Natus Medical Incorporated
Q4 2017 Earnings Call Transcript

Published: 7 Feb 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Natus Medical Fourth Quarter and Full Year 2017 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, February 07, 2018 and contains time-sensitive information that is accurate only as of today. Earlier today, Natus Medical released financial results for the fourth quarter and full year 2017. 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 presenting 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 about the company’s financial guidance for 2018 before opening the call up for 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 2017. Natus reminds you that the 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, please see its 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 Mr. Jim Hawkins, President and Chief Executive Officer of Natus Medical. Mr. Hawkins?

[Jim Hawkins:]

Thank you, operator. Our fourth quarter and full year 2017 results that we released earlier this morning reported revenue of $131.4 million compared to $107.7 million last year. We also reported non-GAAP earnings of $0.42 compared to $0.51 in our fourth quarter last year. For the full year 2017, we reported revenues of $501 million compared to $381.9 million in 2016 and non-GAAP earnings per share of $1.45 compared to $1.62 last year. As we previously reported, revenue in the fourth quarter was lower than expected due to weakness in our U.S. neuro diagnostic business and lower than expected revenues from Otometrics. Revenue from our recently acquired neurosurgery business was above our expectations. Newborn Care revenue performed as expected during the quarter, correspondingly, our non-GAAP earnings per share came in lower than expected as well. In our neuro diagnostic business while we were disappointed with the results in the fourth quarter, we are encouraged that in 2018 we will receive the orders the customers delayed in the fourth quarter, in fact, some of these large orders have already been booked in the first quarter. I am also pleased we achieved year-over-year revenue growth in our international neuro diagnostic business as the weaker dollar has again levelled the playing field in our international markets. This segment had been under pressure for the prior three years as the dollar went from $1.40 to $1.05 against the euro. Now with the dollar in the mid 120 versus the euro, it makes us very competitive again. In neurosurgery we have made great strides in integrating the products we acquired from Integra and the Natus. We have already hired and trained a neurosurgery salesforce. This sales team combined with the excellent sales management and clinical personnel we retained from Integra will not only service our new customers, but also gives us the ability to grow this new business segment. In Newborn Care, we continue to make significant progress in remediating the warning letter we received from the FDA. We continue to prune smaller products that don’t want the resources to keep them in the market and we now have a number of new product development projects underway. I am also pleased to report that we have hired Leslie McDonald to lead our Newborn Care business. Leslie is a talented executive that will be able to continue the progress in remediating Newborn Care and to also grow this business unit to record levels in the years ahead. We remain very excited with the future of Otometrics. While the fourth quarter came in under expectations, they still achieved both revenue and earnings targets in their first year as part of Natus. I am pleased to report their backlog also grew year-over-year. In the fourth quarter, we implemented Oracle or Global IT system at Otometrics. While making great progress in this project, it was very disruptive to both sales and operations in the quarter they resulted in not being able to take orders and deliver product on a timely basis for much of the quarter, which we did reduce revenue which did reduce revenue in some cases for customers needed product immediately. We still need to implement Oracle for Otometrics U.S. businesses and certain countries in Asia in 2018. We believe this will go much smoother as our products are now loaded in the system and they have gained experience on Oracle. We continue to believe that 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 continues to expand. We also believe we have an opportunity for further growth in the U.S. market as Otometrics has underpenetrated this market in the past. They also have an exciting new product pipeline. All of these factors give us the confidence to believe Otometrics will achieve revenue growth of at least 10% in 2018. We remain very excited about Otoscan, our revolutionary new hearing aid fitting product. Otoscan digitizes the hearing aid fitting process from the initial hearing aid fitting, with the customer and providing specifications to the manufacturer. We recently introduced Otoscan into a few markets as planned. Further introductions will occur throughout 2018, while we expect minimal revenues in 2018 as our initial customer network is established, we believe digital imaging at the year will become the standard for hearing aid fitting in the years ahead. To further describe Otoscan, it represents a large opportunity for Natus and the growing worldwide hearing aid fitting market. Today, there are approximately 8 million high-end hearing aid sold that would be eligible for an Otoscan digital image. This translates to an annual market opportunity of approximately $200 million. This would be obtained through a combination of Otoscan hardware sales and an upload download data and cloud charge. We believe Otoscan has the same opportunity as the intraoral scanner that revolutionized the dental digital impressions market in the dental office. We believe the digital impression of the year is compelling to hearing aid manufactures and dispensers as it is a safer and more, and more comfortable than a silicon impression and it saves many 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 for patients to continue to use hearing aid as many stopped due to fitting factors. We have shown and tested Otoscan with certain key customers and their response been extremely positive. In the fourth quarter, Natus announced that it will be the exclusive sales agent for the Embrace MRI monitoring system in the United States. The Embrace is designed for imaging a neonate. The Embrace MRI System includes a temperature-control incubator that can be placed directly into the Embrace MRI. Along with being able to get diagnostic quality images, the Embrace does not require an expensive, dedicated shielded room as all other MRIs as the Embrace magnet is a fully enclosed and self-contained system. Because of this patented technology, the Embrace MRI system can be located in the neonatal intensive care unit or NICU. This, we believe, will now allow neonates to have images performed that historically have not been able to happen due to the complexity and risk of transporting these high-risk babies to an MRI, which is typically located a great distance from the NICU. It is also very disruptive for the NICU as both doctors and nurses would need to escort an infant in