Masimo Corp (MASI) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Masimo Corporation fourth quarter and full year 2008 earnings conference call. (Operator Instructions). I would like to turn the call over to your host for today's call, Mr. Steve Moran, Executive Vice President, General Counsel of Masimo. Please proceed, sir.

Thank you, Lindsay. Welcome to Masimo's fourth fiscal quarter and full year 2008 earnings release conference call. Our press release was distributed about an hour ago. If you have not seen the release and would like to, a copy is posted on the Investor Relations page of our website at www.Masimo.com. On the call today are Joe Kiani, Masimo's Chairman and Chief Executive Officer, and Mark de Raad, Executive Vice President Finance, and Chief Financial Officer. In a just a few moments, Joe and Mark will deliver remarks on our results achieved during the 2008 fourth quarter and full year 2008, and general comments regarding our business, including our fiscal 2009 financial guidance. After Joe and Mark offer their comments, there will be a question and answer session, in which they will answer as many questions as time permits.

Before we begin, let me remind you that this call may contain forward-looking statements. While these forward-looking statements reflect Masimo's best current judgment, they are subject to risks and uncertainties that could cause our actual results to vary. Risk factors that could cause Masimo's actual results to materially differ from our forecasts are discussed in detail in our filings with the Securities and Exchange Commission. With that, I would like to turn the call over to Joe Kiani, Chairman and CEO.

Thank you, Steve. Thank you, ladies and gentlemen, for joining us today. Earlier today we announced the financial results for both our fourth fiscal quarter and full year 2008. As I noted in our press release today, we are happy that despite the difficult economic conditions we continue to see strong demand for Masimo SET and Masimo Rainbow SET technology and products. In fact the 31,700 drivers that shipped represented a record quarter for Masimo. We estimate that our total installed base of Masimo SET and Masimo Rainbow SET dockets, excluding hand-held devices has increased to 567,000, net drivers, up from 470,000 drivers just a year ago. We believe this strong shipment level in the face of difficult economic conditions is further evidence that hospitals continue to recognize the superiority of our technology, allowing hospitals to both improve their patient's care as well as reduce overall cost of care.

In addition to our strong fourth quarter and full year financial results, which Mark will review with you in more detail, the fourth fiscal quarter in 2008, also included some important business and operational milestone that I would like to briefly mention. Late in Q3, we initiated a limited market release of continuous hemoglobin platform. As we explained, it was not the commercial launch of hemoglobin but limited the release because as with the release of our other products, we found that with limited marketing testing, we can sometimes significantly improve our product, before we commercially release the product. Limited marketed release also allows us to obtain valuable feedback on how we can best develop and deliver our training programs for our new products. In Q3 earnings call, I mentioned that we hope to have from 10 to 20 limited market release customers by the end of fourth quarter. I'm pleased to report that we finished the fourth quarter with 23 such limited market release customers and clinical sites. And believe we may be up to 50 limited market release sites, by the time we commence our commercial release of hemoglobin, which we are still expecting will be before the end of this quarter, Q1 2009.

Later in this call, I will provide you with some additional observations on the progress we made in our Total Hemoglobin limited product release. Other important events included Masimo's Rainbow SET, SpCO and SpMet, which is our noninvasive carbon monoxide and noninvasive hemoglobin measurement, today received CPT codes and Medicare reimbursement for outpatient care. Nihon Kohden also expanded integration of Masimo's SETpulse oximetry technology worldwide. ZOLL, one of our longtime OEM partners entered into a multi-year agreement to add Masimo Rainbow SET technology in their EC E-series defibrillators. We launched the first non-adhesive pulse oximetry sensor design for low birth weight babies focused on the less than 500-gram babies. Also, in Q4 we also successfully completed the realignment of international operations allows us to better serve our non-US customers by centralizing all our international sales, marketing support, planning and logistics and administrative activities in one location in Neuchatel, Switzerland.

Although no major additions in Q4, the fiscal year 2008 represented a significant year in our ability to add talented experience and knowledgeable executives to our team. To quickly refresh your memories, I wanted to touch on briefly on the key new hires, Jon Coleman has joined us as President of International Business. As you can see from our press release today, we are realigning our international business under the direction of John, including the establishment of a new international head quarters in Neuchatel, Switzerland. David Goodman joined as Executive Vice President of Business Development. David is focused on expanding business development activities, allowing us to consider a variety of opportunities that may present themselves as Masimo continues to consider a other technologies that may contribute to our long-term mission of improving patient care, and reducing their cost of care by taking noninvasive monitoring to new sites and applications.

