments on our contract with Venezuela. Excluding the Venezuela revenue, organic revenue declined about 1.4% for the newborn care business unit. The decline is primarily attributable to lower revenue from our phototherapy devices which were subject to ship hold during most of the quarter. Revenue from our Otometrics business unit was $31.8 million or 25% of total revenue during the first quarter of 2018 compared to $27.8 million and 22% of total revenue during the same quarter of last year. The Otometrics business unit achieved revenue growth of $14.5%. In total, revenue from devices and systems contributed approximately 68% of total revenue in the first quarter of 2018 compared to 65% in the 2017 period, while revenue from supplies and services was approximately 32% of total revenue in the first quarter of '18 compared to 35% in the 2017 period. Revenue from domestic sales was approximately 53% for the first quarter of 2018 compared to 52% in the same period of last year. Revenue from international sales was approximately 47% for the first quarter of 2018 compared to 48% for the same period in 2017. On a non-GAAP basis, our gross margin increased by 128 basis points in the first quarter of 2018 to 59% compared to 57.8% in the first quarter of 2017. The increase was a result of non-recurring lower gross margin revenue from the Venezuela contract, as well as non-recurring lower gross margins on a larger than normal phototherapy backlog shift during the first quarter of 2017. The increases in our year-over-year gross margins were slightly offset by lower gross margins in our neurology and Otometrics business unit due to unfavorable product and geography mix. Non-GAAP operating expenses increased by $6.4 million compared to the same quarter last year. Our non-GAAP operating margin decreased to 9.2% compared to 11.5% for the same quarter last year. The increase in OpEx and decline in operating margin was driven primarily by the addition of operating expenses acquired as part of our neurosurgery business, as well as additional spending on new product development including Otoscan and Retcam [ph]. Our first quarter non-GAAP effective tax rate was approximately 23%. This rate is higher than we expected due to a number of provisions in the U.S. and the new U.S. Tax Law. The new law eliminates significant favorable deductions and includes new provision that require us to pay U.S. federal tax on a portion of our form profits. As our foreign operations, primarily Otometrics, become more profitable, we expect to see some decrease in our overall effective tax rate. As a result, we anticipate that our overall 2018 non-GAAP tax rate will be 20% to 22%. Other income was $0.1 million for the first quarter, primarily the result of exchange rate fluctuations. Interest expense was $1.9 million during the first quarter. We expect interest expense during the second quarter to be at $1.5 million and full year 2018 interest expense to total between $5 million and $6 million. On a GAAP basis, net loss was $3.1 million or $0.10 per share, a $3.5 million decrease from the same quarter last year. Non-GAAP net income decreased $1.8 million compared to the same quarter last year, and non-GAAP earnings per share was $0.24. In the first quarter, we recorded about $7.9 million of depreciation and amortization expense. Share-based compensation was about $2.4 million during the first quarter. Now let's take a minute to look at the balance sheet and some cash flow items. We repurchase $4.7 million of Company stock and repaid $25 million of outstanding debt in the first quarter of 2018. As a result, net cash decreased $24.5 million during the quarter. We ended the quarter with a net debt of $64.9 million. Cash flow from operations was $6.3 million during the quarters. Our days of sales outstanding increased by a day versus the first quarter of 2017 to 90 days. Non-GAAP diluted shares outstanding increased slightly to 33.1 million shares compared to 33 million shares in the same period of last year. And with that, I'll turn the call back over to Jim. Jim?

[Jim Hawkins:]

Thanks, Jonathan. I would like to review our financial guidance for our second quarter and the full year 2018, all on a non-GAAP basis. For the second quarter of 2018, we expect revenues of $129 million to $130 million, and non-GAAP earnings per share of $0.25 to $0.26. For our full year 2018, we are maintaining our guidance of revenue of $535 million to $540 million, and non-GAAP earnings per share guidance of a $1.61 to a $1.65. Before turning to the question-and-answer portion of today's call, I would like to briefly comment on the recent development with one of our shareholders, Voce Capital. As we confirm this week, Voce has nominated Director candidates to replace 50% of the Natus Board. The Natus Board is always open to input from shareholders that may help enhance shareholder value and we have maintained an active dialogue with Voce over the past five years. We believe a proxy contest is unnecessary. With that said, the purpose of today's call is to discuss our first quarter earnings. We would ask that you please keep your questions focused on that. We will now turn the call over to questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Raymond Myers with Benchmark. You may begin.

