Masimo Corp (MASI) 2011 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Masimo's First Quarter 2011 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. Please go ahead.

Hello, everyone. Joining me today are Chairman and CEO, Joe Kiani, and Executive Vice President of Finance and CFO, Mark de Raad. This call will contain forward-looking statements which reflect Masimo's best current judgment. However, they are subject to risks and uncertainties that could cause actual results to differ. Risk factors that could cause our actual results to differ materially from our projections and forecasts are discussed in detail in our SEC filings. You will find these in the investor section of our website. With that, I'll pass the call to Joe Kiani.

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us for an update on our first quarter 2011 financial and operational performance. Here are some highlights -- Masimo hit a new milestone in the quarter for product revenue exceeding $100 million for the first time. This performance reflects an 18% increase versus the same quarter last year as we experienced increased demand for a core SET and Rainbow technologies on a global basis.

We believe that the strong Q1 sales are due to a combination of the cyclically strong first fiscal quarter and the robust driver placements in 2010. Our strong driver shipments continued into 2011 as we shipped 43,100 new Masimo SET and Rainbow SET drivers into the market, which represents another new quarterly new record high.

We now estimate our global installed base to be approximately 890,000, up 18% compared to the year-ago quarter.

Our strong quarterly sales and driver shipments, which remain well above the industry's mid single-digit growth rates underscore the fact that our breakthrough technology continues to attract new customers and therefore we continue to increase our share of the worldwide market.

And consistent with our commitment to shareholders, we reduced our operating expense growth by over 50% to just under 8%. This, along with our new lower effective tax rates, helped our earnings per share rise 25% to $0.30 versus adjusted Q1 2010 EPS of $0.24, which excluded certain one-time items.

Next, Mark will review our financial results in detail. After his remarks, I'll provide a quick strategic summary and then open the call to questions. Mark?

Thank you, Joe, and good afternoon, everybody. First quarter 2011 total revenue rose 14% to $113 million versus $98.8 million in the year-ago period. Growth was driven by an 18% rise in product revenue to $101.6 million due primarily to higher sales of sensors and other consumables. Product revenue growth was partially offset by an 11% decline in royalty revenue to $11.5 million resulting primarily from the change in the Covidien royalty rate effective March 15, 2011.

As you know, we announced earlier this year that we had amended our agreement with Covidien, which was set to expire on March 14th. Under the new agreement, we will continue to receive royalty payments equal to 7.75% of Covidien's US pulse oximetry sales through at least March 15, 2014.

Our first quarter SET revenue grew 17% to $94.1 million, demonstrating our strength in both US and international markets and across both acute and alternative care channels. Rainbow revenue was also up nicely in the quarter, rising 39% to $7.4 million versus $5.3 million in the first quarter of 2010. We saw year-over-year increases in all Rainbow product categories including licensing, consumables, boards, and instruments.

Importantly, we saw strong year-over-year growth in total hemoglobin revenue, which was partially offset by ongoing headwinds in our RAD 57 sales, which continue to be impacted by the lack of state and local government funding.

Our end user, or direct business, which includes sales through Just In Time distributors grew more than 25% in the first quarter to $85.3 million versus $68 million one year ago. This direct business represented 84% of product revenue versus 79% in the year-ago quarter while OEM revenues accounted for 16% of product revenue in the quarter versus 21% in the year-ago quarter.

First quarter 2011 OEM sales were down 9% to $16.3 million from $17.8 million in 2010. Importantly, although the volume of OEM board sales continues to rise over the prior-year period, indicating that our technology continues to be delivered through our OEM partners, we are seeing a lower amount of sensor shipments through the OEM channel. This is due partly to the fact that fewer of our OEM partners are reselling our sensors. The good news is that as we see lower OEM sensor sales, these same sensors are being moved to our other direct channel as evidenced by some of the strong growth in both our US and OUS regions.

Despite the slightly higher ASPs that are generated on these sensors through our direct channel, the significant increase in our year-over-year total product revenue was due to significantly increased total sensor unit volumes.