Rick Fishel, who has been with us for several years, will as of this quarter be focusing entirely on our worldwide OEM business, and in driving our new business opportunities in the areas of alternate care, including the emergency medical systems and physicians offices. Also, in the most recent quarter we announced that Steve Paul who was previously our United States area Vice President for the west, will be assuming responsibility for all of our US hospital business. Steve has been a great deal -- excuse me, brings a great deal of experience, knowledge and energy to this extremely important role, and we look forward to the contributions that we know Steve will be able to provide to our Company. Earlier in the year, we added additional key resources including Steve Moran who is our new Executive Vice President and Legal and Human Capital, as well as our General Counsel and Secretary. Steve brings a tremendous amount of legal experience in both corporate contract and general business law. Steve is also responsible for our Human Capital development which by the way, we expect to continue to add over 100 new professional positions over the next year in the US alone.

Dr. Michael O'Reilly, who joined us in 2008 as our Executive Vice President of Medical Affairs is a practicing anesthesiologist, and has already added tremendous benefit to our organization by ensuring we continue to always have the clinician perspective in mind when we design, develop and deploy our new technology. As today's reported Q4 and full-year 2008 financial results show we had a strong year, with product revenues going by nearly 30%, and earnings, excluding the $0.25 one time Q4 2008 tax charge, rising to $0.78. Even though at the beginning of the year, we had forecasted 23% product revenue growth and EPS of $0.52. Now Mark will provide you with a more detailed summary of our Q4 and full year 2008 financial highlights, including the 2009 financial guidance. After Mark's review I would like to spend a few moments updating you on the general business, our products and some of the key 2009 areas we will be focusing on during the year. We will then be happy to answer questions as Steve Moran alluded to. Mark?

Thank you, Joe. Hello. Good afternoon, everybody. Please keep in mind all comments, will except when I note otherwise relate to financial results on a GAAP basis. As a reminder in fiscal 2007 prior to our initial public offering, Masimo was required to report GAAP earnings per share under the two class method. For the benefit of our investors we have continued to include in our quarterly earnings releases today, the non-GAAP 2007 financial statements with 2007 earnings per share computations, as if the current if converted method had been used in the prior periods.

Earlier today we reported record total fourth quarter revenues of $83.1 million, which consisted of record product revenues of $71.4 million, and royalty revenues of $11.7 million. This represented an approximately 29.4 increase in year-over-year fourth quarter product revenue growth. As Joe mentioned, we shipped 31,700 new pulse oximeters and pulse co-oximeter drivers into the marketplace. And based on these shipments, we now estimate that our total worldwide installed base, net of estimated retirements, to be approximately 567,000 drivers. Importantly this is up 21%, from the estimated 470,000 net installed units just one year ago.

As we noted in the past, the shipment of new pulse oximetry units is important, because once installed these units generate future sensor sales which continue to represent the most significant component of our total product solution revenues. During the fourth quarter of 2008 we generated approximately $4.7 million in Rainbow related product revenues, which was up 161%, from $1.8 million in the comparable prior year period. Our stronger than expected Rainbow revenues related to a large OEM MX board order, as well as very strong US demand for the Rad-57, related we believe to the end of year budget related purchase. Included in the $4.7 million of Rainbow-related revenue were our initial Total Hemoglobin revenues derived from our limited market release of Total Hemoglobin.

Fourth quarter 2008 product revenues generated from our direct business, which includes sales through our distributors totaled $56.1 million, or 79% of total product revenues, while OEM revenues totaled $15.3 million or 21% of total product revenues. This compares to approximately 76% and 24%, in the same prior year period, and as a result of our multi-year worldwide direct sales force expanse, as well as a decline in our year-over-year OEM revenues, while our year-over-year fourth quarter OEM revenues were down, the number of Masimo OEM boards were up year-over-year, by approximately 3%. During the fourth quarter, our US product revenues total $54 million, or 76% of total product revenues, compared to $41.4 million, or 75% in the prior year period. The slight decrease from 25% international revenues in the fourth quarter of 2007, to 24% in the fourth quarter of 2008, was due primarily to the strong US fourth quarter, assisted by the recognition of some previously recognized deferred revenue.

On a year-to-date basis, US and international direct and distribution revenues rose by 37% and 50%, respectively. Our 2008 fourth quarter royalty and license fee revenues decreased to $11.7 million from $14.1 million in the prior year period, due to the expected lower royalty rates associated with our 2006 settlement agreement with Nellcor now part of Covidian. As a reminder, our settlement agreement with Nellcor included a 15% royalty rate in 2007, and a 13% rate in 2008. Our 2008 fourth quarter product gross profit margins rose to 65.6% from 63.9%, in the prior year period. The year-over-year increase was due primarily to the beneficial impact of improved manufacturing efficiencies, related to higher production levels as well as increased Rainbow product sales.

