Natus Medical Incorporated
Q3 2009 Earnings Call Transcript

Published: 2 Nov 2009

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Natus Medical 2009 third quarter financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded today, November 2, 2009 and contains time sensitive information that is accurate only as of today. I would now like to turn the call over to Brienne Fisher, director of Investor Relations for Natus Medical, please proceed.

[Brienne Fisher:]

Earlier today, Natus Medical released financial results for the 2009 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 [e-mail]. 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 website for the next 90 days. In terms of 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 2009. Ken Traverso, Vice President of Marketing and Sales 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 2009. 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 to company's business, please see its 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?

[Jim Hawkins:]

Thank you, Brienne. In the third quarter, our revenue increased to $44.9 million compared to $41.7 million reported last year, while our net income totaled $3.7 million compared to $4.8 million in our third quarter last year. While our profit results were down from last year, we are quite pleased that we showed revenue growth of approximately 6% over the same period last year, and our revenue increased sequentially over our second quarter by about 19%. Even without the contribution of Alpine, our third quarter revenue increased by 12% over our second quarter 2009. We are also happy to report that Natus generated more than $6 million in cash through operations in the third quarter and exited the quarter with $29.6 million in cash. In the quarter, the worldwide economic slowdown that started to impact our business in December 2008 continued but to a much lesser extent. In the third quarter we experienced not only increased sales activity but more importantly an increase in orders. We believe this is a sign that hospital capital spending has stabilized and is gradually improving. In 2009, we continue to focus on cost reduction. Our improved third quarter financial results reflect our efforts to reduce spending and showed productivity gains through operating efficiencies as we continue to integrate our acquisitions. In the third quarter, we continued to see solid sales results for our newborn hearing screening products as we are the worldwide market leader in this segment. We were also pleased with the results in our neurology and newborn care product areas. We believe hospitals are continuing to limit spending on capital equipment but we are certainly experiencing stabilization in business and believe we will continue to see our revenues and earnings increase as we proceed through 2009 and into 2010. On July 6, we announced the acquisition of Hawaii Medical, a manufacturer of single-use disposable products sold into the NICU in nursery and hospitals. Although relatively small with trailing annual revenues of $3.2 million, it is a great tuck-in acquisition for Natus as we plan to move Hawaii's operations into our Olympic Medical facility during the third quarter. By bringing their products to our direct sales force, we will not only increase sales but also profitability by capturing the markup their U.S. distributor was enjoying. We also plan to launch these products into international markets beginning in the fourth quarter. Prior to the acquisitions, substantially all of Hawaii Medical sales had been in the United States. I am pleased to now report that we have completed the integration of Hawaii Medical. All of their operations have been transferred to our Olympic Medical facility in Seattle and we have launched their products into markets outside the United States. On September 14th, we announced the acquisition of Alpine Biomed, manufacturer of neurological devices and disposable products. Alpine is a market leader in EMG in Europe with 2/3 of their revenues outside of the United States. We are currently working through the integration of Alpine and expect it to be accretive to our 2010 results. We believe the acquisitions of Hawaii Medical and Alpine Biomed suggest that our business model is back on track. This coupled with improved business conditions in our markets gives us the opportunity to return to the revenue and earnings growth rates we achieved in the years leading up to the 2008 recession through a combination of organic growth, cost reductions and accretive acquisitions. With that overview, I would like to turn the call over to Steve Murphy. Steve?

