Masimo Corp (MASI) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 Masimo Corporation Earnings Conference Call. My name is Grace Ann and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session toward the end of this conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's presentation, Mr. Nick Laudico from The Ruth Group. Please proceed, sir.

Thanks, operator. Welcome to the Masimo Corporation's First Quarter 2008 Earnings Conference Call. Masimo's senior management joining us on the call today will be Joe E. Kiani, Chairman, Chief Executive Officer, and Mark P. de Raad, Executive Vice President and Chief Financial Officer.

Before we begin, Masimo cautions you that this conference call includes forward-looking statements. All statements other than statements of historical facts included in this conference call that address activities, events, prospects or developments that Masimo expects, believes or anticipates or may occur in the future are forward-looking statements.

These forward-looking statements are based on current expectations about future events affecting Masimo and are subject to uncertainties and factors relating to its operations and business environment, all of which are difficult to predict and many of which are beyond Masimo's control. Certain factors mentioned in this conference call include the risks outlined under forward-looking statements in Masimo's press release filed today, and under risk factors in its periodic reports filed with the SEC will be important in determining future results.

Although Masimo believes that the expectations reflected in its forward-looking statements are reasonable, Masimo does not know whether its expectations will prove correct. All forward-looking statements included in this conference call are expressly qualified in their entirety by the foregoing cautionary statements.

You are cautioned not to place undue reliance on these forward-looking statements, which may speak only as of the date hereof. Masimo does not undertake any obligation to update, amend or clarify these forward-looking statements, or the risks outlined in today's press release, or its SEC filings, whether as a result of new information, future events or otherwise, except as may be required under the federal securities laws.

And with that, I'd like to turn the call over to Joe Kiani.

Thank you, Nick. And thank you, ladies and gentlemen, for joining us on our first quarter 2008 revenue and earnings announcement. As you've seen from our press release today, we had a strong quarter due to our clinically superior technology offering and business model. To get things started today, Mark will provide you a summary of our Q1 financial results. Afterwards, I'd like to close off with some comments and then Mark and I will answer your questions.

Mark?

Thank you, Joe. Please keep in mind that all my comments today will relate to our financial results on a GAAP basis. And as you'll recall, prior to August 2007, our IPO, Masimo is required to report earnings per share under the Two-Class Method. After our IPO, we have reported earnings per share under the traditional treasury stock method.

To allow for comparability, we have continued to provide non-GAAP pro forma earnings per share for the prior periods, to allow our investors to recognize the difference in reported earnings per share under both methods. Therefore, included within today's earnings release is a schedule reconciling the Q1 2008 GAAP earnings per common -- I'm sorry, the Q1 2007 GAAP earnings per common share, to the Q1 2007 non-GAAP earnings per common share.

As we reported earlier in our press release today, our total first quarter revenues were a record $71.1 million, and consisted of record product revenues of $59.7 million, and royalty revenues of $11.4 million. This represented an approximate 30% increase in year-over-year product revenue growth.

During the first quarter, we shipped over 28,600 new pulse oximetry units, or drivers, into the marketplace, and, as a result, we now believe that our net installed drivers total approximately 491,000 units worldwide, compared to just 399,000 one year ago. The shipments of these new drivers, as you know, are key components of our business model, because once installed, these units drive future disposable and reusable sensor sales, which continue to represent the most significant component of our total product solution revenues.

During the first quarter, we shipped approximately 2.7 million in total Rainbow-related products, which was up 104% compared to 1.3 million in the comparable prior year quarter and up 50% from the 1.8 million reported in the prior fourth quarter of 2007. The 2008 first quarter strength in Rainbow revenues was largely due to increased sales of our Rad-57 handheld carbon monoxide measuring devices. However, we have also begun to see initial revenues from our other Rainbow measurements, including both methemoglobin and pleth variability index, or PVI.

