Masimo Corp (MASI) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Masimo Corporation fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to turn the call over to Eli Kammerman. You may begin.

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 current judgment including certain of our expectations regarding fiscal 2016 financial performance. 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 our discussed in detail in our SEC filings including our most recent Form 10-K and Form 10-Q. You will find these in the investors section of our website. We will also discuss certain non-GAAP financial measures.

A description of each non-GAAP financial measure and a reconciliation of each non-GAAP financial measure to the most comparable GAAP financial measure can be found in our earnings release. I'll now pass the call to Joe Kiani.

Good afternoon and thank you for joining us for Masimo's fourth quarter 2015 earnings call. We finished 2015 exceeding our targets as our diversified product portfolio and geographic reach generated good growth, despite one less shipping week in Q4 2015 versus Q4 2014, the continuation of the significant year-over-year FX headwinds, as well as a weak flu season.

Our Q4 2015 core product revenues grew to $159.8 million, including a 35% year-over-year increase in rainbow revenues to a new quarterly record of $19.1 million. Some other important highlights from our fourth quarter included, we shipped a record 48,500 oximeters, yielding 2015 shipments of nearly 183,000 oximeters, including -- excuse may, excluding our handheld and finger pulse oximeters and increasing our global install base by nearly 8% year to year to more than $1.4 million. Our international sales grew by approximately 18% on a constant currency basis.

The adoption of Root accelerated, which has now become the fastest growing hardware revenue product in our history and is laying the foundation for increased adoption of our core technology. Our Q4 2015 GAAP earnings per share were $0.46, which includes approximately $0.06 in net benefits related to various unique Q4 2015 transactions that Mark will discuss in more detail.

For the full-year, our product revenues increased to $599.3 million, up nearly 8% and up 11% on a constant currency basis. At the same time, our full-year GAAP earnings per share was $1.55 or $1.49 if adjusted for the unique Q4 2015 item. This $1.25 -- this $1.55 in GAAP earnings per share was up approximately 19.2% from the prior year $1.30 per share.

Our strong finish to fiscal 2015 gives us confidence that we are on track to continue to deliver on our business plan and to improve operating leverage that we have been discussing and now continue into the last two years of our 10-year plan. As a result of our outlook for 2016 is very positive.

As Mark will share with you shortly, we are, today, providing FY16 financial guidance that is focused on continuing to deliver earnings-per-share growth at a rate of at least twice the product revenue growth rate. Operator, there is a thumping sound. If you can get rid of it that would be great. I guess we will have to live with the thumping.

Next, Mark will review our fourth quarter financial results in more detail and then discuss our financial guidance for 2016. And then I will provide more detail on 2015 and 2016 expectations. Mark.

Thank you, Joe, and, hello, everybody. Reported total revenue and product revenue for the fourth quarter was $167.3 million and $159.8 million, respectively. Product revenue rose by 3.8% or 6.5% on a constant currency basis versus the fourth quarter of 2014, as our Q4 2015 product revenues we're reduced by $4.2 million due to continuing adverse foreign exchange rate movements.

In addition, if you also adjust for the extra week in the prior quarter, which we estimated on a worldwide basis at approximately $5 million, our comparable Q4 2015 to Q4 2014 profit revenue growth would have been 10.1%. Q4 product revenues came in above our expectations due to a combination of increased OUS revenue, coupled with strong capital sales of both Root and our new MightySat finger pulse oximeters.

Q4 2015 rainbow product revenue totaled $19.1 million, up by 35% or nearly 37% on a constant currency basis, and that was up from $14.1 million in the prior year period. The record growth was due to the approximately $3 million in rainbow products related to continued sales to a new large customer in the Middle East and very healthy growth for both rainbow disposable sensors and instruments.

In addition our Q4 SpHb revenues due largely to the new Middle East customer increased by more than 60% to $6.1 million versus $3.7 million last year. Our worldwide end-user or direct business which includes sales through just-in-time distributors grew 4.3% in the third quarter to $137.9 million versus $132.2 million in the year-ago period. FX-adjusted our worldwide end-user direct business grew by 7.2%, and if we also adjust for the prior year extra week, our worldwide end-user direct business would have grown by 11.3%.

