Masimo Corp (MASI) 2017 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Masimo's Third Quarter 2017 Earnings Conference Call. The company's press release is available at www.masimo.com. (Operator Instructions) As a reminder, this conference call is being recorded. I'm pleased to introduce Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations.

Thank you. Hello, everyone. Joining me today are Chairman and CEO, Joe Kiani; and Executive Vice President of Finance and Chief Financial Officer, Micah Young.

This call will contain forward-looking statements, which reflect Masimo's current judgment, including certain of our expectations regarding fiscal 2017 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 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 Investors section of our website. I'll now pass the call to Joe Kiani.

Thank you, Eli. Good afternoon, and thank you for joining us for Masimo's third quarter review. As we enter the final months of 2017, we are gratified to be in the final stage of delivering on the commitments we made 10 years ago after our successful initial public offering. Our results this quarter were once again above expectations as we realized the benefits of geographic diversification and a broadened innovative product portfolio.

The growth in product revenues was the fastest rate this year at 13%, while our adjusted earnings per share grew at a rate which was double the revenue growth rate, no matter how you look at it, with or without the stock options exercise gain. We also achieved one of the best quarters in our history in terms of winning new contracts with prominent hospitals and hospital systems, as more hospitals recognized the superior capabilities of our technologies to improve their patient care and reduce their costs.

The strength in our business is exemplified by the fact that for the second quarter in a row, we realized more than 50,000 oximeter shipments, as shipments rose by over 11% versus last year to reach 51,100 oximeters to yield a new estimated installed base of 1,566,000 oximeters, excluding our handheld and finger pulse oximeters. This is clear evidence that both our direct and OEM business with Philips, as well as many of our other excellent OEM partners work, is bearing fruit for all: them, us, hospitals, clinicians and most importantly, the patients.

Before we move on to the details of our third quarter results, I'd like to invite you all to extend a warm welcome to our new CFO, Micah Young, who joined Masimo just 2 weeks ago. Micah has become fully immersed in Masimo business activities and attended the American Society of Anesthesiologists conference in Boston last week, as well as meeting some of our investors in Boston with me. As you know, Mark de Raad will be retiring at the end of this year after more than 11 years at Masimo, and Mark is with us today for some closing comments later. I'll discuss some additional business updates later in the call as well.

Now I'll ask Micah to review our Q3 results in more detail and provide you with a final update on our 2017 financial guidance. Micah?

Thank you, Joe, and good afternoon, everyone. For the third quarter of 2017, we reported total revenue, including royalty and other revenue, of $193.7 million, which reflects growth of 15.6% or 15.4% excluding the impact of currency. Our product revenue grew approximately 13% on both a reported and a constant currency basis to $181.3 million for the quarter. This represents another quarter of double-digit growth, which was driven by strong performance across our international markets, complemented by increased adoption of our newer technologies.

Rainbow product revenue grew 20% to $21.5 million, due primarily to continued strong revenue from Saudi as we began to ship against the most recent tender award. SpHb revenue grew 72% to $10 million for the quarter, with the strength, again, related to our Saudi business. Nomoline capnography, O3 cerebral oximetry and SedLine Brain Function Monitoring, along with the Root connectivity platform, delivered aggregate growth of 34% for the quarter.

Our worldwide end-user or direct business, which includes sales through just-in-time distributors, grew 16% to $159.1 million. Our direct business represented approximately 88% of total revenue -- total product revenue in the quarter versus 86% in the prior year period. While OEM unit sales grew, our OEM revenue declined approximately 3% to $22.2 million, representing 12% of product revenue as compared to 14% in the prior year period.

By geography, our U.S. product revenue grew 4% to $119.3 million compared to $114.6 million for the third quarter of 2016. Our international product revenue grew 36% to $62 million or 35% on a constant currency basis, driven by strong contribution from our Saudi tender and solid growth across the rest of the Europe, Middle East and Africa region. Based on these strong results, international revenue represented approximately 34% of total product revenues in the quarter, as compared to approximately 29% in the prior year period.

