Natus Medical Incorporated
Q3 2008 Earnings Call Transcript

Published: 11 Nov 2008

[Operator:]

Welcome to the Natus Medical 2008 third quarter financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded today, October 30th, 2008, and contains time sensitive information that is accurate only as of today. Earlier today, Natus Medical released financial results for the 2008 third quarter. If you have not received the news release or if you would like to be added to the company’s distribution list, please call Natus Medical in San Carlos, California at 650-802-0400, or email your request to Investor Relations at natus.com. This call is being broadcast live over the internet at www.natus.com, and a replay of the call will be available on the company’s Web site for the next 90 days. And the term for the structure for today’s call, Jim Hawkins, President and Chief Executive Officer of Natus will present opening comments. Then Steve Murphy, 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 strategy and financial guidance for 2008. Ken Traverso, Vice President, Marketing & Sales; Dr. Chris Chung, Vice President, Medical Affairs and R&D, will join in answering any 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 2008. Natus reminds you that its 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 our periodic reports on Form 10-K and Form 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.

[Jim Hawkins:]

Thank you, operator. I am very pleased to report our record third quarter 2008 results. In the third quarter, our revenue increased by 45% to $41.7 million, up from $28.8 million reported last year. Our net income was $4.8 million in the third quarter, up from $3.2 million on a comparable basis in 2007, representing a 52%. During the third quarter, we continue to see growth in newborn hearing screening. Natus continues to be recognized as a worldwide market leader in newborn hearing screening in both technology and product breadth. We believe the market for newborn hearing screening outside the United States will continue to be a growth opportunity for Natus in the years ahead. With the recent introduction of our ALGO 5, the next generation of our newborn hearing screener featuring our double AABR technology, sales of that product were up 20% over sales of the ALGO 3 product last year. We believe these results validate the improvements in the ALGO 5 as it represents a significant upgrade to our customers. The improvements include user-friendly features such as data management, bar coding, and wireless transfer of data. We remain confident that our customers will be motivated to upgrade their older products to the ALGO 5. In the third quarter, we continued to have excellent results from our recently acquired Excel-Tech division, as they contributed significantly to our revenue growth for the quarter. More importantly, as we had projected, the acquisition contributed to our earnings growth immediately being accretive to earnings per share throughout 2008. As we have previously discussed, the acquisition of Excel-Tech has allowed us to realign our domestic sales force into two distinct sales organizations focused on the newborn care and neurology markets. We believe this has allowed us to devote the appropriate sales resources to these two distinct markets opportunities. We completed this realignment in January, and I am pleased to report that this transition continues to go extremely well. As we had expected, we have seen increased productivity from both sales groups with this new market focus. Our world class sales organization was again successful in taking the new products we acquired and immediately increasing sales, both in units and average selling prices. We have now successfully completed the restructuring of our operating divisions initiated in February of this year. We have consolidated product development activities by product category at our Olympic, Bio-logic and Excel-Tech facilities as well as consolidating our customer and technical service organizations. We believe these restructuring has resulted in a more streamlined and efficient operation, and has reduced redundant activities that had previously been performed at multiple sites. Although this restructuring resulted in approximately $600,000 of incremental costs during the first three quarters of this year, we will start realizing savings in the fourth quarter. So the restructuring will be approximately cost neutral in 2008. However, this restructuring should result in a $2.4 million annual operating cost reduction in 2009 and beyond. Earlier this year, we also strengthened our balance sheet by completing two public offerings of our common stock raising approximately $100 million in new equity. As we exited the third quarter, we had approximately $69 million in cash with minimal debt. Our current strong cash position supports our strategy of identifying acquisitions and integrating businesses that will be accretive to our earnings. We completed the acquisition of SonaMed on May 28th. SonaMed manufactures and markets a newborn hearing screening product and associated disposables. We initiated the integration of SonaMed very quickly. And by the end of June, we had moved all other operations to our Bio-logic facility in Mundelein. SonaMed with annual revenues of approximately $3.5 million, has been consistently profitable for many years. And this acquisition was immediately accretive to earnings per share, and we expect this to continue. On July 2nd, we completed another acquisition of the neurology business of Schwarzer GmbH located in Munich, Germany. Schwarzer Neurology develops and markets EEG systems and disposable supplies used in the detection, diagnosis, and monitoring of neurologic disorders. With the acquisition, we now have a market leading position for diagnostic neurology systems in the German-speaking regions of Europe. On October 2nd, we completed the acquisition of NeuroCom. NeuroCom is a worldwide leader in the development of computerized tools for the assessment and rehabilitation of patients with balance and mobility disorders. NueroCom’s systems are used worldwide in a broad spectrum of medical disciplines including neurology, orthopedics, sports medicine, geriatrics, and physical rehabilitation. More than 1,000 medical and academic institutions are currently utilizing their NeuroCom technology in the United States and abroad. We are very excited about the growth opportunities in this developing field, and believe NeuroCom is and will continue to be a market leader. NeuroCom has a broad patent portfolio. And combined with their market leadership position and the Natus worldwide sales and marketing capabilities, we believe we will build – we will be able to accelerate their revenue growth. Shortly after I joined Natus in 2004, we laid out a plan to grow revenue to a $250 million annual run rate as we exited 2008, and to increase earnings by 50% per year. We are proud to say we have made consistent progress towards this very aggressive target, considering that in 2003, the company reported only $31 million of revenues and lost millions of dollars. We remain focused on this strategy. We continue to execute on our strategy of growth through accretive acquisitions. But with the current economic situation and uncertain business conditions, we are in a more cautious mode. We will be deliberate in making an acquisition, assuring ourselves that the deal is priced right and that the target will remain strong given the economic environment we now operate in. As you are all aware, Valuation (inaudible) company is an asset to have fallen recently. And we want to make sure that we pay appropriate prices based upon future market conditions. We will forward on the acquisition when we are confident that the target’s business conditions are stable and the timing is right for Natus. With that said, we should also point, we have an exciting pipeline of opportunities. Natus is now positioned for a successful 2008, in which our goal has been to achieve earnings growth of approximately 50%. We believe we are on target to achieve this goal as reflected by our 2008 earning guidance. And as we have previously stated, we seek to acquire companies, products, and/or technologies that will allow us to leverage our brand and establish sales channels. And we look to continue for acquisitions to be immediately accretive in the first full quarter after acquisition. With that overview, I would like to turn the call over to Steve Murphy. Steve?

