MASI

Masimo Corporation (MASI)

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Masimo (MASI)

Q4 2010 Earnings Call

February 15, 2011 4:30 pm ET

Executives

Sheree Aronson - Corporate Vice President, Corporate Communications and Investor Relations

Mark de Raad - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Corporate Secretary

Joe Kiani - Founder, Chairman, Chief Executive Officer and Acting Chief Technology Officer

Analysts

John Putnam - Dawson James Securities

Lawrence Keusch - Morgan Keegan & Company, Inc.

Gregory Hertz - Citi

Pete Vitale

Joanne Wuensch - BMO Capital Markets U.S.

David C. Clair

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to Masimo's Fourth Quarter and Full Year 2010 Earnings Conference Call. The company's press release is available at www.masimo.com. [Operator Instructions] I am pleased to introduce Sheree Aronson, Masimo Vice President of Investor Relations.

Sheree Aronson

Hello, everyone. Joining me today are Chairman and CEO, Joe Kiani; and Executive Vice President of Finance and CFO, Mark de Raad.

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

With that I'll pass the call to Joe Kiani.

Joe Kiani

Thank you, Sheree. Good afternoon, ladies and gentlemen. Thank you for joining us. I am happy to report that Masimo closed out 2010 with another solid quarter driven by strong and increasing demand for our breakthrough Masimo SET and Masimo Rainbow SET technologies. Here are just a few highlights of our fourth quarter.

First, we achieved 14% growth in our core SET business and a 44% increase in Rainbow business. Growth was broad-based, with every major geographic region posting double-digit increases. In all, this performance lifted our total product revenue by 17%. And as Mark will explain later, the true growth was even stronger given that deferred revenues that we had in 2009 that we didn't have in 2010.

Second, we placed a record number of drivers again this quarter with a shipment of 41,800 units, excluding handheld devices. This trend is particularly important as an indicator of future recurring sensor sales in 2011 and beyond. Moreover, within an installed base that now totals 855,000 drivers, we have increased our global footprint by 18% since year end 2009 further strengthening our reach and competitive position. We believe that these results continue to demonstrate our ability to expand relationships with existing customers while attracting new customers through our breakthrough technologies that improve patient care and lower costs across a range of clinical settings.

And speaking of breakthrough technologies, in Q4, we continue to innovate, debuting Halo Index, a dynamic new wellness indicator. Once cleared by the FDA and proven through independent clinical studies, we expect Halo Index it to be an important new tool to inform clinicians of the current patient status and the status of the patient in the future. Halo Index is another example of our commitment to help automate and improve patient care.

And finally, given our strong financial performance, we rewarded stockholders with a special $0.75 dividend, the second in 2010 following a special $2 dividend paid in the first quarter. In total, the $2.75 in 2010 dividends reflect not only our dedication to enhancing stockholder value but also our healthy balance sheet and confidence in our long-term outlook.

In addition, we amended our settlement agreement with Covidien in the beginning of 2011. Under the new agreement, we extended our covenant to not sue them for their N600 Pulse Oximeter in exchange for a 7.75% royalty on their total U.S. pulse oximetry and associated product revenues for at least the next three years, effective March 15, 2011. The amendment allows Covidien to add certain new measurements. If they do, the revenue from such new measurements would also be subject to the 7.75% royalty rate. And should Covidien introduce noninvasive hemoglobin measurement, the royalty rate would increase to 11.75% from 7.75%. We also received a covenant from Covidien for all of our existing products released as of March 14, 2011, and some future products.

As you probably remember, since August 2009, we have indicated that investors and analysts should assume that the Nellcor royalties would end in March 2011, and that at the time, we would likely to incur additional legal expenses from the then expected IP suit against Covidien. Fortunately for all involved -- well, maybe except for some of the lawyers, this assumption did not materialize. We have also suggested for some time now that investors and analysts should expect a significant decline in the growth rate of our operating expenses, which was intended to mitigate some of the risk in the event the royalty payments ended .

Although we now expect a continuation of the royalty payments, we continue to believe it is time for Masimo to be much more prudent in how it invests in its growth. Therefore, most of the incremental royalty revenue will be reflected in our operating income. However, as indicated in our press release on January 31, we will also be retaining a portion of these new royalty revenues to reinvest in the business primarily to fund hemoglobin, SpHb, noninvasive hemoglobin and other key clinical studies and other selected activities all designed to enhance our future standing.

I'll talk more about our 2011 objectives and growth strategies later, but first, Mark will review our fourth quarter and full year 2010 results and discuss our 2011 financial guidance. Mark?

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