this process as well as for radiology, a special setups and attention would be needed to scan a critical premature baby. Because of these factors, images are most often not performed as the risk reward has not been beneficial. The Embrace will now allow for MR images to be taken on a routine basis that will make for better medicine for neonates. The Embrace does not require a special shielded room and other expensive renovations that can often cause two or three times the cost of an MRI. We introduced the Embrace to the U.S. market at the Radiology Society of North America, show in Chicago on November. Our Newborn sales forces was recently trained and are now marketing the product. Initial response has been extremely positive. Since the Embrace is both expensive and disruptive, we anticipate lead times of one to two years to secure orders and ship products. Therefore we are not forecasting or we are forecasting minimal revenue in 2018. As part of the partnership with Aspect Imaging, the owner of the Embrace, Natus will receive an equity participation of 10% of Aspect Imaging after their original investment is recovered. We believe the Embrace is a breakthrough technology and product and can have a meaningful change on how neonate medicine is practiced today. In summary, we are pleased that we achieved our long term goal of 500 million of revenues in 2017 as well as the progress and performance of Otometrics. We are also excited about our entrance into neurosurgery. I remain excited about the future of Natus. We are market leading positions and the majority of our products and markets. We plan to continue to acquire and partner with companies and products to strengthen and expand our markets. As always, we will look for our acquisitions to be immediately accretive. We also look to improve our profitability in 2018 as we integrate Otometrics with Natus along with the added neurosurgery products. I would also like to thank our employees for their hard work in 2017 as we integrated both Otometrics and the neurosurgery products into Natus. I will now turn the call over to Jonathan Kennedy, our Chief Financial Officer for a review of 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, restructuring, 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. And 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 fourth quarter 2017 revenue of $131.4 million, a 22% increase from the same period last year, primarily owing to the addition of Otometrics. Revenue from our neuro business unit increased $68.2 million and included approximately $11 million of revenue from our recently acquired neurosurgery business. In total, the neuro business represented 52% of total revenue during the fourth quarter of 2017 compared to $63.8 million and 59% of total revenue during the same quarter last year. Excluding the revenue from neurosurgery, neuro declined approximately 9.6% for the fourth quarter year-over-year comparison and down 2.5% for the full year year-over-year comparison. Revenue from Newborn Care business unit decreased 19.8% to $35.2 million or 27% of total revenue during the fourth quarter of 2017 compared to $43.9 million or 41% of total revenue during the same quarter last year. Remember that last year’s fourth quarter revenue included about $10 million from shipments on our contract with Venezuela. Excluding the Venezuela revenue, Newborn Care organic growth was 3.8%. And revenue from our Otometrics business unit was $28 million or 21% of total revenue during the fourth quarter of 2017. Full year revenue was $114.1 million for Otometrics. In total, revenue from devices and systems contributed about 70% of total revenue in the fourth quarter of 2017 compared to 67% in the 2016 period, while revenue from supplies and services was about 30% of total revenue in the fourth quarter compared to 33% in the 2016 period. The increase in device mix was primarily driven by the addition of Otometrics, where device revenue is about 76%. Revenue from domestic sales was approximately 54% for the fourth quarter of 2017 compared to 59% in the same period in 2016. Revenue from international sales was approximately 46% for the fourth quarter of 2017 compared to 41% for the same period in 2016. Again, the change in mix was driven by Otometrics, where approximately 75% of revenue is outside the United States. On a non-GAAP basis, our gross margin decreased by 95 basis points in the fourth quarter of 2017 to 60.4% compared to 61.3% in the fourth quarter of 2016. The decrease is driven by lower gross margins in our Otometrics and neurology businesses offset by improvement and the Newborn Care margin and higher margin of our latest neurosurgery acquisition. Non-GAAP operating expenses increased by $14.5 million compared to the same quarter last year. Our non-GAAP operating margin decreased to 16.1% compared to 20.8% in the same quarter last year. The increase in OpEx and decline in operating margin was driven primarily by the addition of Otometrics as well as additional spending on new product development. On December 22, the U.S. Tax Cuts and Job Act was enacted. The most material impact to Natus from the tax reform act is the tax on being repatriation of all foreign subsidiary earnings. The repatriation tax resulted in an estimated one-time tax cost of $18.3 million. In addition to that, the Act requires the Company re-measure its deferred tax assets and liabilities to account for the impact of lower corporate tax rates on the future reversal of temporary differences. Due to Natus’s net U.S. deferred tax position this re-measurement result in additional estimate tax cost of $3.9 million for the fourth quarter. Also during the quarter, the company released its historical valuation allowance on its U.S. deferred tax assets, this one-time benefit decreased our GAAP tax expense by $10.8 million. Our fourth-quarter non-GAAP effective tax rate was about 25.9% and looking ahead to 2018 as we figure out all of the impacts of the Tax Reform Act, we expect our overall non-GAAP tax rate in the 20% to 21% range. Other expense was $0.5 million for the fourth quarter primarily the result of fluctuations in the euro to the U.S. dollar exchange rate. Interest expense was $1.8 million during the quarter as we added about $50 million in debt for the Integra acquisition. On a GAAP basis, net loss was 7.1 million or $0.22 per share, a $17.3 million decrease from the same quarter last year. Non-GAAP net income decreased $2.8 million compared to the same quarter last year and non-GAAP earnings per diluted share was $0.42. In the fourth quarter, we reported approximately $10.9 million of depreciation, impairment and amortization expense. Share-based compensation was approximate 2.2 million during the fourth quarter. Now let’s look at the balance sheet and cash flow metrics. Net cash decreased $43.5 million during the quarter, due to the Integra asset acquisition and we ended the quarter with a net debt of $65.3 million. Cash flow from operations was $5.6 million during the quarter, and our days of sales outstanding increased by two days versus the third quarter to 89 days. Non-GAAP diluted shares outstanding remained flat at 33 million shares since the same period last year. And with that, I’ll turn the call back to Jim.

