Masimo Corp (MASI) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Masimo Corporation second quarter 2010 earnings conference call. The Company's press release is available at www.masimo.com.

(Operator instructions.)

I am pleased to introduce Sheree Aronson, Masimo Vice President of Investor Relations.

Good afternoon. Joining me are Chairman and CEO Joe Kiani and Executive Vice President of Finance and CFO Mark de Raad, who will each make remarks and then take questions.

This call contains forward-looking statements which reflect Masimo's best current judgment. However, they are subject to risk and uncertainties that could cause actual results to vary. Risk factors that could cause our actual results to differ materially from our forecast are discussed in detail in our SEC filings. You will find these in the Investor Relations section of our website.

With that, I'll pass the call to Joe Kiani.

Can we just to make sure everyone can hear us, because we heard someone can't? Excuse me one moment. We're just going to make sure people can hear us. Is our moderator still on the phone?

Yes, sir, I'm here.

It's just a delay. Okay, we're fine. Okay. Thank you. Thank you very much.

Well, good afternoon. Thank you, Sheree, and thank you, ladies and gentlemen, for joining us today.

Masimo achieved solid results, with total revenue up 20%, making this Masimo's first ever $100 million revenue quarter. Performance was driven by a 26% rise in product revenue, including a 60% increase in rainbow revenue. This performance comes despite a still challenging economic climate and reflects double-digit sales growth both in the US and internationally. What's more, shipments of Masimo SET and Masimo Rainbow SET units were up 35%, to 36,700 units, excluding handheld devices. Overall, these results reveal momentum across key fronts.

First, our core SET business is exhibiting strong growth and share gain. The accuracy and reliability of our pulse oximetry technology, along with our efficient Patient SafetyNet solution for the general ward, are helping us to expand hospital customer relationships and win new business. As a result, Masimo's second quarter Masimo SET pulse oximetry revenue rose 23%, which is well above industry and competitor growth rates, demonstrating strong demand for our gold standard pulse oximetry technology in both our direct and OEM channels.

Second, our Rainbow platform, is gaining traction as more clinicians and patients experience the benefits of our breakthrough noninvasive measurements. At $7.2 million, our Rainbow revenue hit a new quarterly high, with growth coming primarily from Rainbow parameter sales, Pronto, sensor and OEM board sales. We believe the Rainbow platform holds great promise as a long-term growth engine for Masimo, providing the opportunity to build new markets and so to strengthen our competitive position and physician relationships. These latest quarterly figures signal that we're on the right track.

Third, our powerful technology offering and expanded sales organization are delivering sizable increases in our installed base. Remember that our drivers enter the market either through the sale or placement of our bedside monitors or through our OEM partners who incorporate them into their multi-parameter devices. As of the second quarter we estimate our global installed base at 789,000 units, up 17% from the year-ago quarter. Rising driver placements indicate that more hospitals are continuing to choose our technology and pave the way for higher recurring sensor revenue in the future.

Fourth, we are delivering on our innovation promise. The second quarter marked an important step forward with the global launch of Rainbow Acoustic respiration rate monitoring, or RAM, and the global limited market release of Pronto-7. Our new hemoglobin spot-check device is now available in most countries on a limited market release. Customer reaction and feedback to both products has been very favorable.

To ensure that we continue our track record of introducing breakthrough noninvasive monitoring technology, we deployed more than 10% of our product revenue to R&D again this quarter. In addition, a few weeks ago we announced our entry into the brain function monitoring market with the acquisition of SEDLine, which we are now in the process of integrating.

I'll talk more about the quarter in a few minutes, but first Mark will provide a more detailed overview of our financial results.

Mark?

Thank you, Joe, and good afternoon, everyone.

As Joe indicated, top-line product revenue performance was strong in the quarter, with favorable growth rates on both a year-over-year and sequential basis. Our total revenue was up 20%, to $100.1 million, versus $83.6 million in the year-ago period. This was driven by a 26% year-over-year rise in product revenue to $88 million, more than offsetting a 10% year-over-year drop in royalty revenue to $12.1 million.

