Natus Medical Incorporated
Q4 2016 Earnings Call Transcript

Published: 1 Feb 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Natus Medical Fourth Quarter 2016 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 call is being recorded today, February 01, 2017, and contains time-sensitive information that is accurate only as of today. Earlier today, Natus Medical released financial results for the fourth quarter 2016. If you have not received the news release, or if you would like to be added to the Company’s distribution list, please email your request to Investor Relations at Natus.com. This call is being broadcast live over the Internet 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:]

Thank you, operator. Our fourth quarter results, that we released earlier this morning, reported revenue of $107.7 million compared to $100 million last year. We also reported non-GAAP earnings of $0.51compared to $0.51in our fourth quarter last year and generated cash flow from operations excluding the prepayment tied to the Venezuela contract of $10.2 million. We also repurchased $1 million of stock during the fourth quarter. I am pleased with our accomplishments in 2016 including the acquisition of Otometrics and RetCam as well as our record financial results considering the regulatory issue at our Seattle facility and the headwinds in some of our international markets. Our fourth quarter results were highlighted by another strong quarter in our neuro diagnostic business in the United States. We believe we continue to take market share due to the combination of our leading products and our strong sales and service organization. Peloton, our hearing screening service business also posted a strong quarter as they signed a record 23 new hospital contracts in the fourth quarter. This positions Peloton for another record year in 2017. As we've previously discussed, we have a voluntary ship hold on certain products in our Seattle facility. The ship hold on these products is incorporated in our Q1 and 2017 guidance. We anticipate the neoBLUE overhead product will come off ship hold by the end of the first quarter. In the fourth quarter, not counting the Venezuelan contract we continued to experience softness in some of our international markets. But I am happy to report on a lesser scale we are hopeful our international markets to stabilize and we will actually show growth in these markets in 2017. As we announced in late September, we entered into an agreement to acquire the Otometrics business from GN Store Nord in an all cash transaction for $125 million. The acquisition closed on January 03. Otometrics revenue was approximately $100 million in 2016 based on the year end value of the Danish currency and with 100% of the revenues of their U.S. sales subsidiary that we acquired in the acquisition. Otometrics is a manufacturer of hearing diagnostics, hearing aids fittings, balance assessment equipment and disposables and software. We believe the acquisition of Otometrics will benefit our customers by increasing focus on the hearing-screening, hearing diagnostics and balance assessment markets and providing the best technology and solutions available in the market. Customers will also benefit by having a source of very high quality hearing aid fitting products from a source independent of the hearing aid supplier. For those not familiar with our Natus hearing franchise or Otometrics, I'd like to spend a few minutes describing each of these markets and how they fit strategically within our current business. First, let's review hearing-screening. Natus is the leader in newborn hearing-screening. The addition of Otometrics hearing-screening product line and customer base will broaden our global footprint in this area. Otometrics' Madsen brand hearing screeners are used by audiologists worldwide for infant hearing-screening as well as hearing-screening for all ages. Madsen brand products include the AccuScreen, a lightweight and portable OAE/ABR screener that offers an alternative to larger card based symptoms like Natus flagship ALGO Newborn Hearing Screening Systems. Next in hearing diagnostics Otometrics is an industry leader in the hearing-diagnostic market. Otometrics products have audiologists in major healthcare facilities and those in private practice, audiologists use Otometrics' wide selection of advanced clinical devices and software solutions to diagnosed hearing disorders. Combining Otometrics Madsen and ICS brands with Natus' Navigator and AuDX hearing diagnostic solutions will provide Natus much-needed scale in this market. Together, Natus and Otometrics will have an industry-leading product offering for the hospital, clinic and private audiologist practice. Otometrics also brings its world-class Oracle product line of hearing aid fitting systems to Natus. Oracle fitting systems are used by audiologists to fit and tune hearing aids. As part of the Natus family, Otometrics will be the largest independent provider of hearing aid fitting systems, providing a new model to customers who want to choose Otometrics fitting systems independently from the hearing aid manufacturer. And finally, Natus and Otometrics will have the most complete product line of balance-assessment tools used by EMTs in hospitals, clinics and private practice. Otometrics’ ICS and HORTMANN brand BNG balance-assessment solutions complement Natus' NeuroCom balance products. We have already combined Otometrics balance products into our sales channel in the United States. We believe Otometrics has an exciting future. The growth of hearing-diagnostic and hearing aid fitting will be a solid grower for this foreseeable future as the worldwide market 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. These factors give us confidence to believe Otometrics will achieve revenue growth of 10% in 2017 and 10% in 2018. Historically, Otometrics has been a breakeven company with business outside North America being nicely profitable, but having losses in the United States. Going forward we have set an operating goal for all of Otometrics of 10% in 2017 and 20% in 2018. We look for this profitability to ramp throughout 2017. Lastly, I want to provide an update regarding our Venezuela supply agreement. As previously announced we received the first payment of $20 million towards the $120 million supply contract in early September. In the fourth quarter, we recorded revenues of $9.1 million from the contract. We now expect revenues to be approximately $10 million in the first quarter of 2017. We continue to expect operating margins on the total contract to be in line with our overall corporate average margin. In summary, we are pleased with our 2016 accomplishment. We look forward to 2017 and achieving another record year in both revenue and earnings per share. I will now turn the call over to Jonathan Kennedy, our Chief Financial Officer to review the financial results. Jonathan?