[Steve Murphy:]

Thanks, Jim. Today I will be discussing our 2008 third quarter financial results on a basis consistent with accounting principles generally accepted in the United States, or GAAP. All per share amounts presented today are on a diluted basis. For the third quarter ended September 30th, 2008, we reported net income of $4.8 million or $0.17 per share, compared with net income of $3.2 million or $10.14 per share for the third quarter of 2007. For the nine months ended September 30, 2008, we reported net income of $11.2 million or $0.43 per share, compared with net income of $7 million or $0.31 per share for the comparable period in 2007. Our results for the first nine months of 2008 reflect increases in net income and earnings per share of 60% and 39%, respectively, over the same period in 2007. Average diluted shares outstanding were 25.8 million shares for the nine months ended September 30, 2008, compared to 22.8 million shares in the 2007 period. As Jim mentioned, we reported record third quarter revenue of $41.7.9 million, an increase of 45%, or $12.9 million, from revenue of $28.8 million for the third quarter of 2007. For the nine months ended September 30, 2008, we reported revenue of $118.4 million, an increase of 41% from $84.1 million reported in the 2007 period. Revenue from devices and systems contributed to 61% of total revenue in the third quarter of 2008, compared with 62% recorded in the third quarter last year. Revenue from supplies and services contributed to 37% of total revenue in the third quarter of 2008, compared with 36% reported last year. Other revenue, consisting primarily of freight charges, was approximately 2% in both periods. Revenue from US operations was $30 million in the third quarter of 2008 or 72% of total revenue, compared with $19.7 million, or 69% of total revenue reported last year. Revenue from international operations increased 30% to $11.8 million in the third quarter of 2008, compared with revenue of $9.1 million reported last year. Early this year, we communicated in broad terms our expectations for revenue contribution and product mix from our three product families as follows, we expected 40% of our revenue to come from our hearing products, including newborn hearing screening and diagnostic hearing; 30% from our diagnostic neurology products; 25% from our newborn care products; and, 5% from other sources. Actual results for the nine months ended September 30th, 2008, reflect the following percentages, 42% from our hearing products, 32% from our neurology products, 20% from our newborn care products, and 6% from other sources. Results for the three months ended September 30, 2008, were not substantially different. Our gross profit was 62% in the third quarter of 2008, compared to 61.4% reported in the second quarter of 2008, and 64.9% reported in the third quarter of last year. Prior to our acquisition of Excel-Tech, the historical gross profit was running at less than 50%. Excel-Tech’s gross margin improved to 62.8% in the third quarter of 2008. While we know how a similar situation with the Schwarzer neurology business that we acquired on July 2nd, 2008, with their results reducing our consolidated gross profit for the quarter. Total operating expenses for the third quarter 2008 were 45.4% of total revenue, down from 49.6% of total revenue in the third quarter of last year, and 46.8% for the second quarter of this year. Our operating expenses as a percent of revenue are typically higher in the first half of our fiscal year, and we expect this percent to continue trail down in the fourth quarter of this year, particularly as we begin to benefit from the restructuring activities we initiated earlier this year. As you may remember, on February 11th, 2008, we announced a restructuring of our North American operating units. While these restructuring activities have resulted in increased expense during the first three quarters of this year, we will begin to benefit from the realignment of functions in the fourth quarter. We continue to believe that the restructuring will result in an approximate $2.4 million annual cost reduction in 2009. Our effective tax rate for the first nine months of 2008 was 37.8%. We expect that our effective tax rate for the full year will be approximately 38%. This rate is lower than we have communicated in the past because we expect that a relatively higher percentage of our income will be taxed in foreign jurisdictions with tax rates lower than in the US. There are many other factors impacting the effective tax rate, some of which we cannot predict in advance. Because of the timing of our tax payments, we believe that our cash tax payment rate in 2008 will be between 20% and 25%. During the nine months ended September 30, 2008, we recorded approximately $4.6 million of depreciation and amortization expense, and $2.3 million of stock-based compensation expense. We estimate that for the full year of 2008, we will record approximately $7 million of depreciation and amortization expense, and approximately $3.3 million of stock-based compensation. We raised approximately $100 million in April and May 2008 in two separate public offerings totaling 5.485 million shares of our common stock. We used approximately $30 million of the proceeds to pay down our revolving and term debt. However, the purpose of the capital raise was not primarily to pay down debt, but to provide us with capital to fund future acquisitions. This capital raise will have a significant dilutive effect on our earnings per share for the second half of 2008. Based on our calculations, the dilutive impact of the additional shares, net of incremental investment income, is about $0.06 per share for the second half of 2008. However, because of the accretive impact of the SonaMed, Schwarzer, and NeuroCom acquisitions, we have been able to maintain our annual earnings guidance with only minimal adjustment. At June 30th, 2008, we reported cash, cash equivalents, and short term investments of $69 million, term debt tied to our real estate holdings of $1.5 million, stockholders equity of $229 million, and working capital of approximately $107 million. In August, we renegotiated our revolving credit facility with Wells Fargo Bank, increasing it from $10 million to $25 million. With that, I will turn the call back to Jim.