[Raymond Myers:]

Just a point of clarification before we start, Jim can you clarify the guidance for the full year, sorry, for the second quarter because I think what you said looks a little bit different than what was in the press release?

[Jim Hawkins:]

Jonathan, do you have that? Perhaps my notes are incorrect. I believe I said $1.29 to $1.30.

[Jonathan Kennedy:]

The press release says $1.29 to $1.31 and non-GAAP EPS…

[Jim Hawkins:]

So the press release is correct to $1.29 to $1.31 and EPS guidance of $0.25 to $0.27.

[Raymond Myers:]

Thank you for that important clarification. Let's talk about Otoscan as much, that sounds very exciting. Can you talk about some of the key takeaways from the AAA Conference and what you're expecting from the launch in the second half?

[Jim Hawkins:]

Sure. It was a very exciting show, certainly all of our employees and sales people were very excited with the reception that the product received. As I mentioned, we look to now break into a handful of different countries and some specific areas in those countries while at the same time working with the hearing aid manufacturers and the ear mold manufacturers. It's a process that of course will take some time but we do expect revenue to start ramping in the second half of the year.

[Raymond Myers:]

And next moving on to the neurosurgical business; you mentioned in the call that you've hired a sales force and one would anticipate that they would be ramping sales. Could you give us some flavor for how that's going and how much growth we should expect in the cadence of that growth over this year?

[Jim Hawkins:]

Yes, we are very pleased with what's been accomplished there. When you think about it, we basically -- when we acquired those assets, we had a sales manager and a few clinical support people that came with the products. Since that time we've hired a sales force I believe of 8 direct sales people, added to our market base and customer touch base through the clinical network and I've got all of those customers trained and they've been seeing customers and getting our products again in front of the customers. You know, that was a very big challenge that we knew when we acquired the business but it's gone very well and we think we have very good people. As far as growth, just to remember on that when we bought those products I believe it was -- their trailing 12 months was around $50 million in revenues and when we bought those assets I think the company we had acquired them from had been very aggressive in their sales since they were going to be losing the products to fill the channels up pretty nicely. And if you go back, I believe we said that we thought that when we acquired the business it would probably be in the $41 million, $45 million revenue range; that's what we thought we were really acquiring here, not the $50 million of trailing 12 that we felt we needed to report for the size of the business. That business is pacing in that range in that $41 million to $45 million, so that's the objective for this year. Going out the future year, certainly yes; once we get the business established at those levels, we look for growth after that.

[Raymond Myers:]

And should we be expecting that growth to be low in the first half and more in the second half as you might anticipate with the new sales force?

[Jim Hawkins:]

For next year I assume what you're talking -- I would hope next year we start having some growth quarter-after-quarter starting in the first quarter next year.

[Raymond Myers:]

Sorry Jim, I meant with this year, the cadence for this year.

[Jim Hawkins:]

Well, Q1 is typically as in most of our business is the lowest revenue quarter of the year as a lot of business is always pulled into Q4. So yes, we would expect Q4 to be the biggest with Q1 being the least in revenue.

[Raymond Myers:]

And then one final question, the guidance for Q2 is a bit lower than what the analyst had expected. Is there been a change in the cadence of the year; they can't more backend waited or was that expected all long and the analyst just didn't get it right?

[Jim Hawkins:]

Yes, it's always a little bit of an issue. We give always first quarter guidance and our year guidance and I think it was just -- I don't want to say you had it wrong but it certainly had it different than what we had internally at Natus. So those things happen and you guys come out with your guidance typically before we even come out with ours; so it's that we're susceptible to that. I suppose that's why some companies maybe just give annual guidance but we feel giving a rolling quarter makes sense.

[Operator:]

Thank you. Our next question comes from Brian Weinstein with William Blair. You may begin.

[Brian Weinstein:]

Jim, I just want to dig into the Otoscan business model a little bit. Have you guys settled in as to how you're actually going to sell the devices here? Are you planning on selling those directly to the audiology community, are the hearing aid and mold manufacturers going to be purchasing the capital upfront? Can you just tell me how that's going to work? And also any thoughts that you guys have on pricing for not only the device but also the cloud services and the data transfer?

[Jim Hawkins:]

Yes, there is a lot of moving parts there Brian, and basically we'll be selling to everyone at the end of the day from the air mold manufacturers to the hearing aid manufacturers and to the dispensers. The price range, it looks like it's probably in the 10 to 12.5 range as where it's settling out and then the model for -- it will be different also by the customer base and actually even by country, whether it's a upload/download charge, whether it's an annual fee based upon a forecasted number of usage, it really matters by markets I would say. Jonathan, do you have any color -- add color to that?

