Q3 2011 Earnings Call
October 25, 2011 4:30 pm ET
Sheree Aronson - Corporate Vice President, Corporate Communications and Investor Relations
Mark P. de Raad - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Corporate Secretary
Joe E. Kiani - Founder, Chairman, Chief Executive Officer and Acting Chief Technology Officer
Lennox Ketner - BofA Merrill Lynch, Research Division
Gregory Hertz - Citigroup Inc, Research Division
John M. Putnam - Capstone Investments, Research Division
Tao Levy - Collins Stewart LLC, Research Division
Ben C. Haynor - Feltl and Company, Inc., Research Division
Joanne K. Wuensch - BMO Capital Markets U.S.
Brian Weinstein - William Blair & Company L.L.C., Research Division
Sara Michelmore - Brean Murray, Carret & Co., LLC, Research Division
Lawrence S. Keusch - Morgan Keegan & Company, Inc., Research Division
William R. Quirk - Piper Jaffray Companies, Research Division
Previous Statements by MASI
» Masimo's CEO Discusses Q2 2011 Results - Earnings Call Transcript
» Masimo's CEO Discusses Q1 2011 Results - Earnings Call Transcript
» Masimo's CEO Discusses Q4 2010 Results - Earnings Call Transcript
Good afternoon, ladies and gentlemen, and welcome to Masimo's Third Quarter 2011 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 of Investor Relations.
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 forecasts 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 E. Kiani
Thank you, Sheree. Good afternoon and thank you for joining us for a review of our third quarter 2011 performance. Masimo product revenue grew 10% in the period, a strong SET performance was partially offset by declines in Rainbow and OEM revenue. Here are the highlights: SET revenue rose 70% demonstrating once again that we are still in the steep part of the S-curve technology adoption for SET, which represents over 90% of our total product revenue.
Our worldwide end-user business grew 18%, with sales in our U.S. acute care channel growing above that high teens level. Considering that a recent third-party hospital survey indicates flat to declining year-over-year U.S. inpatient surgery volumes in the third quarter, we were happy with this growth. International sale growth was also solid across both the acute and alternate care channels.
Without a repeat military order like the one we had in the third quarter last year, our Rainbow business was substantially lower. But even without the military order, Rainbow revenue was unimpressive, it was flat versus the year-ago quarter. Still, there were some bright spots. For example, excluding the year cum military order, our SpHb sensory unit volumes and revenue more than doubled. So while we are disappointed by overall Rainbow performance, we are confident that Rainbow will ultimately be a catalyst for our growth.
We also know that, as with any truly breakthrough technology, Rainbow performance will be choppy until we start rising on the steep part of the S-curve of technology adoption.
OEM sales were lower in the quarter, due in part to lower board shipments and consumable revenues. Even so, we added 33,400 new Masimo drivers to market in the quarter and brought our installed base to approximately 950,000, a 16% increase over the year-ago quarter. In fact, during the quarter, we shipped our $1 millionth oximeter, marking a key milestone for Masimo and underscoring our continued market penetration.
Given our third quarter financial results and current market assessment, we are reducing our annual 2011 product revenue and EPS guidance by approximately 3% and 10%, respectively, as detailed in the press release we issued this afternoon. Part of this annual guidance reduction is related to a $1.5 million Q3 inventory charge off that Mark will discuss in some more detail.
While we are disappointed in having to reduce our short-term financial expectation, I am confident in our long-term outlook, and will speak more about our outlook and strategies in a few minutes.
I will now pass the call to Mark for a detailed review of our Q3 results and revised 2011 guidance. Mark?
Mark P. de Raad
Thank you, Joe, and good afternoon, everybody. Masimo's third quarter 2011 total revenue rose 3% to $104 million versus $101 million in the year-ago period. Contributing to this was a 47% decline in royalty revenue, from $12.2 million to $6.4 million, reflecting the change in the Covidien royalty rate from 13% to 7.75%, effective March 15, 2011, and in addition, lower than expected Covidien U.S. pulse oximetry royalty payments which we received in Q3, compared to what we had accrued in Q2.
Third quarter product revenue rose 10% to $97.6 million, representing primarily growth in our acute care channel, as recent expansion of our installed base translated into increased year-over-year sensor sales to hospital customers. This is also reflected in SET revenue growth of 17% to $89.8 million. A couple of developments dampen SET growth in the quarter. First, we believe various macroeconomic factors weighed on the market in the quarter and had an adverse impact on hospital procedure volumes, which in turn, impacted our SET adhesive volume and revenues, as well as capital equipment sales. Also, we experienced a rise in the number of customers choosing to reprocess single-use SpO2 sensors through Masimo, which negatively impacted SET sensor ASP sales as our reprocessed sensors are sold at a lower price.
In addition, we were expecting to resolve the payment of an additional $3 million for products we provided to a major U.S. hospital system, as part of their installation earlier this year. However, the healthcare system is still working to evaluate and reconcile their records with ours, and as a result, no resolution has occurred, and therefore, we were unable to recognize any additional revenue beyond the $760,000 that we previously recognized in Q2 2011. We are obviously working with this customer and hope to have a resolution before the end of the year.