Masimo Corporation (MASI) Q1 2011 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to Masimo's First 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 Vice President of Investor Relations. Please go ahead.

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?

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. On a geographic basis, U.S. product revenue rose nearly 19% to $72.4 million, compared to $60.9 million in 2010's first quarter. Product revenue outside the U.S. totaled $29.2 million, up 17% compared to $24.9 million in the first quarter last year. Favorable year-over-year currency exchange rates added approximately $988,000 to first quarter international revenue totals. Note that this foreign currency exchange rate benefit was partially offset by approximately $465,000 in higher foreign currency operating expenses. Our OUS revenue was up by double-digits in all regions including Japan. Thankfully, all our Japanese employees are okay following the devastating earthquake and tsunami. Immediately following the tragedy, we donated a significant amount of technology to various rescue organizations throughout Japan. And while we did experience some impact during the initial weeks after the tragedy, our total Q1 Japanese revenue is only minimally impacted. At the same time, other international events, such as the unrest in the Middle East, did result in some delays and potential short-term losses of opportunities. Despite some of these regional pressures, our total Q1 OUS product revenue still represented approximately 29% of our total Q1 product revenues. Our first quarter gross profit margin was 64.4%, down from 66% one year ago, due primarily to the short-term impact of unfavorable manufacturing variances related to the prior quarter production activity, part substitution costs and some unique implementation costs associated with two large installations. Combined, these short-term factors accounted for an approximate 100 basis point reduction in our overall Q1 product gross margins. As expected, we are also seeing the impact of higher equipment amortization costs resulting from the very strong equipment placements that we delivered throughout 2010, and the impact of a higher level of contract renewal activity at lower renewal sensor prices. Recall that when we renew contracts, we are typically renewing at prices that were established on average 5 years ago. In addition, generally speaking, we are also seeing a more aggressive general pricing environment. As we indicated in our February call, a reduction in Q1 gross profit margins was expected, and we factored that into the guidance previously provided for gross profit margin for 2011. The total gross profit margin including royalty was 68% in the first quarter of 2011 versus 70.4% in 2010's first quarter. The decline reflects the items I just noted as well as lower year-over-year royalty revenue, following the change in the Covidien royalty rate effective March 15, 2011. Operating expenses were $51.4 million versus first quarter 2010 operating expenses of $47.8 million, excluding the $30.1 million one-time gain related to the resolution of an antitrust lawsuit against Covidien, offset by a $10.9 million in one-time marketing expenses, which included $10.3 million to establish the Masimo Foundation. Importantly, as Joe alluded, excluding the one-time items from the year-ago operating expenses, our first quarter 2011 operating expenses rose 7.5%. This significant decline in year-over-year operating expense growth is consistent with our previous comments regarding our plans to moderate the rate of operating expense growth beginning in 2011. The actual year-over-year increase was due primarily to higher SG&A staffing levels and higher travel and legal expenses. First quarter 2011 operating expenses also included $10 million in R&D spending, which was up 6% from $9.4 million in the year-ago quarter, due primarily to higher year-over-year engineering staffing levels. As I mentioned earlier, foreign currency exchange rates increased total first quarter 2011 operating expenses by approximately $465,000 compared to the first quarter of 2010. First quarter 2011 operating income was $25.4 million, up nearly 18% compared to adjusted operating income of $21.6 million, which excludes year-ago one-time items to which I just referred. Our first quarter 2011 effective tax rate was 29%, down from 35.3% in the year-ago period. This notable decline is due to the combined benefits of the R&D tax credit extension, a change in the state effective tax rate, and the impact of our growing international business. Our higher year-ago tax rate was also due to the one-time net gain from our antitrust settlement, which was all U.S.-based income. In summary, the combination of strong product revenue growth, lower royalty revenues, lower product gross profit margins, lower operating expense growth and a lower tax rate resulted in the first quarter net income of $18 million or $0.30 per diluted share, which represents a 25% increase over the adjusted earnings per share of $0.24 in the year-ago quarter. As of April 2, 2011, total cash and cash equivalents were $105.6 million, compared to $88.3 million at fiscal year-end 2010. This $17.2 million increase was due primarily to cash generated from operations. As of April 2, 2011, our DSO was 46, down from 48 on January 1, 2011. And over the same period, inventory turns rose to 3.4 from 2.8, as the majority of additional inventory we carried to support a couple of large installations has been shipped. Since this is the first quarter of the year, let me close with a quick reminder about our policy regarding annual financial guidance. As you'll recall, we provided 2011 revenue and EPS guidance in February, when we released fiscal fourth quarter and full year-end 2010 results. It is our policy not to update annual guidance unless there are material developments, which cause us to believe that either revenue or earnings per share will be materially outside the range we previously provided. Based on our Q1 results and currently available information, we are not providing any update to the annual guidance we issued in February. So with that, I'll turn the call back to Joe.