On a geographic basis, US product revenue rose nearly 19% to $72.4 million compared to $60.9 million in 2010's first quarter. Product revenue outside the US totaled $29.2 million, up 17% compared to $24.9 million in the first quarter last year.

Favorable year-over-year currency exchange rates added approximately $988,000 to first quarter international revenue totals. Note that this foreign currency exchange rate benefit was partially offset by approximately $465,000 in higher foreign currency operating expenses.

Our OUS revenue was up by double digits in all regions including Japan. Thankfully, all our Japanese employees are okay following the devastating earthquake and tsunami. Immediately following the tragedy, we donated a significant amount of technology to various rescue organizations throughout Japan. And while we did experience some impact during the initial weeks after the tragedy, our total Q1 Japanese revenue was only minimally impacted.

At the same time, other international events such as the unrest in the Middle East did result in some delays and potential short-term losses of opportunities. Despite some of these regional pressures, our total Q1 OUS product revenue still represented approximately 29% of our total Q1 product revenues.

Our first quarter gross profit margin was 64.4% down from 66% one year ago due primarily to the short-term impact of unfavorable manufacturing variances related to the prior-quarter production activity, part substitution costs, and some unique implementation costs associated with two large installations. Combined, these short-term factors accounted for an approximate 100 basis-point reduction in our overall Q1 product gross margins.

As expected, we are also seeing the impact of higher equipment amortization costs resulting from the very strong equipment placements that we delivered throughout 2010 and the impact of a higher level of contract renewal activity at lower renewal sensor prices. Recall that when we renew contracts we are typically renewing the prices that were established, on average, five years ago.

In addition, generally speaking, we are also seeing a more aggressive general pricing environment. As we indicated in our February call, a reduction in Q1 gross profit margins was expected, and we factored that into the guidance previously provided for gross profit margin for 2011.

The total gross profit margin, including royalty, was 68% in the first quarter of 2011 versus 70.4% in 2010's first quarter. The decline reflects the items I just noted as well as lower year-over-year royalty revenue following the change in the Covidien royalty rate effective March 15, 2011.

Operating expenses were $51.4 million versus first quarter 2010 operating expenses of $47.8 million, excluding the $30.1 million one-time gain related to the resolution of an antitrust lawsuit against Covidien offset by a $10.9 million in one-time marketing expenses, which included $10.3 million to establish the Masimo Foundation.

Importantly, as Joe alluded, excluding the one-time items from the year-ago operating expenses, our first quarter 2011 operating expenses rose 7.5%. The significant decline in year-over-year operating expense growth is consistent with our previous comments regarding our plans to moderate the rate of operating expense growth beginning in 2011. The actual year-over-year increase was due primarily to higher SG&A staffing levels and higher travel and legal expenses.

First quarter 2011 operating expenses also included $10 million in R&D spending, which was up 6% from $9.4 million in the year-ago quarter due primarily to higher year-over-year engineering staffing levels.

As I mentioned earlier, foreign currency exchange rates increased total first quarter 2011 operating expenses by approximately $465,000 compared to the first quarter of 2010.

First quarter 2011 operating income was $25.4 million, up nearly 18% compared to adjusted operating income of $21.6 million, which excludes year-ago one-time items to which I just referred.

Our first quarter 2011 effective tax rate was 29%, down from 35.3% in the year-ago period. This notable decline is due to the combined benefits of the R&D tax credit extension, a change in the state effective tax rate, and the impact of our growing international business. Our higher year-ago tax rate was also due to the one-time net gain from our antitrust settlement, which was all US-based income.

In summary, the combination of strong product revenue growth, lower royalty revenues, lower product gross profit margins, lower operating expense growth, and the lower tax rate resulted in first quarter net income of $18 million, or $0.30 per diluted share, which represents a 25% increase over the adjusted earnings per share of $0.24 in the year-ago quarter.