Total gross profit margin for the 2008 fourth quarter decreased to 70.5%, from 71.2%, in the same prior year period, primarily due to the anticipated decline in year-over-year Covidian royalty payments. Our fourth quarter engineering expenses were $7.2 million, up 31% compared to $5.5 million in the same prior year period. The year-over-year increase was due primarily to a $1.2 million increase in payroll and payroll related costs, associated with increased research and development staffing levels, higher stock-based compensation charges, and higher year-over-year clinical trial expenses. Our 2008 fourth quarter selling general and administrative expenses rose to $31.2 million, up approximately 15%, from $27.2 million in the prior year period. Higher expenses were due primarily to the combined results of a $4 million increase in payroll, payroll related and stock-based compensation costs, consistent with an increase in worldwide selling general and administrative staffing from 360, at December 29, 2007 to 415, at January 3rd, 2009.

Our 2008 fourth quarter effective tax rate increased significantly to 102.7%, from 31.3%, in the prior year quarter, due primarily to a new international business organization and structure, designed to better serve and support Masimo growing international business. By centralizing our international operations, including sales management, marketing, customer support, planning, logistics, and administrative functions, we expect to be able to develop a more efficient and scalable international organization, capable of being even more responsive to the business needs of customers, all under one centralized management structure. As a result of this realignment in Q4 2008, we incurred a one time tax charge of $14.9 million, or $0.25 per share related to the expenses for sharing in the costs of our ongoing research and development efforts, as well as the prepayment of licensing commercial rights to utilize preexisting intangibles.

Importantly, as a result of this new international business structure we expect that our future income tax rate will decline, although future income tax rates will depends on various factors including profits or losses before taxes, changes to tax law, and the geographic composition of our pretax income. Absent this implementation our fourth quarter pro forma tax rate would have been 28.1%. This Q4 2008 rate was lower than the Q4 2007 rate, due primarily to increased 2008 research and development credits, which have in the past two years been recognized in the fourth quarter tax provision.

In summary, despite the decline of nearly $2.4 million in fourth quarter 2008 versus 2007 royalty and license revenues, our strong year-over-year product revenue growth, higher product gross margins and lower than expected operating expenses have combined to generate fourth quarter 2008 operating profit of $20 million, as compared to $17.6 million, in the same prior year quarter. Because of the previously mentioned 2008 Q4 tax charge, related to the realignment and consolidation of our international business we incurred a $14.9 million or $0.25 per share earnings charge, which resulted in a $0.01 GAAP loss for the fourth quarter of 2008.

Without the one time tax charge, our pro forma earnings per share in the fourth quarter of 2008 would have been $0.24, up from the $0.20 in the fourth quarter of 2007. Now I would like to make a few comments on our balance sheet. For the twelve months ended January 3rd, 2009, total cash increased to $146.9 million, from $96.7 million at December 29, 2007. During this 12 month period we generated $8.2 million in cash from operations and approximately $28.8 million in cash, from the tax benefit and cash associated with the exercise of stock options. These sources of cash were partially offset by the repayment of approximately $30.4 million in debt, and $6.9 million in capital equipment purchases. Depreciation and amortization expense for the 12 month period was $5.7 million. At January 3, 2009 our day sales outstanding declined to approximately 40, from 44 as of the prior year period inventory turns increased slightly to 3.6, from 3.5 in the same prior year period.

And now I would like to share a few comments regarding our 2009 financial guidance. Clearly, providing financial guidance in today's economic and political environment is difficult. Although the conventional wisdom has been that the medical industry and related medical device industry has been relatively immune to economic downturns, it is apparent that our customers are facing a growing level of uncertainty, including their ability to obtain the necessary access to capital, the lower overall hospital census for paying patients data, and impact of lower overall census on hospital budgets. Additionally, recent budget proposal on health care reform discussions created additional levels of uncertainty regarding hospital spending, Medicare reimbursement rates and other related issues. Majority of Masimo direct US business model is based on long-term sensor agreements that do not require up front capital commitments.

As a result, a large part of our US business has not and continues to not be restricted by our customers ability to fund capital purchases. However, our OEM customers are impacted by the capital purchase, and there are portions of our US business including the sale of pulse CO-oximetry including carbon monoxide and the soon to be released Total Hemoglobin that are tied to a capital sales model. To the extent that the current economic uncertainty and budgetary reductions cause our potential customers to delay, and or cancel new capital equipment sales, our ability to generate revenues could be impacted. Also while our long-term sensor agreements provide for minimum annual sensor purchases, if hospital census levels fall, that could over the short-term, impact the volume of sensors being purchased by customers, and as a result impact our ability to generate consumable revenues.