Thank you, Mark. During the first quarter, we advanced each of our key objectives, beginning with leveraging our global sales force. This is the principal engine behind the double-digit growth rates we continued to deliver in SET revenue and driver shipments, both of which achieved record highs in the first quarter. We are continuing to maximize our team's effectiveness through a better and more efficient utilization of our existing sales resources throughout the world, and we are confident that this will allow us to continue to seize on growing market demand for our technology, as evidenced by the new customer wins and renewals we continue to achieve. Our technology's performance is the key reason we're progressing against our other key objective, which is to expand our presence in the general ward. Our gold-standard Masimo SET pulse oximetry provides reliable measurements with fewer false alarms, even with patient motion, low perfusion or other challenging clinical conditions that caused competitor's pulse oximetry to fall short. In addition, only Masimo provides Rainbow Acoustic Monitoring, a simple and automated method of continuously measuring the patient's respiration rate. Rounding out our general ward offering is our Patient SafetyNet system, which facilitates simultaneous remote monitoring of up to 80 patients and provides the alarm either at the central station or directly to the nurse via a pager. Masimo Patient SafetyNet is an open architecture system that can either be integrated into the hospital's existing IT infrastructure or operate as a stand-alone system. This is an important distinction that can make our system easier and more cost-effective to install. We continue to be encouraged by the increased interest level we see from hospitals who are considering expansion of monitoring into their general floor environments. Another objective is to increase Rainbow awareness and adoption, and in the first quarter, we made progress in a number of fronts. We added new OEMs that are incorporating Rainbow measurement into their patient monitors, including Welch Allyn and Newtech, Inc., as well as Royal Fornia Electronic Device Co., two Chinese manufacturers. We finished 2010 with approximately 20 Masimo Rainbow SET OEM agreements and intend to grow that number considerably by the end of 2011. We also continued to expand the body of evidence that demonstrates the clinical and economic advantages of our Rainbow platform, with new studies released in the first quarter on SpCO, our noninvasive carbon monoxide monitor; and SpHb, our noninvasive -- hemoglobin monitor. We also recently announced a new enhanced version of our reusable SpCO sensor, which provides improved accuracy and reliability performance for patient with low oxygen saturation and elevated methemoglobin. Customer interest for all of our Rainbow parameters is stronger than ever, especially for SpHb, which has tremendous potential to positively influence clinical decision-making, patient outcomes and healthcare costs. On the spot-check SpHb front, we made progress on refining the original Pronto-7 device in the quarter and expect to reenter the market with a new sensor sometime in mid-2011. And as you're aware, we're also selling Pronto, which is another spot-check SpHb device. We are encouraged with the 39% increase in our year-over-year Rainbow revenue and with our year-over-year doubling in consumable revenues, the evidence that these new technologies are clinically enabling. Touching briefly on another key objective, our R&D teams continue to pursue solutions to clinically relevant problems, and we remain committed to introducing breakthrough products. As you will recall, our most recent introduction was the Halo Index, which we debuted in the late 2010s. Halo, a dynamic wellness indicator that facilitates continuous trending and assessment of multiple physiological measurements has received CE marking in Europe and will be subject to FDA clearance before commercialization here in the U.S. And finally, to complement our internal R&D efforts, we're also continuing to explore strategic acquisitions and agreements of complementary technologies that we can incorporate into our existing platform. In closing, we were happy with the strong Q1 product revenue performance, especially since the results exceeded our own internal projections. We achieved a new milestone in the quarter by topping $100 million in product revenue for the first time, demonstrating the strength of our technology and value of our business model. We increased our market share to a double-digit growth in our core Signal Extraction Technology business, global installed base and Rainbow platform, while holding the rate of operating expense growth to single-digits. With that, we'll be happy to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Bill Quirk with Piper Jaffray.