[Jonathan Kennedy:]

Thank you, Jim. Today, I'll be discussing our financial results on a GAAP basis as well as a non-GAAP basis. Our non-GAAP results exclude amortization expense, restructuring, certain other charges and their related tax effect. We believe that the presentation of these non-GAAP measures along with our GAAP financial statements provide a more thorough analysis of our ongoing financial performance. You can find a reconciliation of our financial results on a GAAP versus non-GAAP basis in today's press release. As Jim stated, we reported fourth quarter 2016 revenue of $107.7 million a 7.7% increase from the same period last year. Revenue from our Neurology business increased 1.3% to $63.8 million or 59% of total revenue during the fourth quarter of 2016 compared to $63 million and 63% of total revenue during the same quarter last year. Revenue from our Newborn Care business also increased 18.8% to $43.9 million, or 41% of total revenue during the fourth quarter of 2016, compared to $37 million, or 37% of total revenue during the same quarter last year. In total, revenue from Devices and Systems contributed approximately 67% of total revenue in the fourth quarter of 2016, compared to 60% in the 2015 period, while revenue from Supplies and Services was approximately 33% of total revenue in the fourth quarter of 2016, compared to 40% in the 2015 period. Revenue from domestic sales was approximately 59% for the fourth quarter 2016, compared to 64% in the same period in 2015. Revenue from international sales was approximately 41% for the fourth quarter of 2016, compared to 36% for the same period in 2015. On a non-GAAP basis, our gross margin decreased by 260 basis points in the fourth quarter of 2016 to 61.3% compared to 63.9% in the fourth quarter of 2015. This decrease in gross margin was primarily driven by shipments on our Venezuela supply agreement. Overall the gross margin on the Venezuela business was approximately 44%. So without the Venezuela business Natus' gross margin would have been 63% in line with our historical norm. The remaining decline in margin was due to overall negative mixed shift. Non-GAAP operating expenses for the quarter increased by $0.2 million compared to the same quarter last year. Our non-GAAP operating margin increased to 20.8% compared to 20.3% for the same quarter last year. The increase in OpEx was driven by costs added from the acquisition of RetCam, and growth in OpEx to support our Peloton and GND service businesses. Our fourth quarter non-GAAP effective tax rate was approximately 25% while our non-GAAP tax rate for the full year 2016 was 23.1%. and looking ahead to the full year of 2017 we expect our overall non-GAAP tax rate to be about 23% to 24%. Non-GAAP other income was about $92,000 primarily the result of FX losses. On a GAAP basis, net income was $10.2 million, or $0.31 per diluted share, a $1.7 million increase from the same quarter of last year. Non-GAAP net income decreased $0.2 million, compared to the same quarter last year, and non-GAAP earnings per share was $0.51. In the third quarter, we recorded approximately $4.1 million of depreciation and amortization expense and our share-based compensation was about $2.1 million during the fourth quarter. Now for the balance sheet. We repurchased about $1 million of company’s stock, and net cash and investments increased by $141.1 million during the quarter. We ended the fourth quarter with $140 million of long term debt. The debt was used to fund the acquisition of Otometrics in January. Cash flow from operations was $4.2 million during the quarter. Our days of sales outstanding decreased 11.9 days during the quarter to 74 days. Our diluted shares outstanding decreased slightly to 33 million shares compared to 32.1 million shares in the fourth quarter of the prior 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 first quarter and full year 2017 all on a non-GAAP basis. For the first quarter of 2017 we expect revenue of $122 million to $124 million and non-GAAP earnings per share of $0.32 to $0.34. For our full year 2017, we expect revenue of $505 million to $510 million and non-GAAP earnings per share guidance of $1.80 to $1.85. With that, we'll turn the call over to questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Jayson Bedford from Raymond James. Your line is now open.