First quarter 2008 product revenues generated from our direct and distribution channel totaled $45 million, or 76%, of total product revenues while OEM revenues totaled $14.6 million, or 24% of total product revenues. This compares to 73% and 27%, respectively, in the same prior year period and continues to reflect the impact of our investment and expanding our worldwide direct sales and marketing organizations.

During the first quarter, our U.S. shipments totaled $44.8 million, or 75% of total shipments, compared to $34.6 million, or 76%, in the prior year period. The increase from 24% international shipments to 25% in the first quarter of 2008 was primarily the result of strong first quarter shipments into our European region with notable revenue gains in Germany, France and the United Kingdom.

As expected, our first quarter royalty and license fee revenues decreased to $11.4 million from $13.2 million in the prior year period due to the anticipated lower royalty rates associated with our 2006 settlement agreement with Nellcor, now of course part of Covidien. Just to remind you, our January 2006 settlement agreement with Nellcor included at 15% royalty rate in 2007, and a 13% rate in 2008 through the end of the agreement.

Our total first quarter product gross profit margins rose to 64.6% from 63.1% in the same prior year period. This increase was due to increased sales of Rainbow-related products, namely the Rad-57, greater sensor sales as a percentage of total sales, and continued improvements in manufacturing efficiencies related to higher production volumes. Total gross profit margins for the first quarter declined to 70.3% from 71.3% in the prior year period, due primarily to the impact of the $1.8 million lower year-over-year royalty revenues.

Our first quarter 2008 engineering expenses were $6.3 million, up approximately 15% compared to $5.5 million in the same prior year period. The total year-over-year increase was due primarily to growth in staffing. As of the end of March, 2008, we have 126 engineering and related engineering support staff, which is up from 115 in March of 2007.

First quarter selling, general and administrative expenses rose to $29.5 million, up approximately 38% from $21.4 million in the prior year period. This increase was primarily related to our continued expansion of our direct sales activities. At the end of March 2008, we now have 117 direct sales personnel, up 24% from the same prior year period. We've also increased staffing throughout our worldwide marketing organization, and have added appropriate resources in IT, finance, legal and human resource functions necessary to support our expanding worldwide business and to function as a public company.

In total, our selling, marketing and general and administrative staffing also rose 23% from 305 in March, 2007 to 376 in March, 2008. Higher year-over-year selling, general and administrative expenses were also the result of about $750,000 in additional patent litigation and other legal expenses associated with being a public company, and as expected, nearly a $1 million increase in stock-based compensation charges which rose from approximately $600,000 in the first quarter of 2007, to $1.6 million in the most recent first quarter of 2008.

First quarter income, before taxes, was $14.4 million, down from $15.2 million in the prior year quarter. This decline is consistent with the $1.8 million decline in royalty revenues but was partially offset by stronger product revenues and gross margins. In fact, excluding the impact of lower royalty payments, our pre-tax operating income was once again higher in the first quarter of 2008 when compared to the same quarter of the prior year.

As we suggested in our February call, our first quarter 2008 effective tax rate declined to 39% from 40% in the prior year first quarter. This decline was due to a decline in our taxable income for the most recent three-month period.

In summary, the combination of our strong first quarter 2008 product revenues, higher gross product margins and operating expenses, resulted in first quarter GAAP earnings per share of $0.15. This compares to GAAP earnings of $0.11 per common share and $0.16 in non-GAAP earnings per common share in the first quarter of 2007.

Now, I'd like to take just a few moments to comment on our balance sheet. For the three month period ended March 29, 2008, total cash declined to $86.3 million, from $96.7 million at December 29, 2007. This $10.4 million decline was entirely attributable to a $26.7 million repayment in full satisfaction of a debt obligation, the vast majority of which had been established only one year earlier.

We believe that a prudent use of the Company's cash would be to repay debt, whose carrying costs had nearly doubled over the past year, as a result of the declining interest rate environment. With this first quarter debt repayment, Masimo now has only $1.4 million in remaining long term debt.