Royalty and other revenue came in at $12.4 million for the quarter compared to $7.3 million for the third quarter of 2016. In the current quarter, this line includes approximately $4 million of Philips NRE revenue, which was approximately $600,000 more than we had expected due to some slight shifting of product deliverables. In addition, our royalty revenue increased $1.1 million to reach $8.4 million for the quarter.

Now let's turn to the rest of the P&L. For the third quarter of 2017, total gross margin including royalty and other revenue was 66.4% as compared to 65.7% in the prior year period. Our product gross margin for the third quarter was 64.5% compared to 64.1% in the prior period. Although we saw some nice year-over-year improvement, our product gross margin was below our expectations due to higher-than-expected placements of monitors with customers, which caused amortization cost to be higher than planned.

Over the long term, these large monitor placements are expected to result in higher sensor and other related product revenues. Overall, we are very excited for the opportunities we have in front of us to drive further gross margin expansion, as we scale our manufacturing capability in our new facility in Mexico and execute the RD sensor line plan.

Also, please note that our total cost of goods sold includes an expense of roughly $650,000 of project expenses related to the NRE revenue from Philips. As reported, our selling, general and administrative expenses were $65.4 million in the third quarter or 33.8% of total revenue, decreasing 70 basis points from 34.5% in the prior year period.

Research and development expenses totaled $15.3 million in the third quarter compared to $15.7 million in Q3 2016. R&D expense was 7.9% of total revenue for the quarter versus 9.4% in the prior year. The slight decrease in spend was primarily driven by a delay in some project and other clinical trial-related expenses, which have shifted now into the fourth quarter.

In total, operating expenses were $80.7 million in the third quarter or 41.7% of total revenue, decreasing 220 basis points from 43.9% in the prior year period. Our operating margin of 24.8% reflected an improvement of 300 basis points versus the 21.8% in the prior year period, largely due to the benefits of scale from our 13% product revenue growth, higher gross product margins and lower operating expenses as a percentage of total revenue.

Moving further down the P&L. Nonoperating income for the quarter was approximately $300,000 compared to nonoperating expense of approximately $500,000 in the prior year period. During the third quarter, we realized net interest income of approximately $750,000 and a $450,000 FX remeasurement loss. This compares to prior year interest expense of approximately $900,000, offset by a $300,000 remeasurement gain.

Our third quarter 2017 tax rate was 18.7% compared to 23% in the prior year period. The Q3 2017 tax rate included a $4.9 million benefit from the new stock option accounting rule as compared to a $2.6 million tax benefit in the prior year period.

Our average shares outstanding for the quarter were approximately 56.2 million, up from 53.6 million in the year-ago period. We repurchased approximately 533,000 shares during the quarter, mostly towards the end of the period, so that the benefit of the reduction in shares is not entirely visible in our results this quarter. The 4.9% increase in our weighted average share count over the prior year period is due to both the impact of stock option exercises and the dilutive impact that a higher share price has under the treasury stock method.

Third quarter GAAP net income was $39.2 million or $0.70 per diluted share compared to $0.52 in the prior year period. The $0.70 per diluted share includes a $0.09 benefit related to stock option exercises. So without that benefit, Q3 2017 earnings were $0.61. This compares to a net $0.05 benefit in the prior year. So without that benefit, Q3 2016 earnings per diluted share were $0.47.

Our days sales outstanding was 56 for the quarter, up from 52 days at the end of the second quarter of 2017. The increase in DSO was primarily due to the strength of our international business, which has a longer collection cycle. Our inventory turns were 2.6 for the quarter compared to 2.9 at the end of the second quarter of 2017. Inventory rose by approximately $11 million from the Q2 level, as we increased sensor stock in preparation for the traditionally strong seasonal volumes in the fourth quarter.

Now I'd like to discuss our final update for fiscal year 2017 financial guidance, which is based on the best information we have available to us. Note that we are providing this updated financial guidance in an environment that continues to be characterized by significant uncertainties related to overall general business and economic conditions, including the future of the Affordable Care Act, as well as potential changes in U.S. corporate tax policies under consideration in Congress.

