Masimo Corp (MASI) 2013 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Masimo's First Quarter 2013 Earnings Conference Call. The Company's press release is available at www.masimo.com. At this time all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I am pleased to introduce Sheree Aronson, Masimo's Vice President of Investor Relations.

Hello, everyone. Joining me 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 current judgment. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Risk factors that could cause our actual results to differ materially from our projections and forecasts are discussed in detail in our SEC filings including our most recent Form 10-K and Form 10-Q. You will find these in the Investor section of our website.

And now I'll pass the call to Joe Kiani.

Thank you, Sheree. Thank you for joining us today on the 24th anniversary of Masimo's incorporation. Our first quarter 2013 results show that Masimo is off to a solid start in 2013, the product revenue up 15% versus the year-ago period, a 14% rise in our core SET pulse oximetry business, and a 24% rise in sales of rainbow products fueled our performance in the quarter.

We also grew driver shipments by 19%, 39,500 units, signaling both the continued global advance of our technology and the potential for continued double-digit growth in consumable sales.

As of March 30, 2013, we now estimate our global installed base to be approximately $1,117,000, up 11% versus the year-ago period.

Despite strong FX headwinds, the addition of the medical device excise tax and the impact of our 2012 acquisitions, it grew first quarter 2013 earnings per share by 4% to $0.28 per share. We also finished the quarter with $81.6 million in cash even after using $4.4 million to repurchase shares of our common stock, demonstrating the strong cash-flow generating capability of our business model.

I'll provide a brief strategic and operational overview of the quarter in a few minutes, but first Mark will provide some additional details of our first quarter 2013 financial performance. Mark?

Hello, everybody. First quarter 2013 total revenue including royalties was $135.9 million, which was up 14% versus the first quarter of 2012. Product revenue was $128.6 million, up 15% versus the first quarter of 2012 including a net increase of $3.6 million from our 2012 acquisitions of Masimo Semiconductor and PHASEIN, whose name was recently changed to Masimo Sweden.

Excluding the impact of these 2012 acquisitions, our product revenue grew 11%, or 12% on a constant currency basis as movements in foreign exchange rates almost entirely due to the weakening of the yen versus the US dollar reduced first quarter 2013 product revenue by $1.1 million versus the prior-year quarter.

Rainbow product revenue grew 24% in the first quarter to $10.5 million due primarily to increased SpCO and SpMet consumable sales. Encouragingly, approximately 50% of our total rainbow revenues were consumables up from 40% in the same prior-year quarter and 42% for all of 2012. Geographically, approximately 70% of our Q1 rainbow revenues were generated in the US as compared to 54% in the same prior-year quarter and 64% for all of 2012.

In a few moments, Joe will speak to some additional spHb revenue information.

Our worldwide end user, or direct business, which includes sales through just-in-time distributors grew 13% in the first quarter to $108 million versus $95.9 million in the year-ago period. Our direct business represented 84% of total product revenue in the quarter versus 85% one year ago.

OEM sales, which made up the remaining 16% rose 26% to $20.6 million compared to $16.3 million in the same period of 2012. Excluding the impact of 2012 acquisitions, our direct and OEM businesses grew 11% and 12%, respectively, in the first quarter of 2013.

By geography, total US product revenue rose 17% to $94.3 million compared to $80.8 million in the same quarter of 2012. Growth was driven primarily by increased SET pulse oximetry sensor sales to hospital customers resulting from the strong 2012 and Q1 2013 driver shipments.

International product revenue rose 9%, or 13% on a constant currency basis to $34.4 million in the first quarter of 2013 versus $31.4 million in the same period last year. The increase is due primarily to growth in EMEA and Canada.

The slightly softer year-over-year OUS sales growth was due to a large OEM order in Q1 2012 that did not recur in Q1 2013.

International revenue represented approximately 27% of total product revenue in the first quarter of 2013 compared to 28% one year ago.

Our first quarter product gross profit margin was 64% compared to 64.4% one year ago. Excluding the impact of our 2012 acquisitions, our underlying product gross margin would have been approximately 65% in the first quarter of 2013 revealing the benefit of our continuing cost reduction efforts as well as a favorable product mix in the first quarter.

As you recall, we're continuing to execute on various initiatives to improve manufacturing processes, enhanced supply chain efficiencies, and drive product costs down. Notably, our reported first quarter product gross profit margin would have been 64.3% if not for the decline in the yen versus the US dollar.

