MASI

Masimo Corporation (MASI)

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Masimo Corporation (MASI)

Q2 2010 Earnings Call Transcript

August 3, 2010 4:30 pm ET

Executives

Sheree Aronson – VP, IR

Joe Kiani – CEO & Chairman

Mark de Raad – EVP & CFO

Analysts

Bill Quirk – Piper Jaffray

Joanne Wuensch – BMO Capital Markets

Mayank Gandhi – Cowen

Gregory Hertz – Citi

Brian Weinstein – William Blair

Matt Dolan – Roth Capital Partners

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the Masimo Corporation’s second quarter 2010 earnings conference call. The company’s press release is available at www.masimo.com. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

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

Sheree Aronson

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

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

With that, I will pass the call to Joe Kiani.

Joe Kiani

Can we just check to make sure everyone can hear us? (inaudible) someone can't. Excuse me one moment; we are just going to make sure people can hear us. Is our moderator on the phone?

Operator

Yes, sir, I am here.

Joe Kiani

There is a delay. Okay, we are fine. Okay. Thank you. Thank you very much. Well, good afternoon. Thank you, Sheree, and thank you, ladies and gentlemen, for joining us today. Masimo achieved solid results with total revenue up 20% making this Masimo’s first ever $100 million revenue quarter.

Performance was driven by a 26% rise in product revenue including a 60% increase in Rainbow revenue. This performance comes despite a still challenging economic climate and reflects double digit sales growth both in the U.S. and internationally. What’s more, shipments of Masimo SET and Masimo Rainbow SET units were up 35% to 36,700 units, excluding handheld devices. Overall, these results reveal momentum across key fronts.

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

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

Third, our powerful technology offering and expanded sales organization are delivering sizable increases in our installed base. Remember that our drivers entered the market either through the sale or placement of our bed-side monitors or through our OEM partners, who incorporate them into their multi-parameter devices. As of the second quarter, we estimate our global installed base at 789,000 units, up 17% from the year ago quarter.

Rising driver placements indicate that more hospitals are continuing to chose our technology and pave their way for higher recurring sensor revenue in the future.

Fourth, we are delivering on our innovation promise. The second quarter marked an important step forward with the global launch of Rainbow Acoustic Respiration Rate Monitoring or RAM, and the global limited market release of Pronto-7. Our new hemoglobin spot check device is now available in most countries on a limited market release.

Customer reaction and feedback to both products have been very favorable. To ensure that we continue our track record of introducing breakthrough noninvasive monitoring technologies, we deployed more than 10% of our product revenue to R&D again this quarter.

In addition, a few weeks ago we announced our entry into the brain function monitoring market with the acquisition of SEDLine, which we are now in the process of integrating. I will talk more about the quarter in a few minutes, but first Mark will provide a more detailed overview of our financial results. Mark?

Mark de Raad

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

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

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