Masimo Corp (MASI) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Masimo Corporation first-quarter 2009 earnings conference call. (Operator Instructions). I would now like to turn the call over to your host for today, Mr. Steve Moran, Executive Vice President, General Counsel of Masimo.

I would like to welcome you to Masimo's first fiscal quarter 2009 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, Mark de Raad, Executive Vice President of Finance and Chief Financial Officer. In just a few moments Joe and Mark will deliver remarks on our results achieved during our first-quarter 2009 and general comments regarding our business. 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 judgment, they are subject to risks and uncertainties that could cause our actual result results to vary. Risk factors that could cause Masimo's actual results to materially differ from our forecast 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, ladies and gentlemen, for joining us today. Earlier today we announced our financial results for the first fiscal quarter of 2009. As we noted in our press release today, we are happy that despite the difficult economic conditions, we saw strong first-quarter demand for Masimo's technology and products.

Our revenues grew by nearly 25% and our earnings grew by 47% compared to Q1 2008. During the first quarter we were able to ship 27,700 new Masimo SET and Masimo Rainbow SET Pulse Oximeters and Pulse CO-Oximeters . And now we estimate, based on our current historical seven-year field life assumption, that our total worldwide installed driver base is now 587,000 units, up from 491,000 units just one year ago. And this number excludes the handheld Pulse Oximeters.

In addition to our first-quarter financial results, which Mark will review with you in more detail, the first quarter also included some important business and clinical milestones that I would like to briefly mention.

On March 23 we commercially launched SpHb. This will hopefully be remembered as a huge milestone for Masimo and medicine. We believe the trend capability of our continuous noninvasive hemoglobin monitor will allow clinicians to better care for their patients in places like the operating room, recovery room and intensive care unit.

Turning to carbon monoxide. During the first quarter the United Kingdom House of Commons Safety Group recommended carbon dioxide screening by Pulse CO-Oximetry to reduce misdiagnosis and prevent deaths. And the US Federal Emergency Management Administration, FEMA, added the Masimo Rad-57 Pulse CO-Oximeter to its required medical equipment list for Urban Search & Rescue teams. We believe that these two events, along with NFPA, IAFF, [NAMSC] should show that noninvasive carboxyhemoglobin monitoring is becoming the standard of care in the emergency environment.

Further on Rainbow, data presented at the Society of Clinical Care Medicine indicated that SpMet could be used for routine screening of Methemoglobinemia in patients receiving Dapsone therapy. as one in seven HIV patients were shown to have elevated SpMet levels.

There were two new studies on Masimo PVI, our breakthrough method to noninvasively and continuously determine fluid responsiveness. One of these studies, which was presented at the Symposium on Intensive Care and Emergency Medicine, was the first study to show PVI was effective in the intensive care unit population, adding to the previous studies in the operating room.

We were also happy to see the first outcomes data on Masimo Patient SafetyNet System, which consists of Masimo's SET pulse oximetry and RadNet Remote Notification System. The data was presented by clinicians from Dartmouth-Hitchcock at the Society for Technology and Anesthesia meeting, showing that Masimo SET with RadNet improved patient outcomes and reduced the cost of care by decreasing rescue calls by 70%, and decreasing ICU transfers by 48%, resulting in improved intensive care unit utilization, with an estimated 163 ICU days savings over the course of one year.

Lastly, [the evidence] of using Masimo SET to screen for congenital heart disease was further strengthened by a 40,000 patient study in Sweden showing a 28% improvement in CHD detection using Masimo SET pulse oximetry over standard methods. Previously researchers had shown that this is possible due to Masimo SET's groundbreaking ability to measure oxyhemoglobin saturation accurately during motion and low perfusion.

Next Mark will provide you with a more detailed summary of our Q1 2009 financial highlights. After Mark's review, I would like to spend a few moments updating you on the current general business conditions, as well as how noninvasive and continuous hemoglobin, or SpHb, is doing, and a quick update on acoustic respiratory monitoring, which we call ARM. We will then be happy to answer your questions. Thank

Hello and good afternoon to everybody. Earlier today we reported record total first-quarter revenues of $85.5 million, which consisted of record product revenues of $74.5 million and royalty revenues of (technical difficulty) $11 million. This represented a (technical difficulty) increase in year-over-year quarterly product revenue growth, and above our expectations.

As Joe mentioned, we shipped 27,700 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 at least [587] drivers, up from 491,000 (technical difficulty) or about 20% from just one year ago.