Favorable foreign currency exchange rates added approximately $300,000 to second quarter 2010 international revenues, compared to the same prior period last year. However, this revenue benefit was partially offset by a $100,000 increase to operating expenses, also related to the same foreign currency exchange rate movement. Given the recent concerns on foreign exchange movements, let me reiterate that our mix of foreign currency-denominated revenue versus our local currency operating expense provides Masimo a partial natural net operating income hedge. However, to be clear, we have not employed any formal hedging strategies, and, to that extent, we could still be impacted by translation or remeasurement gains and losses as we translate our local currency balance sheets into US dollars at the end of each period. These gains or losses are reported in other income and/or expense on our profit and loss statement.

Product revenue growth was fueled by the 23% year-over-year rise in Masimo SET revenue during the quarter to $80.5 million. Second quarter 2010 revenue generated from our end user or direct business, which includes sales through our just-in-time distributors, rose 18% versus the same quarter last year, to $68.1 million, and represented 77% of total product revenue.

OEM revenue made up the remaining 23% at $19.9 million and represented a strong 58% year-over-year increase. Recall also that the pullback in hospital capital spending may have been the most severe in the year-ago second fiscal quarter period, which significantly impacted OEM sales levels during that time. Our results in the second quarter of 2010 show that Masimo continues to secure a high percentage of our OEM partners' pulse oximetry sales.

Second quarter Rainbow revenue was also strong, at $7.2 million, up 60% compared to the prior period last year, reflecting higher year-over-year sales of license parameters, sensors and boards, and even some initial sales of Pronto-7.

There was also positive news in our revenue by geography. Our US product revenue rose a healthy 23% on a year-over-year basis, to $63 million, compared to the same prior period last year, with solid performance coming from both our direct and OEM channels. Despite seasonality factors, our second quarter 2010 US product revenues also rose sequentially, up 3% versus the first quarter of 2010.

Product revenue outside the US totaled $24.9 million, up 32%, or 31%, on a constant currency basis. The regions of Europe, Middle East, Africa, Japan and the rest of Asia were the most significant contributors to our year-over-year international growth. International product revenue was 28% of total product revenue in the quarter, marking the third consecutive quarter our OUS mix has been in the 28% to 29% range. This positive and sustained mix shift underscores the fact that our multi-year investment to build an international sales organization and infrastructure continues to gain strength.

As previously noted, we achieved strong growth in our worldwide installed driver base in the quarter. Excluding handheld devices, we shipped 36,700 new pulse oximeters and pulse co-oximeter monitors, up 35% compared to 27,100 in the same period last year. We estimate our total worldwide installed base at the end of the quarter, net of estimated retirements, at 789,000 drivers, compared to 675,000 just one year ago. As Joe mentioned, these unit shipment trends are a precursor to future recurring SET sensor sales, and we expect additional Rainbow SET license and sensor sales.

Our product gross profit margin was 66.1% in the second quarter, compared to 66.3% in the same prior period last year. The slight year-over-year decline is due primarily to the increased mix of OEM board revenue, which generally carries lower overall margins. In addition, as we noted last quarter, we did continue to experience some incremental manufacturing expenses as we completed most of our manufacturing transition from Irvine to Mexicali.

Second quarter gross profit margin, including royalties, stood at 70.2% compared to 71.8% in the same period last year, due primarily to lower year-over-year royalty expenses and the impact of the OEM mix and manufacturing transition factors I just noted.

On a GAAP basis, our second quarter 2010 operating expenses were $49.3 million, including approximately $1.4 million in one-time marketing-related spending. Recall that we received a $30.1 million payment from Covidien in the first quarter of 2010 following our award in an antitrust lawsuit. We indicated at that time that we planned to spend approximately $15 million of this award on special one-time marketing and clinical research programs and to establish a nonprofit foundation, which we did in the first quarter. Adding to the $10.9 million we recorded in the first quarter to the $1.4 million in the second quarter brings our total year-to-date one-time marketing expenses to $12.3 million. We expect the remaining $2.7 million, or approximately $0.03 per share, to be spread over the second half of this year. Our best estimate is that approximately $0.02 will be incurred in Q3 and $0.01 in Q4.