Offsetting the decline in cash due to this debt repayment was nearly $17.6 million in cash that was generated from operations. This source of cash consisted primarily of $8.8 million in net income, a $4 million increase in deferred revenue resulting from our growing business, and a $3.2 million tax benefit related to first quarter employee stock option exercises.

At March 29, 2008, our trade DSO was 46, compared to 44 at the end of the fourth quarter of 2007, and to 55 in the prior year period. Inventory turns were 3.3 at the end of March 2008 compared to 3.5 at the end of December 2007, and 3.8 on March 31, 2007.

The improvement in our days sales outstanding measurement is the result of improved collection efforts and processes throughout the world. The slight decline in our inventory turns ratio is within our acceptable range as we continue to balance the need for efficient inventory to meet the demands of our growing install base with overall inventory management.

Now I'd like to just quickly remind you of our stated policy regarding providing both revenue and earnings per share guidance. As we discussed in our February 2008 conference call, our stated policy is that we intend to provide annual financial guidance in our first call of the fiscal year and we did provide that guidance in our February conference call. So, consistent with this policy, we are not, at this time, commenting on our full year guidance.

Thank you for our time, and now I'd like to turn the call back over to Joe.

Thank you, Mark. As you have heard, we had another great quarter, but Q1 was an important quarter, really in a bigger way, for Masimo's history because of our debut of continuous noninvasive hemoglobin. In Q1, actually on January 30, we filed for the FDA clearance on our noninvasive continuous hemoglobin device.

We demonstrated for the first time this product in March at the World Congress of Anesthesia Meeting in Capetown, South Africa, and we were greeted with a very interested and excited crowd. This excitement has only grown since then. We hope that we will get regulatory clearance so that we can help improve patient care, reduce the cost of care, and build a stronger Masimo with the launch of our continuous noninvasive hemoglobin monitor.

With that said, I want to end my talk with a couple of closing thoughts. Our clinical contribution and business model has allowed us to build a solid business with our breakthrough measure-through-motion and low perfusion pulse oximetry with visible room to grow, as we bridge the gap between our new pulse oximetry sales market share and installed base market share, which drives the sensor sales and most of our revenues.

Secondly, Rainbow, with continuous noninvasive hemoglobin, [continues not only] for carbon monoxide, methemoglobin and PVI, will continue to make great impact to patient care and our business. And finally, our innovation engine is running strong, and we hope to introduce more breakthrough solutions for the benefit of patients, our customers and our shareholders. So with that, we'd like to turn it back to you for your questions. Next? Would you help us please?

Operator, we'd like to open the floor to questions, please.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Bill Quirk of Piper Jaffray.

Great. Good afternoon. And congratulations on a very nice quarter, guys.

Thanks, Bill.

Thank you, Bill.

A couple of questions. First off, on Rainbow, clearly outperformed in the quarter. Joe, were there any one-time large purchases here from the distributor, or is this simply a case of some building momentum with this product line?

This is a case of building momentum with the product line. I think, as you know, through Q1 and part of the Q4 of 2007, many fire emergency associations started to recommend monitoring carbon monoxide for the first time and I think you're seeing the momentum. And as far as -- just to remind you, this is not our distributor buying a lot and putting on the shelf, because we only report what has been sold through the distributor to the customer.

Okay, very good. So -- without trying to get into guidance here, Joe, would it be fair to say that we're seeing kind of continued momentum here into the second quarter, as well?

We should. We don't believe there was any one-time events in Q1.

Okay, great. And just one last question, and I'll jump back into the queue. It just -- specifically thinking about total hemoglobin -- thank you for the data on when you filed that. Would it be fair to assume, guys, that we should see a May or June approval here on the 510K, and then I guess separately from that, how would you characterize your discussions with the FDA?

Well we have a lot of respect for the FDA, and consistent to their guidance, we don't like to suggest when we're going to get FDA clearance. Hopefully, we will get FDA clearance. And I think as far as communication with the FDA, we've had the normal communication -- nothing really significant to report at this point.

Very good. Thank you.

Thank you.