Joe, first question, if my math is right, it looks like SET utilization bounced right back. It looks like a very close to flat after obviously trending negative for a couple of quarters. I guess, one, is my math correct? And secondly, can you comment a little bit on what you're seeing there?

Thanks, Bill. First of all, you're right. It did bounce back, but that could just be due to the fact that Q1 is usually our best revenue per socket quarter. So I don't know if you want to create a trend on that. I think the other quarters will probably be solid compared to previous quarters. But I don't know if at this point we can draw a line up.

Okay, understood. And then, just thinking about the Rainbow side of the business. Obviously, we had a couple of quarters now where it's been a very strong one quarter, off the next. Can you help us think a little bit about this business in terms of what percentage of this is now recurring revenue. You mentioned it obviously was up a double year-over-year. I was just trying to pin the map down here on how much of this is basically variable in any given quarter?

Sure. And obviously, as it matures, you can imagine it will be mostly be recurring revenue. But I think at this point it's still probably mostly capital, and the minority will be recurring revenue.

Your next question comes from the line of Matthew Dodds with Citi.

It's Greg Hertz actually calling for Matt. I was just hoping you could help me drill down a little bit on the margins. Obviously, you alluded to some specific pressure points there. Could you just kind of expand upon that a little bit more, and then also could you maybe try to help quantify maybe on the -- some of the other moving parts there? You mentioned 100 basis points decline associated with some moves in the manufacturing, some plan changes there. But as far as the revenue mix, if you could touch upon that maybe, and also just what you're seeing as far as from the pricing standpoint, how much are the renewals, how much of that's pushing on the margins as well?

Sure, Greg. Well let me -- I guess, I'll start by answering your question by maybe just reiterating some of the points that I made in the prepared remarks, because we tried to be very specific about what was impacting the current quarter margins in terms of unique, one-time items. I mentioned the manufacturing variances, the part substitution as well as the unique installation costs that related to a couple of our large installations. So those are the categories that we think are more of a one-term, one-time nature. The longer-term impacts are things that we have talked about in the past, including, for example, the impact of higher boxed amortization expense, which as I alluded to, related to the large amount of capital equipment that we placed last year, almost $30 million throughout the year. And also, as I mentioned, the impact of renewals. Now your question was whether or not we can get more granular than that, and the answer is no. All of these are elements of what are obviously impacting our overall gross margins. But none of them are significantly higher or lower than anyone else. They just combined to have the related impact on our overall gross margins. And then finally, as I said, I mean, we all continue to seize a pretty aggressive pricing environment that has obviously impacted, not only the contract renewals, but also the new contract environment that we're looking at. So I think the combination of all those essentially are the reasons why the margins were what they were in the first quarter. The good news is they are actually very consistent in a sense with what we had expected, and one of the reasons why in February, we mentioned that we thought the first quarter margins were going to be a little bit lower than what we were projecting for the entire year guidance when we said 65.5% to 67.5%. So hopefully, that covers your question.

Yes, that helps. Thanks a lot. And just one other thing on the Rainbow revenue side, thinking about it from an ex-handheld standpoint, would the Rainbow revenues have been more in line with -- and I know there's a little bit of volatility in the back half year between 3Q and 4Q, what would have been closer to those levels?

To what levels?

To the absolute revenue. Rainbow revenue product levels, excluding the handouts in the back half of last year?

I don't understand your question. Would you please clarify your question?

Sorry. I'm just trying to compare the 1Q results for Rainbow revenue with the back half of 2010. And I'm just wondering if you were to have excluded the impact of the handhelds because of the volatile nature of those sales.

Okay, I think you're referring to the military order.

