Q1 2011 Earnings Call
May 03, 2011 4:30 pm ET
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
William Quirk - Piper Jaffray Companies
Brian Weinstein - William Blair & Company L.L.C.
John Putnam - Dawson James Securities
Lawrence Keusch - Morgan Keegan & Company, Inc.
Joanne Wuensch - BMO Capital Markets U.S.
Gregory Hertz - Citigroup Inc
Previous Statements by MASI
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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 risks and uncertainties that could cause actual results to differ. 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 will find these in the Investor section of our website.
With that, I'll pass the call to Joe Kiani.
Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us for an update on our first quarter 2011 financial and operational performance.
Here are some highlights. Masimo hit a new milestone in the quarter with product revenue exceeding $100 million for the first time. This performance reflects an 18% increase versus the same quarter last year, as we experienced increased demand for our core SET and Rainbow technologies on a global basis. We believe that the strong Q1 sales are due to a combination of the cyclically strong first fiscal quarter and the robust driver placements in 2010.
Our strong driver shipments continued into 2011, as we shipped 43,100 new Masimo SET and Rainbow SET drivers into the market, which represents another new quarterly record high. We now estimate our global installed base to be approximately 890,000, up 18% compared to the year-ago quarter.
Our strong quarterly sales and driver shipments, which remain well above the industry's mid-single-digit growth rates, underscore the fact that our breakthrough technology continues to attract new customers, and therefore, we continue to increase our share of the worldwide market.
And consistent with our commitment to shareholders, we reduced our operating expense growth by over 50% to just under 8%. This, along with our new lower effective tax rate, helped our earnings per share rise 25% to $0.30 versus adjusted Q1 2010 EPS of $0.24, which excluded certain one-time items.
Next, Mark will review our financial results in detail. After his remarks, I'll provide a quick strategic summary and then open the call to questions. Mark?
Mark de Raad
Thank you, Joe, and good afternoon, everybody. First quarter 2011 total revenue rose 14% to $113 million versus $98.8 million in the year-ago period. Growth was driven by an 18% rise in product revenue to $101.6 million, due primarily to higher sales of sensors and other consumables.
Product revenue growth was partially offset by an 11% decline in royalty revenue to $11.5 million, resulting primarily from the change in the Covidien royalty rate effective March 15, 2011.
As you know, we announced earlier this year that we had amended our agreement with Covidien, which was set to expire on March 14. Under the new agreement, we will continue to receive royalty payments equal to 7.75% of Covidien's U.S. pulse oximetry sales through at least March 15, 2014.
Our first quarter SET revenue grew 17% to $94.1 million, demonstrating our strength in both U.S. and international markets and across both acute and alternative care channels.
Rainbow revenue was up also nicely in the quarter, rising 39% to $7.4 million versus $5.3 million in the first quarter of 2010.
We saw -- year-over-year increases in all Rainbow product categories, including licensing, consumables, boards and instruments.
Importantly, we saw a strong year-over-year growth in total hemoglobin revenue, which was partially offset by ongoing headwinds in our Rad-57 sales, which continue to be impacted by the lack of state and local government funding.
Our end user or direct business, which includes sales through just-in-time distributors, grew more than 25% in the first quarter to $85.3 million versus $68 million one year ago. This direct business represented 84% of product revenue versus 79% in the year-ago quarter, while OEM revenues accounted for 16% of product revenue in the quarter versus 21% in the year-ago quarter.
First quarter 2011 OEM sales were down 9% to $16.3 million from $17.8 million in 2010. Importantly, although the volume of OEM board sales continues to rise over the prior year period, indicating that our technology continues to be delivered through our OEM partners, we are seeing a lower amount of sensor shipments to the OEM channel. This is due partly to the fact that fewer of our OEM partners are reselling our sensors.
The good news is that, as we see lower OEM sensor sales, the same sensors are being moved to our other direct channel, as evidenced by some of the strong growth in both our U.S. and OUS regions. Despite the slightly higher ASPs that are generated on these sensors through our direct channel, the significant increase in our year-over-year total product revenue was due to significantly increased total sensor unit volumes.