[Steve Murphy:]

Today I will be discussing our third quarter 2009 financial results on a basis consistent with accounting principles generally accepted in the United States, or GAAP. I will also present selected results on a non-GAAP basis that exclude the direct acquisition costs of the Hawaii Medical and Alpine Biomed acquisitions. We believe that the presentation of these non-GAAP results aid in assessing the performance of our core business. All per share amounts presented today are on a diluted basis. I will also discuss the contribution of Hawaii Medical and Alpine Biomed to our third quarter results. We reported third quarter revenue of $44.3 million, an increase of 6% or $2.5 million from revenue of $41.7 million for the third quarter of 2008. Alpine contributed $2.4 million to revenue during the third quarter. Excluding the contribution of Hawaii and Alpine, our revenue grew by 10% sequentially over our 2009 second quarter. For the third quarter ended September 30, 2009, we reported net income of $3.7 million or $0.13 per share compared with net income of $4.8 million or $0.17 per share over the third quarter of 2008. Alpine Biomed contributed approximately $196,000 to income before taxes. We have adjusted our third quarter 2009 GAAP results with the direct costs associated with the two acquisitions we completed in the quarter which totaled $460,000 and were reported as a component of general and administrative expense. Excluding those costs, our non-GAAP net income was $4 million and earnings per share were $0.14. Although these results are lower than our results last year, they still exceeded our expectations as reflected in the guidance we provided on July 30th, with our non-GAAP earnings per share exceeding the high-end of our guidance by $0.03. For the nine months ended September 30, 2009, we reported revenue of $114.9 million compared to $118.4 million for the comparable period in 2008, and net income of $6.8 million or $0.24 per share compared with net income of $11.2 million or $0.43 per share for the 2008 period. Revenue from devices and systems contributed to 54% of total revenue in the third quarter 2009, compared to 59% in 2008, while revenue from supplies and services contributed to 44% of total revenue in the third quarter of 2009, compared to 39% in 2008. Other revenue consisting primarily of freight charges was approximately 2% in both periods. The increase in revenue from supplies and services to 44% from 39% last year reflects the contribution of Hawaii Medical where substantially all of their revenue was from single-use disposable and/or consumable products. Hawaii Medical contributed $934,000 to revenue in the third quarter. Revenue from domestic sales was $30.1 million for the third quarter of 2009 or 68% of total revenue, compared to $29.9 million or 72% of total revenue in the same period in 2008. Revenue from international sales was $14.1 million in the third quarter of 2009, compared with revenue of $11.8 million reported last year. Looking at revenue in the third quarter 2009 from the standpoint of our product families, our hearing products contributed to 39% of revenue, our neurology products contributed to 41% of revenue, our newborn care products contributed to 15% of revenue, while 5% of revenue was from other sources. Given the contribution of Alpine Biomed in the third quarter, these percentages are substantially in line with our expectations as we enter the year. Our gross margin was 60.6% in the third quarter of 2009 compared to 62% in the same period last year. During the third quarter 2009, we paid $460,000 of severance costs for production personally at Excel-Tech in our corporate facility in San Carlos. These staff reductions were the final phase of the restructuring we initiated early last year and reflect our continued effort to outsource manufacturing to contract manufacturers. Absent the severance cost our gross profit would have been 61.6% and I will note that we did not exclude these costs in the non-GAAP results we released today. Total operating expenses were 48.9% of total revenue for the third quarter of 2009 up from 45.4% of total revenue in the third quarter last year. And substantially the same as our second quarter 2009 operating expenses as a percent of revenue. However excluding the $460,000 of acquisition-related direct costs I mentioned earlier, our operating expenses would have been 47.8% of revenue representing about a 1% improvement sequentially over our second quarter 2009. Our effective tax rate for the third quarter of 2009 was 30% and was 34% on a year-to-date basis. Our effective tax rate was lower in the third quarter than in previous quarters because of a number of discrete adjustments to the tax provision including primarily the impact of foreign currency fluctuations on deferred taxes at Excel-Tech. In addition, the acquisition of Alpine Biomed resulted in a marginal reduction of our effective tax rate because their foreign operations are taxed at lower rates than our consolidated rate. We expect that our cash tax payment rate in 2009 will be approximately 20%. During the three months ended June 30, 2009 we recorded approximately $2 million of depreciation and amortization expense including $1.1 million of amortization of intangibles associated with our acquisitions. We also recorded $1.3 million of stock-based compensation expense. At September 30, 2009 we recorded cash, cash equivalents and short-term investments of $29.6 million, stockholders' equity of approximately $238 million and working capital of approximately $76 million. We have a $25 million revolving credit facility with Wells Fargo Bank that we are not currently drawing on. Before I turn the call back to Jim, I will note that for the first time in the history of Natus as a public company we will report retained earnings on our September 30th balance sheet having eliminated an accumulated deficit that approached $40 million in 2004. Jim?