Correct.

Q3 and Q4?

Yes, I'm just wondering, if on an absolute basis, the levels would have been more consistent with what we saw in the back half of 2010, excluding the handhelds.

Yes, absolutely. The Q3, Q4 had volatility due to military order, which we did not expect to see in Q1 and Q2 again. So, yes, that is correct.

Your next question comes from the line of Joanne Wuensch with BMO Capital Markets.

Thank you very much for taking my question. A couple of things in no particular order, Halo, in the United States, what are we thinking of that?

Joanne, we're not certain. It depends on how long it takes to get FDA clearance. We're expecting to file the 510(k) on Halo in the next couple of weeks, and we hope that it will be approved within 90 to 120 days. But lately, some 510(k)s of ours have taken a year to get clearance of. So really, we're not certain.

Okay. Previously, I've heard you mention a distributor for the Pronto in the physician's office. Is there any update on that?

We have not made a choice yet of which distributor we want to enter into this relationship with. But we are having a great dialogue with the distributors that we are considering. And once we relaunch Pronto-7, and we feel that we're ready for full market release for our spot-check technology, that's when we would sign up one of these distributors. So we still are expecting to do that in the second half of 2011.

Okay, and my final question has to do with Banner and Kaiser. Banner, you should have completed full implementation, and you should be near the end of Kaiser, is that correct?

Wow. Are you visiting customers now? Yes, you're right. I think we've completed Banner, and we are near completion of Kaiser.

Your next question comes from the line of Brian Weinstein with William Blair. Brian Weinstein - William Blair & Company L.L.C.: Maybe you could talk a little bit more about the general ward and the uptick there? Maybe can you just give us a little bit more commentary about what you're seeing there and what the pipeline is for new accounts? And what's the sales cycle there, as your sales reps are going in there? How long does it take to close one of those deals?

Well, we're not getting into specifics on the pipeline or kind of the uptake. What I can tell you is that the interest is very strong. The pipeline is getting really strong and a lot of successful implementation, a lot of successful references. And we believe that the general ward market is happening at the same time as we are out there with this technology, and it's such really a real-time situations, and it's a fun time to be out there. And given the strength of our technology, we believe we are winning the majority of the business and the new opportunities. Brian Weinstein - William Blair & Company L.L.C.: Okay, on SEDLine, we haven't heard much since the acquisition. Maybe you can talk about what you're doing with the product and the technology there, and give us a little bit of an update on its contribution to the company at this point?

SEDLine business, Michael, is not very considerable right now, although it's growing nicely. But I don't think it's big enough for us to kind of break it apart. As far as our plans for the future of the technology, given the competitive nature and the open dialogue here, unfortunately, I can't get into it. But we do believe that there's a good future for us with SEDLine, and we're very happy we have gotten into that business with SEDLine.

Your next question comes from the line of Matt Dolan with Roth Capital Partners.

First question on the base SET business. Can you update us on your outlook for driver placements this year? You've kind of talked about it, maybe plateauing at levels we saw last year, and we saw yet another uptick here in Q1. So does that continue to move up into the right, or is this a quarterly run rate that we should build off?

Well, I'm not sure if it's a quarterly run rate to build on because it was higher than we had anticipated. However, we still feel good that 2011 driver numbers should see an increase compared to 2010. So I think I must have given you numbers before, but I think the numbers we've given, I think, we're between 150,000 and 160,000, and we feel comfortable with that still.

Right, okay. And then, Mark, maybe on the pricing side, you mentioned some of that in your prepared remarks, can you just help us weigh the impact of some of the variables of repricing you're seeing out there as well as the reuse of sensors, if that's even impacting you to the degree that you're able to see -- anyway, to quantify those variables?