Our first quarter total gross profit margin, including royalties, was 65.9% compared to 66.5% in the same period last year.

First quarter 2012 operating expenses were $66.4 million up 16.6% versus the year-ago quarter. Contributing to the increase was $2.2 million from the impact of our 2012 acquisitions, and $1.8 million for the medical device excise tax, which went into effect at the beginning of 2013. Excluding these items, our total operating expenses rose 9.6% in the first quarter over the same prior-year period.

SG&A expenses increased 12% versus the year-ago period to $52.3 million excluding the $1.8 million in medical device excise tax and $1.1 million from the impact of 2012 acquisitions our SG&A expenses rose 6.4%. This increase was due primarily to higher year-over-year staffing levels and rampup of the hemoglobin salesforce, legal fees, and various marketing-related expenses.

R&D spending rose 35% to $14.2 million in the first quarter compared to $10.5 million in the year-ago period. Again, excluding the impact of 2012 acquisitions, engineering expenses rose 24% due primarily to increased staffing levels, engineering project and new product development related costs.

First quarter 2013 operating income was $23.1 million, up 4% compared to $22.3 million in the year-ago period. Non-operating expense was $2.3 million in the first quarter compared to $582,000 in the year-ago period. The rather significant increase reflects the recognition of realized and unrealized losses on foreign currency denominated transactions due almost entirely to the near 10% decline in the value of the yen versus the US dollar from the end of December 2012 to the end of March 2013.

Our first quarter of 2013 effective tax rate was 21.2% down from 27.5% in the same period last year. As we discussed on our fourth quarter 2012 call, we expected a lower Q1 effective tax rate due to the retroactive extension of the federal research tax credit for all of 2012, which we have recognized as a discrete tax benefit in the first quarter of 2013.

In addition, the slightly lower Q1 2013 effective tax rate relative to our original Q1 2013 tax rate guidance was due primarily to a one-time tax benefit associated with the final business realignment resulting from our acquisition of PHASEIN in mid-2012.

First quarter 2013 net income was therefore $16.4 million, or $0.28 per diluted share compared to $15.8 million, or $0.27 per diluted share in the same prior-year period.

It's important to recognize that in the first quarter 2013 earnings per share included approximately $0.03 in FX-related expenses versus approximately $0.01 in the prior-year period as well as approximately $0.02 in operating expenses for the new medical device excise tax and an approximate $0.02 loss associated with the 2012 acquisitions.

These additional charges to our Q1 2013 P&L were partially offset by approximately $0.02 in tax benefits related primarily to the recognition in the Q1 2013 quarter of the benefit of the 2012 R&D tax credit. Of the above items, only the $0.03 in FX-related expenses were not anticipated and, as a result, we noted that in our earnings release today.

As of March 30, 2013, our DSO was 48 versus 49 at December 29, 2012. Over the same period, inventory turns were unchanged at 3.8. Total cash and cash investments as of March 30, 2013, were $81.6 million compared to $71.6 million as of December 29, 2012. The change reflects primarily net cash generated from operations offset by $12.4 million in cash used to repurchase approximately 778,000 shares of our common stock under the program approved by the Board in February.

Since this again the start of a new year, I'll close with just a quick reminder on our guidance policy, which is that we do not update our annual financial guidance unless there are material developments, which cause us to believe that either product revenue or earnings per share will be materially outside the numbers we previously provided. Based on our first quarter results and currently available information, we are not updating the annual guidance we issued on February 14, 2013.

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

Thanks, Mark. Our first quarter 2013 results demonstrated once again the power of our breakthrough SET and rainbow SET technologies. Our recurring revenue business model and our innovation-driven strategy to position Masimo for sustained double-digit growth today and well into the future is paying off.

Market share gains were evident not only in our sales performance but also in our new driver shipments, which reflect rising demand from both (inaudible) and hospital customers worldwide. Sensor sales were strong this quarter on both the dollar and unit basis as recent installed base expansion translated into higher consumable sales.

In addition, we believe we saw some benefit from the more severe flu season this past winter, particularly in the US.

The accuracy and reliability of our core pulse oximetry technology and breakthrough measurements of rainbow pulse CO-Oximetry platform along with rainbow acoustic monitoring and our efficient patient Safety Net monitoring solution are helping us to expand existing customer relationships and win new business.

Increasingly, new pulse oximetry agreements with hospitals also include advanced rainbow measurements, general ward patient monitoring systems, or both.