[Jim Hawkins:]

Before opening up the calls to questions I would like to make a few comments and review our guidance for the fourth quarter and full year 2009 and 2010. As we noted in our press release we have experienced increased demand among all of our product lines through the third quarter. We expect this trend to continue through 2009 and into 2010. In light of these positive conditions we now expect revenue for the full year 2009 to range from $164 million to $165 million and earnings per share to range from $0.39 to $0.40. We had previously said we expected revenue would range for $149 million to $151 million and earnings per share would range from $0.35 to $0.37. For the fourth quarter 2009 we expect revenue to range from $49 million to $50 million and earnings per share to range from $0.15 to $0.16. We had previously said we expected revenue would range from $40.3 million to $41.3 million and earnings per share would range from $0.14 to $01.15. This compares to revenues of $43.4 million and earnings per share of $0.22 reported in the fourth quarter of 2008. For the full year 2010 we expect revenue to be approximately $196 million and earnings per share to range from $0.49 to $0.51. Our guidance is on a GAAP basis including the impact of expensing employee equity-based compensation. However, it does not include the impact of any future acquisition-related charges associated with Hawaii Medical or Alpine Biomed acquisition or other acquisitions or restructuring-related charges that may be incurred and the impact any future potential acquisitions might have on our related – on our results from operations. All earnings per share amounts are on a diluted basis. Operator, with that I'll open up the call to questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Sarah Michelmore – Cowen and Company.

[Sarah Michelmore:]

Jim, if you can just talk us through Alpine a little bit and just in terms of the mechanics of making that a accretive. What should we think about in terms of cost savings and at what pace? Thanks.

[Jim Hawkins:]

Certainly, you know, the product lines fit very well together and we look for certain not only cost synergies going forward but also on the sales side by putting the sales forces together, some real benefits there. We really don't see getting these benefits in a major way until 2010 as we typically, when we do acquisitions, like to get these synergies at the beginning of the year and put the sales forces together at that time, because we just hate to give our sales force new products, especially in Q4. They're focused on closing their year and having to take them out of the field to do training on all the Alpine products just doesn't seem productive. So we typically wait till January to do that. Thus we expect the real benefits to come in 2010.

[Sarah Michelmore:]

And if I look at your 2010 guidance there. if I just look at what you did in Q3 and what your guidance is for Q4, it just seems like in terms of the top line you're not really anticipating any underlying organic growth. And then on the margins also if I assume that Alpine is in fact accretive during the year, it doesn't seem like you've modeled in any significant underlying increase in operating margins either. So just curious if that's just conservatism on your part, or are there other things that we should considering when we draw models? Thanks.

[Jim Hawkins:]

Let's see, I think – I might not have this exactly right – but I think the guidance we gave has about a 5% built-in revenue growth from internal, so that I would say is certainly below our historic levels. And I think the reason we're doing that is there is – and maybe it is a touch conservative – but there is certainly going on a lot in health care right now with the unknown of what this health care reform is going to be and knowing if people that have followed Natus, you know, we really like to be on the conservative side when there's a lot of unknowns out there. So we've taken that approach again and we're hopeful that certainly if things fall out, we'd love to exceed those numbers, and as we hinted, I think there's an opportunity to get back to our historic growth rates, both internal growth and earnings per share in 2010. But we just didn't feel comfortable guiding to that at this time with the unknowns out there.