With that said, here's our updated 2017 financial guidance. We are now projecting total revenue, including royalty and other revenue, to be approximately $774 million versus prior guidance of $769 million. This new outlook includes $736 million in product revenue compared to prior guidance of $732 million. We are also projecting royalty and other revenue of approximately $38 million as compared to prior guidance of $37 million, which includes $5 million of NRE revenue from our Philips partnership in the current quarter -- or in the current -- new guidance versus a prior estimate of $4 million.

We are also projecting total gross margin including royalty and other revenue to be approximately 66.6%. We now expect full year product gross margins to be approximately 65%, down slightly from our prior guidance of 65.2% due primarily to higher amortization costs associated with a record amount of equipment that we have placed during the first 3 quarters of 2017. We expect our total annual operating expenses for 2017 to be approximately $329 million, which is in line with our prior guidance.

We are estimating our GAAP tax rate at approximately 12.3% for the year, which assumes an effective tax rate of approximately 31% in Q4 2017. Based on these revised estimates, we are now projecting our full year GAAP EPS to be $2.95, up from our prior estimate of $2.80.

With that, I will turn the call back to Joe.

Thank you. Thank you so much, Micah. We are happy to report double-digit growth product revenues for Q3, and more than double that rate for EPS growth. As Micah described, our third quarter results have led us to increase our full year guidance for the third time this year. Our ability to realize the potential leverage in our business that we foresaw 10 years ago is rewarding, as we see our operating profit margin climb to nearly 25% in Q3.

In Q3, we had the best contract booking quarter in our history. We won another top 20 U.S. News & World Report hospital as a new customer, NYU, while also winning a major contract with St. Luke's Hospital in Bethlehem, Pennsylvania. In addition to a strong quarter for gaining new customers, we also had our biggest contract renewal quarter ever, including Kaiser renewing our pulse oximetry agreement, which we are very proud of.

Our Q3 oximetry unit volume of 51,100 units is an important leading indicator for a healthy future for our business. A critical factor in achieving this new record level is our expanding relationship with Philips, which is presently focused on providing rainbow SET oximetry to our mutual customers. Over the next 2 years, our partnership efforts with Philips will include availability of additional Masimo technologies, such as O3 organ oximetry or cerebral oximetry, SedLine Brain Function Monitoring and Nomoline capnography in Philips monitors.

During Q3, we launched some noteworthy new products including a compact Rad-97 monitor into the U.S. market; our RAS-45 acoustic respiration sensor for pediatric and adult patients; and our Trace software for charting and analyzing oximetry and other data from our monitors.

As I mentioned earlier, Mark de Raad will be retiring from Masimo at the end of this year after joining us 11 years ago. His contributions to Masimo are too numerous to mention on this call now. But suffice to say, Mark has played a critical role in making Masimo into what it is today while positioning us for a great future. I hope that you will join me in wishing Mark a retirement with more time to relax and less time estimating taxes.

So here's Mark to offer some closing comments to everyone. Mark?

Thanks, Joe. I'm happy to report that my 40th and last earnings call with Masimo, once again, includes the type of good results that we have consistently reported, especially recently. While I will certainly miss our quarterly discussions, I'm confident that Micah will be able to continue the Masimo tradition. My time at Masimo over the past 11 years has been an exceptional experience, and I'd also like to thank Joe for providing me with a wonderful opportunity to be a part of Masimo, its growth and the impact that Masimo has had on patient care. I wish you all a fond farewell, and I will be looking forward to Masimo's continued success.

Thank you so much, Mark. As excited as we are to have Micah to join us, we are equally going to miss you, Mark.

Thank you, Joe.

Thank you for all that you've done. As we enter the final few -- or maybe more precisely, 2 months of 2017, we are happy to be well-positioned to deliver the results we committed to delivering 10 years ago. We will exit the year with more potential for increasing our scale than at any point in our history. Our ever-broadening innovative product portfolio, combined with a steadily increasing body of clinical data showing the benefits to patients from the use of our technologies, should enable us to continue growing our impact to health care. More than ever, we remain committed to our mission to improve patient outcomes and reduce the cost of care and our guiding principle that have helped us steer Masimo to what it is today.