While still in the very early growth stages, general ward monitoring is beginning to gain traction. It represents a significant unmet medical need as the combination of patient-controlled analgesia and lower staff-to-patient ratios can increase the likelihood that a clinician may not be there to observe a patient's declining health status and take appropriate action.

Moreoever, recent patient safety recommendations issued by the Joint Commission and other organizations are shining a spotlight on the need for continuous real-time pulse oximetry monitoring. Today over 200 hospitals have contracted with us to install patient Safety Net systems, and we expect Masimo to ultimately capture a meaningful portion of this growing market.

In addition to our proprietary Measure Through Motion on low perfusion pulse oximetry, Masimo offers hospitals a compelling suite of advanced monitoring options including RRA, or Acoustic Respiration Rate monitoring. RRA is especially important for post-surgical patients receiving patient-controlled analgesia for pain management as the sedation can induce respiratory depression and place patients at considerable risk of serious injury or death.

During the first quarter, the University of Virginia Medical Center joined the growing list of institutions to deploy RRA. As UVA clinicians are using RRA in the post-anesthesia care area to assess patient breathing and facilitate earlier detection of respiratory compromise or distress.

Of course, Masimo's strengthened its respiration and ventilation monitoring offerings in 2012 with the acquisition of PHASEIN, a maker of capnography as well as gas and anesthetic agent monitoring technologies. We were very happy with PHASEIN's first quarter 2013 sales performance, which rose dramatically over pre-acquisition levels in the year-ago quarter. In fact, on a combined basis, sales of our respiration and ventilation products grew by more than 50% versus the year-ago performance.

Moving forward, we expect growth in this category to be further strengthened by continued RRA adoption and extension of sales responsibility of PHASEIN's EMMA Mainstream Capnometer and ISA sidestream capnograph to Masimo's direct acute care salesforce.

As you know, Masimo's key competitive advantage and most significant long-term growth opportunity lies in our ability to provide customers a host of unique breakthrough rainbow parameters, which have been shown in multiple independent clinical and case studies to help clinicians improve patient care, save lives, and reduce costs.

During the first quarter, we made good progress on our efforts to grow adoption of the rainbow platform as evidenced by the 24% year-over-year sales increase. Importantly, our performance in the quarter reflects acceleration in the sale of rainbow consumables, which helped, as Mark mentioned earlier, to drive the mix of consumable sales to total rainbow sales to nearly 50%.

The cornerstone of our rainbow platform is total hemoglobin, which we believe has the potential to become the standard of care for its ability to reduce blood transfusion rates and clots and detect patients at risk of bleeding to death.

As discussed on our call last quarter, we are dramatically expanding the resources dedicated to spHb with a new 60-person worldwide global blood management sales and clinical support team. This is shaping up to be a great team of blood management specialists well qualified to build awareness and education of spHb's value proposition among key decision-makers, namely surgeons and hospital executives.

We expect the US team to be largely in place by the end of the second quarter and the OUS team to be in place by year-end. Their initial focus will be building a pipeline of new business using a variety of innovative tools. These include our Better Care guarantee, a risk-sharing program that guarantees a hospital blood transfusion related costs will be greater -- the reduction of it will be greater than the cost of spHb monitoring.

In addition, we've recently introduced a new version of our spHb sensor, [Rev-K], that provides even better performance than prior sensors under challenging changes in perfusion, which can occur in certain types of patients during surgery. Early feedback from customers has been very positive.

Importantly, the list of OEM partners offering rainbow-equipped monitors continues to expand. To date, approximately 50 OEMs have executed agreements to integrate rainbow technology into their products, including 22 that have already released rainbow-enabled products. We expect the two largest patient monitoring companies, Philips and GE Healthcare, to introduce rainbow-enabled products within the next 12 months.

In the first quarter of 2013, total hemoglobin sales were approximately $2 million. We expect spHb to increase steadily throughout the year, particularly in the second half as our new sales team becomes productive and as new Better Care customers begin implementing spHb to better manage their patient care and blood management programs.

As you've heard me say before, it is impossible to predict when we'll see spHb sales take off. However, I am confident that it will be an S-shaped curve, and the steps we're taking to build a dedicated sales team at key OEM partners continually improve the technology and educate through clinical research and novel marketing programs are correct and necessary to speed growth.