[Jayson Bedford:]

Good morning guys, can you hear me?

[Jim Hawkins:]

Hi Jason, yes.

[Jayson Bedford:]

Okay. So I wanted to ask you about the Otometrics integration and specifically I'm just wondering their sales effort and the potential synergies with your existing portfolio and then just wondering if they may be able to help some of the softness you've seen internationally?

[Jim Hawkins:]

Yes, that's a very good question Jason and we think there are some definite benefits there, especially on the hearing diagnostics side and potentially on the balance side. In hearing-screening certainly we are a strong number one position in Newborn hearing-screening and they are a solid number two. So I think the combination of our two businesses being able to really promote the correct product for the market in each individual country will certainly be a benefit and not, how can I say this, it is certainly not having to spend all the time demo-ing all the products and competing to make for a more efficient sales process. Maybe Allstate will like that. And so we see some definite benefits there. On the diagnostics side, we think that hearing diagnostics for Natus is a smaller player it certainly builds out the Otometrics product line by having the Natus products and so we see some certain help there. You know, maybe just commenting on the international business as you may have caught in my prepared remarks our international business while down in the fourth quarter was down much less than it had been in the past and as we work our way through the first quarter of this year things continue to be stabilizing. So we are really quite hopeful that our international business will potentially even grow year-over-year which is a big change from being down 7% to 10% over pretty much over the last couple of years. So that's very optimistic.

[Jayson Bedford:]

Okay and maybe secondly on Otometrics and the margin profile can you just realize that you are expecting some growth in the topline, but where does the margin improvement come from meaning breakeven to a goal of 10% what where does the improvement comes from?

[Jim Hawkins:]

Yes, I think a few different areas, maybe I'll focus on the topline a little bit and Jonathan you can talk about potentially some operational things. But certainly with the growth of their business will certainly help margin. As you go from a breakeven business and we look to get their gross profits up for one, but even if they are at their current 50% to 55% rate of gross profit incremental revenue certainly helps profitability. We also noted that their U.S. business has always been a loser and we're a little fortunate that they took some very good steps before we acquired the business I would say to right size the business a little better based upon their revenue situation as it currently is. So that will also help. Jonathan, there's probably some other operational issues you'd like to comment on.

[Jonathan Kennedy:]

Yes, as Jim pointed out the team at Otometrics had already been working on some projects. One of them was a cost of materials project where they consolidated vendors to a much smaller base of vendors at lower prices so we will get a better cost of goods on the materials. You can imagine breaking apart a business like that out of a large company, there's process efficiencies that we're beginning to work on. And I think that will help a lot bringing Otometrics on to our single ERP system will present an opportunity to make the business much more transparent and reduce the cost of transactions just in the cost of license fees alone will save quite a bit. And then lastly just when we looked at – when Otometrics would look at in the past and when you see in our filings as they come out is this pretty significant GN Store overhead allocation that Natus just does not have. And so between among those four things, materials cost, process efficiencies, less overhead and Oracle implementation, we should see a pretty good opportunity to get from where we are today to exiting the year about 10%.