Your next question comes from the line of Tao Levy of Deutsche Bank.

Hey, good afternoon. This is Tao from Deutsche.

Hey, Tao.

Hey. I just want to understand a little bit, Mark, your -- the guidance that you provided -- you say you're not changing things, but you clearly exceeded expectations -- I think Joe put that in his prepared comments. So I'm just trying to understand, given you exceeded Q1, why you're not updating the full year guidance. How relevant is that guidance, again, with Q1 coming in stronger or are you expecting something in the back half to slow down?

Well, Tao, I think the way to answer that, as I said in my prepared remarks, that the company's policy, which both board and management have agreed to abide by, is one in which we'll provide annual guidance up front. When and if we think it's appropriate throughout the year to update that guidance, we will do that. But as of right now, we're consisting -- we're going to continue to be consistent with that policy and, having been just through the first quarter, our policy right now is that we're not going to comment on any additional guidance.

Okay.

And just to maybe say a couple of more words on that. When we were going to go public, we thought about this and there were three options, obviously. One is to provide quarterly guidance, one is to provide annual guidance, and one to provide no guidance at all. We opted for providing the annual guidance, and it's very tempting for us to want to update our guidance, but we just want to stick to our plan and when we absolutely feel like we have to, we'll provide you more information.

Okay. It just makes it a little bit challenging to kind of incorporate Q1 results and the outperformance there with not changing full year guidance, but that's fine. And then, Joe, maybe I'd love to get your thoughts on what are sort of the next steps with the FDA? Is it -- do you now just sort of wait for feedback from them -- maybe they have questions, maybe they don't, and no news is good news? I'm just wondering if there's sort of some specific timeline or next steps with the FDA.

Well, I think we're going to sit tight and wait to hear back from the FDA. The FDA has been very good at getting back with us within typically around 90 days, so we're not that far from that window, but we have no way of knowing whether that will happen in this case, and -- but we're hopeful that we'll hear from them, and we're hopeful that we'll get clearance one day.

Okay, great. And this is, sorry, a last follow up. Just following on Bill's question earlier. In terms of trends -- sales per installed base, there's no real change as the year progresses historically? There's no seasonality on how hospitals order sensors?

Yes, there is some seasonality on how hospitals order sensors due to the flu season. So typically, we see more demand for sensors in the winter months. To date, however, our growth has far outstripped that seasonality change that's very, very minor, so to answer your question, yes, there is, but I don't believe it's a big enough number that will impact Masimo's momentum.

Great, thanks a lot, and great quarter.

Thank you.

Your next question comes from the line of Philip Legendy of Thomas Weisel Partners.

Hi, guys. Great quarter.

Thank you, Philip.

Hi, Philip.

I thought I had you on the speaker phone. First question, back to the -- on the base business. At this point, what percent of bids do you think you are -- bids in the market are you invited to compete for and what do you think your win rate is on those bids?

Okay. This is going to be, unfortunately, a big guess, because it's hard to know all of the information that we don't know. I mean, I know what I know, but I don't know --. My guess is that, at this point, we're probably invited to over 50% of the bids and we probably win over 70% of them.

Okay. And what do you think -- do you have an updated view of what market growth is today?

Well, I don't believe anything has come out that changes what we had stated historically, and what has been reported, which has been 6% to 8%. We had some quarters [seem] to be maybe near 10% or slightly above 10%. So I think that trend is probably still going on out there, driven by I think the growth, the general [floor] monitoring area, as well as the demand for single patient use sensors due to worries across infection, particular the MRSA.

Okay, and then just on a few technical issues here. It looks like the revenue per driver is up again in the quarter. And I'm just wondering -- have you been seeing a price increase? Is anything changing there that would cause that to change?

Phil, I agree with you. That does seem to be going up. It could be one or two things, or maybe both. One, maybe we've been too conservative with the seven-year life span of our pulse oximeters and pulse co-oximeters that are, excluding handhelds, of course. And the other is, as I've said earlier, we are seeing some areas where, in prior years, they were using reusable sensors to now go to the single patient use sensors to avoid cross-contamination between patients.