I'll close with a few thoughts on Masimo's steadfast commitment to innovation, which is the essence of our success thus far. Research and development spending in the quarter equaled roughly 10% of total revenue consistent with prior periods and above industry averages. But what makes our innovation engine so strong is not the number of engineers we have but the gifted and dedicated engineers we are fortunate to have.

We are concentrating our engineering efforts on support and advancement of existing platforms and sensor technologies with the aim of continually enhancing performance, increasing clinician ease of use and patient comfort, and lowering production costs.

One way we are achieving this is by leveraging the capabilities of Masimo's Semiconductor, where we can get more efficient LEDs and photo detectors built, which facilitate improved management of demand for rainbow sensors and is expected to help lower costs, over time.

At the same time, we are investing in development of new breakthroughs like Root, our intuitive interactive open architecture monitoring and connectivity platform providing unlimited applications from the OR to the general floor, which we plan to introduce through a limited market release by midyear.

With guiding principles to always do what is best for patient care and stay true to our promises and responsibilities, our innovation engine continues to position Masimo as the leading edge with multiple opportunities for tremendous growth.

With that, we'll open the call to questions. Operator?

(Operator Instructions) Bill Quirk, Piper Jaffray.

So, Joe, first question -- you went out of your way to comment about general ward and some wins there, and I was hoping perhaps you could help us think a little bit about how significant or can you quantify this, perhaps, now versus, say, a year ago or two years ago -- just to give us a sense to what extent it's really contributing to the overall performance?

Well, today, it's been de minimis -- the adoption of monitoring on the general floor to our revenue and to our driver numbers. But I expect it to be, one day, half if not greater part of our revenues. The reason is, unfortunately, patients are dying every day on the general floor because they're on opioids, and they're not being continuously monitored. Both Anesthesia Patient Safety Foundation and JCAHO have recommended the monitoring of these patients. And we expect eventually that wall will fall, and when hospitals begin doing it, like places like Dartmouth-Hitchcock have, not only will they see no more dead in bed problems, but they'll save money. I mean, Dartmouth mentioned $1.5 million annual savings for their implementation of patient safety net.

So it's got to happen. I think you all know that the critical care beds are about 125,000 beds in this country, whereas the general floor beds are at least 450,000. So even if a quarter of those beds, roughly, became general floor continuous monitoring beds, the revenue and volume should be equivalent to pulse oximetry business that we have today.

Very good, and then, Joe, perhaps thinking about maybe a little more acute question -- we've certainly seen the volumes start to tail off here in the first quarter, particularly in March and into April. Can you talk a little bit about, I guess, the current situation. You mentioned, obviously, that you had a flu benefit in, no doubt, the fourth as well as the first quarter but perhaps you could just speak to what you're seeing right now.

Well, I assume that by volume you mean adhesive sensors.

Yes, that's correct.

Yes, because I think if you look at, obviously, the driver numbers, we're seeing a different story. Unfortunately, it's quite early in the quarter for me to give you what's going to happen this quarter, but I would agree with you that in the first month of April, the volume of adhesive sensors are lower than they were in our January numbers, let alone February numbers.

Got it, okay, thank you for the color there. And then just the last one for me, and I'll jump in the queue, and I recognize it's still early. But now that we're at least a couple of months into the [ex-cal] launches at work, can you add any, I guess, any additional color there? Are you seeing any effects, be it good or bad?

Well, the ex-cal launch and preparation for launch has been going on for years. And it's been actually more than a couple of months. In certain areas, it's been for years (inaudible) it's been several months. And probably the best I can tell you is that everything is nice and smooth. There's no issues.

As far as what has it done to reduce knock-off sensors in international markets, we don't know yet. It's hard to measure it, but we're going to do our best to try to measure it.

Matt Dolan, Roth Capital Partners.

First, I wanted to look at the core growth number -- your placement growth rate in the last two quarters has been very strong. Should we, perhaps, anticipate, as those sensors start to pull through, even an acceleration in the quarter growth rate, going forward?

That's what we expect. I'll just warn you that Q1, generally our strongest sensor volume quarter and then second is by Q4. And then the worst quarter is Q3, the summer quarter. So I believe what you said is correct, Matt. I don't know how it will impact us in the next couple of quarters, though.

Okay, very good. And then on the rainbow side, obviously, you haven't made changes to guidance. Can you walk through maybe some of the elements that helped that quarterly run rate tick up through the year, specifically, when does the hemoglobin group start actually contributing, and where are you in terms of Pronto and its contributions to that category?