[Jayson Bedford:]

Okay, that's helpful. And then maybe just a last one from me and then I'll let someone else jump in. So what are your cash flow expectations for 2017 and what is left on the buyback?

[Jonathan Kennedy:]

What is after the buyback, we probably have $15 million or so left on the buyback. Cash flow expectations for the year, I would we end up somewhere in the 15% to 20% of revenue for cash flow. We will be investing a little bit in the Otometrics business beyond what we normally would be in IT systems and most of that's where the capital will go.

[Jayson Bedford:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from Chris Lewis from Roth Capital Partners. Your line is open.

[Chris Lewis:]

Hey guys, good morning. Thanks for taking the question.

[Jim Hawkins:]

Hey, Chris.

[Chris Lewis:]

Jim, I wanted to follow up on some of your comments around international. If I exclude Venezuela from the fourth quarter it looks like it was down 2% to 3%, albeit is still down, but improving versus the double-digit decline that we saw in the first three quarters of 2016, so can you just elaborate on maybe what you thought exiting the year in some of those international markets and what you've seen through the first month of this year that gives you confidence that maybe that does return to the growth this year?

[Jim Hawkins:]

Sure. I think of one factor is certainly the stability of the currency. The dollar is more in a stable range. It had gone down probably 15% over the last couple of years and so maybe even 20% so, that was quite a headwind for us. Certainly with the Middle East last year, especially the first three quarters the oil prices being down we saw great reduction of spending. Latin America we saw a lot there between softness between not so much Venezuela because of our agreement, but Argentina and in Brazil, those businesses seem to be stabilizing and we look for growth there is what we’re hearing and seeing, so we feel good about that. And certainly stability in Europe, the Asia-Pacific market has been somewhat solid throughout, China had a solid year and it looks like we should have solid growth there next year. So when you add all this up, I think it - we looked at coming from headwinds to tailwinds now on the international front which could be a real positive.

[Chris Lewis:]

Okay, great to hear and then Otometrics, I may have missed it, but the 10% growth rate for 2017 what basis that off of? I'm just trying to figure out what's led to your guidance.

[Jonathan Kennedy:]

Yes, so that’s off of about $100 million base, I tried to walk everyone through it in my prepared remarks, that based upon the currency of the DKK, the Danish Krone at the end of the year if you take, if you convert that to U.S. dollars and then take their U.S business that we also acquired with its subsidiary of GN, but we acquired that as part of it as well and you take all those revenues, it was right around $100 million based upon the dollar at that time, so that’s where you get the basis.

[Jim Hawkins:]

Yes, one thing that won’t be obvious from the GN filings of this U.S. subsidiary, GN was only a 60% owner when we acquired GN and we acquired Otometrics from GN, as acquired 100% of it, so that was a private minority ownership of that, so there's a difference there from the filed reports.

[Chris Lewis:]

Okay, great and then may be just one more for me and I’ll hop back in queue, but may be Jonathan just for you in terms of gross margin expectations, I know there is some moving parts between the core business and Otometrics coming on board and then Venezuela in the first quarter, but any guidance you can provide on what the that outlook assumes in terms of the gross margins for this year and how those trend over, over the course of the year? Thanks.

[Jonathan Kennedy:]

Sure, yes definitely the Venezuela business obviously impacted negatively gross margin and then the addition of Otometrics will negatively impact gross margins. So our guidance for Q1 has gross margin in the low 50s, 51% to 52% range and then in terms of going out for the rest of the year.

[Jim Hawkins:]

That may be low 60s not low 50s for all of Natus.

[Chris Lewis:]

For all of Natus.

[Jonathan Kennedy:]

Yes, while including the Venezuela business and including Otometrics that's what we have in the model. And then for the rest of the year we would see it going up. Certainly, we don’t have anything in guidance for Q1 for Venezuela, I mean beyond Q1 for Venezuela, so that'll be a relief into margin in Q2, Q3, Q4 and then but Otometrics will stay in there, so we would see it going up steadily end of the year in the low 60% range.

[Chris Lewis:]

Okay, thanks.