Our direct business represented approximately 86% of our total product revenue in the quarter, level with the prior year period. Our OEM sales comprised the remaining 14% and rose by 0.6% versus the prior year period. By geography, total US product revenue increased by 1.3% to $106.6 million compared to $105.3 million in the same quarter of 2014.

Once again, though, recall that we had one less shipping week in Q4 2015 versus 2014, which we estimated impact our US product revenue by approximately $4 million, and as a result on an adjusted basis, we believe our US product revenue growth was really up by approximately 5.3%. Our Q4 OUS product revenues of $53.1 million rose by 9.3% versus $48.6 million in the same prior year period, and up 17.9% on a constant currency basis, and up 20.3%, if you also adjust for our estimated $1 million impact due to the one less week in the prior year period.

Excluding the impact of FX rates, OUS year-over-year revenue growth rates were highest in the EMEA and Japan regions compared to the prior year period. International revenues represented approximately 33% of total Q4 product revenues or 35% on a constant currency basis, up from 32% in the prior year quarter. Our fourth quarter 2015 GAAP product gross profit margin was 59%, down from 65.8% in the prior year quarter.

However, if you adjust for the impact of the $9.7 million Q4 inventory valuation adjustment, our gross profit margins would have been 65.1%. In fact, our Q4 product gross margins would have been 66% had it not been for the 70 bips negative impact of the large Middle East order, primarily because we were required to accelerate the capital equipment depreciation, and 20 basis points impact of actual Q4 FX rates versus our original FX 2015 rate assumptions.

Adjusting for these items our adjusted Q4 product gross margins of 66%, would have been the fourth quarter in a row of sequential gross profit margin improvements, which is consistent with the fiscal gross profit margin guidance we provided in February 25, 2015, and importantly, reflect the continued benefit we're seeing from our value engineering activities.

The Q4 2015 $9.7 million inventory valuation adjustment was a result of various product end-of-life decisions, and other related inventory adjustments that we made in light of the exciting new line of devices and sensors that Joe will describe in more detail later in the call. Reported fourth quarter 2015 total operating expenses were $64.9 million, a decrease of $11.7 million versus $76.5 million in the prior year period.

The decrease was attributable to a $25 million settlement from Mindray which was then partially offset by the re-accrual of a $5.4 million award that the district court had vacated but was reinstated on appeal just late last week. Also during the fourth quarter, we made a $5 million charitable contribution to the Masimo Foundation.

Excluding the impact of this net legal benefit and the charitable contribution, Q4 2015 adjusted operating expenses would have been $79.5 million, up by $3 million or 3.9%, reflecting the continuation of our disciplined control of operating expense growth. Adjusting for the three items I just noted but also recognizing the currency benefit we realized in our operating expenses, our year-over-year operating expenses would have been up 5.9%.

SG&A expenses were $70.7 million, including the $5 million charitable contribution donation. Without that donation, our SG&A expenses would have been $65.7 million, up 6.8% versus the $61.5 million in the prior year period. Adjusted for the impact of the donation and for the benefit from foreign exchange rate, our year-over-year SG&A expenses would've been up 9.4%.

R&D spending of $13.8 million declined by 8.1% versus the year-ago period, due primarily to lower clinical trial and engineering project related expenditures. Fourth quarter 2015 operating income was $36.9 million compared to $32.6 million in the prior year period. Excluding the impact of the unique Q4 adjustments, Q4 2015 operating income was $32 million, essentially level with the prior year period, despite having one less selling week and the negative year-over-year impact of foreign exchange rates.

Q4 2015 non-operating expense was $1.9 million compared to an expense of $1.4 million in the prior year period. The Q4 2015 expense includes approximately $741,000 in interest related to the reinstatement of the $5.4 million award that I noted previously. In addition, we incurred approximately $800,000 in net interest expense related to borrowings under our line of credit.

Our fourth quarter 2015 effective tax rate fell to 28.4%, down from 30.2% in the same period last year. The final Q4 effective tax rate was slightly below our most recent expectation, due to the permanent implementation of the R&D tax credit, which was signed in December 2015. Our average shares outstanding for Q4 was $52.9 million, down from $53.1 million in Q4 2014.