No, not really, because as I said before on the other call, we're not going to get into the specifics of each different element. They all contribute to the overall margin environment that we talked about before. We continue to believe that the issue of reprocessing is a topic that is in the marketplace. And as a result, it is undoubtedly one of the factors that helps create the kind of more competitive pricing environment that we're talking about. But we've not seen any dramatic uptick or downtick in that kind of activity. So in general, I don't think there's anything new or different from the reprocessing standpoint that we haven't seen in the last year or so. And then just in general in terms of pricing, again, as we alluded to before, this environment is one where because of the constant focus that hospitals have on their overall bottom line, we find ourselves in just about every contract situation working very hard to obviously continue to sell the value of the technology, but doing so in a environment where hospitals are looking at every possible way in which to reduce their own operating expenses. So that's an environment that, as you know, has existed for a long time now, and it's one that we expect will continue to be pretty competitive as we go through the rest of this year.

I guess, to rephrase, is there an overall pricing basis? Is there a number you could give us in terms of the percentage decline you're seeing year-over-year?

Well, if you go back directionally, I'll use the analogy of our reprocessed -- or I'm sorry, our renewal contracts. Directionally, what we have said in the past is that 5 years ago, you would have seen that sensor pricing probably in the $11 to $12 range. Today you're seeing that sensor pricing somewhere in about the $9 range. So you can take that GAAP and divide it by 5 years and you get a sense of the kind of annual reduction in sensor pricing that we've seen. Now remember, obviously, a large part of the Masimo go-forward story here is the migration of that declining SpO2 sensor volume into, we hope, eventually higher-priced Rainbow sensors. So that is part of the overall plan that we have put in place here. And we continue, despite the pressure on the SpO2 side, to continue to identify other cost reduction opportunities within our own manufacturing operations that we think will allow us to counter balance some of the pricing pressure that we see on the ASP side.

Okay. Thanks for that. And the last one is a follow-up on Rainbow. Just looking at the guidance you gave last quarter, it implies obviously a sequential tick up in the coming quarters. Considering you haven't updated anything today, can you just walk us again through the scenarios that get you to the low and high end of guidance and tell us if the high end is realistically achievable at this point?

Sure. The original guidance to which you refer was $40 million to $50 million that we suggested back in the middle part of February. And the difference between the low-end and high-end of that range, in our opinion at that time, was simply based upon whether or not we were able to release the Pronto-7 here in the U.S. by about the middle part of this year. So that was the determining factor as to whether or not we thought the high-end of that range was achievable or not. Obviously, the low-end of that range was on the assumption that, that scenario did not materialize.

Okay, so you said the high end is still a possibility in your eyes?

Well, as I said before, we don't update our guidance. We don't talk about any more specific information other than we talked about back in February. So I think I've provided coverage on why the $40 million, why the $50 million, and you'll have to draw your own conclusion.

Your next question comes from the line of Larry Keusch with Morgan Keegan. Lawrence Keusch - Morgan Keegan & Company, Inc.: Mark, just to follow on with the last question. Since Pronto-7 is a key driver between the low-end and high-end of that $40 million to $50 million range that you have for 2011, can you just walk us through sort of what are the key milestones to getting the product out in this mid-2011 timeframe that you talked about?

Well, the most important milestone is getting it approved by the FDA. We intend to submit with the FDA later this month. And so the key factor in whether or not we're able to achieve that range that we just spoke to will be dependent upon the timing related to the FDA's approval. Our history, of course, we've had situations where the approval cycle has been relatively short. That's obviously what we're still hoping is going to be the case here, since essentially this product is not dramatically different from the previous product that had already been approved. But as you know, it's very difficult these days to predict approval cycles from the FDA. So that would be the biggest hurdle to that U.S. introduction. Now having said that, we fully expect to introduce the Pronto-7, or reintroduce, I should say, the Pronto-7 in our international markets in the middle part of this year. So that will still be an element that's a component of that range of $40 million to $50 million, even if we are in a worst case scenario unable to get the FDA approval. Lawrence Keusch - Morgan Keegan & Company, Inc.: Okay. And then just one more for you, Mark, and then one for Joe. Just as you talked about your effective tax rate, obviously, it's nice rate in the first quarter as well as the gross margin being impacted by what could be considered to be one-time-ish events. Should we anticipate, and I guess being offset by seasonally strong revenue quarter, but how should we be thinking about the progression of both the tax rate and the gross margin for the remainder of the year?