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

(Operator Instructions) Our first question comes from the line of Tao Levy with Wedbush.

Mark, congratulations on your retirement. I'll start off there, and welcome, Micah.

Thank you.

Thank you.

So maybe we could start off with -- if you look at the Saudi tender order, how large is that and how predictable is that over the next few quarters?

Okay, sure. We are not in a position to give out the exact number, but we do believe, short of some catastrophe, that business should repeat and perhaps grow in the coming year.

All right, okay. And historically, the international business has been a little bit lumpy, and that's kind of why I was asking about the Saudi contribution, because, obviously, that's been a big growth driver for you guys in the last couple of quarters. And so how should investors think about maybe the international business might be a little more predictable than we've seen in the past, is that possible?

I think so, Tao. In fact, coming into the new year, we had predicted a softer census in the U.S. and we're relying more heavily in our international business, including Saudi. So we are getting what we expected, so I don't believe there's a surprise here. And last year, we had an unusual year with Saudi because for the first time I think in the history of, I guess, the West doing business with Saudi, they changed what they were doing. They -- with a new king and a prince, they decided they were going to cut back spending by 70% to 90% on every company they were doing business with until they kind of got their arms around what was going on with the oil prices and how they were going to become more oil independent. So that was unusual last year. It was not expected. Saudi has always been very predictable. I think we've gone back to a mode of predictability with Saudi Arabia.

Great. And then just a couple more. You talk about how the number of sockets or oximeters that you ship should be viewed as a leading indicator. So I was wondering if the last few quarters, geographically, do you have a sense of where those sockets are being installed or placed? Is it more international than U.S.?

Well, because of our direct business in places like Saudi, international has seen some growth. But the bulk of our volume comes from our OEM business, not direct from the installed base perspective. And from all that I know, that growth in this quarter has mainly come from the U.S., as Philips, who has had between 50% to 60% market share in the U.S. and abroad, is shipping more and more Masimo in the U.S. marketplace and other parts of the world.

Got you. And then just the last question. When you ship product to Philips, in the past, you've talked about how that has increased nicely since you signed the partnership agreement. Does that get recorded in international revenues or domestic? And that's it.

Sure. I believe the OEM business reports the revenue depending where the company is based out of. And I think Philips is based out of the U.S. I think it comes from the U.S. revenue side. Now if you look at our OEM business, unit volume-wise, we had a nice increase quarter-over-quarter, as Micah said, but revenue decreased. And that's -- and it actually has more to do with some of the consumables sales that were going through OEMs last year that did not happen this year. Whether that's because of the slower census that we foresaw in the U.S. or maybe we took some of that business direct, is not clear to me at this point. But what I can tell you is that the drivers that we're seeing are coming in some high-quality institutions, where Philips and Masimo and other OEMs are placing them in and not parts of the world where either we're not going to get the types of sensor volume per socket we expect or potentially not even at all.

And our next question comes from Rick Wise with Stifel.

Just -- you highlighted the product gross margins were less than expected and it sounds like for a good reason, as you suggested, because of the greater placement of monitors and related amortization. But thinking back to the Analyst Day, clearly, the message was gross margins are going to improve in general, product gross margins specifically, because of volume, because of mix, because of cost reduction. How do we think about all the moving pieces and where the product gross margins go from here over the next few quarters, 12 months, et cetera?

Great question, Rick. Nothing's changed with our thesis. We expect a 0.5% increase year-over-year with our gross margin expansion from all the factors, including RD line rollout as well as increased sensor revenue and volume from our Philips agreement. So that should not change. We are seeing some major deals with heavier equipment or monitor placements than we had anticipated. So that has caused some temporary hit to us. Also, if you remember, given the positive cash flow we received from the stock option exercise gain, we increased the speed of scaling our manufacturing facility, a second manufacturing facility in Mexico, which then also kind of kept gross margins in check in Q1, but I think these are all temporary. I think the broad macro view of things is that we anticipate gross margins improving 0.5 percentage point annually.