This decline was primarily due to the impact of our FY15 stock repurchases, largely offset by stock option exercises and the impact on fully diluted shares outstanding of a higher stock price. In Q4 for 2015, we repurchased approximately 600,000 shares, bringing our total repurchases for the year to 4.1 million.

Fourth quarter GAAP 2015 net income was $24.1 million or $0.46 per diluted share, including the $0.06 per share benefit related to the special Q4 2015 adjustments. This adjustment -- this adjusted $0.40 per share was equal to the $0.40 per share in the prior year period, again, despite the extra selling week.

And in addition, as highlighted in our GAAP to non- GAAP reporting, the impact of year-over-year FX rate changes reduced our reported Q4 2015 earnings-per-share by approximately $0.02 as compared to Q4 2014. As with prior quarters, we have provided supplemental non-GAAP schedules which illustrate our non- GAAP gross profit margins, operating expenses, operating income and earnings per share.

We provide these schedules primarily in order to show the impact that year-over-year movements in foreign exchange rates are having on our FY15 GAAP operating results, as we do not engage in any kind of hedging activities, unlike many other sizable medical device companies with worldwide exposure. In the interest of time, I'm going to defer a summary review of year-to-date financial results but will direct you to today's press release and the Form 10-K.

As of January 2, 2016, our day sales outstanding was 46 compared to 45 as of January 3 2015. And over the same period of time, our inventory turns increased to 4.2, reflecting the benefit from the inventory valuation adjustment that I previously noted. Total cash and cash equivalents as of January 2, 2016 were $132.3 million compared to $134.5 million as of January 3, 2015.

During 2015 we generated approximately $114 million in cash from operations, $28 million from stock option exercises, and we borrowed an incremental $60 million on our line of credit. During the year, these funds have been primarily used to repurchase approximately $150 million in stock, and add about $50 million in property plant and equipment related primarily to the final build-out of our new corporate headquarters, as well as the acquisition of a building in New Hampshire, Connecticut.

Now, I would like to turn to our FY16 financial guidance, which is based on the best information we have available to us. In addition, because of the continuing volatility in the foreign exchange markets and the impact of those rates on our 2016 GAAP financial guidance, we're going to highlight the impact of the FX assumptions on that guidance.

We're providing this information because we believe it's important to understand the underlying improvements occurring within our business that, unfortunately, could be somewhat obscured by the continued adverse foreign exchange rate volatility. We are projecting our total FY16 GAAP revenues to be approximately $670 million, including $640 million in product revenues and $30 million in royalty revenues.

Based on our recent discussions with Medtronic, we expect our royalties to continue. However, given that there is no agreement, we can't be certain and, therefore, should there be any changes, we will certainly let you know. Included in the $640 million in projected product revenues is an assumed negative impact of approximately $4 million in FX rate movements when comparing our planned 2016 FX rates to the actual 2015 FX rates.

For example, our 2016 FX rates modeling assumptions include the Japanese yen at approximately $1.18, the Euro at $1.09 and the British pound at $1.44. We expect 2016 GAAP revenues for rainbow to be approximately $68 million, which will be up approximately 11% from the prior year period. We expect our GAAP 2016 product gross profit margins to be approximately 65.4%, including approximately a 10 bip reduction due to the impact of foreign exchange rates.

And as in prior years, we expect our product margins to be slightly below this average in the first half of the year and then higher in the second half of the year. We expect our 2016 total operating expenses to be approximately $317 million, reflecting a modest increase of 4.2% over our adjusted FY15 expenses from continuing operations of about $304.3 million, which excludes the impact of the Q4 legal matters and charitable contributions that I previously described.

Importantly, as we noted in our press release on December 18, 2015, our projected 2016 GAAP operating expenses includes approximately $7 million in reinvestment into R&D and other infrastructure development for new projects tied to the suspension of the medical device tax. Based on current fiscal 2015 mix of US and OUS income, including the impact of the foreign exchange rate assumptions, we expect our effective tax rate to be approximately 29% to 31%.

We expect our annual interest expense to be approximately $4 million based upon current borrowing base levels. And we are projecting our average weighted shares outstanding for the year to be approximately $53 million to $54 million growing radically throughout the year. And I will also know this projection does not assume any additional share buybacks beyond those already executed through the end of last year.