Despite this very challenging economic environment we intend to move forward with our 2009 launch of Total Hemoglobin and towards the end of 2009, our limited market release of acoustic respiration monitoring or ARM. Both of these products and all existing Rainbow parameters require customers to purchase a one time license fee, as well as more complex and therefore higher cost sensors. While we are encouraged by the initial response we have seen for our Total Hemoglobin product, we do not know what impact the current economic environment, including lower budgeting levels will have on our ability to generate additional Rainbow revenues including Total Hemoglobin. While these risks are present, we also recognize that pulse oximetry constitutes the bulk of business is a standard of care in all critical care settings, and as a result we believe that demand for pulse oximetry is likely to continue.

Given the macroeconomics, Masimo business model, one typically referred to as the razor, razor blade model, does allows us as a result of our long term sensor agreements, to forecast a large percentage of our future revenues. In addition, our strong fourth quarter driver placements, coupled with the 567,000 drivers now in place throughout the world, provide us with a reasonable level of confidence to provide the following forecast for 2009. However, these are only projections, and our actual performance could be different. Masimo expects that 2009 total product revenues will be between $310 million, and $315 million. Masimo also expects that total Rainbow revenues, including revenues from the 2009 commercial launch of Total Hemoglobin will range between $23 million and $25 million, or 7.5% to 8%, of total product revenues, which is up from 5.2% in 2008, and 3.7%, in 2007.

Masimo also expects 2009 royalty revenues to be between $42 million to $46 million, down from over $48 million in 2008. This reduction is expected to be due primarily to the assumption that Covidian's total US pulse oximetry revenues will decline in 2009 versus 2008, as a result of both the impact of the economic environment, as well as Masimo's continued market share expansion. As a result of these ranges, Masimo expects total 2009 revenues to be between $352 million and $361 million. For the full year of 2009, we believe that our consolidated gross margins will be approximately 66%. We believe this improvement from our 65.4% in 2008 will be due to a higher level of sensor revenues, versus total product revenues, increased sales of Rainbow products and benefits from transition of manufacturing activity from Irvine, California to Mexicali, Mexico. For the full year 2009 Masimo expects the total operating expenses to be in the range from $172 million to $176 million, compared to $146.3 million in 2008. This increase is expected to be due to the anticipated expansion in our US sales force, including the creation of a new sales force targeted at the physician's office as well as growth in engineering, marketing and administration.

Internationally, as part of our new business realignment, we plan to continue to expand our sales, marketing and other support organizations necessary to expand our growing non US marketplace. Also included in the 2009 operating expense, estimates are $11.6 million in stock based compensation, compared to $7.4 million in 2008. Given the current economic environment, low interest rates and uncertainty over the direction of foreign exchange movements, we are projecting a $1 million figure in other income, primarily from interest earned on our invested cash. This is consistent with the $1 million in 2008. Importantly, the previous guidance on revenues, gross margins and operating expenses are all based on foreign exchange rates that we have established at the start of the year, for our own internal budgeting purposes. To the extent that foreign exchange rates move dramatically, financial results could differ.

Primarily as a result of our new international business structure, we expect our 2009 tax rate will decline to the 32 to 33% range, down from our recent historical tax rate range of 38% to 39%. Although we are not providing any additional financial guidance beyond 2009, we do expect that our future income taxes will remain at these levels, or move lower depending upon a variety of factors, including our profits or losses before taxes, changes to tax law and geographic composition of our future pretax income. We are projecting a weighted shares outstanding figure of approximately $61 million to $61.5 million for the full year.

As a result of all these projections, Masimo expects 2009 earnings per share to be in the range of a $0.83 per share to $0.87per share. This guidance includes the expected reduction in 2009 royalty revenues, the increase stock based compensation expense, and our new lower tax rate. To reiterate, while we believe this guidance to be appropriate as of March 3, 2009, these are projections and our actual performance could be different. Thank you for your time, I will turn the call back to Joe.