As of April 2, 2011, total cash and cash equivalents were $105.6 million compared to $88.3 million at fiscal year-end 2010. This $17.2 million increase was due primarily to cash generated from operations. As of April 2, 2011, our DSO was 46 down from 48 on January 1, 2011. And over the same period, inventory turns rose to 3.4 from 2.8 as the majority of additional inventory we carried to support a couple of large installations has been shipped.

Since this is the first quarter of the year, let me close with a quick reminder about our policy regarding annual financial guidance. As you'll recall, we provided 2011 revenue and EPS guidance in February when we released fiscal fourth quarter and full year-end 2010 results. It is our policy not to update annual guidance unless there are material developments, which cause us to believe that either revenue or earnings per share will be materially outside the range we previously provided. Based on our Q1 results and currently available information, we are not providing any update to the annual guidance we issued in February.

So, with that, I'll turn the call back to Joe.

Thank you, Mark. During the first quarter, we advanced each of our key objectives beginning with leveraging our global sales force. This is the principal engine behind the double-digit growth rates we continue to deliver and set revenue and driver shipments, both of which achieved record highs in the first quarter.

We are continuing to maximize our team's effectiveness to a better and more efficient utilization of our existing sales resources throughout the world, and we are confident that this will allow us to continue to seize on growing market demand for our technology as evidenced by the new customer wins and renewals we continue to achieve.

Our technology's performance is a key reason we are progressing against our other key objective, which is to expand our presence in the general ward. Our gold standard national SET pulse oximetry provides reliable measurements with fewer false alarms even with patient motion, low perfusion, or other challenging clinical conditions that cause competitors' pulse oximeters to fall short.

In addition, only Masimo provides Rainbow acoustic monitoring, a simple and automated method of continuously measuring a patient's respiration rate. Rounding out our general ward offerings is our Pat SafetyNet system, which facilitates simultaneous remote monitoring up to 80 patients and provides the alarm either at a central station or directly to the nurse via a pager.

Masimo Patient SafetyNet is an open architecture system that can either be integrated into the hospital's existing IT infrastructure or operate as a standalone system. This is an important distinction that can make our system easier and more cost-effective to install.

We continue to be encouraged by the increased interest level we see from hospitals who are considering expansion of monitoring into their general floor environments.

Another objective is to increase Rainbow awareness and adoption, and in the first quarter we made progress in a number of fronts. We added new OEMs that are incorporating Rainbow measurements into their patient monitors including Welch Allyn and Newtech, Inc., as well as Royal Fornia Electronic Device Company, two Chinese manufacturers.

We finished 2010 with approximately 20 Masimo Rainbow SET OEM agreements and intend to grow that number considerably by the end of 2011. We also continue to expand the volume of evidence that demonstrates the clinical and economic advantages of our Rainbow platform. With new studies released in the first quarter on SpCO, our non-invasive carbon monoxide monitor, and SpHb, our non-invasive hemoglobin monitor.

We also recently announced a new enhanced version of our reusable SpCO sensor, which provides improved accuracy and reliability performance for patients with low oxygen saturation and elevated net hemoglobin.

Customer interest for all of our Rainbow parameters is stronger than ever, especially for SpHb, which has tremendous potential to positively influence clinical decision-making, patient outcomes, and health care costs.

On the spot-check SpHb front, we made progress on refining to the original Pronto 7 device in the quarter and expect to reenter the market with a new sensor sometime in mid-2011. And, as you are aware, we are also selling Pronto, which is another spot-check SpHb device.

We are encouraged with a 39% increase in our year-over-year Rainbow revenue and with our year-over-year doubling in consumable revenues that evidenced that these new technologies are clinically enabling.

Touching briefly on another key objective, our R&D teams continue to pursue solutions to clinically relevant problems, and we remain committed to introducing breakthrough products. As you will recall, our most recent introduction was the Halo Index, which we debuted in the late 2010. Halo, a dynamic wellness indicator that facilitates continuous trending and assessment of multiple physiological measurements has received CE Marking in Europe and will be subject to FDA clearance before commercialization here in the US.

And, finally, to complement our internal R&D efforts, we are also continuing to explore strategic acquisitions and agreements of complementary technologies that we can incorporate into our existing platform.