And based on all of these assumptions, we expect our 2016 GAAP earnings per share to be approximately $1.69. With that, I will turn the call back to Joe.

Thank you, Mark. Looking back on 2015, I am proud of the achievements by the entire Masimo team in bringing our technologies to more customers and patients which has enabled us to help more patients and exceed our financial targets. Last year, we realized a noteworthy acceleration of growth for rainbow sales and steady increase in our install base, leading to consistent above-market growth rates for our SET pulse oximetry products.

All of this occurred in the face of a very adverse FX environment, and a weaker than usual flu season in Q4. We believe the growth in US hospital admissions in Q4 was similar to Q3, being in the range 2% to 2.5%. Considering that small increase, we are happy with the growth of our core SET pulse oximetry business in 2015, as we shipped a record 183,000 oximeters including the record 48,500 oximeters shipped in Q4.

Our annual driver shipments rose by over 6% in 2015 while our install base increased by 8% last year, roughly two times the rate of published market growth for pulse oximetry, boding well for increases in sensor revenue in 2016. Our new install base now stands at more than 1.4 million oximeters excluding handheld and finger oximeters.

We are gaining market share due to the clinical benefits of Masimo technology for improving the quality of care while reducing cost of care. Accordingly, we achieved numerous clinical and commercial milestones in 2015, including the rapid adoption of Root, providing a new source of revenue and platform for our core technologies that is on pace to eventually boost our year-ove- year sales this year by 1% to 2%.

Note that this adoption occurred despite the lack of approval in the US for Root for temperature and blood pressure monitoring an approval that, we, as of last week, have just now received. Revised industry standard from the national fire protection association requiring firefighters exposed to fire and smoke to be assessed for carbon monoxide poisoning on-site strengthened the basis for adoption of our rainbow carbon monoxide monitoring technology.

Studies showing the value of our new ORI which is Oxygen Reserve Index, as a leading indicator for imminent drop in oxygen saturation, which is still pending FDA clearance. Studies illustrating the benefit of our PVI measurement for contributing to significant reduction in length of stay, post-operative complications, and overall cost of care. A study finding that the combined use of our SpHb and PVI technologies generated a 25% reduction in one month mortality for 6000 patients undergoing surgery under general anesthesia.

Significant new customer wins in the US and around the world, including institutions in Brazil, India, Saudi Arabia, Turkey and the UK, further indications to our install base for Patient SafetyNet which, as of now, has expanded to 365 hospitals and continues to rise quarterly. In addition to those customers and clinical milestones, we've launched a number of important new products last year including MightSat with PVI measurement and the Rx version of MightySat, patient Safetynet series 5000 with iris connectivity and MyView, Root with blood pressure and temperature measurement.

As we turn our focus to 2016, we are excited about the potential for this year. We have a substantial number of pending product clearances at the FDA, four products which have already received the CE mark.

Our outside US sales of these products have been encouraging, and we are looking forward to adoption of these new Masimo technologies in the US beginning with Root with blood pressure and temperature monitoring, which as we noted just received 510(k) clearance. Pending US launches, ORI code three regional/[verbal] oximeter and MightSat with RRP which is respiration rate from the plethysmograph.

Our newer products are not contributing to an acceleration of product sales growth. Sales of many products have been rising faster than our aggregate average, including rainbow, SpHb and Root, as we have already mentioned. Further evidence for adoption is seen in the sales of single patient use SpHb sensors for 2015, which rose by triple digits year-over-year.

For 2016, we have a confident outlook for additional gain, as we are well-positioned to realize increases in product adoption and selling efficiencies from two relatively new sources. First, we expect sales of Root to pull in sales of Masimo technologies beyond SET and rainbow. For example, our SEDLine brain function monitor along with our capnography and 03 regional oximetry monitors all work with Root and can be easily adopted by customers once the Root unit has been installed.

Secondly, we have instituted some important changes within our salesforce recently, which we believe should make our sales staff much more effective. We have realigned our blood management and SEDLine brain monitoring salesforce to now integrate their selling efforts, simultaneously, creating incentive for driving sales of SpHb, PVI, SEDLine, O3 and ORI when they are approved, based on Root through this team.

