MASI

Masimo Corporation (MASI)

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Masimo (MASI)

Q3 2012 Earnings Call

November 01, 2012 4:30 pm ET

Executives

Sheree Aronson

Joe E. Kiani - Founder, Chairman and Chief Executive Officer

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

Analysts

David C. Clair - Piper Jaffray Companies, Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

Brian Weinstein - William Blair & Company L.L.C., Research Division

Matthew Dolan - Roth Capital Partners, LLC, Research Division

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Lennox Ketner - BofA Merrill Lynch, Research Division

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to Masimo's Third Quarter 2012 Earnings Conference Call. The company's press release is available at www.masimo.com. [Operator Instructions]

I am pleased to introduce Sheree Aronson, Masimo's Vice President and 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 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 the most recent Form 10-K. You will find these in the Investors section of our website.

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

Joe E. Kiani

Thank you, Sherry, and thank you, all, for joining us today, especially our friends and investors who are joining us from the points that have been hit the hardest by Hurricane Sandy. We're sorry you had to go through that and we hope for you a speedy recovery, but we also thank you for being diehards and joining us today.

We finished the third quarter with 15% year-over-year growth in product revenue, fueled primarily by our direct business in the U.S. and abroad. We shipped 33,100 new Pulse Oximeters and Pulse CO-Oximeters in the quarter and now estimate our worldwide installed base to be 1,056,000 monitors, representing an 11% year-over-year increase and demonstrating continued adoption of our technology by hospitals worldwide.

Importantly, sales of rainbow products topped $11 million in the third quarter, representing a 41% year-over-year increase. This was fueled primarily by a 92% jump in total hemoglobin revenue as more care providers recognize the potential of our continuous spot-check hemoglobin monitoring to help reduce unnecessary blood transfusions, identify occult bleeding and detect anemia.

Also, during the quarter, we strengthened our future growth potential with the introduction of new breakthrough products which we displayed and announced at the recent American Society of Anesthesiologist Annual Meeting, and with the acquisition of PHASEIN, a developer and manufacturer of best-in-class capnometry and anesthetic agent monitoring solutions.

Reflecting our confidence in Masimo's long-term potential, the board has declared a special cash dividend of $1 per share based on December 11 -- payable on December 11 to stockholders of record as of November 27. This action demonstrates our commitment to enhancing stockholder value, and by making the declaration now, Masimo stockholders can take advantage of current dividend tax rates, which may increase in 2013. This is the fourth instance of a special dividend being paid by Masimo in the past 6 years, and it's the third since we became a public company in 2007.

Including the dividend announcement today, since becoming a public company, Masimo will have returned approximately $220 million to stockholders in the form of special cash dividends and another $62.5 million in the form of purchases of our common stock. Together, these represent approximately 88% of the cash generated from operations between 2008 and September 2012. Our ability to do this underscores the power of our innovation and recurring revenue model to generate strong cash flows, a healthy balance sheet and expectations for future growth.

I will provide additional perspective on our business and strategy in a few minutes, but first, Mark will review the details of the third quarter financial performance. Mark?

Mark P. de Raad

Thank you, Joe, and good afternoon, everybody. In the third quarter product revenue rose 14.8% to $112.1 million reflecting primarily increased sensor sales to hospital customers. Movements in foreign exchange rates resulted in a decline of approximately $1.1 million in Q3 2012 product revenue compared to the prior year quarter. On a constant currency basis, product revenues therefore rose 16%.

Third quarter product revenue also included approximately $900,000 in revenue from Masimo Semiconductor, which we acquired in mid-March 2012, and $1.5 million in revenue from PHASEIN, which we acquired in late July 2012. Excluding the impact of these acquisitions, our total product revenue rose 12.4% versus the year-ago period or 13.5% on a constant currency basis. Masimo's third quarter 2012 total revenue including royalties rose 14.4% to $119.1 million versus $104 million in the year-ago period.

Rainbow product sales grew 41.3% in the third quarter to $11 million. Encouragingly, we saw significant year-over-year growth in rainbow consumables, which suggest to us that utilization of our rainbow products continues to increase. Specifically, as Joe mentioned, SpHb was a standout performer in the quarter, and it was up 91.6%. Our worldwide end user or direct business, which includes sales through just-in-time distributors, grew 15.2% in the quarter to $95.2 million versus $82.6 million in the 1-year-ago period.

In total, our direct business represented 84.9% of product revenue in the third quarter, consistent with year-ago levels. OEM sales, which made up the remaining 15.1%, rose 12.9% to $16.9 million, compared to $15 million in the same period of 2011. Excluding the impact of acquisitions in 2012, our direct business grew 13.7% while OEM revenues grew 4.6%.

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