[Sarah Michelmore:]

And is there anything specific on the cost infrastructure side that we should keep in mind that would keep you from expanding your operating margins more than what you had kind of assumed in that model, is there any specific headwinds there? Maybe it's the non-cash expense that just – is there anything specific year-on-year that we should keep in mind in terms of dynamics? Thank you.

[Jim Hawkins:]

I don't think so. You know, as historically when we do acquisitions as with Alpine we buy companies a lot of times that have gross profits in that 50% range. And it takes us maybe a year to get them up to where the 60% range or better. And so we would anticipate that would be sort of a key factor in being able to try to improve that gross profit as we move through 2010.

[Operator:]

Your next question comes from the line of Brian Weinstein – William Blair & Company.

[Brian Weinstein:]

I'm following up on Sarah's questions here. I'm just scratching my head a bit on the guidance. It looks like you guys are – put up kind of a 9% after-tax margin now, are kind of guiding to a similar after-tax margin in 2009 but if I do the math it looks like you're guiding to about a 7% after-tax margin in 2010. So I appreciate the conservatism there, but is that really what's going on, because it seems to me that if business is getting better that we should expect to see an acceleration there.

[Jim Hawkins:]

Sure Brian, I think one thing Steve did mention and I'm not sure the exact factor but we are – the tax rate in this quarter was quite low and I think Steve's numbers are probably in the 38% tax rate for next year on our guidance. So that is a potential factor there. And I think that we just want to be a little bit on the conservative side. These are – I would almost classify this as a preliminary guidance. It's early, we wanted to get out there with the acquisition of Alpine and to put some numbers out so analysts and shareholders wouldn't get too far ahead of themselves because we do have work to do in gaining the synergies for next year and it certainly isn't a slam dunk combined with the business climate out there. But we are certainly hopeful.

[Brian Weinstein:]

And am I right to say that on the trailing 12-month revenue Alpine prior to your acquisition was doing about $30 to $35 million?

[Jim Hawkins:]

Yes, I think if you as we mentioned I think in the press release I think they did about $32 million when it's $32 to $34 when you back out sales that they were selling to us and we were selling to them, they'd get eliminated now. So it's in that range.

[Brian Weinstein:]

And is there any reason to think that they cannot get to a 20% plus pre-tax margin over the next kind of 12 months or so?

[Jim Hawkins:]

Yes, we would certainly as I think you know as you've followed us, that certainly is our goal to get to that over the next 12 months.

[Brian Weinstein:]

Yes, okay. Again it just seems that you guys are being extremely conservative which I guess I understand in this environment. Thank you.

[Operator:]

Your next question comes from the line of Matt Dolan – Roth Capital Partners.

[Matt Dolan:]

Just a couple questions on the environment as you see it and kind of what you're tying into guidance, Jim. On the pricing side of things are you expecting a constrained ability to be able to raise prices next year, does that play into this organic growth rate? And then on the order size side of things what are you seeing now? Have you been able to get some of those bigger orders on the table or is the overall dollar amount still an issue with some of these hospitals?

[Jim Hawkins:]

Yes, so on your first question on pricing, yes, I think we have certainly going into 2010 in our forecasting have not – have lowered the pricing capabilities that we've had over the last few years. We've toned that down a bit, don't really want to get into what percentages but certainly it is reduced from prior years as far our ability to raise prices. We just think we want to be conservative going into 2010 with this environment. Let's see the other part of your question was order sizes. Yes, we did certainly see some activity in bigger orders and certainly closed some bigger orders but there are still quite a few out there that we're hoping to bring in by the end of the year. But again makes it difficult to guide for big orders these days and include them in guidance when it is a little lumpy out there.

[Matt Dolan:]

And a question on Alpine, maybe could you talk a little bit about those synergies you're expecting to see given the fact that they were – the majority of their business was OUS prior to your acquisition?