On a continuing basis, our earnings growth for 2015 exceeded our product sales growth due to well executed planned control of operating expenses, and an expanding gross margin adjusted for the year-over-year impact of FX rate. Throughout 2015, we were able to improve our gross margin, adjust for foreign exchange and the unique Q4 items, despite the normal annual ASP reductions, due largely to the significant progress we have achieved with our value engineering work over the past three years.

We view 2015 as a key turning point for Masimo in terms of our ability to demonstrate the gain in real earnings power that we can achieve. A major milestone in our ability to achieve such gain stems from our R&D prowess as exemplified from the recent introduction of sensors code named red diamond and called RD which improve upon our LNOP and LNCS sensor line. In fact, we have begun a transition plan for our LNOP sensors with the introduction of RD sensors.

The RD family of sensors is the first of a planned sequence of products which will provide patients with a much more comfortable and lower profile sensor. Our early market experience with these products have been overwhelmingly positive. We have already launched the SET pulse oximetry RD sensors and will soon roll out rainbow SET pulse co-oximetry RD sensors, and a rainbow light SET sensor that will, hopefully, enable rapid adoption of ORI due to it's expected cost and lower price point, as compared to rainbow sensors.

We believe these products, together, can not only improve care and patient comfort but have the ability over time to add to our revenue and earnings. I am also excited to report that in early 2016, we are launching the RAD-67 handheld pulse co-oximeter with the new Miniclip finger SpHb reusable sensor that incorporates our second generation SpHb monitoring technology. Improvements include reducing the time to take a measurement, improved SpHb tolerance to motion, and the repeatability between measurements.

This device will allow us to replace the Pronto-7 spot-check device. Additionally, we are launching the RAD-9 and the RAD- 97 monitors that will replace RAD-8 and the RAD-87 oximeters and move our core measurement platforms to the current instrumentation and UI technology with all of the features in our flagship products, the Radical-7 and Root.

For our long-term pipeline, we have a sizable collection of research and development projects underway today. The recent suspension of the medical device tax will allow us to accelerate the pace of some of these projects while initiating new groundbreaking products that are targeted at improving patient care and reducing cost of care. As we announced last quarter, we have a new plan to buy up to five million shares of our stock.

During Q4, as we have previously mentioned, we repurchased approximately 600,000 shares. In summary, we are happy with our results for 2015, and we're excited about the prospects for 2016. We are continuing to diversify our portfolio and geographic reach.

And as we head towards the last two years of our 10-year post- IPO plan, we are determined to continue to deliver on the financial leverage that we believe exists within the Masimo business model, while maintaining focus on our mission to reduce the cost of care and improve patient outcomes. With that, we will open the call to your questions. Operator?

(Operator Instructions)

Larry Keusch, Raymond James.

I thank you. Good afternoon, everyone.

Hello, Larry.

Joe, I am hoping you can just start with the guidance for 2016 and, specifically, the royalty and the inclusion of it. Back in 2014, obviously, you had [adopt roid] when facing a situation where there was some uncertainty besides to provide a range of scenarios. Obviously, you did not do that this time around. Can you walk us through, again, why you are assuming at this point that the royalty does stay in for the year.

Since the earnings call we had last quarter, we have had constructive dialogue with Medtronic. And while there is no certainty that a new agreement will be reached, today, at this hour, we believe that it's more likely than not that the royalties will continue until October 2018. Now, as Mark mentioned, if that changes, we will immediately notify our shareholders.

Okay. That's very helpful. And then, two other quick ones for you. In terms of the operating margin outlook over the next several years, again, you had been talking about mid 20% range. Again, I wanted to see if that was still the right way to think about it, and what the appropriate time frame is?

And then on Root, you obviously indicated that you had successful product sales this year. I wanted to make sure I understand the business model behind that. Are you actually selling that product, that monitor? Or are you placing it, or is it a combination of both?

I am going to answer the second question, and then I will let Mark answer the first. As far as Root, Root has three key features. First, let me answer your question. We are selling it. But the three key features is its open architecture, it's connectivity hub where we don't charge for the data, and the fact that we priced it as a tech product, which is $2000.