Sure, sure. First of all, I think that improvement in the overall economy seems to be seeing its way to the municipalities and seems to be creating more business for us for carbon monoxide and methemoglobin monitoring in the EMS environment.

As far as the hemoglobin salesforce, we have about half of them in place. We've just trained them, maybe two or three weeks ago, and they are now in the field of doing what they do. So we expect to see the result of their contribution. Hopefully, it begins soon but really Q3-Q4 timeframe.

And then as far as the Pronto and Pronto 7, volume-wise, we're doing better than we were in the same quarter last year, especially in the US where we have this new distribution team of PSS and, which is, I guess, McKesson now, and Henry Schein. But they're at reduced revenues due to, a, our decision to make our prices more competitive in concert with the full market release of the product and also having this layer of distribution that takes this margin.

While we're encouraged by the increase in volume due to their health (inaudible) distributors, it's not what we expected, far below what we had planned with them. So we're going to continue watching that, and if we don't see it improve by the end of this quarter, as we've already been in communications with our distribution partners, we're going to change certain things to, hopefully, make things work a little bit better.

Okay, that's great. And then, Mark, if I could sneak one in on the earnings side -- it looks like most of the moving parts that you gave us were as predicted on the last call other than maybe the FX component. So just so we have it straight, it was a $0.03 hit from FX, or your number would have been $0.03 higher, and yet you're maintaining -- or you haven't changed your guidance for the year. Can you just walk through that dynamic?

Yes, no, you're correct -- $0.03 was the impact on the current quarter but, obviously, since that's already embedded in that quarterly actual EPS number, by definition, unless we had some reasons to change some of our other Q3 through Q4 outlooks, that would suggest no change to the annual guidance.

Yes, I think it's, obviously, if it wasn't for the Japanese exchange rate going where it went, we would have done about $0.03 better this quarter. But those numbers are already, unfortunately, in our $0.28, which is what we had, roughly, I guess, the consensus was.

Joanne Wuensch, BMO Capital Markets.

Good evening, thanks for taking the questions. This is Jake Messina in for Joanne. How are you all?

Thanks for clarifying that.

I figured it could be easily mistaken. Just wanted to ask maybe a little bit about -- given clinical evidence demands when hospitals are looking towards new investments -- do you have any larger studies planned or working with anyone to validate the claims made for the general floor space or for hemoglobin?

For hemoglobin we do -- we mentioned the NACHO trial that is a multi-center, multi-country study that's underway. We're hoping by the ASA timeframe next year to maybe have something presented -- not this year but 2014 year.

As far as general floor studies, I'm not aware of a large-scale study, but I am aware of a lot of hospital studies and evaluations, and the results are remarkable. And I think -- I guess -- I don't think you need that study. I think it's very clear, it's intuitive. The saves are almost automatic and, you know, one hospital, I don't know if I can mention the names, I'm not going to, but one hospital reported 50 saves in less than a year after the implementation of Safety Net in the general floor.

So it's just so dramatic, it doesn't make sense that not every hospital has yet implemented a solution -- whether ours or somebody else's. Of course, our solution is the best, but they need a solution.

Okay, and then just maybe on gross margins. I know you didn't change guidance, but you did note a 30 basis point impact from the yen. Was that anticipated or would there be a similar impact throughout the rest of the year?

No, by definition, it wouldn't be anticipated because we assumed -- our guidance was based upon rates that we started the year with. So that would not change the numbers and, therefore, there's -- again, 30 basis points on one quarter can move pretty quickly in the remaining three quarters based upon movements in other directions.

For example, FX rates could obviously change dramatically again in any of the next three quarters. So the 30 basis points was not enough to change anything for the year.

Okay, but given current rates, you could experience similar dynamics if things didn't change, right?

Yes. If the yen/dollar exchange rate stays where it is, then you're right, we could see the same kind of impact, at least from that segment of our business. But, again, the point being that there are a variety of different elements impacting our overall gross profit margins, gross FX rates, usually not something we bother to call out. But, again, because of the dramatic movement this quarter we felt it was important to highlight that.

Understood. And maybe if I could just squeeze one more in, I think this is the first time I've heard a dollar number of the $2 million for hemoglobin. I was wondering if you could tell us what it was for 2012, and that will be it for me, thank you.

