Masimo Corporation (MASI)

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Masimo (MASI)

Q2 2011 Earnings Call

August 09, 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

Sara Michelmore - Brean Murray, Carret & Co., LLC

Lawrence Keusch - Morgan Keegan & Company, Inc.

Unknown Analyst -

Matthew Dolan - Roth Capital Partners, LLC

Pete Vitale

Joanne Wuensch - BMO Capital Markets U.S.



Good afternoon, ladies and gentlemen, and welcome to Masimo's Second Quarter 2011 Earnings Conference Call. The company's press release is available at [Operator Instructions] I am pleased to introduce Sheree Aronson, Masimo's 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 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'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, and thank you for joining us for an update on our second quarter 2011 financial and operational performance. Our product revenue grew 17%, driven by a 24% increase in our direct business and a 26% increase in our Rainbow revenue.

In addition, we shipped 37,300 new drivers, growing our global installed base of drivers by 17% to roughly 922,000. All signaling continued demand for our breakthrough technologies and on a global basis. Despite challenging conditions, including the weak global economy, natural and civil unrest in certain parts of the world and the challenging U.S. regulatory environment, Masimo continued to post double-digit revenue growth, evidence of the strength of our innovations, business model and growth strategy.

Our confidence in Masimo's long-term growth prospects and commitment to return value to shareholders was underscored today with our announcement that the board had authorized a stock repurchase program of up to 3 million shares of our common stock over the next 24 months. We are excited to be putting this program in place.

I'll provide a strategic summary and market update in a few minutes. But first, I'll pass the call to Mark for an updated detailed review of the results of Q2. Mark?

Mark de Raad

Thank you, Joe, and good afternoon, everybody. Second quarter 2011 total revenue rose 9% to $109.6 million versus $100.1 million in the year-ago period. Growth was driven by a 17% rise in product revenues to $102.6 million, representing primarily increased consumable sales.

Product revenue growth was partially offset by an expected 42% decline in royalty revenue to $7 million, reflecting the impact of the new lower Covidien royalty rate from 13% to 7.75%, effective March 15, 2011.

Second quarter SET revenue grew 16% to $93.5 million, reflecting increases in both U.S. and international markets and across both acute and alternate care channels. The total product U.S. growth rate was 13%, while our OUS growth was 25%.

Our OUS growth rate was impacted or benefited from stronger direct revenues, while our U.S. growth rate was impacted by lower OEM revenues.

Rainbow revenue rose 26% in the second quarter of 2011 to $9.1 million versus $7.2 million 1 year ago. The increase reflects higher sales across all major Rainbow product categories, consumables, licensing, boards and instruments.

Total hemoglobin sales were particularly strong, up more than 50% versus the year-ago quarter. Our worldwide end user or direct business, which includes sales through just-in-time distributors, grew 24% in the second quarter to $84.7 million versus $68.1 million 1 year ago.

Second quarter 2011 OEM sales were down 10% to $17.9 million from $19.8 million in 2010 due to the reduction of OEM sales of Masimo sensors.

However, despite the decline in OEM consumable sales, OEM board sales remained strong, demonstrating the continued demand for our technology among both our OEM partners and their customers.

Our direct business represented 83% of product revenues versus 77% in the year-ago quarter, while OEM revenue accounted for 17% of product revenue in the quarter versus 23% in the year-ago quarter.

By geography, U.S. product revenue rose 13% to $71.5 million compared to $63 million in the 2010 second quarter. Product revenue outside the U.S. totaled $31.1 million, up 25% compared to $24.9 million in the first quarter -- or the second quarter of last year with every major region contributing to growth.

Importantly, second quarter OUS product revenue represented approximately 30% of our total product revenue, the first time that our OUS revenue has reached 30%.

Favorable year-over-year currency exchange rates added approximately $2 million to second quarter international revenue totals. Note that this foreign exchange benefit was largely offset by approximately $1.2 million in higher foreign currency denominated operating expenses and $200,000 in higher foreign currency cost of sales.

Our gross profit margin rose to 66.5% in the second quarter compared to 66.1% 1 year ago. This increase was due primarily to favorable year-over-year manufacturing variances and the previously noted favorable impacts of foreign exchange rates, partially offset by higher equipment amortization associated with increased driver shipments in 2010 and early 2011, which we've previously discussed.

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