In closing, we were happy with the strong Q1 product revenue performance, especially since the results exceeded our own internal projections. We achieved a new milestone in the quarter by topping $100 million in product revenue for the first time, demonstrating the strength of our technology and value of our business model. We increased our market share to a double-digit growth in our core signal extraction technology business, global installed base, and Rainbow platform while holding the rate of operating expense growth to single digits.

With that, we'll be happy to take your questions. Operator?

(Operator Instructions) Bill Quirk, Piper Jaffray.

Joe, first question -- if my math is right, it looks like that SET utilization bounced right back. It looks like it's very close to flat after, obviously, turning negative for a couple of quarters, I guess, one, and is my math correct? And, secondly, can you comment a little bit on what you're seeing there? Thanks.

Thanks, Bill. First of all, you're right, it did bounce back. But that could just be due to the fact that Q1 is usually our best revenue for a second quarter. So I don't know if you want to create a trend on that. I think the other quarters will probably be solid compared to previous quarters, but I don't know if at this point we can draw a line up.

Okay, understood. And then just thinking about the Rainbow side of the business. Obviously, we've had a couple of quarters now where it's been a very strong one quarter, off the next. Can you help us think a little bit about this business in terms of what percentage of this is now recurring revenue? You mentioned that obviously was up double year-over-year. I was just trying to pin the math down here on how much of this is basically variable in any given quarter. Thanks.

Sure, and obviously as it matures you can imagine it will be mostly recurring revenue. But I think at this point, it's still probably mostly capital, and the minority will be recurring revenue.

Matthew Dodds, Citi.

Gentlemen, it's Greg Hertz actually calling in for Matt. How are you doing?

Great, Greg, how are you doing?

Good, thanks. I was just hoping you could help me drill down a little bit on the margins. Obviously, you alluded to some specific pressure points there. Could you just kind of expand upon that a little bit more? And then also could you maybe try to help quantify maybe on the -- some of the other moving parts there. You mentioned 100 basis points decline associated with some moves in the manufacturing -- some planned changes there. But as far as the revenue mix, if you could touch upon that, maybe. And also just what you're seeing as far as, from the pricing standpoint, how much the renewals -- how much that's pushing on the margins as well? Thanks.

Sure, Greg. I guess I'll start by answering your question by maybe just reiterating some of the points that I made in the prepared remarks, because we try to be very specific about what was impacting the current quarter margins in terms of unique one-time items. I mentioned the manufacturing variances, the part substitution, as well as the unique installation costs that related to a couple of our large installations. So those are the categories that we think are more of a one-term, one-time nature.

The longer-term impacts are things that we have talked about in the past including, for example, the impact of higher lost amortization expense, which as I alluded to, related to the large amount of capital equipment that we placed last year -- almost $30 million throughout the year.

And also, as I mentioned, the impact of renewals. Now, your question was whether or not we can get more granular than that, and the answer is no. All of these are elements of what are, obviously, impacting our overall gross margins. But none of them are significantly higher or lower than anyone else. They just combine to have the related impact on our overall gross margins.

And then, finally, as I said, we all continue to see a pretty aggressive pricing environment that has obviously impacted not only the contract renewals but also the new contract environment that we're looking at.

So I think the combination of all those essentially are the reasons why the margins were what they were in the first quarter. The good news is they're actually very consistent, in a sense, with what we'd expected, and one of the reasons why, in February, we mentioned that we thought the first quarter margins were going to be a little bit lower than what we were projecting for the entire year guidance when we said $65.5 million to $67.5 million. So, hopefully, that covers your question.

It helps, thanks a lot. And just one other thing -- on the Rainbow revenue side, thinking about it from an ex-handheld standpoint, would the Rainbow revenues have been more in line with -- and I know there's a little bit of volatility in the back half of the year between 3Q and 4Q, but would have been closer to those levels?

To what levels?

To the absolute revenue -- Rainbow revenue product levels excluding the handhelds on the back half of last year?

I don't understand your question. Would you please clarify your question?