Excluding the one-time gains, our second quarter total operating expenses were $47.9 million, up 20% from $40 million in the same prior period last year. The increase was consistent with our internal targets and are the result of approximately $5.2 million in higher payroll and payroll-related expenses associated primarily with our continuing worldwide sales force expansion; approximately $800,000 in incremental customer installation per diem activities and related costs that are consistent with our record high first half 2010 driver shipments; and approximately $634,000 in SEDLine operating expenses. Partially offsetting these increases in operating expenses was a $760,000 benefit associated with the receipt of Covidien antitrust appeal legal fees, which we received as a result of winning the appeal.

Las month we announced the acquisition of SEDLine, a privately held brain function monitoring company. Remember that in late 2009 we made a $3 million investment in the company. Through July 2, 2010, accounting rules required that we consolidated SEDLine's net operating loss into our consolidated operating results, although, as a non-controlling interest, we were not required to include their net loss in our earnings per share calculation. As a result of this acquisition, effective Q3 2010, SEDLine's operating results will be included in our EPS calculation, and we expect this to reduce our third and fourth quarter earnings per share by approximately $0.01 in each period.

Included within our total operating expenses noted above, our R&D expense for the second quarter was $9.1 million, compared to $7.3 million in the same quarter one year ago. This 25% rise was due primarily to additional engineers, engineering supplies expense and new project costs related to new product development.

Our second quarter 2010 operating income, excluding the one-time spending, was $22.4 million, compared to $19.9 million in the year-ago quarter, representing a 13% increase.

Our effective tax rate declined to 34.7% in the second quarter, from 35.3% in the prior quarter, due to the inclusion of SEDLine as well as an improved OUS profitability expectation based upon our most recent annual forecasts. For the first six months of 2010, our year-to-date tax rate was 35.1%, compared to 33.9% for the same period last year.

Our second quarter GAAP net income was $14.3 million, or $0.24 per diluted share. Excluding the one-time marketing spending, our adjusted EPS was $0.25 per diluted share, which is up 14% from the $0.22 in the second quarter last year.

Now, turning to the balance sheet, as of July 3, 2010, total cash, cash equivalents and short-term investments were $111 million, compared to $189 million at year end 2009. The change over the past six months is due primarily to the $117.5 million dividend payment made in the first quarter, partially offset by net cash received from the antitrust award and cash generated from operations.

At July 3, 2010, our DSOs rose to 51, compared to 44 at year end 2009, due primarily to a $3 million receivable which was recorded in January and which was paid in July. Without this receivable July 3, 2010 DSO would have been 48, up four days from the 44 at the beginning of the period. This slight increase in DSO is due largely to the impact of the European financial issues that have resulted in a modest slowing of our OUS payments.

Inventory turns remained fairly constant at 3.2 at July 3, 2010, versus 3.4 at year-end 2009.

Let me close with just a quick word about our outlook. As you all know, we provided 2010 revenue and GAAP EPS guidance in February when we released our year-end 2009 results. It is our policy not to update annual guidance unless there are material developments which cause us to believe that our revenue or earnings per share will be significantly outside the range we previously provided. Based on currently available information, we are not providing any update to our annual guidance issued in February.

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

Thank you, Mark.

As you all know, Masimo's mission is to improve patient outcomes and reduce the cost of care by taking noninvasive monitoring to new sites and applications. I have never been more enthusiastic about our ability to drive this mission forward than I am today. We are now in the final stages of a multiyear initiative to expand our global sales and marketing organization, an effort that has allowed us to roughly double the size of our sales force in the last two years and strengthen the [goal] infrastructure that supports it. That sales force is now offering a host of new, breakthrough technologies that address important clinical needs and have significant market-changing potential.