[Jim Hawkins:]

Sure, outside the U.S. it really is a great fit in that they do go direct in both France and Germany which is where we're strong. So by being able to have all those sales people now carry all the products, we think is going to be a big help there. By giving us more power outside the U.S. in this environment we think that's a benefit and we're going to be able to leverage our sales management outside the U.S. in a big way. Outside of France and Germany Alpine I think had one or two people out there trained to work with distributors and we have 14. So we think we're going to get a lot more [mind] share and certainly we'll get the benefits there. And in the U.S. again by our – I would say much larger sales force then what Alpine had in 2010 by combining these we will do quite well.

[Matt Dolan:]

And then finally, with these two deals being integrated at this stage, what's the outlook from an acquisition standpoint for Natus? Should we expect something here in the near future or do you have too much to digest right now?

[Jim Hawkins:]

Yes, well, we keep our eyes open for, at this point, things that we would consider almost tuck-ins. And a tuck-in means that these days at our size as probably something less than $10 million or maybe less than $15 million in revenue, something along those lines. I would say a bigger acquisition in the $30 million to $60 million range. It's not our plan to do one here in the next few quarters and I would say most likely it's the back half of next year because we do want to get this integration completed.

[Operator:]

Your next question comes from Joshua Zable – Natixis Bleichroeder.

[Joshua Zable:]

Most of them have actually been answered, but just a couple of quick ones here. Just first on Alpine, I know you gave us the revenues for the quarter. Can you break that up as far as devices in disposables and all devices?

[Jim Hawkins:]

Steve, do you have any numbers handy on that?

[Steve Murphy:]

You know what? We're still getting our hands around it and to be honest, I don't have the breakdown.

[Joshua Zable:]

And then again, just kind of getting back to the environment because I know a lot of people kind of asked about the outlook and whatnot, you guys obviously seem to be doing pretty well here on a relative basis. I know you said that orders have picked up, Jim. Can you just kind of give us a sense, just general? We know you guys are sort of at the lower end of cost, if you will, as far as equipment goes, so that's helping you. Is it a function of these were kind of backed up orders that we talked about the delay in spending and they kind of finally pulled the trigger? Is it a function because it's at the end of the year? Is it a function of you guys beating out competitors there? I mean, I'm just trying to get the dynamics because it's really difficult in this environment for us to gauge sort of what hospitals are spending on and where you guys seem to be having success, so maybe just any color would be helpful.

[Jim Hawkins:]

Yes, Josh, I think I agree with you. I think we have done, probably gotten, maybe performed better than some other in the device space. I think it's a lot of reasons. We have a great sales force out there and a great brand and people do need our products. And I think we've mentioned early on they can delay them for a while but not forever. On top of that, I think our strategy on focusing on international is starting to pay off because it's just certainly not being as affected as the domestic markets. Steve, I don't have the numbers off the top of my head, but I think we're right around 40% now as we looked at 2010, of our international business as a percentage of our total sales, where if you go back a couple of years we were probably 25%. So I think that's helped as well.

[Operator:]

Your next question comes from Eric Schneider – UBS.

[Mike Duncan:]

This is kind of going on the back of some of the other questions, but for 2010 the guidance seems to suggest less leverage than we've seen in the past. The first question is do you expect to see year-over-year improvements in both gross margin and SG&A as a percentage of sales?

[Jim Hawkins:]

For the full year, it's a little difficult on gross margin in that Alpine that we acquired, a fairly significant acquisition, was a 50% kind of gross profit company. So when we averaged over 60%, that does obviously drag us down. So to get to those levels, we're certainly hopeful to get it certainly a lot better than it is now. But when you look at the whole year and timing the improvements of that, it is going to be difficult to get improvements in gross profit year-over-year.

[Mike Duncan:]

So it's probably more flattish for gross margins?