Well, we had promised, because you guys kept asking for us to give you a number, so we said we'll do it the beginning of this year. We're not sharing what it was in 2012, but I promise in 2014 we'll start doing year-over-year analysis.

Deal, thank you.

Thank you. We reluctantly give you this number because it's so low we didn't think it was material. But the feedback from our shareholder base is that they wanted to hear it, so that's why we're doing it.

Matthew Dodds, Citigroup.

Good afternoon. First, Mark -- also following up on the FX -- was the hit in non-operating -- was that kind of a one-time reset of that line, at least, shouldn't be an issue if the [end] stays where it is the rest of the year?

Directionally, I would say yes because, as you probably know, that hit on that line was primarily due to the re-measurement of our local -- or our foreign entities balance sheets based in local currency. So, again, assuming that rates at the end of March don't change to the rates at the end of June, September, December, et cetera, then the majority of that hit, if you will, was absorbed in this first quarter.

But the P&L itself could, obviously, be impacted based upon what happens to rates throughout the rest of the year, the rest of the P&L.

And then, Joe, a quick one for you. I know the models mostly raise the razor blade, but when you look at Europe and some of the comments about a tough capital equipment cycle, can that have an impact or did it have an impact on maybe your OEM business? Do those customers kind of get held up in that? I assume not your direct, but was there anything you worry about there that you saw in the quarter?

Nothing that I worried about, but certainly the European market has been under a lot of pressure the last few years. Germany is the only solid country there. But, of course, also it's the biggest market there.

So, no, I mean, as you noticed from our OEM drivers, we had one of the best quarters we've ever had. I think it is probably the best quarter we've ever had in Q1. And we -- while I don't think it's going to go crazy, going forward, for the next three quarters, I believe those kinds of numbers are realistic for the rest of the year.

So -- so I guess, no, I'm not worried about anything specifically in Europe, but also our OUS revenue growth wasn't as strong as its US growth and, clearly, that may have something to do with the European capital market.

But you also said flu might be a little of that, as well, since it was harder in the US, right?

Yes, the flu was harder in the US and, of course, the flu also helped us more in the US because of the single patient use model in the US compared to Europe.

Brian Weinstein, William Blair.

So we're roughly about, what, a year or so into kind of the Better Care stuff here, and I'm curious if you could kind of talk about your level of satisfaction with how it's gone, so far; what you're seeing from the program, particularly with the early adopters in terms of the audits -- are they saving money, are they not, and how that all kind of sorts out early on?

Well, I -- unfortunately, I don't have any more insight because the new customers that had signed up to Better Care under the guarantee model, for just various reasons have not implemented yet. One of them is anxious, for example, to have the radical 7 communicate directly to their EMR and does not want to begin implementation until that's done. Another one is in the middle of redoing their whole EMR so they don't want to start this one until the EMR ward is complete.

So -- for various reasons, we've had -- unfortunately, we haven't had the benefit of the rainbow of revenues coming from the Better Care customers. We do expect, in the second half of the year, for the implementation to have happened, and then for us to not only start seeing some of the revenue increase but then be able to tell you about the audit and what we found out.

So how long after somebody begins to implement that does the audit happen? Is that a kind of every six-month thing? Every quarter, every year? When do you guys actually see that kind of stuff?

Well, I guess, about half, it seems to be quarter, and half of them right now a year. And we're trying to get it down to maybe a quarter or six months. But whatever the customer feels comfortable with, and we're not pushing too hard on that.

Okay, and another question on the spHb sensors, just generally in the different types that you have there. Can you talk a little bit about where pricing is at this point on the spHb sensors and how often are you guys seeing software upgrade revenues when you see somebody implementing this?

Well, sensor ASB is despite our promise to reduce the prices dramatically also because some of these major conversions haven't happened yet, I think if I was -- maybe on the market -- that hemoglobin ASB for the ReSposables are about, I think, $40. And I believe the disposables are about $90.

$90, yes.

Okay, and the last question -- can you just tell us what percent of your business is yen-exposed and then what the other foreign currencies are that you guys are exposed to? I don't know that you guys have said that.

Well, 30% of our business is international, so we are exposed to that. I think probably the single biggest country contributor is Japan.

Directionally, Brian, it would be on the order of about -- of the total international business -- about anywhere from 25% to 50%, as much as 35% per -- depending upon the quarter.

Lawrence Keusch, Raymond James.

Hi, guys, it's actually Constantine for Larry. So I guess if I could just start off, could you quantify what was the full impact in the quarter?