At the same time, our R&D team is pursuing some exciting new ideas to keep Masimo at the forefront of noninvasive monitoring. We are very well positioned to take advantage of multiple growth opportunities today and over the long run. For example, while pulse oximetry has been the standard of care in critical care areas of the hospital for years, Masimo is now enabling accurate and reliable monitoring not only in the critical care areas, but in other areas such as the general ward. The combination of patient-controlled analgesia and lower staff-to-patient ratios on the general-care floors makes it less likely that a clinician will be there to observe an avoidable adverse event. Consequently, continuous monitoring of patients in general-care areas of the hospital is a growing unmet medical need.

Masimo SET is particularly well suited for this continuous monitoring because it delivers a 95% reduction in false alarms while improving the detection of true alarms to 97%, even under the most difficult clinical conditions of motion and low perfusion, when other pulse oximeters fall short. This fact was made clear recently in the groundbreaking general ward study published in Journal of Anesthesiology. I know many of you are already familiar with this study, but its results are so compelling that they bear repeating. After deploying Masimo SET and Patient SafetyNet remote monitoring system, Dartmouth-Hitchcock experienced a 65% decrease in distress codes and rescue activations, a 48% drop in patient transfer to ICU, 135 fewer annualized ICU days, and no sentinel events.

Hospitals are taking notice of how Masimo can help them improve outcomes and decrease the cost of care. We are seeing a growing number of our long-term sensor agreement contracts now incorporating some level of continuous general ward pulse oximetry monitoring along with Patient SafetyNet, which is a wired or wireless system that allows clinicians to monitor real-time patient data from up to 80 bedside devices either from a central monitoring station and/or their pagers when an alarm is set off. When you consider that the general care areas typically have five to seven times the number of beds as the critical care areas of a hospital, it is easy to appreciate the long-term potential of pulse oximetry in the general ward. We estimate conservatively that it could double the current $1 billion global pulse oximetry market.

To further our opportunity in the general ward, in June we launched Rainbow Acoustic Monitoring, or RAM. RAM uses an innovative acoustic adhesive sensor that is easily and comfortably applied to the patient's neck. Using the advanced signal processing that Masimo is known for and that leverages Masimo SET, the respiratory signal is separated and processed to display a continuous wave form that allows clinicians to view the respiration rate and signal quality. Clinical studies have shown this measurement to be equivalent to the respiration rate derived from capnography, although better tolerated by patients.

Respiration rate is an important vital sign that is often neglected due to prior limitations. It is especially important for postsurgical patients receiving patient-controlled pain medications, as sedation can induce respiration depression and put these patients at great risk. We expect RAM to have a significant positive impact on the quality of patient care on the general ward by facilitating early detection of respiratory compromise and patient deterioration.

To cite an example, one of our first RAM customers initially began using it in their short-stay surgical unit, where they cared for postop patients who had been moved from the recovery room. A strong patient safety advocate, this major multi-facility medical center was already familiar with our continuous pulse oximetry monitoring with Patient SafetyNet. After adding RAM, they reported that clinicians were able to identify patients in distress earlier and then make the necessary clinical interventions. In a matter of months the customer decided to expand use of RAM to at-risk postop patients across their systems and is currently deploying it in three of their four hospitals.

RAM is, of course, part of our Masimo Rainbow SET platform, the first and only technology to noninvasively and continuously monitor hemoglobin, carbon monoxide, methemoglobin and fluid responsiveness, PVI, measurement that previously required invasive procedures. The most notable among the Rainbow parameters is SpHb, noninvasive continuous hemoglobin, which we provided -- excuse me, which we provide as either a continuous or spot-check measurement. Continuous SpHb measurements are trended over time and play an important role in helping clinicians identify stable and safe hemoglobin levels in order to prevent unnecessary blood transfusions, especially during surgery.

A recent independent study presented at the European Society of Anesthesiology Annual Congress validated the real-world clinical accuracy and utility of SpHb. In the study conducted at Necker University Hospital in Paris, clinicians simultaneously recorded SpHb and an invasive hemoglobin measurement on patients undergoing high blood loss surgery. Measurements were taken at the beginning and end of any clinical intervention and before and after blood transfusion. Results showed a strong agreement between the noninvasive Masimo SpHb and an invasive blood test, with a bias of 0.26 grams per deciliter and standard deviation of 1.1 gram per deciliter.