[Operator:]

Thank you. Our next question comes from Brian Weinstein from William Blair. Your line is open.

[Brian Weinstein:]

Hey guys, good morning. Thanks for taking the questions. Sorry to belabour this point, but I just want to make sure the difference between the $110 million in revenue at Otometrics that you guys put in the press release on the deal and the $100 million that you’re talking about today is sort of a base there, are you saying that that difference was sort of an FX move or we're just trying to understand the 110 versus the 100?

[Jim Hawkins:]

Yes it was a combination of mostly an FX move Brian. If I remember right, I think the DKK was around 6.65 and then it went to 7.14 I believe at the end of the year. So that was quite a move and then just certainly then finding having a better indication of where the revenues landed for the year as well and then bringing in 60% of or the other 40% of the U.S. business that we acquired. So, which was already in that plan, but when you add all that up, it was like I said mainly currency. It was the main difference there.

[Brian Weinstein:]

Okay. And it looks like just doing the quick math, the U.S. business in general was kind of flat to down even a little bit when you back out RetCam especially for the last couple of quarters, can you talk about the tone of business domestically and what you're seeing in both Neuro and in Newborn screening?

[Jim Hawkins:]

Yes, I think to highlight that is probably we need to talk about the ship-holds. I believe Jonathan the ship-holds probably affected us by was it $4 million or $6 million in the quarter?

[Jonathan Kennedy:]

That is right, yes.

[Jim Hawkins:]

In Q4?

[Jonathan Kennedy:]

In Q4 about $6 million.

[Jim Hawkins:]

About $6 million, so that certainly was year-over-year headwind.

[Brian Weinstein:]

You're talking about certain – how you're seeing the end markets in Neuro and in Newborn screening domestically what your view is on those end markets right now?

[Jim Hawkins:]

Sure. In Neuro it's very strong. We had a very good quarter and the Newborn business is solid, if you don’t count the ship-hold.

[Brian Weinstein:]

Okay. And then when I look at your guidance for next year, if I sort of back out Venezuela from both periods, Otometrics as well as out RetCam, it looks like you're kind of guiding the legacy business at least on the top line to be down year-over-year a little bit. Is that just conservatism on your part or is there anything that either that you're seeing that we should be more aware of it, we may be haven’t thus so far?

[Jim Hawkins:]

Yes I think we should have maybe walked through that a little bit. I don't think that is the case if I remember right, it gets a little too meaty to maybe go through here, but I want to say our legacy business is not counting Otometrics and Venezuela is about a wash, so maybe here is a way to maybe just briefly go through that Brian. If we were maybe 382 this year in revenue and we had let's see, in our guidance I believe for Otometrics, I don't believe we're guiding the full 10% growth, are we Jonathan?

[Jonathan Kennedy:]

No.

[Jim Hawkins:]

I think we're probably maybe at the 106, 107, great for Otometrics in our guidance. So let's say that takes us to almost 490, I guess Otometrics would be if you added that in and then you add $7 million for RetCam since we had RetCam for half the year that would put us to what like 496, 497 something like that and we're guiding $505 million to $510 million. So I'd say a lot of devils in the details there, but we're sort of mid-guidance would be probably around 2% organic growth, if you were able to follow that.

[Brian Weinstein:]

Yes, I think I was there, when we can follow up Jonathan with you and Jonathan I'll find on that is a little bit dear. Okay, the last question from me then is, can you talk about what your expectations are and give us an update in general on the services business, you talked about Peloton has not had a good quarter, but can you get a little bit more specific, I mean where they are with hospitals at this point and what your expectations are for that business as well as other services businesses that you guys are investing in over the last couple of years? Thanks.

[Jim Hawkins:]

Sure. Let's see what Peloton we had record quarter with 23 hospitals being signed up, I think it takes us to about 127 and we are certainly looking for continued rapid growth there. At GND we are looking for the same kind of growth, very nice growth there. I believe both had finished the year around $13 million or $14 million in revenues and I think we're believing, they're going to grow to $16 million or $17 million this year in that kind of range. Nicview actually had a flat quarter there, that business has the tendency to be a little lumpy but we are still believe Nicview is going to have a very good year in 2017.