Thank you, Mark . As a reminder, and especially for any of new investors that may be on the call, I wanted to review some important messages regarding Masimo. In the mid-90s we revolutionized with the pulse oximetry with our measure through motion and our low profusion Masimo SET pulse oximetry technology. Today Masimo pulse SET oximetry is helping caring clinicians save numerous lives and eyes -- eyesights. And Masimo's SET is considered the gold standard for pulse oximetry, Our market share for new pulse oximetry sales is noticeably higher, than our market share of pulse oximetry revenues. This is due to the time it takes to have the installed base of pulse oximeters catch up with the annual rate of pulse oximetry shipment. Within five years, due to the accumulation of installed base, our revenue market share should start approaching our annual shipment percentages.

We have revolutionized noninvasive marketing with Rainbow or what we call Rainbow SET. Masimo Rainbow SET allows clinicians and professionals to measure carbon monoxide, met hemoglobin, PVI which is a measure of fluid responsiveness, and now hemoglobin and oxygen content continuously and noninvasively for the first time. Analysts projected hemoglobin will be a billion dollar market opportunity, bringing Masimo's long-term potential market opportunity to over $3 billion. As I explained earlier we are currently in the limited release space for hemoglobin, the response to it has been encouraging, and we hope to release noninvasive hemoglobin commercially in late March. While we are very excited about hemoglobin and long-term future, we can't determine the level of demand that will occur in 2009.

For example, when pulse oximetry was introduced in the early 80s, it didn't happen overnight, the growth. You guys can look at that model, and we would be happy to point you to it. But we do believe we will get to significant growth with it, it's just a matter of when that will happen. Rainbow is exciting beyond what it will do for us in terms of growth, with it, we hope to help caring clinicians save and improve the lives of even more people. With that said, I would like the end with some closing thoughts on 2008 and 2009.

For 2008, the fiscal year marked Masimo's first full year as a public company. In general we were happy with our business and financial results which included, significantly exceeding our original product revenue and earnings per share forecast. We continue to expand at a near 30% product revenue growth rate in a market, which most suggest grew 6% or 8% rate, despite increasingly challenging economic environment. We introduced hemoglobin in March 2008, at the World Congress of Anesthesiology meeting, received FDA clearance for Hemoglobin in May 2008, and for the family of single patient adhesive Rainbow hemoglobin sensors, we received FDA clearance in September of 2008. At that time, we initiated the successful limited market release of the products that resulted in over 20 limited market release accounts, and on target to deliver the product commercially in late Q1 2009.

We also realigned all our international operations in to a new structure designed to allow us to even better and more responsively meet our needs of our non US customers. As for 2009 we have good things to look forward to. We obviously expect to shortly launch Hemoglobin commercially for the hospital markets, with our hospital bedside devices. We also hope that we will be introducing a new Rainbow sensor system that will provide lower cost alternatives to hospitals subject to regulatory clearance. Also we hope to have a portable hemoglobin device we call Pronto, for the physician's office. We hope to begin the limited market release of this product in 2009, and be hopefully fully commercial in 2010.

Mark mentioned earlier acoustic respiration monitoring. We expect that product to hopefully be launched this second half of 2009, similar to the way we launched Hemoglobin in 2008. We will continue to invest in our worldwide sales expansion. We hope by the end of the year we will have 200 sales reps. And continue to expand -- see an expansion of international revenues as a percentage of total product revenues, resulting from Europe, Japan, Canada, Latin America, Australia and the rest of Asia. And continue to focus on our product quality and customer service. From M&A standpoint, we will be evaluating a variety of technologies that we believe may fit in to our longer term product strategy.

And most importantly, continue the Masimo model. Our clinical contribution and business model allowed us to build solid business, with our breakthrough measurement to motion pulse oximetry, with room to grow as we bridge the gap between new pulse oximetry shipments and the new -- installed base, which drives our sensor sales and most of our revenues. We expect Masimo Rainbow SET pulse CO-oximetry to have a great impact on patient care. However, as I stated earlier the timing when we will be on the steep part of growth with the new technology introduction is hard to predict.

We will continue to focus on our mission of improving patient care and reducing cost of care by taking noninvasive monitoring to new sites and applications. regardless of market conditions and we will run our business with a long-term horizon outlook. We have a great innovation engine, and despite the headwinds we are eager to solve more of the remains problems clinicians and care providers face. I would now like to turn call back to our moderator, and begin to take any questions that you may have. Thank

(Operator Instructions). The first question comes from the line of Bill Quirk with Piper Jaffray.

Good afternoon, and congratulations on a great quarter, guys.

Thanks, Bill.

Mark, first question for you. The sequential decline in gross margins. I assume that was pretty much tied to the strength in the driver business, i.e. it was kind of a mix shift with some lower margin products?

Yes, I mean that was one of the reasons couple of small minor reasons, the change that you are talking about is 4/10th of a percent. Nothing overly dramatic, nothing worth mentioning.