Given all that, we have decided not to give away Root. So sell those unlike everything else we pretty much had done to date, on those products we did sell some of it but, certainly, a greater percentage of Root devices that are being placed are being sold than being placed.

Okay. Perfect. Thank you.

Larry, to your question on operating income targets, yes, you're absolutely right. As we have been talking about for a number of years now, the goal is to certainly climb into the 20% range and, hopefully over the next couple of years, head towards 25% based on some of the leverage points that, I think, provided some visibility to in this past year. And I think with the guidance that we've provided today, suggests that that kind of performance is going to continue. And obviously, we're going to work very hard to make sure we not only achieve the numbers that we provided today but, hopefully, be in a position to do a little bit better.

Okay, thanks.

Thank you, Larry.

Tao Levy, Wedbush.

Thank you, good afternoon. In terms of the record shipment of new oximeters, I understand the record shipment in terms of the absolute numbers. But then you obviously take some out of the installed base, so you end up with, essentially, a similar number in your installed base as last year.

I guess the question is, I know part of it is an estimate on your guys' part in terms of how long current systems will be used in the field. But I'm trying to figure out whether the new monitors that are being pushed out of the new drivers, whether they generate more revenue than some of the older products that you have out there?

Okay. Those are all really good questions, Tao. Let me try to answer them as best as I can. First of all, you are right. The growth rate, not the number but the growth rate is the same, despite record shipments. And that's because we are assuming that anything that's 10 years old or older has been retired.

Obviously, we have -- it is a theoretical assumption. In fact, most likely, we are incorrect about that assumption. Information about the OEM partners of ours is that their products last about 15 years. And as you know, more than 80% of our drivers are OEM's products.

But then the second part of your question that do also the newer shipments drive more sensors or drive more revenue? The answer to that question is, yes, as well. Because early on, our OEM partners were not in the OR or the critical care beds. They were in the less acute sides, and the new drivers also have the revenue associated with rainbow parameters, as well as rainbow sensors.

I think I have answered both of your questions.

Yes, thank you. Very helpful. In terms of as you transition to the red diamond, I guess, platform, anything that's going to add potentially to noise in future quarters, whether it's additional inventory write-downs or maybe some disruption in how quickly product can get out the door to some of your customers?

I think we did a conservative job of really taking care of any of those potential write-downs, as Mark noted, $9.7 million of it. I think we should be covered. Obviously, as installed base converts, there will be patient table issues.

We think we've got a good strategy, and we think we are covered for that given some of the other parameters surrounding our business. No, we don't expect negative surprises. Hopefully, from here on, will be the same or positive.

Got you and you're not saying from a salesforce distraction, if they are spending more time changing out or making sure a customer is happy instead of going after new business?

That's possible, that's possible. Although, as a new -- so far the customers that have switched to the RD sensors have been very pleased. Usually you get the distraction is something goes wrong or there's a hiccup. Certainly, there is potential as we scale from low volume to high volume, a hiccup might occur. But we're not projecting distraction.

In fact, in the way we have set our business this year, we have accounted for some of that with some of our expectations and what they are going to be doing. Also, don't forget, have a really large clinical Specialist team, which are very nicely aligned with our salesforce team in the field. So we think some of that customer service will fall more on the CS team than on the salesforce.

Okay, perfect. Thanks a lot.

Thanks, Tao.

Brian Weinstein, William Blair.

Hello, Brian.

This is Matt Larew in for Brian this afternoon. How are we doing?

Hi, Matt.

A quick one on rainbow, obviously, a strong quarter. I'm just wondering if you can help outside of that large Middle East order, was this primarily or more driven by new customers coming in or existing customers really ramping up or adding indications?

A little bit of both, a little bit of both. We not only had new customers. We had existing customers expand. We had more sensor consumption, so I think it seems healthy out there.

And I think this study from Limoges that studied 6000 patients and shows really good results. Some of it isn't published yet so I can talk about it. The one part published in and ask abstract is 30-day mortality was down by 25%. I think that's huge.

I think as that study gets more attention from full manuscript release, I think the strength will continue.

Okay, thanks, Joe. Thinking about capital allocation here in 2016, can you give us an idea of anything you are seeing on the M&A front, whether there are different opportunities or if valuations have changed at all on the private side with some of the public comps coming down. So thoughts on M&A throughout 2016?