Great. And looking -- and I know you're not providing 2018 guidance yet, but this was a good quarter. Many moving pieces here, but you're certainly locked up to your 8% to 10% growth goals looking good. Does this set us up for an '18 just conceptually, (inaudible) you know, that certainly at the upper end of your sort of organic growth range and potentially better, do you feel like -- are you feeling more confident about that kind of a setup as you look ahead?

Rick, we still believe 8% to 10% growth rate annually for the foreseeable future is attainable. We, of course, are going to do everything we can to beat that rate. Some of the new products we've introduced, like Nomoline capnography, SedLine Brain Function Monitoring and O3 Regional Oximetry have -- are growing faster than we had anticipated and our international business seems to be growing faster than we anticipated. We also have invested in more countries in our direct strategy, and that should bear fruit. But that's kind of all part of what we think should be an 8% to 10% growth rate that we can rely upon, and we'll do everything we can to hopefully beat it, like we have this quarter.

Two last quick ones for me. Should I assume that weather and hurricanes didn't have an impact since you didn't call it out? And maybe for Micah, I mean, Mark has been fantastic, as we all know. But any professional is going to bring some new perspectives or thoughts to the job. What -- Micah, how should we think about your priorities or perspectives as you take over this critical role at a very exciting time?

Thank you, Rick. Before Micah answers that, let me answer the first part of your question or maybe what you were saying regarding the hurricane. We actually do think the hurricane did impact our hospitals census, some of our hospital customers, like HCA. So it did have an impact, we think, on census. But fortunately, because of stronger international business, we didn't feel it. As I said earlier, without the hurricane, we had anticipated following 2016, where we saw unbelievable increase in census, that there was a likelihood of a slowing down, especially in light of uncertainties regarding Affordable Care Act. But yes, hopefully, in the new quarter and the new year, census should get better, because hopefully, no more hurricanes and more normal rate of people going to hospitals for their elective surgeries. Micah, do you want to comment on the second part of the question?

Yes, so just to answer your question, Rick. So for me coming in, right now, as Joe mentioned even in his prepared remarks, I'm really just diving deep into the business, trying to learn as much as I can. Mark has done a tremendous job of setting the stage and building out a financial organization and just getting more equipped financially to position this company where it is today. And based on my prior experiences at prior medical device health care companies, I've had the same similar focus as Mark and Joe have here with trying to drive, not only top line growth, but also profitability improvement over time. And I think that that's something that I'm going to continue to drive with Joe and the team, to really drive that operational focus on the business. I've been very, very deeply involved operationally in my prior companies, and that's something I'll continue on where kind of Mark left off with the executive team. It's a tremendous executive team here, and I'm excited to work with them. I think we got some great opportunities in terms of gross margin improvement that we can make as we continue to execute on the RD sensor line project, as well as continuing to vertically integrate that new facility in Mexico. So this is some great opportunities ahead and I think there are other things that we can do to get into operating expenses of the business and make some improvements there as well, so...

Thank you, Micah.

Our next question comes from Larry Keusch with Raymond James.

So I just wanted to touch on the SpHb sequential revenue growth. Is the right way to think about that, that the majority of that sequential growth is due to the Saudi contract?

No, no. That is not the case. It's due to our international growth, which is very strong, Europe, Middle East, Africa, Asia, Latin America, Australia. So no, we had a really nice international growth. And Saudi being part of EMEA, helped. And that's why we called it out. It was a nice piece of business. But no, that is not the case.

Okay. That's great color. And Joe, did I miss it, did you guys actually provide a sense of how big the Saudi revenues were in the quarter?

No, we have not provided the actual revenue. We don't think we're in a position to do that. But no, I can assure you, excluding Saudi, the business internationally grew very nicely.