Sorry, of what, Constantine?

Full impact on the quarter on your pulse oximetry sales.

The full impact -- no, unfortunately, we can't. Trust me, if we could, we would have called it out, but we don't really know. We know it was a bigger flu season than it was a year ago, so, undoubtedly, that impacted us. But we're not certain how much.

Got you, okay. And then, Joe, can you just maybe just provide some commentary with regard to your share repurchase program? You made some headway this quarter, but I saw -- given the commentary, I guess, over the last year, I kind of thought you guys might have been a little bit more aggressive in completing the buyback. So if you could just provide any thoughts, any kind of, maybe, feel for the gaining.

Well, sure. We announced, I think, a 6 million share repurchase over a three-year period. I thought we did pretty good (background noise) for a month and a half. But, yes, I think we also are trying to manage our cash. We don't want to get too low on cash both from -- you have to be ready for surprises but also for opportunities outside of just buying our shares. So we're trying to buy back as much as we can but doing it in a prudent fashion.

Got you. And then last one -- in terms of -- I don't know if you can give -- provide just your latest thoughts in terms of kind of any M&A opportunities that you're seeing, I guess, in your pipeline?

Nothing that we're seriously considering doing at this point. We are always interested in those opportunities, and obviously we've done well now with both -- actually, all three acquisitions of PHASEIN, acquisition of Spire Semiconductor, and Andrometh. So we're three for three, so we're feeling like we can maybe do more, but nothing to report yet.

Lennox Ketner, Bank of America,

I guess not to spend too much time on the flu, but I just want to have one question on that, because both you and your main competitor reported low double-digit growth in pulse oximetry this quarter, which obviously suggests the market grew around that rate, which is much higher than the 3% to 5% market growth at least we've seen historically. So I'm just trying to get a better understanding of how much of that is just flu versus whether we're seeing a sustainable uptick in market growth. It sounds like, from your comments, that the general ward hasn't really picked up yet; that most of that uptick is flu and that we should kind of expect to go back to the 3% to 5% range -- for the market not for your growth -- in the coming quarters. Is that the right way to think about it?

Well, I really can't speak to Covidien. My understanding was that their growth had come from emerging markets. But let's just say for a moment that their growth did come also because of the flu season. I would say, unless the general floor market is on fire, and I haven't noticed it yet, I would expect the normal growth for our industry to be about 5%.

Okay. And then just in terms of getting the general ward to pick up like you were saying earlier, it really doesn't seem to make sense to me that it hasn't picked up more yet. What do you think is needed for that to happen given that we already have (inaudible) the Safety Board and Joint Commission recommending it, and it does seem to make a lot of sense. Do you feel like there's clinical trials that need to be done or what kind of gets that market to really open up?

I think just continued education and success of the existing hospitals, the 200 that have done it already. I believe there might be some other government agencies that may step in and make the recommendation. Obviously, if they do, that will go a long way but until that happens, I think the market, in general, at some point is just going to decide it has to do it.

So -- truly, it's one of those things that's puzzling to us all because we would have expected all 5,000 US hospitals to be on the way of having continuous monitoring for patients after surgery that are on opioids. But, as you've seen from the number we announced, it's probably less than 10% of the hospitals who have done it so far.

Okay, and then just a last one on the NACHO trial that you mentioned, quickly, I may have heard wrong, but I thought that data was initially expected kind of by mid 2013 or so, and now it sounds like you're saying late 2014. Is there a reason for the delay on that?

No, I think what we now said it would start, I thought we said in a year we'll have abstracts going out. But those usually have a deadline of six months before the publications or presentations at trade (inaudible) -- or the conferences.

Okay, so we could still see abstracts in 2013?

I don't know. I don't think so because I think -- didn't the study begin about this time last year? Or maybe later. So we'll let you know better maybe --

Okay, yes, I can follow up offline.

I apologize, I don't have better information on that.

Spencer Nam, Janney.

(inaudible) that question -- I just want to make sure that folks on the call are aware of the study that came out of Cairo University. It came out in January and basically they showed a 50% reduction in the group that had non-(inaudible) hemoglobin, (inaudible) induction and blood transfusion. And about -- I guess about a one-hour improvement in providing blood transfusions to those who needed it. And that 50% reduction was on heavy blood-loss patients, which, (inaudible) is Mass General was a 90% reduction on low blood-loss patients. And I think when we did the math on the heavy blood-loss patient population that they saw this reduction, it came out to about almost one bag per patient, which could be about $1,000 a patient. So we won't repeat that study in this call, but I think we mentioned it on the prior earnings call.