Yes, we are out there looking at a lot of things. Nothing huge but a few interesting, small opportunities that we are engaged in, assuming the due diligence goes well. We will hopefully add one or two new technologies, and some of the revenue to our business, which is not at this point assumed in the numbers we provided you.

Okay, thanks, Joe. One real quick one for Mark. I know that you don't hedge at this point but just wondering, given all of the growth we've seeing outside of the United States, is that something you have given any thought to moving forward? That will be all for me. Thanks, guys.

Sure, we looked at this carefully several times, and we have concluded that we spend real money trying to protect shadow money, and we don't like spending real money. I don't think we're going to change our strategy. Mark, do you want to add anything to that?

No, I think that's correct. I also think, Matt, as you know given where rates have gone over the last couple of years now, it's tough to know whether the opportunity to hedge has already occurred, and we should see a reverse of what we've seen in the last couple of years, which some are beginning to predict. It would actually be an inopportune time to set up a hedging strategy that would turn the headwinds that we faced for the last couple of years, instead of becoming tailwinds for us, they remain neutral. I think for right now, as Joe said, we are pretty well set in are non- hedging strategy approach.

Okay, great. Thanks, guys.

Chris Lewis, ROTH Capital Partners.

Hey, Chris.

Hey, guys. Good afternoon. Thanks for taking the question.

Nice day out here.

Sure is, always is. Joe, wanted to follow up on the previous M&A question. In terms of some of the potential assets you are looking at, can you elaborate a bit on the ones, particularly, that are already generating revenues? Give us a sense of the type of size of asset you think the Company's fit to take on at this point? Maybe type of technology and any type of timing details you may have on that?

I would rather not given we are not done with our due diligence, and I can't tell you whether they are going to come through. But what I can tell you is that we've acquired several businesses in the past decade from pure technology with no revenue like Andromed in Canada which we turned into rainbow acoustic monitoring to Phasein who had significant revenue, although small but real revenue and profit coming up in Sweden that gave us are capnography and airway gas monitoring.

In every one of these acquisitions, knock on wood, we have really done a great job of integrating so I think we have a formula. We have a good team of people, and if we were about to acquire a Company our own size, I would say we don't know how to do that, and we might mess it up, but the sizes were looking at our not much bigger than we have bought before. I think we should be able to handle it.

Okay, appreciate the color there. In terms of the guidance and the guidance methodology you have used for this year, I think a few quarters ago you talked about excluding some of these larger one-time orders that have historically been choppy from quarter-to-quarter when they come in in terms of timing and such. Have you taken that same type of conservative kind of guidance approach to the 2016 outlook in terms of some of those international tender orders coming in?

Yes, yes we have. We like how everything felt last year, so we decided to repeat the same process and strategy.

Okay. In terms of just end market, you talked about 2%, 2.5% patient admissions, little bit of a weaker flu season in the quarter. Can you give us a sense of what you have seen sp far this year about two months into 2016? How if those end-markets trended relative to your expectations? Thanks.

Mark, do you want to take care of that?

Sure, sure. I think it's interesting in the sense that as we alluded to before, this year's flu season was definitely light, as we completed Q4 and frankly, as we started into the new year. I also think over the last couple of months, there has been a resurgence of flu activity.

Most of the recent data we've seen suggests that this year is mirroring closely 2011, which was a year in which the flu season was late, so we have actually seen a bit of an up-tick in the last, I would say four weeks or five weeks of activity. That seems to be corroborated by some of the external data we have seen as well.

That could bode well for what -- at least versus what most people's assumption, I believe, which was that this rather weak flu season was going to continue. Right now, it is actually looking a little bit more positive, maybe take that it was in December and January.

I do want to say though, no on is coughing around Masimo. It might be ending.

That was a month ago.

One of the perks of living in Orange County, I guess. Thanks, guys.

Thanks, Chris.

Bill Quirk, Piper Jaffray.

Great, thanks. Good afternoon, everybody.

Hello, Bill.

I wanted to go to an earlier one, Joe, on Root. You guys had really nice success with this here in the still relatively early stages of launch. Help us think a little bit about -- because it carries a relatively low capital cost, help us think about where you guys think this could generate in terms of incremental pull through revenue with some of the adjacent products over the call it three- and five-year time frames?