[Jim Hawkins:]

Thanks, Steve. Before opening up the call to questions, I would like to make a few comments and review our guidance for 2008. We believe Natus is one of the fastest growing profitable medical device companies in the country. Many of our product offerings enjoy market leading positions, and we have accomplished this in part through eight acquisitions over the last four years. We continue to be the worldwide leader in newborn hearing screening. It is a growing business with a great recurring disposable revenue model. With sales of the Olympic Cool-Cap tracking to our forecast, we continue to believe that the combination of the Cool-Cap and the Olympic CFM will become very successful products for Natus. We also believe the integration plan we initiated at Excel-Tech last year, coupled with the restructuring activities among our North American operating divisions we initiated earlier this year, have positioned us to maintain the revenue and earnings growth we have achieved over the last four years. Before we discuss our guidance for the remainder of 2008, I want to note that we have attempted to develop our guidance on a conservative basis, which we think is prudent given the current potential for worldwide economic slowdown along with the impact of a strong US dollar that could affect our international business. For the full year 2008, we expect revenue to range from $167 million to $169 million, and earnings per share to range from $0.68 to $0.71. We had previously said revenue would range from $166 million to $169 million. This compares to revenue of $118.4 million and earnings per share of $0.43 reported for the full year of 2007. We reported non-GAAP earnings per share of $0.47 for 2007. The GAAP results for 2007 excluded acquisition related costs associated with our acquisition of Excel-Tech on November 29th, 2007. For the fourth quarter of 2008, we expect revenue to range from $48.5 million to $50.5 million, and earnings per share to range from $0.25 to $0.28. We previously had said revenue would range from $47 million to $49 million, and earnings per share would range from $0.25 to $0.28. This compares to revenue of $34.2 million and earnings per share of $0.12 reported in the fourth quarter of 2007. On a non-GAAP basis, we reported earnings per share of $0.17 in the fourth quarter of 2007. The non-GAAP results for the fourth quarter of 2007 excluded the Excel-Tech acquisition related cost. Our 2008 guidance is on a GAAP basis, including the impact of expensing employee equity-based compensation, which we expect to be approximately $3.3 million for the full year of 2008. We expect that depreciation and amortization expense will be approximately $7 million in 2008. Combined, this represents over $10 million of non-cash expenses included in our operating results for 2008. Our guidance does not include the impact of any nonrecurring acquisition related charges for potential acquisitions. All earnings per share amounts are on a diluted basis. In conclusion, we want to reflect once again on our accomplishments so far this year. Our pretax earnings are up 67% on the year-over-year basis, and our net income is up 60% on a year-over-year basis. There are a few medical device companies that can attest to these – to results like these. We remain confident in our strategy as we continue to position the company for growth in 2009 and beyond. This growth will come from both our internal development of new products and product enhancements, and when the opportunity arises, additional acquisitions that we expect to be accretive. With that said, Steve, Ken, Chris, and I would be happy to take your questions. Operator?

[Operator:]

(Operator instructions) And your first question comes from the line of Ed Shenkan of Needham & Company. Please proceed.

[Samir Harish:]

Hi, guys. Thank you for taking the call. This is Samir Harish for Ed. I just wanted to follow up on something you mentioned during the presentation, the Excel-Tech gross margin improvements. Those numbers seem quite great. I’m just wondering if you could give us just a little bit of color as to where you’ve achieved some of those gross margin improvements. Where they from manufacturing consolidation, material acquisition costs, product redesign? Any color there would be helpful.

[Jim Hawkins:]

Samir, I think it was a combination of two things, which probably contributed equally. One was a reduction in our manufacturing costs and product mix. As we said, we de-emphasize – and as we said earlier, we de-emphasized their supply products that had a very low margin. And their device and system sales have done very well this year. So that is leading to that improvement in the gross profit.

[Samir Harish:]

Okay. And just to follow up on Excel-Tech, can you give us an update on the R&D side, for example, the CPAP products?

[Jim Hawkins:]

The CPAP product is one that, I believe we communicated recently, basically put on the shelf shortly after we acquired the company. And I think you’re probably referring to the home – there’s a home diagnostic test and a CPAP product. The CPAP product, I think, we put on the shelf immediately when we acquired the company. The home diagnostic product, we have – we’re sort of monitoring that whole market place to determine what the home market is going to be for diagnostic sleep test. But we don’t have any of that in our revenues guidance at all. We’re just sort of monitoring that situation.