Sorry. I'm just trying to compare the 1Q results for Rainbow revenue with the back half of 2010. And I'm just wondering if you were to have excluded the impact of the handhelds because of the volatile nature of those sales would --

Okay, I think you're referring to the military order.

Correct. Just wondering if the -- ?

In Q3 and Q4?

Yes, I'm just wondering if on the absolute basis, the levels would have been more consistent with what we saw on the back half of 2010 excluding the handheld?

Yes, absolutely. The Q3 and Q4 had volatility due to the military order, which we did not expect to see in Q1 and Q2 again. So, yes, that is correct.

Joanne Wuensch, BMO Capital Markets.

A couple of things in no particular order. Halo in the United States -- when are we thinking of that?

Joanne, we are not certain. It depends on how long it takes to get FDA clearance. We are expecting to file the 510K on Halo in the next couple of weeks. And we hope that it will be approved within 90 to 120 days. But lately some 510K of ours have taken a year to get clearance of. So, really, we're not certain.

Okay. Previously, I've heard you mention a distributor for the Pronto in the physician's office. Is there any update on that?

We have not made a choice yet of which distributor we want to enter into this relationship with, but we are having great dialog with the distributors that we are considering. And once we relaunch Pronto 7, and we feel that we're ready for a full market release for our spot-check technology, that's when we would sign up one of these distributors. So we still are expected to do that in the second half of 2011.

Okay, thank you. And my final question has to do with Banner and Kaiser. Banner, you should have completed full implementation, and you should be near the end of Kaiser. Is that correct?

Are you visiting customers (inaudible)? Yes, Joanne, you are right. I think we've completed Banner, and we are near a completion at Kaiser.

Just doing my job. Thanks very much.

Obviously.

Brian Weinstein, William Blair.

Maybe you can talk a little bit more about the general ward and the uptake there. Maybe you can just give us a little bit more commentary about what you're seeing there and what the pipeline is for new accounts. And what's the sales cycle there, as your sales reps are going in there? How long does it take to close one of those deals?

Well, without getting into specifics on the pipeline or the uptake, what I can tell you is that the interest is very strong. The pipeline is getting really strong, and a lot of successful implementations, a lot of successful references, and we believe that the general ward market is happening at the same time as we are out there with this technology. So it's really a real-time situation, and it's a fun time to be out there. And given the strength of our technology, we believe we are winning the majority of the business and a new opportunity.

Okay. On SEDline, we haven't heard much since the acquisition. Maybe you can talk about what you're doing with the product and the technology there and give us a little bit of an update on its contribution to the company at this point?

SEDline business, Michael, is not very considerable right now. Although it's growing nicely. But I don't think it's big enough for us to kind of break it apart. As far as our plans for the future of the technology, given the competitive nature and open dialog here, unfortunately, I can't get into it.

But we do believe there's a good future for us with SEDline, and we're very happy we have got into that business with SEDline.

Matt Dolan, Roth Capital Partners.

The first question on the base SET business, can you update us on your outlook for driver placements this year? You've kind of talked about it maybe plateauing at levels we saw last year. And we saw yet another uptake here in Q1. So does that continue to move up and to the right or is this a quarterly run rate that we should build off?

Well, I'm not sure if the quarterly run rate to build on because it was higher than we had anticipated. However, we still feel good that 2011 driver numbers should see an increase compared to 2010. So -- I think all of us have given you numbers before, but I think the numbers we've given, I think, were between [150 to 150,000], and we feel comfortable with that still.

Great, okay. And then Mark, maybe on the pricing side, you mentioned some of that in your prepared remarks. Can you just help us weigh the impact of some of the variables of repricing you're seeing out there as well as reuse of sensors, if that's even impacting you to a degree that you're able to see? Is there any way to quantify those variables?

Not really, because, as I said before on the other call, we're not going to get into the specifics of each different element. They all contribute to the overall margin environment that we talked about before.