Okay. Understood. Joe, I understand that you don't want necessarily want to commit to hemoglobin number for '09. Can you us -- I guess I want to push on this a little bit -- can you help us think about that in the context of the guidance, obviously you guys assume something when you put the numbers together.

Yes we did. I think as we looked at it we didn't just didn't look at what the appetite we thought was for our product by the number of clinicians and customers that contacted us but rather -- rather we looked at historical growth for pulse oximetry when it was introduced. And when we looked at that we basically saw within five years pulse oximetry came from of course nonexistent, to about $100 million revenue. So it's difficult for us to tell you what we are we are going to do this year.

Things are different, economy is different, whole environment of how health products get paid for is different. Masimo is not like other companies when they were introducing pulse oximetry, so do we have a good reputation and on our team that can on a positive take a forward in a fast way. We feel comfortable giving you our Rainbow revenue numbers, but given the newness of the product and we are just not prepared to give you a number for hemoglobin by itself.

Okay, understood. And Joe, to stay on the economy for a second, given the how you guys decide to price the product, i.e. close to about $100 a sensor and obviously the license fee. Have you guys given thought to changing that strategy at all? For example, taking away the license fee for a big order, that type of thing?

We are flexible in that, as long as overall price of the sensor or price of equipment, amortizing one or the other, we can look at that. So far and I know I can say, so far we are dealing with early adopters, so it's hard to make grand statements about what it will mean with others. So far we haven't seen pricing as a major issue towards our success with hemoglobin. But one of the things I mentioned we hope in 2009, to introduce this new sensor system. We coined it resposable -- which is a combination of a reusable element and a disposable element, that reduces the cost of goods for disposable element. So we are looking to introduce that and we hope to have that be roughly half the price, of the single sensor disposable model.

So that when we did our market survey, we had noticed based on the surveys, assuming the survey was correct, that many, a good percentage, I think 30% or 40% of customers that we surveyed felt that $100 price on the sensors was enough of a price for them to jump forward, given the cost savings and care improvement they expected. But I think the number jump ups to 60% or 70% when the price fell below $60. We hope with introduction of this new resposable sensor system we are coming out with, we will also be able to reach a broader audience.

Okay great. And just one more quick one, before I jump back into the queue. Joe, timing on some ARM data, or rather second generation ARM data?

The timing of that data in terms of clinical results, I would guess the earliest would be January of 2010, short of some of the other, I guess maybe international forums. So that's what I'm expecting right now.

Thank you.

Thank you.

Next question comes from the line of Tao Levy with Deutsche Bank.

Afternoon.

Good afternoon, Tao.

You mentioned at the end of the quarter you had 23 hemoglobin customers, can you give us a sense of how many monitors were at those customers?

I think it was about 26 to 70, I would say.

So the average was 2 to 3 then?

Roughly.

And then you talked about the timing of ARM being similar to hemoglobin, when you expect to -- is that going to be 510(k) -- and when do you expect to file that?

Yes we expect it to be a 510(k) , before we acquired this technology from Andromed, they had 510(k) clearance already on it. So we expect to be doing an updated 510(k), and we hope to have something submitted I guess towards the middle of the

Okay. And -- let's see -- as I look on your basic on your SET business, again we were still seeing amount of revenues generated per socket going up, what is driving that, and should we just extrapolate what you did during the fourth quarter going forward? Or is there a reason why that might move down in 2009?

Well, that's a good question, Tao. In Q4, we started hearing that census had dropped, therefore we had anticipated that maybe sensor per driver would potentially drop. So we did not see that happening. Again our best estimate is that potentially two things happened. First of all outpatient of surgeries dropped, which normally don't use disposable probes, and maybe pain patient census dropped. Which you know unless things really got bad, that should not affect our business. Because pulse oximetry is a standard of care, every surgery, ICU and every recovery room. I don't have a better crystal ball than you do, but I would just think that things should be where they have been. I wouldn't expect a big change.

And my last question, Joe you mentioned briefly on M&A, what are you thinking there, are you thinking that you could easily plug in to one of your -- to a monitor out there, size? You have obviously have a bunch of cash on the balance sheet. That's it, thanks.

We are mostly at this stage of our Company interested in new technologies that we think is a good fit to our mission. So we think there is an opportunity for us to maybe bring some of the technologies in, that wouldn't be companies that necessarily have revenue, although it could, but would allow us to maybe continue to improve our product pipeline over the next several years.

Okay. Thanks.

Thank you.

Next question comes from the Sara Michelmore with Cowen and Company.