Sorry -- so the next question, please.

This is Spencer Nam from Janney. I have two questions, but they're related -- both related to rainbow. So I'll just ask them together and then have you respond to that. So, you know, the $2 million, the sensor revenues on the spHb -- could you maybe describe what kind of customers they are? They may be hospital types or whether there is some sort of a trend or a commonality amongst the customers who are currently adopting this? And then you indicated that you're going to provide sort of a year-over-year comparison. I guess you're planning to provide the revenue numbers for spHb, and that tells me that you guys are obviously seeing something out there that leads you to believe that the spHb revenues will likely continue to accelerate from here.

And then -- but you did say that it's already -- just curious, kind of what are some of the things that you guys see that lead you to feel confident about the numbers that growing and then whether that says anything about the overall -- the hospital environment in terms of capital equipment spending, whether you guys also see that environment improving here.

Sure, sure, I'd be happy to try to answer all those questions. First of all, I believe the value of spHb is not just that it's non-invasive but that it's continuous. I think that combination proves itself more valuable in a hospital setting than any other setting. There's monitoring patients during surgery for labor and delivery or monitoring them for blood loss post-surgery in the recovery room or ICU.

So I guess consistent with that, the majority of our revenue comes from the hospitals. We expect, over time, the vast majority of our sales to come from hospitals and not the alternate care setting because we think that's where the greatest potential for transforming health care is.

As far as our confidence in the future of it growing and maybe that's why we're going to enjoy talking about year-over-year growth starting next year is a combination of factors. One, the feedback we're getting from customers or what this product is doing for them; two, the dedicated salesforce that is getting out there; three, the additional studies that have come out to show the value of hemoglobin. I mean, it's not the small fee when you now have two studies that show outcome improvement by using hemoglobin in a hospital. Pulse oximetry, which has become a standard of care, which I don't think any anesthesiologist would begin a surgery without it. In every randomized controlled trial before the Masimo SET pulse oximeter actually showed no value. The biggest one, in Netherlands, 20,000 patients -- 10,000 with, 10,000 without, showed no difference in anything looking at the patients in the OR.

So -- of course, with Masimo SET now exceeding pulse oximetry become a useful tool both in reducing (inaudible) prematurely in [DNA], undetected CCHD in newborns, now helping because of its low false alarm rate of continuous monitoring capability, patients on the general floor, it's taken 30 years, if not longer, for pulse ox to show that value for hemoglobin, and the past couple of years have shown the value.

And I think last but not least, I think some of these new marketing tools like Better Care and maybe the biggest -- we're kind of like out there by ourselves and maybe just Drager and Welch Allyn for hemoglobin will soon, with GE and Philips coming onboard, it's going to be a huge difference.

I can tell you, we would not have pulse oximetry sales, or very little of it, without Philips and GE in the mix. So we're quite excited about the future. Again, I'm sorry, I don't want to mislead you by thinking it's going to become bonanza nor make you feel like it's not going to be great, but I can't tell how things are going to grow -- how fast -- but I do believe strongly that one day it will become the standard of care.

So did I answer all your questions?

Actually, just one quick follow-up -- you mentioned the hospitals being the main customers. What kind of hospitals are we talking about here?

Surprisingly, it's not teaching hospitals alone. I mean, it's academic hospitals as well as your community hospitals. So one thing that I think is driving it, unfortunately, in this era of time that we're in, is cost. I think -- you know, you'd like to think people are rushing to this because it's going to save lives, which it is, but I think every hospital has recognized practically to every one of them, I would say, that blood transfusion is an expensive line item. The bags of blood are probably under a top five line items, and with the studies showing that spHb can help dramatically reduce it, and our ability and willingness to even guarantee it, I think it's making, you know, from a community hospital to an academic hospital, wanting to do it. And it's not just the US -- it's happening in Europe, it's happening in Asia.

So it's an exciting time. I just can't -- probably can't wait for a year or two to go by and hoping to show the results that we are hoping for.

So with that, I'm going to wrap up today's call. For those that have been around for 24 years on this call, happy 24th. For the new friends since our IPO five years ago, thank you for joining us. Have a great afternoon.

Thank you. This concludes today's conference. You may now disconnect.