We continue to believe that the issue of reprocessing is a topic that is in marketplace and, as a result, it is undoubtedly one of the factors that helps create the kind of more competitive pricing environment that we're talking about. But we've not seen any dramatic uptick or downtick in that kind of activity. So, in general, I don't think there's anything new or different from the reprocessing standpoint that we haven't seen in the last year or so.

And then, just in general, in terms of pricing, again, as we alluded to before -- this environment is one where, because of the constant focus that hospitals have on their overall bottom line, we find ourselves in just about every contract situation working very hard to obviously continue to sell the value of the technology, but doing so in an environment where hospitals are looking at every possible way in which to reduce their own operating expenses. So that's an environment that, as you know, has existed for a long time now, and it's one that we expect will continue to be pretty competitive as we go through the rest of this year.

I guess, to rephrase, is there on an overall pricing basis, is there a number you could give us in terms of the percentage of decline you're seeing year-over-year?

Well, if you go back directionally -- I'll use the analogy of our reprocess -- or, I'm sorry, our renewal contracts. You know, directionally, what we have said in the past is that five years ago you would have seen that sensor pricing probably in the $11 to $12 range. Today you're seeing that sensor pricing somewhere in about the $9 range. So you can take that gap and divide it by five years, and you get a sense of the kind of annual reduction in sensor pricing that we've seen.

Now, remember, obviously, a large part of the Masimo go-forward story here is the migration of that declining SpO2 sensor volume into, we hope, eventually, higher-priced Rainbow sensors. So that is part of the overall plan that we have put in place here, and we continue, despite the pressure on the Sp02 side, to continue to identify other cost-reduction opportunities within our own manufacturing operations that we think will allow us to counterbalance some of the pricing pressure that we see on the ASP side.

Okay, thanks for that. And the last one is follow-up on Rainbow -- just looking at the guidance you gave last quarter, it probably is obviously a sequential tickup in the coming quarters. Considering you haven't updated anything today, can you just walk us again through the scenarios that get you to the low and high ends of the guidance and tell us if the high end is realistically achievable at this point?

Sure. The original guidance to which you refer was $40 million to $50 million that we suggested back in the middle part of February. And the difference between the low end and the high end of that range, in our opinion at the time, was simply based upon whether or not we were able to release the Pronto 7 here in the US by about the middle part of this year. So that was the determining factor of -- as to whether or not we thought the high end of that range was achievable or not. Obviously, the low end of that range was on the presumption that that scenario did not materialize.

Okay, so you're saying the high end is still a possibility, in your eyes?

Well, we're not -- as I said before, we don't update our guidance, we don't talk about any more specific information other than what we talked about back in February. So I think I've provided coverage on why the $40 million, why the $50 million, and you'll have to draw your own conclusion.

Larry Keusch, Morgan Keegan.

Mark, just to follow on with the last question -- since Pronto 7 is a key driver between the low and high end of that $40 million to $50 million range that you have for 2011, can you just walk us through what the key milestones to getting the product out in this mid-2011 timeframe that you talked about?

Well, the most important milestone is getting it approved by the FDA. We intend to submit with the FDA later this month. And so the key factor in whether or not we're able to achieve that range that we just spoke to will be dependent upon the timing related to the FDA's approval. Our history, of course, we've had situations where the approval cycle has been relatively short. That's obviously what we're still hoping is going to be the case here since, essentially, this product is not dramatically different from the previous product that had already been approved.

But, as you know, it's very difficult these days to predict approval cycles from the FDA. So that would be the biggest hurdle to that US introduction. Now, having said that, we fully expect to introduce the Pronto 7, or reintroduce, I should say, the Pronto 7 in our international markets in the middle part of this year. So that will still be an element that's a component of that range of $40 million to $50 million, even if we are in a worst-case scenario, unable to get the FDA approval.

Okay. And then just one more for you, Mark, and then one for Joe. Just as you talked about your effective tax rate, obviously, a nice rate in the first quarter as well as the gross margin being impacted by what could be considered to be, sort of, one-time-ish events. Should we anticipate, I guess, being offset, by the way, by a seasonally strongly revenue quarter. But how should we be thinking about the progression of both the tax rate and the gross margin for the remainder of the year?