Beyond the operating room, we are also seeing increased interest in deployment of SpHb in labor and delivery, where postpartum hemorrhage is one of today's most common complications for delivering mothers. A study published in the May issue of Anesthesia and Analgesia found that between 1995 and 2004 postpartum hemorrhage increased 28% in prevalence. According to the study, postpartum hemorrhage markedly increased odds of in-hospital mortality and causes 19% of in-hospital maternal deaths. Maternal bleeding is typically discovered after a significant change in vital signs and/or symptoms and then confirmed with an invasive laboratory hemoglobin test. This approach can result in late detection of bleeding that can affect patient outcome, whereas continuous SpHb can help clinicians quickly identify and react to significant changes in hemoglobin levels.

Perhaps the most exciting SpHb news during the quarter was the FDA clearance and limited market release of Pronto-7 in late June. Pronto-7 is our new handheld device designed for quick and easy noninvasive hemoglobin spot-check testing along with SpO2, pulse rate and perfusion index in virtually any environment. It sells with a special reusable finger-clip sensor designed specifically for spot-check hemoglobin accuracy, speed and performance in lower perfusion index conditions.

Since hemoglobin is critical to assessing anemia and blood loss, it is one of the most commonly ordered tests, both in the hospital and in non-hospital settings. However, current testing requires a painful needle stick for the patient, time-consuming blood draws for the clinician and typically provides delayed results. Conversely, the palm-sized Pronto-7 provides a needleless, pain-free measurement in less than a minute, making it ideal for the needs of point-of-care environments. Patients benefit from immediate face-to-face counseling with their physician about the results, while physicians benefit from increased efficiency and patient throughput.

In the US, Masimo SpHb has received a CPT code for noninvasive hemoglobin measurement, and Medicare has set a 2010 reimbursement rate of $7.19 per eligible test. In addition to the clinical and practice management benefits, we expect this reimbursement to help provide the financial rationale for adoption of SpHb testing in physicians' practices and hospital environments.

Early reviews of the Pronto-7 by customers have been extremely positive, and we plan to move to full market release soon, targeting physicians' offices, emergency medical services, emergency departments, blood donation centers, long-term care acute-care centers, clinics and hospitals. The product is available through all Masimo hospital sales reps and international distributors.

In addition, we have a physician office sales force in the US which is currently comprised of approximately 20 reps. We are continuing to increase the size of this sales force while we build awareness of the product and perfect a formula for selling. Once this is done, we will likely transition to a major distributor focused on physician practices and point-of-care facilities. Over the long term, we see enormous potential for our Rainbow platform and SpHb specifically. We are obviously still in the very early adoption phase of what could, in our view, ultimately be at least a $1 billion market.

Looking to other long-term growth opportunities, we announced a few weeks ago the acquisition of SEDLine, the inventor of electrocautery-resistant four-channel brain function monitoring. Brain function monitoring has become a widely utilized modality for assessing depth of anesthesia and sedation. Based primarily on analysis of EEG, SEDLine brain function monitors continuously measure the electrical activity of the brain and translate those changes to the level of consciousness.

Brain function monitoring has been deployed in a variety of clinical environments, including the OR, ICU and ambulatory surgical centers. SEDLine currently holds a small share of the estimated $125 million global brain function monitoring market. However, we see substantial growth potential for the market with the transition of anesthetic gases to IV-based sedation and development of new technologies that provide greater sensitivity, specificity and reliability.

Following our investment in SEDLine in late 2009, we were able to spend the last six months becoming much better acquainted with their technology and market opportunity and decided to move forward with the acquisition. It is also worth noting that SEDLine customer base is similar to our own, and, as a result, we expect the Masimo sales force to immediately add the SEDLine offering into their product lineup. In addition, SEDLine products are deployed via a razor/razor blade business model, something that we are very familiar with. We are currently working on CE Marking and getting regulatory clearances in other parts of the world.

I also want to remind our shareholders that we plan to not grow our expenses in 2011 anywhere near the level we have for the last four years. We believe we are near critical mass for number of team members, including engineering and sales professionals, for the time being.