[Samir Harish:]

Okay. And I understand you have some concerns going forward due to the credit market conditions today. Have you seen any impact from that on capital spending thus far, maybe just tell us how things are tracking October thus far?

[Jim Hawkins:]

Yes. Well we certainly don’t comment on tracking in October. That should be in our guidance. And I think you can tell by our guidance, we feel very good about our business. We are being cautious. I think it’s just prudent as they’re a lot going on and we try to take that into consideration. But we feel it’s been a very strong year. And we’re going to have a very strong Q4. When you think about being able to take our earnings from – on a comparable basis $0.47 to $0.68 to $0.71, while having the dilution that we’re having by the stock offering that we did, it’s – we’re very happy with where we’re at and where the company is, and where the fourth quarter is going to end for as we feel very good about our business.

[Samir Harish:]

Well, if I could just follow up on that, if we kind of – not looking for guidance for ’09, but if you kind of look at the mix of the business today, what portion of the business gives you the most concern going forward?

[Jim Hawkins:]

We don’t have a lot of concern about any of the business. I think that we have – we’re going to wait and see the strong dollar – this has such a drastic short term move. We do think about that. When we think about it, our international customers, potentially, are going to get a 15% to 20% price increase depending on where the dollar settles down compared to the Euro or other currencies. With that said, in a lot of our business, we – it’s a disposable product. They need the product. We don’t think it will be really greatly affected. But it does make you stand back, and make sure you’re monitoring the situation.

[Samir Harish:]

Okay. Last question and I’ll step back in queue. The ALGO pricing, I think you were looking for a price increase with ALGO 5. Were you able to get that through with the customers? And how well was that received?

[Jim Hawkins:]

Yes. We’re real happy with the way the ALGO 5 has done. Our ASP is up on that, and probably also contributing to our good gross profit.

[Samir Harish:]

Thank you, guys. I’ll get back in queue.

[Operator:]

And your next question comes from the line of Joshua Zable of Natixis. Please proceed.

[Joshua Zable:]

Hey, guys. Congrats on a great quarter, and thanks for taking my call here.

[Jim Hawkins:]

Sure.

[Joshua Zable:]

Just a quick question of clarity here, I know, Jim, you talked about your goals, $250 million. And I’m sure you’re assuring us that you guys aren’t going to do anything rash here given that we’re kind of hitting that deadline, for lack of a better word. But I’m just trying to understand if you’re sort of giving us a heads up to say that, “Look, we talked about $250 million. The economic environment is what it is.” And we all understand that. And given that, you’d rather sort of wait because you see prices coming down, down, down. You’d rather buy it cheaper. Or we’re still on target theoretically, but you’re just not going to do anything stupid, basically.

[Jim Hawkins:]

I would say there are two, maybe three different points. One, we are moving ahead on acquisitions. I probably can’t comment too much more on that. But with that said, we are being a little more prudent because not only – looking forward at the businesses that we’re looking to acquire, we have to make sure that their business is going to remain solid into ’09. Historically, the way the marketplace has been, it’s been a nice steady medical device market. Companies typically have maintained sales or grown every year. And we just want to make sure that when we’re going to be buying something with that product line, it’s going to continue.

[Joshua Zable:]

Okay. Fair enough. And then, I know you know you don’t want to talk about too much about this in detail, but maybe you can give us a little color. You’ve given your guidance. You obviously feel pretty good about it. And like I said, things look pretty good. But can you give us a little bit of color. I know you operate in certain niche type marketplaces. You’re not seeing weakness in the general business. But in terms of maybe the neurology or the EEG versus infant hearing, which is obviously doing extremely well. Are you seeing any weakness in any part of the business as far as hospitals are going? Or is it pretty steady across the board?