[Jim Hawkins:]

I would say that's probably correct. We certainly would look to be north of 60% for sure as a company, but to get to 63%, 64% might be a little difficult.

[Mike Duncan:]

And then do you see 2010 as a transition year, or should we just expect kind of more modest leverage going forward?

[Jim Hawkins:]

I'm not sure of the definition of a transition year. This is what Natus does. We see it as a year where we're getting back on track, where we'd like to get to our historic levels of internal growth which we see the opportunity to do that if things fall into place. And then by doing these accretive acquisitions, we look really to get back to our historic rates and don't see it as a transition year as much as getting back to the prior five years that we've been operating in before the recession.

[Mike Duncan:]

And then on the capital equipment side, I realize this is probably a difficult question but would you venture a guess at the percentage of sales that were delayed versus sales that were just lost completely?

[Jim Hawkins:]

Oh, boy, I don't know how many we've lost completely.

[Mike Duncan:]

Or are you seeing – has there been customers?

[Jim Hawkins:]

There hasn't been a lot I would say that we've lost completely. I'd say it's the vast, vast majority is delayed.

[Mike Duncan:]

So you're not seeing any weakness from customers where they're just shutting down for whatever reason, deciding not to expand where they would have before?

[Jim Hawkins:]

Ken, why don't I turn that over to you and see if – I can't think of any myself – of any orders that we've lost because hospitals have cut expansion.

[Ken Traverso:]

No, not really. As Jim said before, a lot of this stuff is replacement product, and at some point you just have to replace some of this equipment. Some of the orders that were larger and that were pushed out were just because I think hospitals were being conservative as well in their capital spending and wanting to make sure that they could see where things were going to fill out before they spent $1 million.

[Operator:]

Your next question comes from Jayson Bedford – Raymond James.

[Jayson Bedford:]

Just related to the neurology business seemed quite strong, at least related to the second quarter. I'm guessing Alpine helped, but were there specific strengths in either NeuroCom or Excel-Tech that really fueled kind of the sequential increase in neuro?

[Jim Hawkins:]

Yes, I would say that was, Jayson, the biggest upside that we saw in Q3 was on the neuro side of the business. Both Excel-Tech and NeuroCom exceeded our expectations in the 10% to 20% range. They both did very, very well and we were pleasantly surprised by that.

[Jayson Bedford:]

So it was from both sources?

[Jim Hawkins:]

Yes.

[Jayson Bedford:]

With respect to gross margin, you look at it, your revenue increased nicely, again, both year-over-year sequentially yet gross margin was down year-over-year flat sequentially. I'm just wondering does that reflect either product mix or is there a pricing dynamic that occurred in the quarter?

[Jim Hawkins:]

No, I don't think it's pricing because we typically are quite disciplined on pricing and we put in prices at the beginning of the year and we pretty much stick with them. I would say there's a little bit of Alpine in there. It represented 5% of our revenues approximately for the quarter and, as I mentioned, there was a lower gross profit there. Also, Hawaii Medical, if you go back and remember when we acquired Hawaii, through the quarter we were selling through their distribution channel. There was a 90-day notice to their distributors. We've now, as of October 1st or 3rd, that has expired, but because of that there was a lower gross profit for them in the quarter. So we look for their revenues to certainly be at a higher gross profit in Q4.

[Jayson Bedford:]

Lastly, can you just update us on the current sales force in terms of how many folks you have selling and which products?

[Ken Traverso:]

We've got about 24 people selling in the neuro space in the U.S., about 16 in pediatrics, and then our diagnostic hearing business goes through our dealer network, but that's managed directly by a Natus person. Internationally, we've got between 13 and 15 international regional managers and sales managers that manage our distributors in about 110 countries.

[Jayson Bedford:]

And Ken, is that kind of the group going forward? Do you expect any changes?