Let me close by saying that we believe our second quarter results within the context of a still challenging economic environment speak to the underlying strength of our business model and value of our technology. Customer enthusiasm for our newest innovations like continuous SpHb, RAM, Patient SafetyNet and Pronto-7 continues to build. We remain fully focused on the opportunities ahead of us and believe we are in the enviable serial innovation position, resulting in a solid business that is growing in double digits and in early stages of an even bigger exciting growth story.

With that, Mark and I will be happy to take your questions. Thank you very much.

(Operator instructions.)

Your first question is from the line of Bill Quirk, with Piper Jaffray.

Thanks. Good afternoon. Nice results, guys.

Thank you, Bill.

A couple of questions. First off, with a couple of very strong driver quarters through the first half of the year, can you talk a little bit about whether or not this is the new normal in terms of placements or are we perhaps seeing a bit of an inflated impact just from some pent-up customer demand?

Well, we actually believe this should continue. Obviously there was pent-up demand, Bill, from the last, I guess, year and maybe even quarter before that year as the financial markets became so bad that everybody put a hold on everything, practically. So that pent-up demand did create a good first half. But from what we see today we don't think the drivers will change much in the next couple of quarters.

Understood. Thank you. And then, as a follow-up, can you guys talk a little or give a little more color into Rainbow in terms of just from a product standpoint what's driving that? I assume hemoglobin's doing quite well, but if you wouldn't mind throwing in a comment about some of the parameters like carbon monoxide and methemoglobin. Thanks.

Well, I think you kind of said it. They're all growing really nicely. We are seeing some really nice growth percentage-wise. Obviously the numbers are still small, and that is why we're not breaking it down, because when they're that small they can be erratic. But I can tell you it has been growing very nicely. And, as we've thought about it, Bill, we think when one of these parameters start becoming significant, like maybe 10% of our revenues, that's the time to start breaking down that parameter out of the group and start talking a little bit more about it on these types of calls.

Very good. Thank you.

Thank you.

Our next question is from the line of Joanne Wuensch, from BMO Capital Markets.

Thanks for taking the questions. Stock-based compensation in the quarter, you used to include a chart in the press release. What does that look like?

Joanne, I think the number, if I recall, is about $2.4 million or so, but I will follow up on that and get back to you.

Thank you. How much did the SEDLine acquisition add to revenue in the quarter?

We're not actually breaking out SEDLine specifically under the general guise of what Joe just mentioned. What we can say is that at least currently SEDLine is a very small portion of our total revenues. However, as Joe just mentioned, we expect that to change dramatically over the next couple of years as we're able to invest the necessary resources both from an engineering and from a sales standpoint.

I would like to add, Joanne, that certainly the growth we had did not come from SEDLine acquisition.

Thank you.

You're welcome.

Another question. You announced a settlement with Hygia -- forgive me if I'm mispronouncing that -- over the last week or two. What is the significance of that?

Well, Hygia is one of I think the two reprocessors out there, and, while we are not quite certain of the impact they're having, we think it's de minimus. But the next thing is that Hygia has agreed to discontinue reprocessing, selling, exporting and otherwise transferring any of Masimo's pulse oximetry devices originally designated by Masimo as for single-use only and/or any other Company-compatible sensors for two years. So, we're pleased with this outcome, which is consistent with our original request in April 2009 that Hygia cease and desist from processing used Masimo sensors.

Okay. My final question is OEM revenue as a percentage of revenue increased in the quarter. Is that reflective of increasing demand from some of the Phillips and the other larger box manufacturers? Thanks.

The short answer is yes.

All right. Thank you.

Thank you.

Your next question is from the line of Mayank Gandhi, from Cowen.

Good evening. Thank you for taking my questions. Can you just talk about gross margin? It, again, came in a little bit softer this quarter, and you mentioned two factors -- increased OEM revenues and incremental manufacturing expenses. Last quarter I think there was some impact from disposable or disposable dynamics. Is that true this quarter as well, and how should we think about going forward?