[Jim Hawkins:]

I’d say it’s thoroughly very steady across the board. We’ve had really very good product sales across. One thing I will point out that last year, Fischer-Zoth had a – did very well with some nice international businesses that they had. And so those come on a year-to-year basis, or are going to be difficult to maintain. But other than that, we looked for growth in all of our businesses year-over-year in Q4. I might also that our business model is still intact. Our goal of being able to grow earnings at 50% a year – we’re not backing off of that. So I want to make sure people understand that. If by chance, acquisitions maybe put off from Q4 to Q1, if the timing’s not perfect, it would be in such a way that we would hope to be able to – as our plan exists, to grow earnings to 50% a year. So I don’t want anyone to read anything into that.

[Joshua Zable:]

Okay. That’s helpful. And then, just one quick question for Steve, just to understand, I know you guys had announced the cost cutting plan for ’09, the $2.4 million. Just so I understand, to be clear, effectively, you guys are going to spend a little bit in Q4 to get those costs in. Is that the right way to think about it?

[Steve Murphy:]

No.

[Jim Hawkins:]

No. Do you want to take this Steve?

[Steve Murphy:]

Yes. Joshua, (inaudible) Excel-Tech in November last year, we started a restructuring at Excel-Tech immediately. And then in February of this year, we announced the restructuring of really the whole North American operations. And as I said, those have resulted in increased costs during the first three quarters of this year. But that restructuring is complete as of the end of September. And we now will start realizing some of that benefit in the fourth quarter. We’ll realize it fully next year.

[Joshua Zable:]

Okay. Great. That’s very helpful. Thanks, guys.

[Jim Hawkins:]

Thanks, Josh.

[Operator:]

And your next question comes from the line of Erik Schneider of UBS Securities. Please proceed.

[Steve:]

Hi, Jim. It’s Steve [ph]. I just want to make sure I’m not (inaudible) the prepared remarks or the response to the questions too carefully, but it sounds like you’re saying that you’re not certain now that you will exit the year at the $250 million run rate because you’re having to negotiate a little bit harder to make people realize – sellers that prices are going down.

[Jim Hawkins:]

I don’t know if I’d quite frame it that way. It’s been a goal that we’ve had to do that. It still is a goal. It hasn’t been in our guidance. It has been a goal. And what we are saying is that in this environment, we are just going to be a little more prudent in looking at things and making sure it all comes together. If it doesn’t come together, it doesn’t – it also doesn’t mean we’re going to back off from what our business model. Whether we do an acquisition in December or do something in February, it’s not going to affect our earnings model. So that’s what I just wanted to try to communicate.

[Steve:]

Okay. And then, you mentioned 20% year-over-year improvement in ALGO 5 relative to ALGO 3. Is that unit improvement or is that revenues that incorporates that higher ASP.

[Jim Hawkins:]

That’s primarily the result of the ASP. But there are – there were increased unit sales. But I would say most of the – the biggest component was the ASP increase.

[Steve:]

Okay. And then, we talked previously, and you noted in the call that about just over 60% of revenue fits in this sort of devices systems bucket or through non-disposable revenue. Is there any way you can bucket that in terms of dollars per item in there so we get a sense of what proportion of that 60% is the things that have to flow through annual budgets, where departments or whole hospitals really have to look at their institutional profitability and decide is that money they’re going to set aside for next year versus–?

[Jim Hawkins:]

Yes. That’s really a very difficult question to answer, Erik. We have a wide variety of products. The nice thing is – really not any of our products really suffer more than $50,000 on a stand alone basis. And so, every hospital looks at their budgeting a little differently. A lot of our products really aren’t in this big budget process. Now if you’re putting a neurology system together, where you’re going to re-equip the whole hospital that could be a $500,000 or $1 million system, and we always some of those every year. But it is a little difficult to really bucket the way you’d like. So we just don’t want to go there.

[Steve:]

Okay. Thank you.

[Operator:]

And your next question comes from the line of Matt Dolan of Roth Capital Partners. Please proceed.

[Matt Dolan:]

Hi, guys. Good morning.

[Jim Hawkins:]

Good morning, Matt.

[Matt Dolan:]

To go back on Q3 itself, Jim. The sales in the quarter relative to your expectations, where there any major orders or maybe areas of your business that impacted Q3 due to maybe extended sale cycles, things of that nature, that may come back here, and just kind of characterize the actual number relative to what you’re anticipating?