Okay, great. And just 2 other ones. Just on the R&D side. I think you had indicated in the 2Q that you had expected that to step up in the second half of the year. And I know you called out some delays, but how do we think about R&D spending now just going forward as you move, I guess, through into the fourth quarter? Or do you anticipate that ramps up in the fourth quarter?

We do. We do. In fact, if you look at our numbers, the way we guided, we guided our beat on the revenue fully for the year. We guided our earnings beat $0.02 shy for the full year, because we think we'll spend that money we didn't spend in Q3 in R&D in Q4. And as you know, R&D is the one place at Masimo that has consistently delivered. So we're going to keep feeding it and we're not going to slow down our R&D going forward.

Okay. That's great. And then last one, Joe. So on the last call, specifically, you talked about when you were asked about M&A, you were talking about looking at markets that were $3 billion to $4 billion in opportunity and growing at or near double-digit rates. Obviously, there aren't a tremendous amount of those types of markets that are sitting out there. So can you give us any updated thoughts around how you might be thinking about M&A directionally and where you might be going?

Sure. Sure. I think broadly speaking, as you know, we believe we have an amazing company, organically growing it, that's built on very solid foundation of clinically superior products with sensor revenue franchise. That kind of mix of business, I don't know if you can get anymore fortified from problems unforeseen. But at the same time, as you know, over the next 5 to 7 years, we hope to build even a greater company than what's in our own trajectory. And as we look at that, we talked about how we have 2 goals. Not only acquiring businesses that will hopefully get us to where we want to get to in 5 to 7 years, but also diversifies Masimo so that in the unexpected case of disruptive technologies in our current space, like Kodak had in their space, we're not left with that Kodak moment I joke about. But the businesses that, at this stage, we're capable of acquiring without diluting what we already know we have at hand, requires us to have kind of a condition that are hard to find, which you said very well: Big market, growing double digits, yet be a little bit of a fixer-upper so we can afford to buy it without having to dilute our company for. So having said that, we've had -- we're looking constantly at companies that come to us and companies that we go after. And in the summertime, there were actually a couple of companies that I had on my radar that I thought fit that bill. One of those companies we ended up not moving forward with. As we completed our due diligence, we -- some things changed with our assumptions as we went in. And right now, we probably have one, like the ones I described to you. Whether that pans out or not, who knows. But we're going to keep looking. But we're also not going to act in haste or buy something that doesn't meet the full parameters that I've laid out for you in the past. So -- and that might mean we may not buy anything -- or buy things like we're buying in the past, which has been technology tuck-ins and more in line with what we're doing today.

Right. And is it still the right way to think about it that to the extent you go after something that's a little bit on the larger side, again, you're not really focused in on your current silos, if you will, that you want, to use your words, diversify outside of what you've got today.

That's correct. But I think the only thing I want to correct for you, right now, we're not anticipating getting something our size or that big. We're looking at buying something that we could turn into our size in time as we optimize our earnings for 5 years from now. So the parameters of such has got to be something that we think we can go in and fix and turn into a shiny beautiful house like the one that we have in this neighborhood. But we have to do it within 5 years, otherwise it won't fit in with our current 5- to 7-year strategy.

And our next question comes from the line of Bill Quirk with Piper Jaffray.

First and foremost, Mark, congratulations. And Micah, welcome to Masimo. You picked a good one.

Thank you.

Thanks, Bill.

Thanks, Bill.

First question on U.S. growth. I think I heard correctly that was 4% in the quarter. Correct me if I'm wrong, guys. I think you had a fairly tough comp. Although it did look like it slipped a little bit sequentially, just curious if there's any puts and takes there, other than simply the comp?

What do you mean by that, Bill? I'm not sure I understand your question.

I think the comment in the prepared remarks was 4% U.S. growth, unless I heard something incorrectly, whereas I think it was an 8% number last quarter?

Yes, thank you. Yes, yes, you're asking about our growth in the U.S., the 4%. Yes, we did have a tough comparator last year because last year, it was the biggest census increase we had seen, really, for the whole time we've been public. So yes, that was a tough act to follow. But yes, nothing -- everything is positive otherwise.