Thank you for taking my question. Back on hemoglobin you used the word hope to release it in late March. I was wondering what exactly are the gating factors in terms of you would be able to do a commercial release, assuming it's a couple of weeks away in terms of what your target is.

Welcome, Sarah. I'm just I think the hope come to my language recently, because of the new Obama administration. But we are expecting to launch end of this quarter, and we -- and short of something that I can't foresee right now, all looks good.

In terms of the limited release customers, what have you learned in terms of how they are evaluating the product, what has their process been? How are they looking at cost saving potential, and clinical improvement potential, in terms of how they would incorporate that product?

We are seeing customers use it mostly in the OR, operating rooms, and some in the ICU, trying to better administrator blood transfusions, and basically avert occult bleedings or a hemorrhage that are not seen.

In terms of international commercial change that you are making, or expansion that you are planning on, are there particular geographic areas you are focused on there and does it impact at all some of the markets that you go through distributors?

We plan planning to go direct in a few additional countries this year. But mostly increasing our presence in the countries that were already direct in.

Okay.

We hope by the end of the year we reached critical mass in every country we are direct in, including the US.

Okay. Lastly, could you give us an update on the business in Japan, Joe?

The business in Japan under the leadership of Jon Coleman and Maniwa-san is going very well. It's grown to what we had expected, maybe even better. I don't think we done a break out for Japan have we, but it's grown, Mark mentioned, I think Mark had mentioned international grew this year by 50%. Certainly Japan contributed to that and was ahead of that pack.

Okay. That's helpful, thank you.

Thank you.

The next question comes from Matthew Dodds with Citigroup.

Hello, Matt.

Hey, guys. Joe, so you actually used another Obama word, you and Mark, it was -- tax. You guys are bringing it down, not up. You got two words in there.

We gave our share of help in Q1 with some tax payments.

So that's how it works. I had a couple questions for you Joe, on the sensor contracts. I know a lot of it is razor blade focused, can you say broadly if that's difference in the US, versus OUS, meaning are there some capital sales OUS, so that's one. And then two, how does your model compare with Covidian and other players, do you have a higher percentage of a long-term disposable contract?

Okay. First of all, OUS, there is far adhesive sensor sales than in the US. Both in total and in percentage. Our market share we believe is the same, its not even potentially higher OUS, but certainly the sensor revenues -- or the revenues wouldn't make you think that due to the lesser purchases of sensors. Had it not been for Rainbow and the fact that we can sell hemoglobin and CO and met and PVI at a good margin, and what we believe will be a healthy revenue stream, we may not have gone direct in my of those countries.

The other piece I want to say before I answer the second part of your question, is the hemoglobin does allow us to maybe turn the international markets into disposable or resposable sensor customers. And it's much more sensitive to sensor placement, and therefore really makes a reusable sensor not practical in long-term care settings like the OR and ICU. So over time, we hope that international will grow more in line to other medical companies rather than what pulse oximetry companies do in general. What was the second question?

The second was how are you different in your percentage of long-term contracts versus Covidian or the smaller players, does this have an advantage for you given what is going on with the economy.

I'm not sure I understand that question on how we are different.

Does Covidian -- are they mostly razor blade contracts as well in the US, or OUS, when you compete with them?

Of course I don't know. I would like -- I think if I was going to give you a guess of that answer, I would say we have a larger percentage of our sensor business under contract than they do.

One last question, for either you, Joe or Mark , the physician office expansion of the 200 sales reps you talked about for hemoglobin in general, is there some rough mix on what the physician group could

Well that doesn't really include the physician office doctors, sales reps, with it we could be up to 220 by the end of the year.

Thanks, Joe.

Thank you, Matt.

Your next question comes from Joanne Wuensch with BMO Capital Markets.

Thank you for taking my question. That 200 number, what does that compare to at the end of 2008?

Joanne that was about 135 I believe, 138 maybe.

And did you give of your Rainbow SET revenue guidance number, how much of that you think is hemoglobin?

No, we did not.

Can you give that or maybe give us an idea of a range?

Maybe not now, maybe in the future we will. We are just comfortable with breaking down our business between Masimo SET pulse oximetry and Rainbow, but we're not ready to talk about Hemoglobin [steel], met, CDI independence.

Since you had a couple of Obama commentaries, I need to ask the question, is there anything in the budget that you think you saw that may be impactful to your business?

Well, I'm an entrepreneur, so I will say [give you that exposure]-- I'm optimistic that his plan would actually help release capital spending for our OEM partners and maybe also for our ourselves in areas like hemoglobin. Its a fact that it's going to be an investment in health care infrastructure, I think that's going to free up other dollars that would have been spent there that may come towards our way indirectly. Plus I like the fact that the Obama campaign is pushing for quality, we believe our customers are getting higher quality of care better patient outcomes with our technology, and therefore there will be more impetus to do best practices across different hospitals in the country.