[Brian Weinstein:]

Okay, thanks.

[Operator:]

Thank you. Our next question comes from Larry Haimovitch from Haimovitch Medical Technology Consultants. Your line is open.

[Larry Haimovitch:]

Good morning, Jim, good morning Jonathan.

[Jim Hawkins:]

Hi Larry.

[Larry Haimovitch:]

So you have provided a little bit of color on Venezuela, I realized Venezuela is a very much of a wildcard for you. Do you have any visibility at all this year with Venezuela or is it completely unpredictable stuff?

[Jim Hawkins:]

Well we have very good visibility for the first quarter. We have been prepaid and so we feel very good about that $10 million number that we look this year all that has pretty much been built or staged and we would be very surprised if that doesn’t happen. Going forward for future releases on the $120 million order, you're correct, it is a little bit of a wildcard with everything going on, it's not in our guidance, but with that said, we're hopeful that we will be getting more shipments but certainly trying to pinpoint the timing of the next prepayment is difficult as we experienced throughout the 2016 it's very hard to call.

[Larry Haimovitch:]

And Jim or Jonathan is the profitability of that business approximately the same as the corporate average or does it differ considerably?

[Jim Hawkins:]

Yes so, we're looking at it on a contract basis and it should be very similar to our overall corporate margin around 20%, maybe 22% something like that.

[Larry Haimovitch:]

Okay. And then one final question for you Jonathan if someone else asked about the buybacks, I just think you said there were $15 million left in the buyback?

[Jonathan Kennedy:]

That is correct, 15. And that is at the end of June.

[Larry Haimovitch:]

Okay. Is there any price limitation on that, that you can discuss or is that just something that you just decided based on current market prices?

[Jonathan Kennedy:]

No it's up to the current market prices, I mean the board can do what they want in terms of price limitations on the buyback but we don’t have any price limitations that would affect the price where it is today.

[Larry Haimovitch:]

What was the price of the $1 million you bought back in Q4?

[Jonathan Kennedy:]

It is probably in that $38 range.

[Larry Haimovitch:]

Okay, so right where we are approximately.

[Jim Hawkins:]

Yes.

[Larry Haimovitch:]

Okay, thanks guys.

[Jonathan Kennedy:]

We have – low down the buyback got into the Otometrics cash need, so we want little lower rate, we had 10 b 5-1 plan that just does auto pilot, so it will just be the market average over time.

[Larry Haimovitch:]

Yes okay, great. Thanks very much.

[Jonathan Kennedy:]

Before we go I want to point out that Jim was correct on the Q1 gross margin, where I had said that the Q1 guidance was in the low 60s is actually.

[Jim Hawkins:]

Low 50s.

[Jonathan Kennedy:]

I said low 50s sorry about that maybe too early for me. It actually, Q1 guidance really has a gross margin range and very high 50, probably in the 59% to 60% range would be something that to consider for Q1 and that is within our guidance as I spoke earlier.

[Operator:]

Thank you. And do we have a follow-up from Brian Weinstein from William Blair. Your line is open.

[Brian Weinstein:]

Hi guys, I just wanted to clarify one thing, so the earnings number of $0.46 in the quarter, the guidance was $0.52 to $0.55 and you met the top line, where in your model did it fall little bit short because in my model it's gross margin and that seems like it was explained because we probably had too high of gross margin in for Venezuela and you guys obviously knew where that gross margin was going to be, but where relative to your expectation was the shortfall call it $0.06 to $0.09?

[Jonathan Kennedy:]

Brian we came in at $0.51.

[Brian Weinstein:]

I'm sorry $0.50 I'm sorry. Yes I'm sorry the $0.51 so what was I think on $0.51 where was – where were you guys a little bit late because everything else seemed like it was in line with our expectation, I'm just trying to understand kind of where if you hit on the top line where things might have been a little bit less than what you thought?