Well, I guess what I'll do is I'll defer again to the ranges that we provided when we provided the earnings guidance. And on the tax rate, you'll recall, that was 28% to 30%. So our first quarter being in 29%, obviously, right in the middle of that, and our best forecasting ability at this point suggests that 29% is the rate that we see for the rest of the year. Obviously, that's why we're using 29% in the quarter.

In terms of the gross margin, I think, as I alluded to in the prepared remarks, when we provided the annual earnings guidance that we did back in February, we suggested a range of $65.5 million to $67.5 million, and that essentially included the fact that we expected a softer first quarter gross margin level. So -- since we're not changing that overall guidance and direction, I think you should infer from that that we still think that that is achievable. And obviously since the first quarter is lower than that range, that would imply that future quarters would have to be higher.

Right, okay, perfect. And then, just for Joe, since Halo could potentially gain FDA clearance here, maybe it's three months, six months, nine months, but potentially could come in this calendar year, I wouldn't anticipate that you'd see much sales. But as we start to think on a go-forward basis, how you think about that market opportunity? How do you help us size that opportunity?

Halo, like I said last quarter, is going to be defined by the clinical studies that come out that hopefully will show the value of it. Because it's a new concept where you are taking multiple measurements and using expert opinion and expert systems, you are taking that information and providing a simple graphical-rich way of telling clinicians how the patient is doing.

So the question is, as you take that -- all that information and get it down to kind of like this one number, and the graphical way of showing that one number for those who want to see it, the question will be -- what does it do for hospitals? What does it do for clinicians? Does it help reduce their cost? Does it help reduce length of stay? Does it help avert death and mortality and morbidity kind of issues?

So I think while we are very excited about Halo, as I've said before, that needs to be really -- its projection -- the trajectory, has to be defined by the clinical studies that are going to come out that talk about its value.

And if those are strong, which we expect them to be, we believe this is going to be a very fundamental change to monitoring and very important measurement and capability for our company. And it should help create demand for everything else that we do, as well as on its own, deliver great revenues and profits.

But I think until -- while we're going to be pricing the product at a certain level right now to get it going and to get the clinicals underway, ultimately, the way that product gets priced and how it gets shaped will shift with the study that will hopefully show its value.

So I apologize that I can't be specific, but it's unlike things like hemoglobin or carbon monoxide or respiration rate or pulse oximetry so does it define market for those, albeit, some are invasive, some are less effective, Halo is something that people haven't done before. There's been attempts at it before. There have been discussions about the need for something like this, but nothing has ever succeeded in fulfilling the promise of what something like Halo could do. So until we get there, unfortunately, we can't forecast it. When we think about our market's potential, we don't even try to put that into it until those studies come out.

(Operator Instructions) John Putnam, CapStone Investments.

Joe, I was wondering if you might give us some color on these two relationships that you've signed in China. How you'll approach the market now and how that might change the opportunity over there?

Well, I think the best thing to get new technologies adopted in the marketplace is by creating competition. And I remember when we first were introducing SET, signal extraction technology, we weren't getting the level of traction that we had hoped for until a few significant companies adopted it and began selling it.

For example, in the US, that was Datascope. And when Datascope started selling Masimo inside their patient monitors, the rest of the industry felt like they had to also provide it.

So I think having these two Chinese companies -- although they're not number-one or number-two company in China for patient monitoring, adopt Rainbow and began selling Rainbow in China, I think it will nudge the number-one and number-two companies in China to adopt Rainbow. So I think it's very important, and we're very excited about these two companies who have joined us. They are great organizations. One of them is very heavy in the emergency environment, and one is just standard patient monitoring in the hospital. So I think it should be very positive.

Great, thanks very much.

Well, if there's any other questions, we'd be happy to take it. Otherwise, I would like to end this call. Do we have any other questions? Okay, great. Well, thank you so much for joining us this afternoon. I look forward to seeing you all in person. Have a wonderful evening. Thank you.

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