[Jim Hawkins:]

Thanks Jonathan. Before opening up the call to questions, I would like to review our financial guidance for our fourth quarter and the full year 2018, all on a non-GAAP basis. In the first quarter of 2018, we expect revenues of $125 million to $127 million and non-GAAP earnings per share of $0.23 to $0.24. For the full year 2018, we now expect revenue of $535 million to $540 million and non-GAAP earnings per share guidance of a $1.60 to a $1.65. We will now turn the call over to questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Brian Weinstein with William Blair. Your line is now open.

[Brian Weinstein:]

Hey guys, thanks for taking the questions. Maybe we could just start on the Q1 guidance. I believe, when you guys originally gave that guidance, you were uncertain if somebody’s U.S. neurodiagnostic orders were going to come back in the first quarter or not, and it sounds like you guys might be a little bit more confident in that. So can you just talk about it, is there just a little bit of conservatism on what you’re thinking about for Q1, as a result of that, it sounds like you are just more confident that some of those might come back in? Thanks. That’s the first question…

[Jim Hawkins:]

Okay, great. Yes, sure Brian, yes we have received a few of those orders and we are certainly encouraged that those orders are going to come in throughout the year. We didn’t change our guidance at this point. There is -- it’s early in the quarter. We think that let's -- after we had this miss in Q4, let’s get through the whole quarter, but we -- you are correct, we are encouraged.

[Brian Weinstein:]

Okay, and then on operating expenses, you guys have been trending kind of at this level – this level of spending now for the rest couple of quarters. Is this sort of a new level we should expect, I’m just asking because I would think there might be some one-time costs that are in it for remediation and may be incremental spending around bringing Oracle in. And then Jonathan you had talked about bonus accrual and potential having that reversed I think in the fourth quarter, so I would have thought that you would have been able to see a little bit more leverage to the bottom line, can you just quantify what that was in the quarter?