Well, the two items that I mentioned before, the impact of the higher percentage of OEM revenues as well as the continuing migration from Irvine, California to Mexicali, were essentially the two primary reasons for that. There really are no other significant material items that impacted that margin. So we hope that by the end of the second quarter that the vast majority of that manufacturing transition has now been completed. So the slight drag that that has had on our margins for the first couple of quarters of this year, we plan to actually no longer see that in the second half of the year.

Okay. And, given that you have Pronto-7 now and -- is -- in the past I know you had mentioned about possibility of signing a large physician office distributor. Is that something -- how are the discussions going on that front? Is that something we could expect in the near term or something that's more further down the line?

Well, I think further down the line. As I mentioned, we want to make sure we're very comfortable with the product and how to best sell the product. We've had dialog with these large distributors. They have shown a lot of interest. We probably will end up selecting one of them, and it could be before the end of the year, it could be beginning of the new year that we'll be comfortable in letting a large sales force like that, aided by our regional smaller sales force, to start selling Pronto-7 in the market.

Okay. And the margin on Pronto-7 is similar to the corporate margin, or is it more than what you have right now, gross margin, I meant?

Well, we think of the business as -- and I assumed your question is Pronto-7 along with the consumables.

Yes.

And the answer is yes. It should be at least the same if not larger than what kind of margin we normally have with our Masimo SET business.

Okay. Thank you.

Thank you.

Next question is from the line of Gregory Hertz, from Citi.

Hi, gentlemen. Thanks for taking my call. I was just hoping maybe to take a bit of a deeper dive on some of the growth you had within the OEM channel and also just the benefit you had with Rainbow SET in the quarter. I'm just wondering, could you say whether or not the OEMs and the increase in contribution to revenues in the quarter was due to maybe some pent-up demand among hospitals, and maybe was that due to the product design cycle and maybe having more of the -- your OEM partners having the Rainbow SET available? Or if you could maybe just describe a little bit more about the overall improvement with Rainbow SET in the quarter. Thanks.

Sure, Greg. I think it's really the demand from the market, and then pent-up demand also for devices in general. But I believe more customers globally are requesting Masimo technology from the OEMs, and that's what's helping us become a bigger -- not only seeing bigger drivers but the bigger percentage of the shipments of our OEMs.

And what's your visibility now? I mean, I know you do have a certain amount of visibility within your OEM partners. Has that improved, and so do you see this as being kind of a sustainable level of revenue contribution for OEMs for the remainder of the year?

Well, good question, Greg, and what I want to say is -- to hedge what I'm going to say, I'm going to say that overall, between the OEMs and our direct business, we think the number of drivers will roughly remain the same. But obviously Q3 is easier to predict then Q4, but it doesn't feel like anything should change (inaudible).

Okay. And then just one final one, with respect to the pace of the parameter rollouts, you've obviously been pretty consistent here over the last couple of years with launching your new parameters. But in line of the SEDLine acquisition, what should we expect to hear with respect to kind of home-grown parameter solutions? Should we expect to hear anything later this year, or is that something that we would hear maybe in 2011? Thank you for your time.

Sure, Greg. Masimo Corp. has a very broad product line in its R&D, and I don't know if we'll deliver on this hope, but we hope to continue to deliver an important new parameter each year for the foreseeable future. And on top of it, Masimo Labs, which we have a relationship with, is working on a pretty big home-run parameter that we have never said we're going to do, or they've said they're going to do, but obviously if they develop that that one particular parameter they're working on should be helpful to Masimo's rollout, as well.

Thanks for your time.

Thank you.

Our next question is from the line of Brian Weinstein, from William Blair.

Hi. Good afternoon. Thanks for taking the question.

Hi, Brian.

Hey. So when we met, Joe, when we met last September with you, you indicated that you thought that the accuracy of Pronto-7 would have to be a little bit better than Pronto or that you would reconsider launching it. I believe the label is similar for the two in terms of the accuracy. Is that true? And then is there data that you have that we just haven't seen yet or that's going to be presented somewhere that's going to show any type of increase in accuracy on the Pronto-7?