[Jonathan Kennedy:]

Sure, I actually spent some time with some customers at the AAA Show. It is -- as Jim pointed out, depending on the customers -- so if you're an air mold manufacturer, there is a different relationship, obviously different volume of devices and upload/download fee; so there is a price there. If you're a single audiologist, it's a completely different situation and a different price there. So I think the way that Jim's categorized it, it is the easiest way, there is a lot of moving pieces. As we get more units in the field and we get a more established average, we can start to talk a lot that. But I would be hesitant to talk about the specifics of the price quotes that we have out there by customer.

[Brian Weinstein:]

Okay. And then as we think about the modeling for the year here; doing about $0.50 in the first half and something like $1.10 or something in the second half and that's a significant step up even though the revenue is not called to be up nearly as dramatically as the earnings are. So can you talk about what's going on that drives such a dramatic increase in that EPS? Is there some kind of -- obviously the yellow metric spending on the front-end maybe is there and maybe some bonus accruals but can you help just kind of step through how we should be thinking about the margin expansion opportunities that you have through the year?

[Jim Hawkins:]

Sure. You're right Brian, it is a backend loaded and I think we've tried to communicate that which is somewhat typical. Certainly on the -- the biggest part of that I would say is the integration of the businesses with Otometrics and the neurosurgery piece going forward. And maybe I'll let Jonathan talk a little bit about the IT implementation and where we're at and certainly that is I think what we've always communicated, where we're going to really start seeing some great synergies. Jonathan?

[Jonathan Kennedy:]

Sure. You know, this is not a new story Brian, we buy businesses, we integrate them, we get the cost appropriate and margins go up and you've seen that over and over again with Natus. So just to remind the line of questioning, this is what we do. So the key to the integration is the IT systems making sure we can operate the business and not let customers down; that project is very far along. We finished a major portion of the international market last month and we expect to complete the U.S. market which will be the end of the project early in June at the latest. So as we move ahead, beyond the implementation we now have a business that's integrated and can be further streamlined and further understood in terms of where the cost opportunities are. But that is what we do and I don't think anybody should take this as up and new; we've talked about this -- I had me in the last call talk about being behind a few months on the integration due to just as difficult as we had but following the 6 or 7 different IT systems out of GN and putting them with Natus with Otometrics but I believe that the vast majority of the effort and the uncertainty is behind us and we'll begin to work on what we do best at Natus.

[Brian Weinstein:]

Last one for me, Jim it sounds like you are putting an end to kind of the M&A for this year, that's something that Voce has obviously wanted but can you just talk broader about your thoughts on the $350 million target that you guys put out at the Analyst Day last year for inorganic growth? Is this still a target that you have and can you remind us why that $350 million is the right number for us to be thinking about? And that's it for me, thank you.

[Jim Hawkins:]

Sure, Brian. Certainly, you know, the $1 billion goal we have set, the five year goal is certainly intact and we are driving to that. I think we've said that this year was going to be a year of integration and getting both the neurosurgery and Otometrics on-board and then we will look to acquire businesses in the spaces that we're in. We think there is big opportunities in newborn, neuro, neurosurgery and Otometrics to continue to grow these businesses. Why $350 million is the right number; well, we pick a goal out there and those of you that have followed Natus for some time, I think our first goal was $100 million, then it went to $250 million, and then $500 million last year which we achieved. And it's just sort of the way that we like to be able to let our shareholders know and our employees where we're looking to drive this business and it's worked for us; I would say successfully in the past as we've been one of the fastest growing medical device companies out there in the last 14 years and we hope to keep that trend going.

[Operator:]

[Operator Instructions] Our next question comes from Jayson Bedford with Raymond James. You may begin.

[Jayson Bedford:]

Good morning and congrats on the Otoscan launch, few questions for you. I guess just in terms of Otometrics growth in the quarter, a nice step up in growth there. Can you give us a few details around where the growth came from and I'm curious, it seemed like there were some ERP related issues in the fourth quarter; I'm just wondering if you saw kind of fulfillment of that so-called backlog here in the first quarter which may have aided the Otometrics growth in the quarter?

[Jim Hawkins:]

I would say that was minimal. I mean it might have been certainly less than $1 million if my memory serves me right but probably in the $500,000 range it wasn't extremely significant. And I would say the growth certainly came outside the United States, China had another solid quarter, some other European countries did very well and I believe, Australia -- we just had a good overall tone to the business.