Our strength in our Q1 revenues came primarily from Masimo SET technology products, including a record quarter of sensor shipments. While this is due in part to our continuing expansion of Masimo SET technology into new hospitals, it is also due, we believe, to the impact of the traditional cold or flu season, which has resulted in both strong fiscal fourth-quarter 2008 and strong first-quarter 2009 sensor volumes.

During the first quarter of 2009 Rainbow revenues totaled $3.1 million, up from $2.7 million in the comparable prior year quarter. While the $3.1 million in Q1 2009 revenues were up from the prior year, these results were below our own Q1 (technical difficulty) expectations.

We believe this is due primarily to cuts in both local and state government budgets, resulting from the overall difficult economic environment, as well as the introduction of the Medtronic Physio Control LP-15 defibrillators. We believe some of our EMS customers have put their orders on hold, as they prefer to have SpCO integrated into these defibrillators.

We did see an increase in Q1 2009 hemoglobin revenues, and in fact without these increased revenues, our total Rainbow revenues would have been down (technical difficulty) Q1 2008.

First-quarter 2009 product revenues generated from our direct business, which includes sales through our distributors, totaled $59.5 million or 79.8% of total product revenues (technical difficulty) while OEM revenues totaled $15 million or 20.2% of total product revenues. This compares to $45.1 million or 75.4%, and $14.6 million or 24.6% in the same prior year period.

The increased percent of direct sales is due to the combination of our continuing expansion of our conversion of hospitals and hospital departments to Masimo Rainbow SET with our direct sales force, offset by our relatively weak OEM revenues, which increased only 3% year-over-year.

During the first quarter our US product revenues totaled $57.2 million or 76.7% of total product revenues, compared to $44.8 million or 75% in the prior year period. The decrease from 25% international revenues in the first quarter of 2008 to 23.3% in the first quarter of 2009 was due to lower European year-over-year product revenue growth rates, and the impact of the strengthening US dollars on Q1 2009 as compared to Q1 2008.

We believe that the lower year-over-year product sales growth rates are due to the fact that our international revenues are to a large extent more dependent on capital purchases versus the long-term sensor agreement model, which is predominant in the US.

Our 2009 first-quarter royalty and license fee revenues decreased to approximately $11 million from $11.4 million in the prior-year period. This decline was due to a more conservative forecast of Covidien's US pulse oximetry revenues, resulting from both the difficult economic environment, as well as the impact of Masimo's continued market share expansion.

Our 2009 first-quarter product gross profit margins rose to 66.8% (technical difficulty) in the same prior-year period. The year-over-year increase was due primarily to the beneficial impact of improved manufacturing efficiencies related to higher production levels and from higher than expected sensor sales.

Total gross profit margin, including royalty revenues for the first quarter, rose to 71.7% from 70.3% in the same prior-year period, primarily due to the same factors that led to the increased product margins that I just mentioned.

Our first quarter engineering expenses were $7.8 million, up 23.8% compared to $6.3 million in the same prior-year period. The year-over-year increase was due primarily to increase in payroll and payroll-related costs associated with increased research and development staffing levels, as engineering headcount rose from 124 to 142 over this period.

Other increased expenses included higher stock-based compensation charges, increased clinical trial expenses, and engineering supplies.

Our 2009 first-quarter selling, general and administrative expenses rose to $32.9 million, up approximately 10.3% from $29.5 million in the prior-year period. Higher expenses were due primarily to the combined results of a $4.2 million increase in payroll, payroll-related and stock-based compensation costs, consistent with an increase in worldwide selling, general and administrative staffing from 376 at March 29, 2008 to 415 at April 4, 2009. Total quota-carrying sales headcount increased to 166 at April 4, 2009 from 128 in the same prior-year period.

Our 2009 first-quarter effective tax rate declined to 33.0% from 39.0% due to the beneficial impact of our new international structure and the lower overall tax rates on our foreign sourced revenues. This decrease in the effective tax rate was due primarily to the increase in anticipated income in jurisdictions in which we do business with lower effective rates.

Our future effective income tax rate will depend on various factors, including profits or losses before taxes, changes to either US and/or international tax law, and the geographic composition of pretax income.

In summary, our year-over-year product revenue increase, slightly lower royalties, but higher gross profit margins, and higher operating expenses resulted in operating profit of $20.1 million as compared to $14 million in the same prior year quarter. As a result, our Q1 2009 earnings-per-share were $0.22 versus $0.15 in the prior year quarter, an increase of 47%.