That makes sense. And then I'll just round it off with another question on hemoglobin. I know that you have some systems out in the field in pilot centers. Can you talk about kind of the impact that you see in the clinical practice from -- what has the impact of the sensor been on the way doctors are able to practice?

Good question. We have -- we have kind of seen accidentally some amazing impact. I think you may be familiar with the story of one doctor who actually put the test unit on himself and found out that he had a low hemoglobin level. He initially didn't believe it. When they drew blood, it was right on, and then he went to find out why and he ended up having bleeding in the thoracic due to a cancer he had. So he ended up doing a surgery, got to the cancer quick enough, and of course, it's one of the testaments to this new technology.

But in a more general form, what we're hearing from customers is that in the OR, by having noninvasive and continuous -- I underline the continuous, hemoglobin monitor, they're able to give blood transfusion when it's really necessary instead of overdoing it which seems to be the case today. And in the intensive care unit they're able to more confidently monitor their patients, so that they will not be bleeding internally until it's too late when it's noticed.

So I think those are probably the biggest impact points. We also see, based on surveys and talking to customers, is that there's going to be a big demand in emergency departments, because many hospital's EDs are -- their protocol is to check hemoglobin on just about every patient that comes in, and, secondly, in doctor's offices, we believe there's a high rate of hemoglobin orders, or CBC orders, which seems to be the vast majority of them are for hemoglobin. And since they can be done noninvasively for the patient, there seems to be a lot of interest in that in many of the doctor office settings.

Do you have a sense yet how significant you are impacting transfusions in the OR? I mean, are they reducing transfusions by 10%, is it 50%? Is there any indication?

No, we have anecdotal evidence, but nothing that I want to put out there. What I can tell you is that all of this data we are getting is based on anecdotal data that has come as a byproduct of collecting data for FDA submission and engineering work. Once the product is released, we have a huge backlog of very well known clinical researchers who would like to do many kinds of studies, including answering some of the questions you have laid out there as far as how much efficiencies and hopefully improvement in care we can get from continuous noninvasive hemoglobin.

Well, we'll stay tuned. Thanks for taking the questions.

Thanks.

Thanks, Philip.

Your next question comes from the line of Matthew Dodds of CitiGroup.

Hey, good afternoon. Joe, a question again on the revenue per driver on an annual basis as it keeps going up. I was wondering, because it is a pretty important number here for the overall revenue. Are other things influencing that, like your move to direct and the U.S./OUS split? You said there was a couple of things impacting it. But how many things can really impact that number? That are meaningful, obviously.

Well, I think I've probably listed the two most likely things, but I think you're right, there probably is a third of reasons why sensor utilization could improve, and that is that historically when Masimo started, we were working with our OEMs. In fact, the initial OEMs were companies that were not very strong in the intensive care unit and the OR.

So in the beginning years, that did affect our sensor utilization. I think now that we're direct, and that many of -- all of the other OEMs practically have come forward, especially the ones that are strong in the U.S. operating rooms and intensive care units, naturally the sensor utilization is going to go up.

But at the same time, I guess going against that trend, is the fact that we have ramped up a pretty large sales force in Europe and Europe is predominantly a reasonable sensor business so we're getting a lot more sockets there now that are not consuming the single patient use sensors so that's kind of going against that trend. But overall, I think as you can see, the trend has been positive.

What we have to decide, and I think we'll know more maybe with some more surveys from our customers, is really how much of it is because the monitors that are being used longer versus shift in sensor utilization from reusable to disposal because of the cross contamination and other things I just mentioned.

Got it. And then, the one follow up. On the VC shares, there was obviously quite a bit that went out, and my sense is it had some of the impact on the stock. Where do you think you are with that? Do you think that the VC holdings that have been sold or are largely gone or do you feel there's still some to go, and do you have a lot of visibility on what the VCs are thinking?