Based on what we have seen, people our buying Root for three areas, the OR, the ICU and the general floor. In the general floor it is mainly the main monitor and it does act like a connectivity hub with the rest of the devices in the room to take to the EMR. In the OR, it becomes a specialty monitor that's really pulling in SEDLine.

And in countries where we have approval 03 and other parameters and capnography, but also people are beginning to look at that device in the OR again as a connectivity hub in a cockpit fashion with some of the technology we have like [kype] that allows everything in the room to get aggregated and displays how the clinician wants it. And then in the ICU it's a combination of additional parameters and a connectivity device for the devices in the room that needs to get connected to the EMR.

We see it in the next three to five years of, potentially, on its own, becoming a very useful device for networking everything in the hospital. But then, it's a natural, once it's in there, it's very inexpensive and seamless to add 03 [silver] oximetry or regional oximetry to add SedLine brain function monitoring and add capnography and airway anesthetic gas monitoring. Each of those are on their own, potentially, similar, if not bigger in sensor revenue annually for us.

So in three to five years if everything goes as we are sniffing out right now, it could help, maybe really increased adoption of these new parameters that we've created. Right now, as you know, we have very little market share or even though we have better products in each of those categories. This Root could help those become leading products.

Okay, got it. Another one for you here, Joe. You mentioned the rainbow light red diamond. Can you elaborate on that? Certainly, we are familiar with the formal rainbow sensors, but what's the light parameter piece of it?

Yes, as you know, the SET sensors have two LEDs, and rainbow has seven plus LEDs, somewhere between seven and 15 depending on measurement. Rainbow light will have four to six and will allow for not only the measurement of SpO2 pulse rate PVI, PI, but also ORI. ORI has been really well received by anesthesiologists because prior to integration and extubation, they fill up the patient with to four or five the amount of oxygen patient requires while they are fiddling with the airway.

Before ORI, they had no way of knowing when they were not doing the airway properly until SpO2 drops, which based on the studies we've seen could be 35 seconds to several minutes delay. So given what it might do for anesthesiologists and how they care about that that, if we could price rainbow light sensors not that far from pulse oximetry sensors, then instead of it being the way it is today, which is three to tenfold the cost of pulse oximetry sensors, it might increase the adoption and really help push a faster revenue growth opportunity from just our installed base, let alone new customers.

Joe, should we be thinking about the sensor costs being something in the neighborhood of 1.5 to 2 times that? Is that a reasonable assumption?

Yes, I think the cost is not that much more for light. For rainbow light, the cost of the sensor is maybe 1.5, to 2 times the SET sensor.

Okay. Appreciate it.

Thank you, Bill.

Ben Haynor, Feltl and Company.

Hello, Ben.

On the salesforce realignment, what proportion of the salesforce did that impact? I assume it's relatively small?

Yes, we had nearly 40 salespeople and 20 plus, 30, maybe clinical specialists out of about 300, 400 people total that this impacted. It's been relatively small.

Okay. That's exactly what I was looking for. And then, Mark, on the $6.1 million accrual that impacted Q4, I believe you said got reversed here recently. Presumably that would hit the Q1 numbers and be factored into guidance, or did I misunderstand that?

Yes, I don't think so. That was one of the adjustments, the $6.1 million I think you are talking about, the legal accrual, the re-accrual that I mentioned, the combination of $5.4 million plus about $700,000 in at least currently accrued interest. The total of $6.1 million, that's reflected as part of the four adjustments I alluded to that were booked in Q4 2015. There is no carry forward impact of that into 2016.

Okay. I misunderstood that that legal decision got reversed and would be impacting Q1?

No, the decision, as I said that was finalized late last week, which as you probably know, put us in a position where because that exposure existed at the end of the year, we actually were required to take the accrual for it in our fourth quarter numbers.

Okay, that makes sense. Sorry I misunderstood that. That's all I had a gentleman. Thank you very much.

Thanks, very much. We appreciate all of you joining us for the call today. We look forward to our next call which is not that far away. Have a wonderful spring soon. Thank you, bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect and have a good day.