Now I would like to make just a few comments on our balance sheet. For the 12 months ended April 4, 2009, total cash increased to $152.2 million, up from $146.9 million at January 4, 2009. During this quarter we generated $5.7 million in cash from operations, and approximately $800,000 in cash from the tax benefit and cash associated with the exercise of stock options. These sources of cash were partially offset by the purchases of approximately 700,000 in capital equipment.

Depreciation and amortization expense for the three-month period ended April 4, 2009 was $1.5 million, while non-cash stock-based compensation expense was $2.6 million.

At April 4, 2009 our days sales outstanding were 44, down from 46 in the same prior-year period. During the same periods our inventory turns were 3.3, flat with the same 3.3 in the same prior-year period.

Thank you for your time, and I will now turn the call back to Joe.

On the last earnings call, we provided our annual 2009 (technical difficulty) guidance, and given our policy to only provide annual guidance once in a year, we will not discuss guidance on this call.

However, I would like to make some comments on what we are seeing in the overall marketplace. As we noted in our last call, although the conventional wisdom has been that the medical industry and the related medical device industry has been relatively immune to economic downturns, it is apparent that our customers are facing a growing level of uncertainties, including their ability to obtain the necessary access to capital, the lower overall hospital census for paying patients, and the impact of that lower census on hospital budgets. Additionally, recent health care reform discussions have created additional level of uncertainty regarding hospital spending.

The majority of Masimo's direct US business model is based on long-term sensor agreements that do not require upfront 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 continue to be impacted by the capital purchase constraints. And there are portions of our US business, including the sale of Pulse CO-Oximetry, including hemoglobin, carboxyhemoglobin, methemoglobin, PVI that we have chosen to charge for, and therefore are tied to a capital sales model.

Also, with our long-term sensor agreements provide -- while they provide for minimum annual sensor purchases, if hospital census levels fall, it could impact the volume of sensors being purchased by our customers, and as a result impact our ability to generate consumable revenues.

In addition, despite our agreements and their acknowledged preference for disposable single patient adhesive sensors due to performance and risk of contamination, our customers worried about finances could take desperate measures, such as switching from disposable sensors to reusable sensors.

Additionally, as we have seen in the past quarter, certain components of our Rainbow product offerings, especially the Rad-57, appear to be suffering from the headwinds of budget delays, or in many cases, budget cuts. We have anecdotally heard from many in the field that the current budget reductions have forced local municipalities, including Fire and Rescue Departments, to choose between new equipment purchases or laying off firefighters and paramedics. And this has clearly impacted our Q1 Rainbow business, and may be an issue for the rest of 2009.

While we do expect to continue to see challenges from the weak economy, we are encouraged by our March 2009 commercialization of hemoglobin, SpHb. We not only anticipate higher second-quarter SpHb revenues, but the availability of SpHb with our pulse oximetry platform further makes Masimo the only logical choice for clinicians who wish to standardize on one technology and sensor family.

We have seen evidence of our improved ability to bid on more pulse oximetry business as a result of our ability to demonstrate total hemoglobin as a readily available measurement. Therefore, we are moving ahead with our salesforce and R&D expansion due to our long-term confidence in our technology and products, including the recently launched total hemoglobin, and soon to be released, acoustic respiration monitoring, or ARM.

We are still focused on beginning a limited market release of ARM in the second half of 2009, with a targeted commercial release in the first half of 2010.

Now I would like to give you more detail regarding our hospital noninvasive continuous hemoglobin commercial rollout. On March 23, 2009 we began the full market release of the first noninvasive and continuous hemoglobin monitor, SpHb. Before that day we had a several month long limited market release in which we received product and clinical feedback, and made final refinements that overall broadened the number of patients that the technology could perform, including lower perfusion conditions.

The clinical feedback we received during the limited market release was very positive, as evidenced by the testimonials in the March 24, 2009 press release. However, I want to emphasize that we have really just begun full sales efforts with the full market release of this product.

The pricing we introduced in the limited market release phase remains in effect. The SpHb parameter price for software that is loaded onto a Radical-7 or a Rad-87 device ranges from $2,000 to $8,000, with an average sales price of $4,500. The single-use adhesive average selling price is about $100.

We continue to believe the market potential for SpHb could be equal to or even greater than the current pulse oximetry market, which is currently over a $1 billion market.