[Jim Hawkins:]

Yes. Not really. I mean, overall, our business was very, very strong. When you said back and look at it, I think on an internal growth basis, we did a little over 10% year-over-year internal growth. We did have an order – a couple of orders, one domestic and one US, that got pushed out a little bit. That happens. But other than that, the business – other than the couple of orders, business was pretty much right on target.

[Matt Dolan:]

Okay. And then, you stressed a lot on the acquisition strategy in this environment now, and continuing to focus and not really wavering from 50% EPS growth next year. On the base business itself, you’re making some good strides. And with the cost cutting, it looks like on the operating expense side, those will continue to come down as a percentage of revenue. Can you update us on your gross margin expectations? I know we talked about a mid 60% number. When could that come in? Is that a decent number to target for next year’s underlying business without acquisition?

[Jim Hawkins:]

Yes. I think, Matt, that at the appropriate time, we’ll talk about ’09 and some of those issues. We just not feel it’s timely at this time to talk about ’09. I think we’ll talk about ’09 in January some time, or if we were to do an acquisition this year, shortly after that acquisition like we typically do. We’ll incorporate that acquisition and typically give ’09 guidance at that time.

[Matt Dolan:]

Okay. Great. Thanks a lot, guys.

[Jim Hawkins:]

Sure.

[Operator:]

And you’re next question comes from the line of Jayson Bedford of Raymond James. Please proceed.

[Jayson Bedford:]

Thanks, and good morning. Just to follow on the last question, you kind of missed the low end of your revenue expectation by about a $0.5 million, and you talked about a couple of orders that got pushed out. Are those orders kind of the delta we’re looking at?

[Jim Hawkins:]

I would say that’s probably right, Jayson.

[Jayson Bedford:]

Okay. And then, you’re fourth quarter guidance implies a sharp expansion in operating margin north of 20%. I guess I’m just wondering, where are the big sources of leverage that you see in the fourth quarter?

[Jim Hawkins:]

A few different things, certainly, with the increased revenues in that quarter, it’s always our strongest quarter, the margins always typically go up. Gross profits go up. We have the restructuring behind us, as Steve mentioned. We’re going to get some nice margin improvement, really, in all areas, from G&A sales and marketing, cost of goods and engineering. So we’ll start falling through in Q4. So it’s a combination of all those things.

[Jayson Bedford:]

Okay. And then, I don’t mean to be – the acquisition question, but in terms of – you’re still – the goal is still to get to this $250 million run rate within the next quarter or two, is that fair?

[Jim Hawkins:]

Yes. I would say that is a very fair statement.

[Jayson Bedford:]

Okay. Thank you.

[Operator:]

And your next question comes from the line of James Sidoti of Sidoti & Company. Please proceed.

[James Sidoti:]

Good morning, Steve. Good morning, Jim.

[Jim Hawkins:]

Hi, Jim.

[Steve Murphy:]

Hi, Jim.

[James Sidoti:]

A quick question, can you just remind me how much of your business is in Europe? And do you have any natural hedges to offset the currency shift to the bottom line or any financial hedges in place for that?

[Jim Hawkins:]

Europe, off the top of my head, Steve, what are we, probably 15% to 20%?

[Steve Murphy:]

Jim, it’s a little difficult for us to get a good measure on that because we sell through a couple of distributors that sell in both Europe and Asia. And so, we don’t necessarily know where those sales end up. And I would say that a lot of our sales – majority of our sales outside of the US are denominated in US dollars. So we don’t – we don’t get involved in any hedges. As Jim mentioned, what the strong dollar does is impact the price that our distributors are paying for our goods, and we can’t hedge that.

[James Sidoti:]

Okay. So it’s (inaudible) affect your margin.