Well, I guess, what I'll do is I'll defer again to the ranges that we provided when we provided the earnings guidance. And on the tax rate, you'll recall that was 28% to 30%. So our first quarter being 29%, obviously right in the middle of that. And our best forecasting ability at this point suggests that 29% is the rate that we see for the rest of the year. Obviously that's why we're using 29% in the quarter. In terms of the gross margin, I think, as I alluded to in the prepared remarks, when we provided the annual earnings guidance that we did back in February, we suggested a range of 65.5% to 67.5%, and that essentially included the fact that we expected a softer first quarter gross margin level. So since we're not changing that overall guidance in direction, I think you should infer from that, that we still think, that is achievable. And obviously, since the first quarter is lower than that range, that would imply that future quarters will have to be higher. Lawrence Keusch - Morgan Keegan & Company, Inc.: Right. Okay, perfect. And then just for Joe, since Halo could potentially gain FDA clearance here, maybe it's three months, six months, nine months, but potentially it could come in this calendar year. I won't anticipate that you'd see much sales, but as we start to think on a go-forward basis, how do sort of think about that market opportunity? How do you help us kind of size that opportunity?

Halo, like I said last quarter, is going to be defined by the clinical studies that come up that hopefully will show the value. Because it's a new concept where you're taking multiple measurements and using expert opinion and expert systems, you're taking that information and providing a simple, graphical-rich way of telling clinicians how the patient's doing. So the question is, as you take all that information and get it done kind of like just one number and the graphical way of showing that one number for those who want to see it, the question will be, what does it do for hospitals? What does it do for clinicians? Does it help reduce their costs? Does it help reduce length of stay? Does it help avert debt and mortality and morbidity kind of issues? So I think, while we're very excited about Halo, as I've said before, that needs to be really -- its projection, the trajectory has to be defined by the clinical studies that are going to come out to talk about its value. And if those are strong, which we expect them to be, we believe this is going to be a very fundamental change to monitoring a very important measurement and capability for our company. And it should help create demand for everything else that we do, as well as on its own, deliver great revenues and profits. But I think until -- while we're going to be pricing the product at a certain level right now to get it going and to get the clinics underway, ultimately the way that product is priced and how it gets shaped will shift with the studies that will hopefully show its value. So I apologize that I can't be specific, but it's unlike things like hemoglobin or carbon monoxide or respiration rate or pulse oximetry, where there's a defined market for those, albeit some of them invasive and some of them less effective. Halo is something that people haven't done before. There's been attempts at it before. There's been discussions about the need for something like this. But nothing has ever succeeded in fulfilling the promise of what something like Halo could do. So until we get there, unfortunately, we can't forecast it. And when we think about our own market potential, we don't even try to put that into it until those studies come out. Lawrence Keusch - Morgan Keegan & Company, Inc.: Okay. That's very helpful.

[Operator Instructions] Your next question comes from the line of John Putnam with Capstone Investments.

Joe, I was wondering if you might give us some color on these two relationships that you've signed in China, how you approach the market now and how that might change the opportunity over there?

Well, I think, the best thing to get new technology to doctors in the marketplace is by creating competition. And I remember when we first were introducing SET, Signal Extraction Technology, we weren't getting the level of traction that we had hoped for until a few significant companies adopted it and began selling it. For example, in the U.S., for example, that was Datascope. And when Datascope started selling Masimo inside their patient monitors, the rest of the industry felt like they have to also to provide it. So I think having these two Chinese companies, although they're not #1 or #2 company in China for patient monitoring, adopt Rainbow and begin selling Rainbow in China, I think it will nudge the #1 and #2 companies in China to adopt Rainbow. So I think it's very important and we were very excited about these two companies who have joined us. They are great organizations. One of them is very heavy in the emergency environment and one in just standard patient monitoring in the hospitals. So I think it should be very positive. Well, if there's any other questions, we'll be happy to take it. Otherwise, I would like to end this call. Do we have any other questions? Okay, great. Well, thank you so much for joining us this afternoon. I look forward to seeing you all in person. Have a wonderful evening. Thank you.

This concludes today's conference call. You may now disconnect.