Long-term we believe the large majority of the SpHb market potential is in the sensor revenue versus the software license revenue. To date there are over 50 hospitals that have purchased SpHb, not including the nine additional hospitals using it primarily for clinical research. Our field sales focus and activity on SpHb is high, with several hundred hospitals requesting SpHb quotes.

In our experience hospitals see the value in SpHb, went to begin using it, and are willing to purchase it. But we have experienced some challenges due to the limited capital budget availability in some hospitals.

To help alleviate some of the capital budgeting constraints and generate revenue more quickly, we recently introduced a program to allow hospitals to immediately begin using SpHb for a limited term by purchasing one box of SpHb sensors for each license they wish to use.

The price per sensor is $20 to $40 higher price than if they had purchased the SpHb software license. We believe this program should help generate additional SpHb revenue, while helping the hospitals further justify capital purchase of the SpHb [primary] license. The program has just been initiated, but the field response and customer response has been positive.

Overall, we have found that some hospitals are also concerned with the potential of SpHb to increase operational expenses. But their sensitivity is not as significant as to capital investments. However, we believe that early adopter hospitals can accept the current sensor pricing in high acuity patients. As clinicians see the value in using SpHb to make earlier and better decisions about patient care blood transfusions, including -- which is very costly.

In support of this, Capgemini recently published a report that concluded that the average 500 bed hospital implementing Rainbow SET technology with SpHb could conservatively generate $500,000 in net improvement to the bottom line due to significant savings per patient, and the operating room and the intensive care unit.

With that SpHb update, I would like to end with some closing thoughts. 2009 marks the 20th anniversary since Masimo began. In fact, May 2 was the 20th anniversary of our incorporation. Our clinical contribution and business model has allowed us to build a solid business with our breakthrough Measure-Through Motion pulse oximetry, with room to go as we bridge the gap between our new pulse oximetry shipments and the installed base, which drives sensor sales on most of our revenue.

We expect Masimo Rainbow SET Pulse CO-Oximetry to have a great impact on patient care. However, as I have stated before, the timing of when we will be on the steep part of growth with new technology introduction is difficult 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.

We run our business for the long-term outlook. We have a great innovation engine, and despite the current economic headwinds, we are eager to solve more of the remaining problems clinicians and care providers face around the world.

I would now like to return the call back to our moderator and begin to take any questions you may have. Thank you.

(Operator Instructions). Bill Quirk, Piper Jaffray.

Joe, given the positive feedback for hemoglobin, I'm a little confused about some of the comments around some of the push back on the CapEx side. Are the number of users at this point below your expectations?

No, they are not yet below our expectations. But I do hear that some customers are finding it difficult to find the capital dollars to purchase the measurements as they wish.

So, I guess, just following (technical difficulty) Joe, based on the early feedback -- and I recognize it is early on the alternative revenue model -- should we expect that essentially that will bridge the gap from an economic standpoint? In other words, you don't see change to the number of users by the end of the year, for example, because they have this alternative revenue model?

Again, I didn't have a specific reason to bring you worries about hemoglobin, but I did want to share with you that capital equipment, being a scarce resource in hospitals these days, we need to compete for it.

So, yes. So to answer your question, with this alternative way customers can begin using hemoglobin, although they will be paying a premium for the sensors because they're not ready to purchase the software yet, we do anticipate having the same number of customers as we did at the beginning of the year using hemoglobin.

Understood. Then Mark, just one quick one for you. In terms of the 4Q Rainbow number, are you willing to give us what the license component of that was? I am just trying to get some type of apples-to-apples on the sensor side.

Did you mean Q1?

No, no, actually for 4Q -- well, I mean, 1Q be great as well, but 4Q, obviously we had a sequential decline, so I am just trying to get a better sense what (multiple speakers).

Certainly no. As we talked about last time, obviously we are talking about total Rainbow revenues as one entire group, simply because of the difficulty, frankly as evidenced in this quarter, of trying to predict where the different elements of Rainbow revenue are going to fall in any one particular quarter.

Understood. Maybe just a last quick one here, just ask the question a different way. Without giving numbers, can you tell us whether or not sensor revenue is up sequentially?

Yes, we can say that.

Tao Levy, Deutsche Bank.

Basically when you talk about the 50 hospitals that now have hemoglobin, was that as of the end of the quarter or is that kind of a real-time?

I believe over 50 at the end of the quarter. By now we have more than that.