[Jonathan Kennedy:]

Yeah, sure. So we definitely – so some of the things we do for remediation we’ve non-GAAP out. So, from a P&L perspective, they’re not in there. And, but I would say that the level of spending is a let’s call it a near term normal but we do look to continue to extract efficiencies out of the organization over 2018. So I would it’s normal today, but over the next several quarters, it should be on a downward trend on OpEx. In terms of the bonus accrual, I think we ended up with about $2 million or so worth of bonus reversal in Q4, so is that another way, that was a benefit in Q4 versus a normal state which you wouldn’t have had in that reversal.

[Jim Hawkins:]

Yeah, Brian just to add to that a little bit. Jonathan was asked to take over Newborn Care. I think it was in April of 2017, and got over and really restructured that whole business. We have a whole new management team culminated by the hiring of Leslie McDonnell, she’ll start next week. With that, there was a trade off in doing that and one was to take not his primary emphasis to be on the integrations and cost containment I would say within Natus. Getting Jonathan back full time in that role, I think we will see a lot of efficiencies now come back into Natus. If you go back a few years ago, when Jonathan joined us, we were in this basic position, in fact it was a lot worse when he joined us. I think we were 8% or 9% operating margin so we end up getting them to almost 19%. And so that is something that again we are going to be focusing on and looking to improve profitability.

[Brian Weinstein:]

Okay, I appreciate all the commentary. Last one from me is are we assuming for FX benefit for the year in terms of revenue and EPS Jim you made a comment that it’s obviously helping you guys, but how should we think about that more formally and what rates are you guys assuming? Thank you.

[Jim Hawkins:]

Yeah, but we don’t, go ahead.

[Jonathan Kennedy:]

I don’t know that I have a break out of that tax benefit on revenue and what not. I can say that as the dollar and I’ve said this before, as the dollar generally gets weaker that helps us as it does for everybody on the topline, to some extent in just FX translation, but then also for purchasing power of our customers outside the United States. And we believe that’s probably the bigger benefits where you are selling more because the U.S. base products are cheaper and a lot of our sales go through dollars, in fact it’s the primary case that most of our sales are transacted in dollars. And then on the cost side, Brian as the dollar gets weaker, our cost go up because we have cost in euro and Canadian dollars that go up. So from a bottom line perspective, there’s not a huge impact although it’s slightly to the negative when the dollar weakens on the bottom line, but on top line it would be the bigger benefit in our view is really more the increase and the customer’s ability to afford American products.

[Brian Weinstein:]

Thanks guys.

[Jonathan Kennedy:]

Okay, thanks.

[Jim Hawkins:]

Thanks. Your next question.

[Operator:]

Our next question comes from Jayson Bedford with Raymond James. Your line is open.

[Jayson Bedford:]

Good morning guys, thanks for taking the question. So just a few, just on the U.S. neuro shortfall in the fourth quarter, any better clarity now that we are a month into the first quarter on kind of the reasons for the slowdown?

[Jim Hawkins:]

Yes I would say without getting into too much detail customer by customer there was a variety of reasons. As I mentioned we have received some of those orders in so it was just really a timing issue. Others, I would say we believe is all timing, it’s just a matter of the delay involved. Money is still budgeted, we haven't had any of those orders that I am aware of that have fallen out and then pulled. So I think if I had to say hospitals for a number reasons, some just because the way Christmas and New Year’s fell, CFOs being gone. We got hit with a little of that in some cases and those orders have come in. It's really just the basic push out that we feel confident that will correct itself.

[Jayson Bedford:]

Okay. So you’re still confident there’s no share loss involved?

[Jim Hawkins:]

Yes. I can tell you, of the large orders we track -- large orders for us it’s over $300,000. Any of those orders that we were counting on we did not lose the competition.

[Jayson Bedford:]

Okay. That’s actually helpful.

[Jonathan Kennedy:]

I wanted to add, its Jonathan. By the end of the third quarter we were actually up year-over-year on neuro in his business and the EEG business and neuro, but by the end of the year it was down only 2.5%. So we’ve had a really strong year and that could be part of the dynamic of whole thing, but also points to we haven't lost market share if you're growing for three quarters in a row and then have one quarter slip back. So, I think there is, as Jim pointed out in his prepared remarks there is a delay or a push out or how we want to categorize it of a business that we feel confident and encourage that we will pick up over the next 2018 time period. We’ve done a pretty good detail analysis. We don't see a lot of changes in dynamics, so you have demand or customer buying patterns have shifted we would we would point to that as the answer for what happened in Q4.