Okay, got it. And then, Joe, you brought up a couple of deal renewals, Kaiser in particular, that you called out. Can you just maybe update us on overall sensor pricing? Is it still trending relatively stable? Obviously, it's been a couple of years since we've seen any issues around refurbished sensors and such. I'm just curious what the overall update is there.

Sure. We are seeing price stability. As you may know, when we launched Masimo SET, it was 30x to 100x better than the competition, yet we offered it at 30% below the competition. And as time went forward, the competition began matching and then they began dropping. For a while we were matching. We finally said, "Hey, wait a minute. Stop here." We have a very valuable clinical tool with Masimo SET oximetry. It's been proven to improve care and reduce cost of care, and there's a fair price that we think pulse oximetry from Masimo should be priced at. We've set that threshold. We've not dropped from that line. And as a result, we instituted that about 3 or 4 years ago, even though our competition, as they compete against us in accounts, not the ones they're not competing for, but as they compete with us in accounts, they sometimes offer prices that are maybe 30% to 40% below ours, and yet we win the business due to the clinical superiority of our technology as well as the service that we give.

Got it. And then last one for me is on Philips. I think Tao touched on it earlier, but we've seen a couple of quarters now about 50,000 sockets in the quarter. Officially, this is ahead of the launch with Philips. And so help us just think, I guess, directionally, guys, once we formally get into the partnership in the fourth quarter, could we expect to see that socket number climb even higher?

Sure. Sure. And you're right, Bill. I think we are ahead of where we expected to be volume-wise with Philips. But compared to our other OEMs, and now that we have a similar relationship with Philips, like the other OEMs, there is still a fraction of where they need to be or they should be naturally, not because of contract, just because of how customers order. So because of that, we think there's much more to come. Because we're ahead of schedule, I'm not going to say you're going to see the same kind of growth next year. But I can just tell you we think overall, as we marched from 30,000 to 40,000 and now to 50,000, we'll be making the march to 60,000 boards a quarter over time.

And our next question comes from Brian Weinstein with William Blair.

This is actually Andrew Brackmann, on for Brian today. So you guys said capnography, O3, SedLine and Root were up 34% in the quarter. First, how big is that in dollar terms and what's the outlook for those businesses? And then similarly, what is the outlook for the SpHb business, with that being up 72%?

Sure. So we haven't given out the exact numbers for those. But the outlook for organ oximetry, for brain function monitoring and capnography is somewhere between $500 million to $1 billion a year, so -- and we are pretty much just starting in those businesses. So we have a long ways to go. And then as far as hemoglobin, hemoglobin is a new -- continuous noninvasive hemoglobin, is the new missionary work that we're after. We've been at it for 10 years now. And while we're happy with what we've seen, we think this is probably less than a couple of percent compared to where it needs to be. And so it's got much, much more to go. We hope one day, hemoglobin would be about a $1 billion market.

Got it. And then I just wanted to follow up on the M&A commentary. It sounds like you guys would be willing to do a dilutive deal. First, am I hearing this correctly? And then would you be able to quantify how much dilution you would be willing to take for a deal?

Yes, you're right. We are willing, if necessary, to do a dilutive deal, as long as we believe it will be a very positive deal for us 3 to 4 years down the line, from an earnings perspective. And as far as how dilutive, we don't mind playing with our cash flow, but we don't want to go much beyond that. And of course, not all of it, because we have our own operating business to go and we don't want to shock the system too much. But yes, we are willing to be buying like a private company does, thinking long term rather than short term.

Got it. And then just one personnel question associated with that. Would you mind talking who internally is running your M&A process?

Yes, today, it's a team of people led by our GC, Tom McClenahan, Eli Kammerman and Paul Jansen. We are actually looking for a head of M&A, and we're in the interviewing process.

Thank you so much, all, for joining us. Our apologies that we did it on Halloween. I hope you guys will have a great evening with yourselves and your families. Thank you so much for joining us.

Thank you.

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