[Jayson Bedford:]

Is this the -- I know you -- I think mentioned in your prepared comments, north of 10% is kind of mid-teens growth what we should expect from this business?

[Jim Hawkins:]

Yes, but I don't think we have that in our guidance to the mid-teen level but certainly something that internally we're driving towards. We think that has the opportunity to hit those kind of numbers.

[Jayson Bedford:]

Okay. And just in terms of margins on Otometrics; we're still looking at 15% for the year?

[Jim Hawkins:]

Definitely. That is certainly a factor that will drive our earnings for the business and for Natus overall, and yes, we are now backing off that target.

[Jayson Bedford:]

Okay. On the neuro diagnostics business, you mentioned longer sales cycle in the U.S. which seems like it's kind of a continuation of what occurred in the fourth quarter. What can you do to condense that sales cycle? And then secondarily, if you can give us a little bit of an idea as to your neuro diagnostic growth of U.S. versus o-U.S. [ph]?

[Jim Hawkins:]

It is a challenge for us, in the U.S. we did secure many of the orders that got pushed out but certainly closing some of the Q1 orders, again it was a process that is not as timely as it has been in the past. The biggest driver to that I would say is IT; IT has gotten very involved in these big systems, big orders where they are really the final gatekeeper at these hospitals, especially on our products where we integrate into the hospital information system, and so they do a lot of testing, they can -- it's really their call and we're at their mercy. We always of course have the situations but this is typical where the hospital maybe has purchased product but is not able to take delivery because they are behind on their buildout of the unit. But overall, the business level is very good, the activity, the quotes, the business that we look to close during the year is -- remains very strong.

[Jayson Bedford:]

And just the U.S. versus international growth profile?

[Jim Hawkins:]

Yes, so it's really flip-flopped Jayson over the few years ago. There was about a two or three year period where the international was going down, something like 8% or 10% a year, I know -- I'm sure you remember that. Now we're getting some marginal growth there and the U.S. business has been enough -- let's call it the flattish range overall, and so that we are seeing. We have very strong market shares in the U.S., we not losing to competitors, our market share is probably somewhere in the 70% range we think in the neuro diagnostic area and -- so it's a good market, it's a nice profitable business but the orders can be a little lumpy at times and then complicated by this IT situation. But with all that said, it's a great business and we look for the business to be very good this year.

[Jayson Bedford:]

Okay. And just to be clear, in the first quarter you did recognize some orders that kind of had been pushed out from 4Q '17, right?

[Jim Hawkins:]

Definitely.

[Jayson Bedford:]

And just lastly, on the 2Q guidance it looks like the implied off-margin is kind of similar to first quarter levels; is there any meaningful difference in the gross margin or OpEx as a percent of sales line as we look at 2Q?

[Jim Hawkins:]

Yes, I don't believe we really comment on that but all that Jonathan commented, if he has given any indication on that.

[Jonathan Kennedy:]

Jayson, your question was just gross margin guidance on Q2, just mean to clarify.

[Jayson Bedford:]

It was gross margin and then OpEx. I'm just wondering let's just do gross margin and I can sell for the rest.

[Jonathan Kennedy:]

Yes, sure. So gross margin for Q2 we expect to be in our more normal Q2 range, it was a little lighter than Q1 than we typically would see. Even though it was up from last year -- the last year of your call had that big Venezuela deal in it that had lower than normal margins and also the phototherapy pieces that I mentioned in my prepared remarks. So I would look at Q2 as trying to be something north of 60% but not much farther.

[Operator:]

Our next question comes from David Solomon with ROTH Capital Partners. Why may begin.

[David Solomon:]

Most of my questions have been asked but just curious, if we can have any updates on the Aspire neonatal MRI, I didn't hear it mentioned on the call today?

[Jim Hawkins:]

Actually that is moving forward, we have a number of leads that we are pursuing, we've had full training in Israel with Aspect [ph] Medical in the quarter. I believe it's called encore [ph], if I remember right the name of that product.

[David Solomon:]

Embrace [ph].

[Jim Hawkins:]

Embrace [ph], you put me off there with Aspire [ph]. But -- no, I think our -- the hospital seemed very keen on this technology and it's uses, and how it can change medical care. But as we've communicated, this is really a long-term sale, this has to not only find a budget of $1 million to $1.5 million in the neck [ph]. It also then needs to be configured in the hospital and from a physical plant layout and all of this is going to take some time. We have minimal business forecasted for this year but do look for certainly to get increasing orders next year.