Roughly (technical difficulty) how is that tracking -- I asked the same question last quarter -- you know, sort of monitors per hospital, are we still in that 2 to 3?

I believe it is higher than that now, but not by much. My guess is average of 5 per place.

Then, Mark, in the product revenue, when I look at the product revenue per install, on a pure number basis that went up about 4%, based on my math. How much of the hemoglobin is impacting that number? Basically my understanding is that the monitors are going to flow through that line. Does that make sense?

Yes, you are correct. In that calculation -- and I am not exactly sure of your specific calculation, but most people that are doing that calculation actually include all Rainbow revenues as a separate element of that calculation, and divide that revenue into the total number of outstanding drivers.

So I think the background to your question, we also noticed the increase, and again, we believe the primary driver of that is that we simply continue to see a higher level of revenues relative to sensors versus the other components of our product mix. It is a mix issue that continues to try that.

Having said that, as we have said for a while now, we are taking a very serious look at the actual useful life within the hospital of these products and doing some exhaustive research, working with our customers both on the OEM and direct side, and doing that all in order to determine whether or not our current seven-year life is, in fact, the proper life to be using. Hopefully within the next couple of quarters we will have some definitive feedback, enough such that if we are in a position to possibly move that needle, we will do it. We also --.

I am sorry.

So obviously, the reason for stating that was that the increase in dollars per driver that we have been seeing is also partly related to the fact that these units are being used for longer years.

You might have more out there than you think?

More than what we are suggesting in the numbers, just because of our conservative useful life assumption.

That's helpful. If I look at the P&L, now you are breaking out this non-controlling interest number. Is that Massimo Labs?

Yes.

If I do not -- very unsophisticated math, is it fair to say $2.4 million in Rainbow disposables is what I back into? Assuming you are at the 10% royalty that you have to pay to Masimo Labs -- I am sure there is an R&D offset, but why can't I do that math?

I don't think that math really works because the profit that is generated on the Masimo Labs' P&L is profit that relates to their royalties, which at this point are primarily minimum royalty payments. If you'll recall, the royalty and the cross licensing agreement requires certain minimum payments. So as a result, there is really not a way to back into the number in the way that you just attempted to.

Matthew Dodds, Citi.

A couple of questions. First, Joe, when you look at the early demand of the hospitals that are customers, are they focusing on all three areas of trauma, ER, surgical, operating room, or is there one area where maybe the economics work better and you're seeing more interest? That is the first question.

Mostly we are seeing the interest in the OR, and then ICU, and then the emergency departments. I am not sure if it is economically driven, but that is where we are seeing it currently.

The second question, you mentioned there could be a benefit for Rad-57 for some government-related mandates. Do you have any timing on when we might see that benefit? Are we talking next quarter or is it a few months out?

I believe actually it probably will be in the next quarter, but it is not significant numbers. FEMA does not have thousands of rescue operations. There is a limited number. So it really, for us, that (technical difficulty) make the Rad-57 a standard in every one of their rescue units is more a statement about how noninvasive carbon monoxide monitoring in the blood is becoming the standard of care in the EMS environment.

Jared Holz, Thomas Weisel Partners.

Could you talk about the competitive landscape in hemoglobin? There is potentially another company on the market as early as 2010. So is the decision to go without selling the boxes and just selling the disposables in order to just capture as much territory as you can, is that one of the strategies here?

Not at all. Not at all. We won't believe there is a competitor until we see it. Measuring hemoglobin noninvasively is a very difficult task. And many companies in the past have thought they had done it. They make one or two units, and that is all they can make. So we are not at all changing our strategies due to any competitive rumors.

Are you going to be announcing some sort of data set from your hemoglobin users comparing the outcomes between your sensor and the gold standard of a CBC? Is that something that we can be looking out for, or is that going to be a case-by-case basis?

I am sorry. Could you repeat your question, I am not sure I understand it.

Sure. So is the Company going to be running a trial comparing the outcomes of the hemoglobin test to CBC hemoglobin levels, or is this going to be something that we are going to have to get from individual hospitals?

We are not doing any studies ourselves, but we are -- and we have provided equipment to several hospitals, at least nine, if not more, that are doing clinical studies on hemoglobin. I don't know when and which one of them will come out with outcome results, but I think (technical difficulty) there initially will be to see how well we trend with changes in hemoglobin in the OR and other places, and how that trend helps them maybe manage things like blood transfusion and care of the patient.