And when you talk about international expansion, what does that entail in terms of costs to build it?

Well, Mark would you like to answer that?

In general Joanne, there really isn't anything truly incremental to the numbers we already provided. As you know over the last couple of years, Masimo invested heavily in our international expansion. And I think this is just sort of a reaffirmation of that, just under a different structure as I said before primarily to allow our management team to consolidate all of their international sales activity under one structure. So then-- and everything from a spending standpoint, that will be required to achieve that is in the numbers that we talked about earlier.

Okay. Thank you very much.

Okay, thank you, Joanne.

(Operator Instructions). Your next question comes from Spencer Nam with Summer Street Research.

Thank you for taking my question. I just have one quick question, for you guys. I just wanted to get a better sense of how your conversation with hospitals are going on, in terms of both your pulse ox products and also the hemoglobin tests. What -- how are these hospitals with the budget crunch, how are they responding to the hemoglobin tests and potential of ramping that up? And also in terms of discussions with pulse ox, are you seeing clearly you so far things have been smooth in terms of demand flow, but are you seeing that maybe the sales cycle increasing a little bit? Or are hospitals thinking a little more about it as they prepare to upgrade the pulse ox for the coming years?

Yes. Let me try to answer that Spencer. First of all, in the US, we are seeing nervous customers. They are of course worried about anything that has to do with capital spending. And therefore even when they are looking at our contracts where we place the capital for free in return, for a sensor contract they want to make sure it doesn't look like the capital item in their numbers, because I think it changes their understanding about future capital spending and access to capital. I think some of those things we have to be sensitive about. We do have some customers that just like at one point investors were doing the irrational exuberance, customers are doing potentially irrational fear of any change.

So yes, we are seeing some of that, but the good -- I think the good news I can give you, when it comes to pulse oximetry at least, is that given that the model that we have is all positive for them. Rationality does come back as you can see from the numbers we have been producing. And the model is as such, they get a much better product that potentially can help reduce eye damage with neonates, improve patient care, capture patients that could be in trouble that they can avoid, which actually [decreases] costs as well, and they do that without having to pay more, than what they were paying before. So in fact, in most circumstances they end up paying less operational budget wise, because they are paying nothing for capital equipment, less operational budget wise than before.

And then when you include in that, that the performance of our product has been shown to minimize invasive procedures such as blood draw, increased time on ventilation, and even reduction in sensor usage, in general, this is no more challenging business for us than it was a year ago or two years ago. Now, on the Rainbow, on hemoglobin, that is new territory for us. Although we could change our model and not sell the parameter and sell sensors like before. Even if we did that, the customer is still seeing a new product, they have to get comfortable with the fact that our product is going to help offset invasive tests that they were doing before, blood transfusions that are not necessary, that also has not just cost implications, but care implications, and get themselves comfortable with those kind of purchases. The good news is we never projected, nor or you guys didn't project we were going to get hospital wide conversions to Rainbow like we do with pulse oximetry. Instead, the projection is that the ORs will buy a handful and try it, ICUs will buy handful and try it. Similar to way pulse oximetry was introduced to US hospitals and abroad. So we think that smaller rate of purchase, done broadly over many hospitals, is going to be key to over time, the clinicians and hospitals seeing the true value of what noninvasive hemoglobin measurement and met hemoglobin measurement, and PVI and CO will do for them. So I'm sorry for the long answer, but I just want to get you the vision -- at least the picture we see, since I can't give you an easy answer.

This is really helpful, thank you.

Thank you.

Next question comes from Bill Quirk with Piper Jaffray.

Quick follow up, Mark I know you mentioned there was an incremental contribution in the fourth quarter from hemoglobin, did you disclose the specific number there or maybe I misheard you? Thanks.

No, Bill, I didn't. You guys are ganging up on me.

That's our job, Joe. So just to be clear Mark, there was no hemoglobin contribution in the quarter?

No, I did not disclose the Total Hemoglobin.

There was a contribution, you didn't disclose it. Thanks so much, guys.

Are there any other questions?

At this time, there are no questions. I will now turn the call over to Joe Kiani for closing remarks.

Thank you so much for joining us this afternoon. We look forward to our next call and hope we can continue delivering on what we promised you. Thank you so much. Good bye.

Thank you. This concludes the Masimo fourth quarter full year 2008 earnings conference call. You may now disconnect.