[Ken Traverso:]

Well, as Jim said, we've got a new group here with Alpine. They're direct in a couple countries in Europe and in the U.S. and so we've got to reconcile where everybody's going to be and what territory sizes we're going to have for 2010 as we pull the product lines together. But their product lines are very complimentary so it should be good for us.

[Jayson Bedford:]

And how big is the Alpine group now?

[Ken Traverso:]

There are about 8 or 10 in the U.S. and internationally there's about 15 depending on their direct and dealer manager organizations if you combine them both.

[Operator:]

Your next question comes from the line of Sameer Harish – Needham & Company.

[Sameer Harish:]

Hi guys. Thanks for taking the question. I just wanted to follow up a little bit on the Alpine integration plan. Can you talk a little bit about some of the activities that need to go on there? It seems like on the sales side that it's largely additive in the near term, but maybe as far as manufacturing and in the G&A side kind of what the integration plan is there?

[Jim Hawkins:]

Certainly, we are looking to constantly improve costs and, as we mentioned, we do have an overall plan for contract manufacturing. It is something that we've driven for a number of years at Natus and we think it makes a lot of sense. So there's not really any one thing, Sameer, that we're shooting for. It's really just to get it in to the Natus model over 2010.

[Sameer Harish:]

Last quarter we asked about hearing side that you mentioned that there weren't any major country initiatives in 2009. Have you seen any change in there or maybe you can comment on what your outlook for 2010 is?

[Jim Hawkins:]

I believe in 2010 – Ken, correct me if I'm wrong – but we do not have modeled any new country adoption in 2010 in our guidance numbers.

[Ken Traverso:]

Correct.

[Operator:]

Your next question comes from the line of David Nierenberg – D3 Funds.

[David Nierenberg:]

Jim, I want to give you the opportunity to sound off philosophically about profitability in 2010. Your conservatism, I think, makes perfectly good sense given the environment. But I am assuming that you're not going to leave on the table opportunities to take price increases, to drive costs down, or to drive sales up.

[Jim Hawkins:]

I would agree with that, David, and maybe just to look back at the facts I think. As we went into – as we entered or we were in 2009 I want to say our guidance in the February timeframe was maybe $0.32 to $0.34 for this year. Again, I think we had mentioned it was on the conservative side and we were hopeful that things would stabilize and improve, as they have. Here we're ending the year. We're forecasting $0.39 to $0.40. We think in these uncertain times, it is just prudent to be conservative in your early year guidance. But we're not putting our – taking our foot of the pedal at all on both revenue opportunities and cost.

[David Nierenberg:]

That's good, because in the 5.5 years you've run the company you certainly have been a profit maximizer. Questions for you about opportunities in developing and emerging country markets to further propel the growth of the newborn hearing screening business. I realize that the economics and health care reimbursement of every country is different. Medical-legal standards of care are different but the number of births so far exceeds the number in the United States and in developing markets, so I am wondering what longer term plans you and the team may have to take ownership of those markets in a manner comparable to what you have done in the developing markets?

[Jim Hawkins:]

And maybe just to review for everyone that might be new to the story. There is about – a little over 4,000 births a year in the United States. We say about 10 million births in the developed world and then there's maybe 100 million to even 120 million births outside of the developed world. David, I think that's what you are alluding to, that 100 million to 120 million birth market per year. It is true we have not focused on that. I don't want to say at all, but pretty much not at all. But it is an area this year that we are now going to focus on and look to potentially bring in some partners as we go to some of these other countries, the Chinas, Indias to look at different alternatives and perhaps even a lower cost initiative, something to really try to get some of these countries going. This won't happen overnight. We know that. But we also think it's time to start look at those markets.

[Operator:]

At this time I would like to turn the call back over to Natus Management for closing remarks.

[Jim Hawkins:]

Well, I'd like to thank everyone for participating in our third quarter conference call. We were very happy with our results as we tried to communicate, and we look forward to a good finish for 2009 and certainly excited about 2010. Thank you, again, everyone for participating.

[Operator:]

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.