Well, you're right that I did say Pronto-7's going to be more accurate than Pronto. From the FDA we did not seek a more accurate specification, but the product is more accurate than Pronto. Pronto-7 is more accurate than Pronto. As far as what type of data is going to be published, I don't know if Pronto-7 data is going to be published any time soon. It's my guess that'll start coming out in 2011. I do know at this year's ASA we expect over 10 studies on hemoglobin, so, but I don't think they're Pronto-7 specific.

Okay. And then, can you comment -- in the past you've given some qualitative comments on quote activity around Rainbow. Can you qualitatively talk about quote activity there, and has there been any change to the average time to close those accounts?

Well, we're not providing any more quote activity, because I think the product is more mature, and, as you can see, the revenues are growing nicely for Rainbow, and I think that speaks a volume for Rainbow in its entirety. I have in the past given you some signals about the percentage growth hemoglobin specifically is seeing, and, while nothing has changed, I don't want to do that anymore until, like I said, each parameter becomes big enough as a percentage of our revenue where it warrants the breakout.

But, to answer the second part of your question, we believe the quoting activity and the time frame to closing has not changed negatively. It may have changed positively slightly. And that has to do with the fact that we're now selling products also into physicians' offices, which take less time to convert from a demo to a quote -- or to an order.

Okay. Great. Thank you very much.

Thank you.

Your next question is from the line of Matt Dolan, with Roth Capital Partners.

Good afternoon. Can we maybe shift over to the international business? It looked like it was flat sequentially, and I think, Mark, you mentioned some slower collection cycles over there. What's the outlook for the international piece of the business, as there are some concerns in the euro zone?

Well, in general, Matt, we actually were very pleased with the performance in the second quarter. There was, ironically, one large transaction that occurred in one of our international entities in the first quarter. That did not repeat, of course, and so, as a result, there was, from a direct revenue standpoint, a slight decline. That was, of course, offset by an increase on the OEM side. So, in general, we're very pleased with the total OUS performance. In fact, against their own internal plans they're measuring ahead of plans for the year. And for the rest of the year, of course, we're heading up into the summer quarter, which is always a difficult one to call in the OUS world. But we expect to continue to see the level, the general level of revenues, that we've seen over the first half of the year and then ending up with a relatively strong end-of-the-year period.

Okay, great. And then, Joe, on SafetyNet and the general floor, I know you touched on some good data points in the prepared remarks, but maybe -- I think last call you talked about entering an inflection point for that particular segment of the market. Can you help kind of recalibrate us there? Are you still equally as optimistic, more or less, now that you've got another few months of hindsight?

Yes, I'm equally as optimistic as I was last quarter, and I've recently had the chance to travel around some of the other regions of the world, and, amazingly, even those regions there's a lot of excitement for Patient SafetyNet. I think that study that came out, which was the first of its kind, has really fueled customers' interest in doing this, because they've always felt that it was the right thing to do for patient care, but they were afraid of the cost aspect of it, and that study showed that it actually saved money. So, long story short, yes, so, we're quite optimistic and -- about the growth of Masimo Patient SafetyNet into the general ward.

Okay. And then, finally, just on seasonality and modeling the rest of this year, obviously last year was a unique macro environment here in the US. Any color you could give us on the trajectory of revenues in the final two quarters here? Thanks.

Well, seasonality-wise, Q3 is usually the slowest quarter, because a lot of Europe shuts down for most of the quarter, and the flu season is over, and people are vacationing. So, but generally we see still strong demand for our technology in Q3 and Q4, and we're feeling optimistic.

Great. Thanks, guys.

Thank you. I think we have time for one more question.

Your last question is from the line of Larry Kush, from Morgan Keegan.

Hi, Larry. Maybe not.

Hello?

We have time for one more question, if anyone has it.

Mr. Kush, your line is open.

I guess we lost Larry.

Okay, we lost Larry.

Well, if there's nobody else, then, I want to thank you all for joining us today, and I'm looking forward to seeing some of you in person, and Mark and I look forward to our next earnings call. Thank you.

This concludes today's conference call. You may now disconnect.