Then just lastly, where do you see the most relevant addressable market for hemoglobin? It is not going to be applicable for all patients or for all procedures here. If you had to identify the market based on what you're seeing so far, outside of specific areas, what type of patients are going to be receiving the hemoglobin over the CBC?

Initially we believe the patients that are at risk of blood loss in the OR, patients at risk of hemorrhage in the intensive care unit, EV patients coming in that will be triaged to see if anemia is an issue or not. But long-term we actually do believe that it will become ubiquitous in the hospital. Being first to make noninvasive continuous hemoglobin, we are seeing interesting things about hemoglobin that may have a more profound impact on people's care. So we will have to see.

(Operator Instructions). Joanne Wuensch, BMO Capital Markets.

(technical difficulty) maturing in the second half of the year launch. How -- help me understand where you foresee that product being used.

Sorry, you started in a little bit late, at least in the sound we got here. Could you repeat the question?

Of course. in acoustic respiratory monitoring, when you start rolling that out and doing your beta testing of it, how do you foresee that product being used?

We initially believe it will be used on the general floor to assess respiration, along with oxygenation from our pulse oximeter to avert sentinel events. These are patients that are patient-controlled analgesia that could stop breathing. So that is the initial target market.

When will we be seeing this device, at a particular tradeshow?

We are hoping to begin limited market release in the second half, probably in Q4. And a tradeshow that we are targeting to hopefully have it ready by will be the ASA, American Society of Anesthesiologist meeting. If not, it will be at the AARC, which is the respiratory therapists conference in December.

Very helpful. You have done a fabulous job of pulling down your tax rate year-over-year. Is there more to come on that over the next year or two?

It depends on our growth internationally.

Then my final question, you mentioned something about Medtronic's Physio-Control Life Pack relaunch. I got a little bit confused there. Can you explain again how that may or may not be affecting uptake of some of your products?

Sure. Medtronic Physio-Control, which is one of our OEM partners, has recently introduced a product called the LP-15 internationally. And I believe they have gotten FDA clearance recently on it for the US. But the LP-15 is the first product that has Masimo Rainbow SET technology inside of it. And basically it can measure carbon monoxide with our sensors, our technology, noninvasively.

So what I think Mark was referring to, with the EMS market some of the people that are used to carrying defibrillators everywhere they go, they would rather see the CO measurement within a defibrillator, so they don't have to carry another product, like our handheld Rad-57.

As a result, ever since that product has been announced internationally, we have seen some of our customers who are about to give us their order for the handheld Rad-57 to instead say, we are going to hold it until we can buy the defibrillator with your technology inside of it.

Do you know when that will be out in the United States?

I don't. I know Medtronic Physio-Control has been under a consent decree for over a year. But despite that they, of course, had been selling products under the rules and regulations of the FDA to government-related agencies. So I shouldn't take a guess on when they are going to start in the US.

Sara Michelmore, Cowen and Company.

Mark, I was hoping you could just clarify a comment you made about the impact of the flu season on your sensor shipments. It was a rather weak flu season year-over-year. So I just was wondering if you could clarify the impact there? And what should we think about, if that is the case, sequentially going into the second quarter what the comparison issues may or may not be? Thanks.

Sure. I think in general the reason why we highlighted that is obviously as Masimo has continued to grow over the last three, four years, we have been growing at a rate obviously where sequential revenue growth has not been an issue. As we are becoming larger and larger, obviously, the reality of the winter flu season is one that is on our minds. And given the relative strength that we saw in both the fourth quarter last year and the first quarter this year, we are highlighting that fact now to make sure that everybody is aware that in general that is the season in which this particular industry has traditionally seen the strongest revenue growth.

That doesn't necessarily imply that there is any change afloat. We are simply just highlighting that fact, given the fact that we had such a strong fourth quarter and first quarter '09 sensor volume.

Then in terms of the OEM orders in the quarter, it sounded like it was a little bit lower than your expectation. What exactly going on in that end and how should we think about the outlook here?

I think in general the good news, as we said, was from a revenue standpoint we are actually up year-over-year. So while last year we were talking about a couple of quarters where that wasn't the case, from a revenue standpoint we are up a little bit.

Having said that, I think as Joe alluded to in his comments, the feedback that we are getting from our OEMs is that their world continues to be a very difficult one. The reality of selling $10,000 to $25,000 multi-parameter devices into this economic environment is tough. As a result, obviously, we get impacted because of our boards being included in those multi-parameter devices.