Matt, this is Mark. The good news is that we've just recently had the opportunity to speak with a large percentage of our more significant shareholders and their indications to us are that they have no intention of liquidating their positions. In many cases, they've been long term Masimo shareholders and they, like us, continue to look very favorably upon the future and they have no short term desire to liquidate or monetize any of their additional holdings.

And Matt, I'd like to add that two of the VCs that did unload about half of their shares last quarter -- both of them had been investors in Masimo for over ten years. One invested in 1996. One in 1994. In both funds -- we were, in one of them, we were the last holding they held, and in the other one, we were their very first investment, and both funds had need for cash as they raised more money and in one case, of course, one of the board members that sits on our board is no longer even in that group, but still named as a general partner of that group.

Right. Well, thank you Joe and thank you, Mark and congratulations.

Thank you, Matt.

Thanks.

Your next question comes from the line of Sara Michelmore of Cowen and Company.

Great. Good afternoon.

Hi, Sara.

Hi, Sara.

Joe, I was wondering. Do you have any more recent data on the percentage share you have of new driver shipments? I know you had some data on 2006. I was wondering if you had any updated data or updated thoughts on your new driver share for 2007 or where you think you are currently.

Sara, there are no new analysts or market research reports since the one in 2006. That one, I think as you remember, showed Masimo's new shipment percentages of pulse oximetry was 38%, neck and neck with our main competitor. I think you know that last year our pulse oximetry and pulse co-oximetry shipments increased by over 20%, compared to a prior year.

So what we don't really know at this point is how much, if any, did our main competitors, or any other competitors, increase or did they decrease. So, at this point, really all we can do is provide you a guess that says we must be over 40% by now.

Okay. And just a follow up on hemoglobin. I know when we spoke to you last you had suggested that the post-approval roll-out plan for total hemoglobin would involve maybe some [beta site] type of use. Can you talk about your latest thoughts there and confirm is that still the plan? And you haven't talked at all about the OUS filing strategy for that product. I was wondering if you could update us on your thoughts moving forward total hemoglobin internationally. Thanks.

Sure, thank you, Sara. I'd be happy to. I guess, first of all, yes, we did say that we thought it would be prudent to not launch right away commercially as soon as we do have regulatory approval or regulatory clearance, but, instead, take ten to maximum 50 beta sites to customers in the U.S. and around the world and make sure that we understand that our customers are satisfied and there's no -- there's still gotchas before we roll it out totally commercially.

Then as far as what is our plan internationally? Europe is probably going to be I think the most predictive territory for launching Rainbow since we don't need FDA clearance for there and what we do need is CE marking, and given that we've gone through the extra burdens of ISO certification, we can CE Mark the product itself. So we're expecting a second half of this year to hopefully begin the beta cite roll out in Europe and if by then we're fortunate enough to have our FDA clearance, we'll of course do it in the U.S. as well.

As far as Japan, it's probably going to be another year to two years after that. Japan's regulatory cycles, unfortunately, have been very long, and China has even been longer than Japan. We don't do a significant amount of business in China, so really what matters to us most, from a market perspective, and reach, is the U.S., Europe and Japan, in that order.

Okay. That's helpful. Thank you.

Thank you. Do we have any other questions?

Your next question is a follow up question from the line of Bill Quirk of Piper Jaffray.

Yes, thanks, I just have a couple of follow up or housekeeping questions, if you will. Hey, Mark, on the tax rate, did that have anything to do with, frankly the mix of income, depending on the geography, i.e. Europe versus (inaudible), for example.

No, Bill, it actually just had directly to do with the total amount of taxable income.

Okay, very good. And then, secondly, I assume that you guys stuck with (inaudible) and there was no change in the quarter. Is that right?

(Inaudible)

Yes? Okay, very good. Thank you.

Our [EMS]. Yes, we are still with them and as you can see, we had a very good Q1 with them. We hope that trend will continue.

Are there any more questions?