[Jim Hawkins:]

Brian even gross margin was a little bit lighter than what we thought, even if you exclude Venezuela we are at 63% and we would typically have a little bit higher than 63% in Q4 maybe 64% I think we ares almost four points low last year. So that was little bit disappointed and then we did spend our R&D and engineering spending is up a little bit higher on an overall basis due to our remediation in Seattle. You'll notice in our report we non-GAAP the, I would say the, very clearly outside consultant expenses, but we didn't do that for the expenses that we can expect to continue. So from a spending perspective little higher in R&D and then a little lower on gross margin due to mix.

[Brian Weinstein:]

But there was nothing that you guys in terms of new margin there was nothing that was price related. You didn't have to give price away at the end of the quarter, nothing like that in order to make the quarter that was all stable correct?

[Jonathan Kennedy:]

No, nothing. Like I've said we've had a lot of discipline with our pricing Brian.

[Jim Hawkins:]

The other thing tax rate too was a little higher in the quarter. We had, you have to estimate your foreign and domestic income and our foreign income within a less and domestic and so our tax rate quarter ended up, higher than we thought, I thought would be close to 24 that be in a 25 on an non-GAAP basis and so that hurt us as well. I mean overall we are pretty darn close to make the revenue, the earning was off about a penny or two. There are three pieces that I just scratched pretty much account for it.

[Jonathan Kennedy:]

Yes, one thing to that last year if you remember and all companies are like this I believe that, we took the R&D tax credit all in the fourth quarter and this year since it was adopted and made permanent at the end of last year it was rateably through the year. So on a comp basis the tax rate this was quite a bit lower in Q4 last year.

[Brian Weinstein:]

Okay, great, thank you for the clarification.

[Operator:]

Thank you. And we have another follow up from Chris Lewis from Roth Capital Partners. Your line is open.

[Chris Lewis:]

Hey guys, just a few follow ups, first to kind of get to the $106 million to $107 million for Otometrics assumption in the guidance, I assume it’s gradual increases throughout the year any commentary you can provide on just an cadence of that business growing throughout 2017 and kind of what gives you confidence in kind of that backend heavy outlook.?

[Jonathan Kennedy:]

Sure, Chris. Otometrics historically has a very backend loaded back yearend loaded revenue model. Typically, it’s around 30% of the revenues come in the last quarter of the year. And the first quarter is around 22% of that number. And then I want to say the second and third quarter around 24% something like that. So, it is a just a way that business flows. There are some different reasons as to why, but that is the way it is and so on top of that historically Otometrics has always lost money pretty substantially in the first quarter and continued losses in the first three quarters of the year and then in the fourth quarter they make it all back to get the breakeven is sort of the cadence that they historically have. So we're certainly looking to change that. Obviously it won't happen since we just acquired the company January 03, all in the first quarter, but I think you will see continued improvement and probability we hope certainly by Q2.

[Chris Lewis:]

And then just on the Seattle ship-hold efforts you mentioned about $6 million of lost revenues or pushed out revenues from the fourth quarter. I think you said neoBLUE, we expect to start shipping by the end of the first quarter. Does the guidance assume any type of potential catch up in revenues or kind of working down in the backlog from the Seattle ship-hold for this year?

[Jim Hawkins:]

Yes, so I think in the first quarter, I want to say for neoBLUE we might have$600, 000 or $700,000 in our guidance number and the only product that we have in our guidance for the entire year is neoBLUE is what we have in our guidance is currently on ship-hold. Everything else guidance has assumed, it will not come out. So we're being conservative on that front.

[Chris Lewis:]

Okay, thanks.

[Operator:]

Thank you and that's does conclude our question and answer session for today’s conference. I would now like to turn the conference back over to Jim Hawkins for any closing remarks.

[Jim Hawkins:]

Thank you, operator. Before we leave the call, I would like to invite the analyst community to save the day to attend our Analyst Day to be held on June 22, 2017 at the Sofitel Hotel in New York City. You will receive more information on the details of the day's events as the date approaches. So in closing we look forward to an exciting 2017 and reaching the $500 million revenue milestone for Natus. Thank you for participation in today's call and for your continued interest and support.

[Operator:]

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