[Steve Murphy:]

No. The one part that will help it sell tied to the Excel-Tech acquisition in that they’re located in Toronto. And the vast majority of their sales are in the United States based in dollars. So we get those sales in dollars, but their costs are in Canadian dollars, obviously, since they’re operating up in Canada. As the dollar has strengthened that, in essence, has lowered our cost on the product and our whole operation up there in Canada. That is also going to be a nice tailwind for us. And potentially, can counteract any costs that we might have tied to the Euro.

[James Sidoti:]

Okay. Thank you.

[Operator:]

And you’re next question comes from the line of Vincent Capos [ph] of First Metro Securities. Please proceed.

[Vincent Capos:]

Yes. Hi, fellows. Thanks for taking my call. I just want to ask you, why didn’t you release your balance sheet?

[Jim Hawkins:]

Vincent, it’s always a crunch to get the numbers out. For a small company, we released fairly early, we think. The 10-Q always comes out a week later. It has the balance sheet in it. And we just felt – there’s a lot of work that goes into a putting a balance sheet together. And that’s the main reason we don’t release it.

[Vincent Capos:]

Right. Can you tell me what your inventory level was?

[Jim Hawkins:]

Once again, we’ll release the balance sheet next week with the 10-Q.

[Vincent Capos:]

All right. And I think that is answered somewhere before, but can you tell me about – but how much of your business is recovering income?

[Jim Hawkins:]

The devices and systems, some of that income is, let’s call it, semi disposable revenue. So we have 30% that’s clearly recurring. And a portion of the devices and systems you can call recurring because of its products that may last 12, or 18, or 24 months, so approaching 50%, let’s say.

[Vincent Capos:]

All right. What makes your business recurring? Is it long term contracts mainly?

[Steve Murphy:]

No, it’s a – yes. It’s a capital supply that once they’re used, they’ve got to be – a lot of times single, single use.

[Vincent Capos:]

Oh, that’s right. Disposable, I’m sorry. I wasn’t thinking. All right. Good. Thanks so much.

[Operator:]

And you’re next question comes from the line of Steve Sabba of Knott Partners. Please proceed.

[Steve Sabba:]

Savings from the North America, is that off of what base? Is that of the current base for 2008 or is that off of what it would have been if you added all the–?

[Jim Hawkins:]

Yes. We couldn’t hear the first part of your question. Could you repeat that please?

[Steve Sabba:]

You said you’re going to have – from the North American integration, you’re going to have these cost savings. What was the amount again?

[Jim Hawkins:]

For next year, it’ll be about $2.4 million.

[Steve Sabba:]

And that’s off of what base? I mean is that off of the current base or is it that off of what it would have been?

[Jim Hawkins:]

If you took a snapshot of the company today after we acquired Excel-Tech–

[Steve Sabba:]

Excel-Tech, yes.

[Jim Hawkins:]

It’s $2.4 million off of that base.

[Steve Sabba:]

Okay.

[Jim Hawkins:]

The day we acquired Excel-Tech, we initiated some restructuring at Excel-Tech. And then in February, continued our restructuring here in the US operations. And so if you took a snapshot of what the company looked like the day we acquired Excel-Tech, the $2.4 million is off of that base.

[Steve Sabba:]

And those expenses that you’ve had this year, those are in SG&A or where are those expenses that–?

[Jim Hawkins:]

Really across the board. We’ve moved engineering, customer service, there’s been some manufacturing. So really, SG&A, it’s affected everything.

[Steve Sabba:]

Okay. And it’s just embedded in the line items?

[Jim Hawkins:]

That’s correct.

[Steve Murphy:]

That’s correct. We’ve just decided early on we work in a non-GAAP. We knew it was going to be essentially cost neutral for the year. And so, all we have done is just talked about it in our communications.

[Steve Sabba:]

Okay, okay. Thank you.

[Operator:]

And I’m not showing any further audio questions at this time.

[Jim Hawkins:]

Well, I’d like to thank everyone for participating in the Natus third quarter conference call. We remain very excited about our business, our business model, and the future direction of the company. We look forward to reporting our year-end results in February. Thanks again.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation, and you may now disconnect. Have a great day.