Frankly, we haven't really seen a dramatic change. And the feedback that we are getting from the OEMs is that directionally they don't expect much of a change either moving forward.

Then last clarification. Joe, you mentioned when you were talking about the cautious side of the ledger, things to just be aware of, you did mention that maybe some hospitals were reusing sensors, that type of thing. How predominant is that? And have you seen any notable shift in reusable sensors, or is that just something that you are keeping in the back of your mind as you look out here? Thanks.

It is the latter. Really we have not seen any shift. So far it has probably been even, if not better than even, in terms of hospitals that switch from reusable to disposables due to worries about contamination and MRSA and so forth.

However, I know the last time there was talk about health care reform, I guess during President Clinton's first term, some hospitals did worry about what is going to happen, and they did try to switch to reusables. I know at that time maybe not even a year passed before they also switched back to disposables.

But still, given the environment, I just wanted to share with you some of the potential risks, not that it has happened in any way. Like I said, for every one that may -- that every case that I have heard that have gone in certain parts of their areas from disposable to reusable, I have heard more that have gone from -- or the same at least -- where they have gone from reusable to disposables.

Spencer Nam, Summer Street.

Thanks for taking my questions. Just a couple of quick questions here. In terms of the Rainbow product revenues, you mentioned that the hemoglobin test contributed more significantly in this quarter. I was just curious how the hospitals are viewing hemoglobin test versus other Rainbow products right now, and whether it there is a difference in terms of their willingness to buy, or the concerns of weak economy that is determining their buying decisions. Are you seeing any difference, or is it pretty similar right now, but it so happens that you had just launched the hemoglobin test and there is some traction there initially?

Let me try to answer your question. The first thing I want to tell you is that we have not seen this much excitement about any measurement we come up with since we introduced Measure-Through Motion pulse oximetry. And in some regards I would say the excitement is probably even higher than Measure-Through Motion pulse oximetry.

So therefore, compared to the other Rainbow parameters, like carbon monoxide, methemoglobin or PVI, hemoglobin by far has been the most exciting.

The only place I would say that may not be the case -- which was not your question, you asked about hospitals -- but the only place that may not be the case is EMS. In the EMS environment they are more excited about CO than hemoglobin.

But to try to answer the second part of your question, and maybe what you're getting at, the question might be the fact that we saw some nice hit to our Q1, even though we announced the product the week before -- two weeks before the quarter ended. The question is, is this pent-up demand or is this further demand that we should see?

I'm going to start off by saying, I'm not sure. But I can tell you that given that we have several hundred hospitals that are in the quoting stage for hemoglobin, I don't expect that was just pent-up demand. I think hemoglobin is going to do well for us. I wish the economic environment when we were launching hemoglobin was better, but regardless, I think it is going to do well for us.

That is very helpful. Then second question is on guidance. I know you guys already stated that you will not talk about guidance this quarter, as you indicated, you had already addressed that last quarter. Given all the commentaries you made in this call about the economic factors, and just changing dynamics within the hospital spending environment, should we -- based on all of that, the fact that you are not talking -- addressing guidance specifically, could we consider that as you guys are remaining firm on your outlook, and you don't see much of a -- at this point, all the data points are gathering point towards having a story for the year that is consistent with what you had painted in Q1 or in January of 2009?

We did our script before we heard Chairman Bernanke's estimate of the economy. So maybe things are going to be good. But, look, I know a lot of companies that are not even giving guidance in this economy. We don't know what we are in store for. We don't know how bad it is going to get. But I can tell you, if the recession doesn't end, it is going to affect us. Think about it. If the OEMs quarter after quarter are doing less than we expect, that will eventually catch up to us with sensor revenues, because the OEMs are a big part of our drivers in the market.

I think that is all I can say at this point about that. And let's hope that the Chairman was right.

I guess I'm just curious about that, because you had a lot of these -- the risk factors or the concerns that you have with OEMs, as well as just the overall environment. But then you also indicated at the end of all of that, however things are looking as consistent as we thought that they would be. And clearly you put together a very strong solid quarter. So I was just curious how you guys are really thinking about the next few months or the rest of the year with respect to all these risk factors, having given some guidance in January of this year?

We run our business based on a long-term outlook. And we, as much as we love for our shareholders to have quarterly wins, this is a five, ten year outlook for us. And we are feeling very good.

I don't have a better crystal ball than you. All I could do is share with you some of the risks I see. And at the same time, it is four weeks into our quarter, so there is no way I can predict, even this quarter, what is going to happen.