[Jayson Bedford:]

Okay. That’s helpful. And just I don’t want to get too granular here, but you a couple times. In terms of the first quarter some of these large orders coming back, is the fourth quarter shortfall was roughly 10 million, let's call it on neuro, what percent of that is coming back or has come back so far in this first quarter?

[Jim Hawkins:]

Nice try, Jason, but we’re not going to go there on that. We will just say that some of the orders have come in at this point. There’s still plenty more to come in, but so I don’t want you to think its – they’ve all come in because they have not.

[Jayson Bedford:]

Okay.

[Jonathan Kennedy:]

Keep in mind, the orders not an order till it’s an order and so there’s always opportunities and opportunities have mouthful routes of completion between that and in shipment. And so its not a – its really not a practical review – practical process to go through every opportunity at and try to determine which one should have been the fourth quarter, which one should have – there’s an overall expectation and that’s what our commentaries reviewing is the overall expectation and buying patterns at a – in a pool of order – pool of opportunities versus one by one.

[Jayson Bedford:]

Okay. And just so we know, the large orders are defined by anything over $300,000, right?

[Jonathan Kennedy:]

That’s correct.

[Jayson Bedford:]

Okay. In terms of Otoscan, you mentioned minimal revenue in 2018 and I think we're looking for a little bit. We’re kind of thinking 5 million for the year. Is that still is a decent number for Otoscan in 2018?

[Jim Hawkins:]

Yes. I think we had – we were talking 4 million to 5 million and that number still stands. But we didn’t want people to think it's going to be 10 million or 15 million.

[Jayson Bedford:]

Got you. Okay. And then, what do you have to do to establish the customer network, meaning what are the steps involved here?

[Jim Hawkins:]

So that’s – it is a complicated process Jason. We have to first you have to get the hearing aid manufacturers on board because they need to have the equipment tied into their system where they can receive all this data, tie it into their systems to be able to make these hearing aids, the molds for the hearing aid off of our digital design. Once that is done then we need to get the – one of the people that sell the hearing aid to get them equipped and they oftentimes carry multiple manufacturers of different hearing aids and those dispensers are sometimes part of a big company and in many times their mom-and-pops, so it is a – and we’re hitting it sort of geography by geography. I think we’re starting off in maybe four countries, because otherwise it just gets too out of hand trying to coordinate all of this. And so that process is now starting and we don't expect much revenues in the first half of the year, but we look for revenues in the back half of the year.

[Jayson Bedford:]

Okay. That’s helpful. And then I’ll jump after this one in every reach, but in terms of operating margins for Otometrics in the fourth quarter and in 2018 is the thought still for 18 to be in that 15% range and maybe if you can comment on how the year ended there for Otometrics on the margin side.

[Jonathan Kennedy:]

Yes. So there been a straight around the goal of 10% last year and that’s with the issues regarding the implementation of oracle and also we’re growing of about $2 million that they won’t able to ship. Going to the profitability margins, that's right 15%, 16% are the kind of operating margins we’re looking to list them to this year.

[Jayson Bedford:]

Thank you.

[Operator:]

Thank you. Our next question comes from Raymond Myers with Benchmark. Your line is open.

[Raymond Myers:]

Great. Thank you. I say I want to pick right up there because that was one of my first questions as well. Jim, earlier this year and think is recently is the third quarter, you felt that you were tracking ahead of schedule on Otometrics goal of reaching 20% operating margins chain grow the recently here, can you help us understand that?

[Jim Hawkins:]

Sure, and as we went into 2018 and started the year and looking at the Otoscan opportunity we have certainly invested a lot more in Otoscan than what we had originally thought and we though the – not trying to drive margins to hard there. It’s more important to get Otoscan established, so we’ve increase the spent there and brought that down and this is a 15% to 16% range, is what we’re looking to do.

[Raymond Myers:]

Okay, great. That’s helpful. Can you talk about your excluded non-GAAP expenses, the levels of intangible amortization, acquisition costs and other non-GAAP exclusions that are incorporated in the Q1 and 2018 guidance? How high are though?