[David Solomon:]

And just sticking on newborn; so revenue seemed to -- so I was just wondering if the 30.9 -- did the drag happen more in the devices? You mentioned supply is being strong; so was it on devices or is it on services?

[Jim Hawkins:]

Yes, supplies were very strong. Jonathan, do you have those numbers handy on the device side?

[Jonathan Kennedy:]

Yes, those were my prepared remarks. So maybe -- David, just -- maybe rephrase your question because I'm not sure I understand what you're asking about that.

[David Solomon:]

Okay. So it was down 24% for the quarter, I know Venezuela accounted for fair amount of that if not all of it. But just looking back to the prior three quarters at 34%, 33.7%, 35.2%; just wondering if the step-down is from devices or services or a combination of both? I'm thinking maybe devices given the ship hold [ph], [indiscernible] how much of that ship hold impacted it.

[Jonathan Kennedy:]

Yes, I got you now. So newborn care; most of it is from devices. If you think of our supplies business, it's pretty steady based on birth rates. So while birth rates have come down over several past quarters, we saw a little bit of a better decline rate this quarter if you know, what I mean, it's actually up a little bit. And so it would have been devices which don't necessarily follow birth rates because not one for one device sale to BABY, we're on the supply side it is. So the decline is in the hardware side and as you pointed out, driven by ship hold on the neuro products that lasted most of the quarter although we're now are beyond that but yes, from a declined basis hardware.

[David Solomon:]

And I just wanted to just go back and neck this full year guidance. So you guys be on revenue for this quarter compared to your guidance; just wondering what your thoughts on keeping the full year guidance where it is for the topline, at least, especially given Otometrics and how it performed this quarter?

[Jim Hawkins:]

Yes, so on the top line we just wanted to keep things where we felt comfortable and we thought that was appropriate to do. And on the earning side, as Jonathan I believe mentioned, with the weaker dollar it has certainly had an effect. You know, the way Natus is structured, we have overseas operations where we manufacture in Ireland and certainly throughout Europe and in Canada. And so our costs have gone up, there has been a little tailwind on the revenue side but when you sort of do the net-net; our costs have gone up in dollar terms. So that is certainly something that was hitting us a little bit but on the revenue side we make it up. Jonathan, you have any other color to add?

[Jonathan Kennedy:]

No, I mean -- I think that's a very good point on the currency, what it does for revenue. So some of the currency -- some of the revenue gains we saw are currency based; and so how we factor that into our annual guidance is that we don't assume anything consistent with currency gains throughout the year. So I would assume kind of the current rates for my forecast. So what are the current U.S. Dollar Euro is; and that gives my total year based on that that I can change but we haven't assumed that that rate change continues to get more favorable. It could, it could go the other way. And then lastly, I'd say yes, well we did beat on the revenue range of our guidance, we had $1.25 million, $1.27 million was the guidance on revenue and we came in at $1.28 million. I think to take $1.06 million, especially given the miss we had in Q4 going into Q1, we didn't want to go back and just necessarily flow through that extra $1.06 million and to revenue for the full year. Sill three quarters left in the year to go and $1.06 million is a massive beat that you would want to just outside throw that through.

[David Solomon:]

Yes, the other point Jonathan made is certainly the tax rate. I think we had forecasted around 21% Jonathan for the year and 24% in Q1 with as these new tax laws we got our arms around it. And then as we go forward, we're hoping -- I think you forecasted it back to the 20% to 22% range which would help as well.

[Jim Hawkins:]

Yes, we are 23% for the first quarter which was higher than we thought but going back into the guidance, we do believe that as our profit mix shifts, some of these new tax revisions won't have the same impact for the full year as they did in the first quarter; and -- so that we expect the tax rate to be similar in the range but from the first quarter we're definitely higher than what we thought it would be.

[David Solomon:]

And just one more final question on Otometrics, do you have what percent was international for the total revenue for the segment -- rough estimate?

[Jim Hawkins:]

The ballpark is probably around 80% or something 75% -- 80% is outside the U.S.

[Operator:]

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Jim Hawkins for closing remarks.

[Jim Hawkins:]

Well, in closing, we look forward to the remainder of an exciting 2018 as we work to integrate our recent acquisitions and improve profitability in the second half of the year. Again, thank you everyone for participating in today's call and for your continued interest and support.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.