But I hope that helps. I think we are going to move on to the next question.

Bill Quirk, Piper Jaffray.

Just a couple of housekeeping questions actually. Mark, I didn't see in the release, what was the diluted cap this quarter?

About $60.2 million.

$60.2 million, okay, great. Then also just, because you did mention obviously the impact of ForEx on the international business, can you tell us just what the overall impact to both the top -- and if you have it -- the bottom line as well, please?

Directionally, are you talking about actual Q1 versus actual Q1 of '08 versus Q1 of '09?

If you have it. That would be great.

Directionally (multiple speakers) the quick answer is that we were impacted fairly insignificantly on the top line. You're talking about a figure below about $0.5 million in total revenues. That was offset by actually essentially a savings on the operating expense side, because remember our current structure internationally is one in which we actually only have a part of our revenues subject to foreign exchange risk. But essentially all of our operating stances are subject to that same risk. So actually from a bottom standpoint the impact of those two was negligible.

Matthew Dodds, Citi.

This is actually Greg with a couple of follow-ups for you. Just, one, as it relates to the license revenue in the quarter, Mark, I know you mentioned specifically that it was based strictly on your estimate -- your estimation of (inaudible) quarter sales over the course of this year, particularly in this quarter. They did seem to post a pretty solid quarter, at least relative to your outlook for license revenue for the year. I'm just wondering, when we should expect, if those trends continue, that we would see some type of an update in your outlook for that estimate?

Again, I think as Joe alluded to, we only provide guidance once. I think I would put our perspective on Covidien's possible royalty payments to us in '09 under the same guise. We obviously are trying to do what we can to take a look at their historical revenues, dial in the current economic environment, as well as some other factors, and that is really how we ended up with the number that we reported in this current quarter.

We don't anticipate changing that number from the guidance that we suggested in our last call until we get to a point where changing that number is warranted. I don't think we are there, since we have not yet seen the first quarter.

Got you. I didn't mean -- I'm sorry, I didn't really mean that as it relates to the guidance for the full year, just as it related to adjusting your revenue recognition over the course of the year. And if you see -- if there would be an adjustment for that in Q2 if those trends continued?

I think, as you know, our accounting policy is such that we make our best estimate and accrue that in the current quarter. And then when we actually receive the payment from Covidien, any difference to that estimate, whether it is up or down, is actually reflected in the next quarter. We would continue to do that.

Then just another one on the -- just a follow-up on Joanne's question about reprocessing the sensors. If you could just share your thoughts as to what the potential demand there is for reprocessed sensors? And what your longer-term objectives are, if you see that there is an opportunity there for yourselves and what the economic implications might be for reprocessing your own sensors? Thank you.

I will try to answer that. First of all, I think our dialogue so far has been about reusable sensors versus disposables, not reprocessed. But to answer your question about reprocessed sensors, we have heard of heightened activity by a couple of companies that have recycled sensors and -- which I think is different than reprocessed sensors. We think of reprocessed sensors as sensors that they actually throw away the parts that are going to become problematic, like the light emitting diodes and photodetectors, and start anew.

So far that activity has not resulted in hardly any -- my best estimate today it is not even 0.1%, if it is even that, of our revenue. But we do have plans to bring out reprocessed sensors. Because the problem with recycled sensors that we have seen so far is that their quality is very low. Basically from what we hear, about 6 out of 10 reprocessed or recycled sensors end up working. And therefore, it frustrates customers. And what they think of the cost savings ends up just being an annoyance.

We do plan to create a reprocess center direct from Masimo for those customers who are really more worried about the green issue, as well as to get some amount of cost savings. And we have submitted our 510K for the reprocessed sensors, and we expect shortly to make a product available to our customers.

As far as how that will impact our revenue, I think it will be de minimis because reprocessed sensors are by definition, you can't do it on every sensor. It is a slow percentage of a sensor that get collected, that can be reprocessed. So if you can imagine, you can't reprocess a reprocessed (inaudible) sensor. So eventually it becomes not a big part of what hospitals use.

So I hope with that, I answered your question. I can't thank you all enough for joining us today. And we look forward to our next opportunity to speak with you. Thank you.

Thank you. That concludes our Q&A portion. I would now like to turn the call back over to Mr. Joe Kiani.

Thank you so much. Back at you again. Have a great, great evening. Bye-bye.

This concludes today's conference. You may now disconnect your lines.