[Jim Hawkins:]

Yes. So maybe I’ll just in a general and I’m going to talk about that and past it on to Jonathan. This is something that we’ve done from the beginning. We did have a lot of consultants working with the FDA and helping manage this project for us. Since that time we have converted some of those people to employees or let’s see they could contract type people and with that there has been some determination that. This is not a permanent looking. And so with that, I’ll past it one over to Jonathan may to further explain.

[Jonathan Kennedy:]

Yes. So you were – Jim, describe the remediation efforts, you asked also about the amortization for this quarter and then going ahead. So in Q4 we had $9.9 million of amortization and intangibles. That represent basically the completion of our purchase accounting for Otometrics and so that’s a little higher than what you were have seen on a quarterly basis this year. Looking ahead in to 2018 that amortization will be at $8 million a year, and that represents the valuation that we placed on the intangible assets that we’ve acquired divided by the lives to give you the amortization of those things, so its think like brand names and customer relationships and things like that somewhat of an academic exercise to go though and determine their lives which we’ve completed, so that what you see going forward. And then, did you have a questions like on the tax side of the non-GAAP reconciliation Ray or just those two.

[Raymond Myers:]

The next part was the acquisition cost. So I would say fair to assume that the acquisition occurred in Q4 therefore there’ll be no more acquisitions cost. So you would make more acquisitions?

[Jonathan Kennedy:]

Well, most of the acquisition is all we call acquisition charges would be of course your standards lawyers, an accountants and legal fees and thing like that that you would do at a at the onset of acquisition. But we would have something that might trail in to a year later. So like on Otometrics acquisition costs, they’re pretty much behind us, but we do have the acquisition of the Integra assets that will have some costs that probably lead through 2018 that will sharpen that line item. Lawyers and accountants typically aren’t the best at billing you quickly, so when we get those invoices and things we try to accrue from it as best we can, but there's always a surprise little later in the game that we’d see.

[Jim Hawkins:]

Yes. Also I think going to the Integra we’re going to be transferring some manufacturing over to native. Well, the cost in doing that is tied to the purchase price accounting, things like that.

[Raymond Myers:]

Okay.

[Jim Hawkins:]

New stand up cost or transition costs early on. It wouldn’t be for, say, an acquisition we did you have four years ago that wouldn’t fall on those lines, but things that are newer and related to very recent acquisitions would fall into those buckets.

[Raymond Myers:]

Very good. My last question is maybe touching again on Otometrics, those little shortfall in Q4 for implementing the ERP Oracle, is that over – is that friction over? And should respect that business to do a little bit better now in Q1?

[Jim Hawkins:]

Certainly, we think it was recently mainly a fourth quarter event. Things are certainly better there now. We've also have a backlog coming in a little bit more than what we had anticipated. And -- but Jonathan I'll let you talk about maybe some of that detail.

[Jonathan Kennedy:]

Yes. So with respect to Oracle implementation we’ve completed the implementation outside the United States for the larger portion of Otometrics, so the Denmark entity and others, but there still remaining a couple of smaller country that we have implement and then we have to the U.S. side of it. And we think that’s going to happen sometime in the first half of this year. The scope is different in that. The U.S. side is basically a selling arm of Denmark side, and so the products and the engineering work that has to be done is much smaller in scope for what we have to do in the U.S. But once that's completed then we will be an optimization state. And I would say, on a project overall if I have to measure it we’re probably several months behind where we would've liked to have been probably owing to a couple things one is just not having all of the nitty-gritty details of how GN had that business structured and the learning that goes through about how good the data is before you start these projects. So we’ve learned a bit. We’ve delayed on purpose in some cases and we’ve delayed not on purpose in other cases. So, these products are big. They are time-consuming, but in the end we will uptake in Otometrics from six ERP system, global operating, energy decentralized global operating business to a single IT system to a centralized operating system and a centralized manager process that will drive the margins from where they stand to the 20% and beyond. And so it's – to work that needs be done. It does take time, seems like we've been at it forever. It's been a year, I’ll point out and these things do take time.

[Raymond Myers:]

Thanks for all that color. Appreciate it.

[Operator:]

Thank you. That shows no further in queue, so I’d like to turn the call back over to Mr. Hawkins for closing remarks.

[Jim Hawkins:]

Thanks, operator. Well, in closing, we look forward to an exciting 2018. And I like to thank everyone for your continued interest and support and for participating on today’s call. Thanks again.

[Operator:]

Thank you. Ladies and gentlemen that does conclude today’s conference. Thank you very much for your participation. You may now disconnect. Have a wonderful day.