Your next question comes from the line of Douglas Simon of Deutsche Bank.

Hi, I'm just - a quick question referring to the cover article in Anesthesiology this month about the pleth (inaudible). Is there any discussion in terms of standard of care with the Societies about using the technology for invasive -- to supplant invasive blood gas monitoring? And I guess as sort of a follow up or a slightly different question to that: in pre-op evaluation with the hemoglobin, is there any potential for capability to measure platelets as well?

Well, unfortunately the answer to both question is no. We are not aware of any standard of care discussions being set for noninvasive blood (inaudible) monitoring that we've developed, and no, we're [now] only measuring hemoglobin and not platelets or anything else. I think the cover of the Anesthesiology that you're referring to is Anesthesia and Analgesia that talks about pleth variability index. Is that the one that you're referring to?

No, it's the May issue of Anesthesiology from the American Society, and it's The Utility of the Proto Pleth (inaudible) in Circulatory Monitoring. (inaudible)

Okay. I have not seen that yet. What I have seen is -- it's nice to hear that. The last issue of Anesthesia and Analgesia -- the cover was on pleth variability index, PVI, which is one of the measurements that we introduced in 2007, and there is a lot of excitement around that as a potential way to check for fluid responsiveness on patients noninvasively, which to date there really is no other solution for.

Any other questions? We have time for one more question.

And your final question comes from the line of [Robert Faulkner] of [Red Mile Group].

Good evening.

Hi, Rob, how are you doing?

Fine. How are you, Joe?

Fine, thank you.

Good. Very nice quarter as ever. And, Mark, I wonder if you could comment on a question that many companies are getting asked. Since some of your partners are in the capital equipment business, are they seeing any push back or financing issues or any reason for hospitals to be reducing their expenditures on capital equipment?

Hello, Rob. I think that there are two ways of answering that. First of all, the great part of our business model, as you know, is a business model that in essence, especially in our long term U.S. hospital contracts here in the U.S., essentially requires no up front capital. And so for our customers, the concern of capital being a hindrance to being able to adopt our technology, is frankly not an issue.

So in situations like we are today, that yet becomes yet another benefit to our overall business model and selling strategy. In terms of what we've seen, we've really not seen anything similar to what you're describing. The only area that I think may be a little bit of insight would be on our larger OEM customers.

It does appear as though, which isn't a big surprise I think to anybody, that the customers are actually selling large, and I'm using the word selling -- large high ticket capital equipment. Those type of customers do appear to be seeing a little bit of softness. But as you can tell by our results this quarter, the basic core foundation of our model does not require any involvement of capital equipment and so we're not being impacted by that.

Right. I just know you have a unique, broad visibility into that other arena. Okay, is anything else --

And one --

Sorry?

Well, it's just an additional thing to say about that is yes, you're right that the capital equipment sellers seem to have, at least in Q1, have had a little bit of slowdown, which is not typical in a recessionary period, for our business, but I think due to the credit crunch, some of the interest, I think, that they're paying has risen to the point where some of these hospitals are pushing out some of those investments.

But the good news is, as Mark said, for Masimo, given that over 80% of our business comes from our direct business, which is not relied -- does not rely on capital equipment sales in the U.S. but rather the placement of devices for sensor business, we are seeing no effect.

Yes. Maybe -- could you also just comment on if there's an update on competition in any way? Are they changing what they're doing? Are they having more or less effect? Certainly your results point to effectiveness on your part.

Well we always take our competition seriously and unfortunately every day we wake up and we're dealing with the same competitor.

Yes. And have they changed what they're doing in any way, that you've seen?

No, that's the unfortunate part. They're behaving the same way, but the good news is the customers hear over the noise. Their noise typically delays things, but does not change the ultimate destination.

Yes, great. Well, thanks, nice job.

Thank you, Rob. Good to hear from you. Well, thank you all so much for joining us, ladies and gentlemen, for our call today. We look forward to our next call, and hope to see you guys face to face soon. Thank you.

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect.