Good afternoon, ladies and gentlemen, and welcome to Masimo's Second Quarter 2012 Earnings Conference Call. This 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. 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 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 our most recent Form 10-Q. You will find these in the Investors section of our website. I also want to remind you that we are hosting our first-ever Masimo Investor Day on the morning of September 20 at The Pierre Hotel in New York. We hope you will plan to join us for this event, which will provide an in-depth review of Masimo's strategy, technology and growth opportunities, and include executive presentations, clinical panel discussions and product demonstrations. To RSVP, please call or e-mail me using the contact information listed on today's release. With that, I'll pass the call to Joe.

Thank you, Sheree. Good afternoon, and thank you for joining us for Masimo's Quarterly Review and Update. We finished the second quarter with 12% year-over-year growth and product revenue, driven primarily by strong performance from our direct business in the U.S. and abroad. We shipped 37,300 new Pulse Oximeters and Pulse CO-Oximeters in the quarter and now estimate our worldwide installed base to be 1,033,000 units. This is up 12% year-over-year and underscores the clinical advantages of our Measure-Through Motion and Low Perfusion Pulse Oximeters and Pulse CO-Oximeters. In addition, we achieved solid increases in adoption of total hemoglobin and acoustic respiration rate monitoring, which out-labels[ph] 2 major long-term growth engines. In the second quarter, SpHb sales grew 48% versus the year ago period, and rainbow Acoustic Monitoring grew by 600%. We are happy to announce today the acquisition of PHASEIN, a Swedish developer and manufacturer of ultra-compact mainstream and sidestream capnometers, multigas analyzers and handheld capnometry solutions. The acquisition of PHASEIN's Technologies complements our breakthrough innovations for patient monitoring, with their portfolio of products ranging from OEM solutions for external plug-in-and-measure gas analyzers and integrated modules to handheld devices. With multiple measurements delivered through either mainstream for intubated patients or sidestream for unintubated patients, our customers can now benefit from CO2, N2o and O2 and anesthetic agent monitoring in many hospital environments, such as operating rooms, procedural sedation and ICUs, as well as the EMS environment. This acquisition fits within Masimo's growth strategy, which is to build a durable recurring revenue franchise with breakthrough, user-friendly, patent-protected technologies that improve the practice of medicine, advance the standard of care and reduce health care costs. In July 2011, American Society of Anesthesiologists revised its standards to say that during moderate or deep sedation, the adequacy of ventilation should be evaluated by continual observation of qualitative clinical sign and monitoring for the presence of exhaled carbon dioxide, or CO2. While we are working with ASA to expand the standard to include rainbow Acoustic Monitoring, because we know that existing rainbow Acoustic Monitoring technology still enjoys many advantages to capnography, we believe that it will be good to have both solutions available to our customers. In a few minutes, I'll provide additional perspective on our business and comments regarding our overall growth strategy. But first, Mark will review the second quarter financial performance. Mark?

Thank you, Joe, and good afternoon, everybody. As Joe just noted, Masimo's second quarter 2012 total revenue rose 12% to $122.8 million versus $109.6 million in the year ago period. Second quarter product revenue also rose 12% to $115.3 million, reflecting primarily higher sensor sales to our hospital customers. This increase occurred despite movements in foreign exchange rates that reduced our year-over-year revenue by approximately $1 million. In addition, Masimo Semiconductor, which we acquired late in the first quarter of 2012, added approximately $800,000 to the second quarter product revenue. Rainbow product sales grew 7% in the second quarter to $9.7 million, as strong growth in SpHb, RAM and other rainbow measurements was partially masked by a drop in Rad-57, SpCO and SpMet sales, which continued to be impacted by municipal budget cutbacks across the country. In fact, excluding Rad-57 product sales, total rainbow revenues in the second quarter actually grew 22%. Also encouragingly, we saw nearly 50% growth in SpHb sales and more than 600% year-over-year increase in RAM revenue, indicating increasing interest in this novel rainbow technology. Our worldwide end-user or direct business, which includes sales through just-in-time distributors, grew 16% in the quarter to $98.4 million, versus $84.7 million 1 year ago. In total, our direct business represented 85% of product revenue, versus 83% in the year ago quarter. OEM sales represented the remaining 15% of second quarter 2012 product revenue. OEM sales declined 5% in the second quarter to $16.9 million, compared to $17.9 million in the same period of 2011. Although down modestly from the year ago period, we do expect that our year-over-year OEM revenues will stabilize through the rest of 2012. By geography, total U.S. product revenue rose 16% to $83.2 million in the second quarter, compared to $71.5 million in the second…

Thank you, Mark. Our second quarter results, including double-digit growth in our product revenue and worldwide installed base, demonstrate that Masimo's superior technology and focus on innovation are drawing in new hospital customers on a global basis and are allowing us to deliver growth rates above those of the overall market. In fact, we continue to convert, on average, over 100 hospitals every year by displacing our competitor and establishing new agreements that give clinicians access to our gold standard SET Pulse Oximetry, which have shown to save babies' eyesight and save lives. The important clinical advantages of our SET technology were validated, once again, in a study published in the second quarter by the Journal of Clinical Anesthesia that showed Masimo's SETs SpO2 sensitivity and specificity to be substantially higher than that of the competitor's study. At the same time, the study showed our SpO2 and pulse rate failure rates to be substantially lower than competitors during patient motion in case of both normal and depleted oxygen levels. This performance difference is why clinicians and hospitals rely on Masimo SET technology to provide patients the best possible care across a wide range of critical care scenarios. Moreover, it is the primary reason that we believe Masimo SET will become the Pulse Oximetry of choice for newborn screening, for critical congenital heart disease, or CCHD, which is one of the most common causes of infant death in developed countries worldwide. The accuracy and reliability and cost-effectiveness of Masimo SET also makes it a preferred choice for continuous monitoring on the general ward. Paired with the Masimo Patient SafetyNet remote monitoring and clinician notification system, it provides an efficient and intuitive solution to help clinicians keep post-surgical patients safe. In the second quarter, Patient SafetyNet system sales were up more than…

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

So Joe, first question is on PHASEIN. And I guess I'm just trying to understand the company a little bit more. It looks like they've been on the market, I think, it looks in Europe since about '03 and in the U.S. since 2005. And so I guess I'm a little curious, the revenue contribution or the revenue addition, rather, that you've highlighted, $4 million, can you help us think about, maybe, given that these guys have been in the market for so long, how come it's -- perhaps had a little larger than where we are at this point?

Well, I think there are several factors. First of all, PHASEIN's strategy had been to be an OEM company, and had also not concentrated on the consumables. They were mostly selling OEM modules, and that really has impacted their revenue and growth. We intend to change those, not only make more direct products, end user products, but also create a sound consumable model for the business. But secondly, capnography has not grown rapidly up until maybe a year or 2 ago when some of these standards were being put in place. And a lot of it has been due to the fact that it is difficult to -- for patients to adhere to capnography and for the clinicians to use it when it comes to sidestream capnography. So we believe because of that, that RAM is a better solution in sidestream applications. But in mainstream application, we believe capnography will continue to play an important role, as evidenced by the sedation standards that ASA has put forward. And some of the new things we can potentially do with their anesthetic patient monitoring, as well as their capnography, for example, it may turn out to be a good way to assess the titration of anesthetics in the ICU by monitoring the amount of anesthetic agents coming out. So I hope that addresses why their revenue is not that high. They have been growing, to our understanding, over 20% a year, year-to-year, but I think we could really step that up, and with complementary products that we have, especially with RAM, we can now make a better argument about where RAM really is beneficial and where capnography is beneficial. And we believe RAM is most beneficial for any sidestream applications slot in the general floor, and so forth.

Understood. And then a question, actually, probably just a couple of quick ones for Mark. There's a lot of details surround guidance, no comments on rainbow. Historically, when you guys don't comment on something, it means that those numbers haven't changed. But we do have this $45 million rainbow target out there. It looks like we'd have to probably step it up quite a bit in the back half to hit that mark. So should we be thinking that obviously, the other side of the business is doing quite well, it looks like you bumped up the guidance and basically, it's kind of a swapping A-Pulse Oximetry for rainbow for the balance of the year? Is that the right way to think about it?

Yes, Bill. I think the reality is, given some of the momentum that we see building in the first half of this year, we're actually pretty encouraged looking forward to the second half of the year. And then remember, the original $45 million guidance for the year was predicated upon us successfully putting in place distribution agreements, which are now in place. So obviously, we're working through the initiation part of those agreements right now. We expect that product will begin shipping through those distributors in the latter part of Q3 and much more significantly in Q4. And so because of that uncertainty, I think as of the current time, we're still not yet prepared to move off of that number. But clearly, Q3 will be an important quarter as we gain the positioning that we will need for a very strong fourth quarter, which was always what we expected we would need in order to achieve that $45 million.

Got it. And then just last one for me, I'll jump back in the queue. I seem to recall, on the first quarter, we had a little bit of revenue slippage. I want to say the number's about $2 million from the first into the second quarter. Is that indeed the case? Did we see that in 2Q? I guess what I'm trying to figure out here is basically, was there any one-time revenue in the second quarter?

No, no. In fact, we were very pleasantly surprised with the second quarter strength in our total sensor volumes. As you recall, historically, the first quarter for us has been the peak quarter for revenues and for sensor volumes. We typically see a reduction in the second quarter and then again in the third quarter, and we were actually very pleased with the somewhat consistent level really of total sensor volume as we went from Q1 into Q2. Now going into Q3, we actually do expect the usual seasonality and then we expect, once again, much stronger fourth quarter as we finish up the year.

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

I just want to confirm, of the $8 million in your revenue guidance variance, $4 million is coming from PHASEIN and the other $4 million is coming from strengths in your core business? Is that the right way to think about this?

That's exactly right.

Okay. Also, it's my understanding that right now, you're taking on the expenses for X-Cal and gross margins, but you're not getting the benefits from turning it on? If that's true, when might we start to see those benefits?

Well, we expect to see the benefits starting to hit in 2013.

Okay. So all of your 50 basis point decrease in gross margin, is all of that associated with PHASEIN or is some of that associated with either foreign exchange or something else?

No, Joanne, just to make sure, you're talking about the 64.5% to the new 64% guidance?

Yes.

Well, I think as I mentioned before, that's primarily the result of PHASEIN, but it's also partly due to the fact that we are now expecting slightly lower overall gross profit margins on the products that will actually be directed into this new U.S. distribution channel. Earlier in the year, obviously, we had to make some assumptions about pricing and cost of product, and now that we're closer, now that we've just signed those 2 agreements, we have a much clearer perspective on what that pricing is going to look like, and as a result, that was the other reason for the slight downward movement in overall gross profit margins. But having said that, as I indicated earlier in the prepared remarks, we're still planning to hover right around 64% in the back end of the year, a little below that probably in the third quarter, and hopefully, a little bit above that in the fourth quarter.

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

I wanted to shift maybe over the OEM side, and maybe you could walk us through the challenges you're seeing there. Is the international customer something that you've now lost? Or is this something that we should see recover in the near future?

Hi, Matt. No, we have not lost the customer. There was a -- maybe, what I consider a one-time revenue event last year that did not repeat this year with the OEM. So in fact, everything is very solid with this OEM, and as we noted, we expect the OEM business to begin stabilizing in the second half and move forward. And by the way, I want to mention that as you know, the downward pressure the OEM revenues have had doesn't mean that there's downward pressure to OEM shipments. As we noted, this quarter, we did over 37,000 drivers, which is kind of the new low, I guess, it's pretty high compared to historical numbers. And allow us to meet the 70,000 drivers that we expected for the year, and a lot of that was on the back of our OEMs doing very well.

Okay, great. And then, I just want to follow up on the gross margin conversation. You had some initiatives in place to help improve those into the back half of the year. Are those still going to have their effect and these other issues are offsetting them? Or is there maybe a prolong or a delay in the benefit from some of those programs?

No, Matt, actually, those are incorporated in the numbers that we're talking about, and we're actually very pleased with what's happened so far, and we expect some of those improvements to continue, as we said earlier in the year, in the second half of this year and probably more significantly moving into 2013. But those initial benefits that we've been talking about for a couple of quarters are already in those numbers, and I think frankly, pretty indicative of the pro forma gross margins that I alluded to in the prepared remarks. I mean, the reality is if you exclude the incremental cost of X-Cal and you exclude the incremental cost, at least at a margin level of the new business, on a pro forma basis, our margins, actually, are very consistent with where they were same time year ago, and that is in an environment where, as we've been saying, pricing has been competitive throughout this entire year. So the reality is, some of these cost improvements that have been ongoing have really been there to essentially manage some of this ASP pressures, which is what we had indicated we thought would happen. And clearly, over the next couple of years, we expect to continue to see those kinds of cost reductions put into the model.

Okay. And then last one for Joe, maybe you could just give us an update on your philosophy on the acquisition side, the things you've done to SEDLine and now, PHASEIN, are you starting to see, at least with SEDLine, some cross-selling or at least some technology integration opportunities? And then maybe, layer into that what we should anticipate in terms of acquisitions going forward.

Thank you, Matt. Yes, SEDLine has actually been a successful acquisition. Although we didn't talk about its growth, it did grow quite nicely in the Q2. Maybe if Mark can find the numbers, I could tell you how much it grew. But we also had been working in the R&D efforts with SEDLine to make it a much more user-friendly product and to really help it sell to a much, much broader usage. One of the things that's very comforting for us is that we go after technologies that we believe are the best. And we're confident that the better technology will ultimately win, assuming you have access to the market, which fortunately, we seem to have it. And so we think SEDLine and PHASEIN, these types of acquisitions are going to be not only good for us but good for the marketplace. In terms of more acquisitions, we are looking at a few other opportunities, one very seriously. We're in the detail phase, and if things turn out okay, we may have more to discuss in the near term. As far as going back to the SEDLine increase, that doesn't increase 123% this quarter compared to the year ago.

Your next question comes from the line of Brian Weinstein with William Blair. Brian Weinstein - William Blair & Company L.L.C., Research Division: You've already talked about a more competitive pricing environment. Can you talk more specifically about what you're seeing there? We've been expecting to see kind of low to mid-single-digit price erosion there, how much worse is it getting? And has it abated at all in the last couple of weeks? Because I know in our conference, you talked about it being down a little bit more than that.

Sure, Brian. I think on the -- it hasn't gotten worse. But as I mentioned at the conference, our competitor, maybe I can't blame them, they're dealing with our innovation engine, and if I were them, maybe I'd do the same thing. But they've gone to cost. The Pulse Oximetry is not a commodity. And it is our job and duty to make sure clinicians and hospitals are aware of the difference the technology makes, not only in terms of Pulse Oximetry, which as I've mentioned before, has been shown to -- with our technologies, save babies' eyesight and lives and very important cost reduction. But the access to PVI, which is a way to measure fluid responsiveness that typically costs hospitals a few hundred dollars to do, which comes with our sensors, or noninvasive hemoglobin that can dramatically reduce blood transfusion, these are the things we have been successfully been able to convey to customers. So while sometimes we have no choice but to go to the price because of our inability to articulate and get to the right people to know the difference that our product makes. Mostly, we've been able to just bend our value proposition, and that's why we've not been eroding -- that's why we made the point of showing you what our margin would have been without some of these things like X-Cal and Masimo Semiconductor acquisition. And then there was a point that I wanted to make, just make sure everyone is clear, when Mark earlier talked about reducing our margin expectation for the year, he did it based on the Pronto and Pronto-7 pricing that we ended up giving to the distributors, not because of SpO2 pricing. So I think it's important to note that. Brian Weinstein - William Blair & Company L.L.C., Research Division: Okay. And then I think you mentioned that were some investments in PHASEIN that need to be made, I think I heard you guys make that comment in the prepared remarks. Can you talk specifically about what those investments are going to be? Is it just in product development? Is it in sales and marketing? Where do you think you need to invest there?

Well, we actually see the technology as really nice, I guess, piece of diamond in the rough. And we think of the things we can do with it, both from end-user productization, as well as, as I mentioned earlier, in creating a better sensor model for that business. And so mainly, those are the areas we're going to focus on in the expansion of our expenses there, our investments, which is really R&D, mainly engineering headcount. But then, there's other areas like what if we could use it for titrating better gases in the ICU. So those are the areas, it's nothing like a new sales force expansion or that because it's a very complementary product line for current OEM sales force and our direct sales force.

Your next question comes from the line of Lawrence Keusch with Raymond James.

This is actually Konstantin for Larry. So I guess, Joe, if you I could start with, you kind of not been, for the last couple of quarters, articulating to the Street some frustration with where the stock price is. So I understand you're going to use -- at least it sounds like you're intending to use some of your cash for -- to make acquisitions. But can you maybe provide some comments in terms of maybe thoughts on incremental share repurchases, or other ways that you think you can create value?

Yes, I'd be happy to. First of all, forgive me if I'm sounding like I'm nagging about the stockprice, but the market obviously does what market does, and it's an intelligent market, so maybe it's just right. But I don't think so -- and as far as use of our cash, as you know, we've bought 3 million shares. We have some acquisition opportunities, one we've done already, another one we're in the final stages of decision-making on. Obviously, if these acquisition targets weren't there and we didn't think they add more value long term to shareholders than stock buyback, we probably would've done more stock buybacks. And in the past, we've also done dividends, very hefty dividends, [indiscernible] regularly. So we're constantly asking ourselves, what's the best way to do good for long-term shareholder value? And at this point, we still believe that unless these acquisition opportunities disintegrate, we are better off to spend our cash to do those than to do stock buyback.

Okay, that's fair. And then, I just want to get your updated thoughts in terms of driver placements. I believe you guys kind of guided initially 250,000 drivers with 80,000 in the second half of the year. And I think part of it was predicated on accelerated adoption of OEM, kind of with OEM adoption of your rainbow parameters. Can you talk -- can you just provide updated thoughts on that? And also put in that context, any update on Philips, and kind of have they started out -- have they started shipping products?

Okay. First of all, a big picture, yes, we still believe the 150,000 is obtainable. Although, we think Q3 will dip and we'll have a strong Q4 to make up for the 450,000 that we're expecting. As far as the second question, of Philips and GE, they're -- to our understanding, they're diligently working on the integration of rainbow into those -- into their products. While I can't predict with certainty, as I've said before, I thought it would take a couple of years from the announcement of our agreement with these 2 companies to get their products or main products out. I still feel good about that, which should put Philips out some time towards July of 2013, and GE not far from there.

Okay. And one last one for me, so we talked about the acquisition about kind of the R&D stock, what you're doing with SEDLine. But can you shed more light on your internal R&D? I mean, you're spending quite a bit of money there. And I don't know if you can just provide updated thoughts, maybe, on some of the newer parameters that you're working in or your new products? I mean, any kind of color would be appreciated.

Sure. Well, like I've said earlier, I'm hoping on September 20 in New York, if we're close enough to launch, we might be able to show you some of the stuff we're working on. It's very exciting. The product pipeline has never been stronger and more, I guess, maybe to me, more delightful. We have some really great product offerings that I think are going to help to really improve the process of care for hospitals. We're also working on new parameters. I'll caution you that I don't expect them to be as big of a story as hemoglobin and RAM. But nonetheless, we think they're going to be valuable. So those are coming as well, so unless you've seen the Radical-7 that we just introduced, but the customers are enthralled with the -- we had some really amazing reactions. We had one customer that's been a big proponent of our competitor for a long time, and they've said to us, "Everything you've done, you know, is good but for us to switch, we need to be wowed." We brought in the new Radical-7, and they said "Wow." So we're -- we had, for a while, focused on the fundamental technologies inside the products by assuring a new noninvasive measurements. We're now putting back our focus on how do you make them really work for customers, and how do we solve some of the problems that seemed simple but no one has done them, things like Halo and things like what we've been doing with Patient SafetyNet. So anyway, with that, I hope on September 20, we'll be able to show some of what we're talking about. But if not, that means, it won't be much longer after that.

Your next question comes from the line of John Putnam with Capstone Investments.

Joe, I just want to go back to PHASEIN for a minute or two. Help me understand, is this technology going to be incorporated in your existing products? Or is it going to be a separate product line?

The PHASEIN technology will be put into our existing products, and we'll also going to make it broadly available to all of our OEMs.

Okay. So it'll be incorporated then in existing and new products, I am assuming.

Yes, and new products, of course. That pipeline I mentioned, it is planned and we've been working on it for a while, even with an OEM to take it, so we'll -- we're going to be -- not too long from now, we'll have those. Plus PHASEIN has some of their own unique products like a little small handheld capnometer. So we plan to introduce that for emergency EMS type of environments and also spruce it up a bit to make it more user-friendly.

Okay. And how large is their organization in terms of people?

I think they're are about 35 people. They're not that big, but they're a really nice, close-knit and bright group of people.

Your next question comes from Lennox Ketner with Bank of America.

I guess, just first one, Joe, you mentioned that the ReSposable launch, I think is -- I guess there's been a limited launch now but it'll expand towards the end of the year. And you said that, that obviously will reduce the carbon footprint, but also the cost to the hospital. I'm just wondering if you could talk a little bit about how we should think about the impact of a shift to ReSposable Sensors impacting both sensor pricing and gross margins from a longer-term perspective?

Let's say, one day, everyone goes to ReSposables, we -- which we don't think it'll happen, but let's just say they do for a moment. There are reasons that even though we think that's a great solution, not everyone's going to use it now, the ReSposables have -- are going to have -- we believe they're going to have the same dollar margin contribution, and actually, even a higher gross profit margin percentage contribution, albeit at a lower ASP. So while it'll impact revenues, it should not impact our gross margin dollars, and I should make the [indiscernible].

Okay. And why would your expectation be that most people wouldn't switch to that if it's less expensive to the hospital?

Well, because clinicians prefer the sensor with a cable solution, so a lot of them are going to want to use that. I think it's going to be hospitals that are mainly have a vision of a green environment that are going to want to use that, as well as hospitals that are adopting rainbow. So I think it'll be kind of a combination of those 2 situations. Plus, as I mentioned before, when we deal with very competitive prices, we deal with those with ReSposables and the ReSposables allow us to be as competitive as we need to be, yet that product has a better indication for use, as well as a higher performance than the competing products, even the ones that have a cable connected to it by our competitors.

Okay. And then, just second question on the NATSO [ph trial. You talked in your prepared remarks about the Mass General trial, but didn't mention the NATSO NATSO [ph] trial for SpHb, which you mentioned in your last call, is that still underway? And if so, when should we expect to see the data from that?

It is. I'm glad you asked because I just said proactively, I'm not happy to see it begun. So hopefully, within a year from now, we should start seeing some abstracts coming out of that, and hopefully, a couple of years, the full manuscript. But it has begun.

Your next question comes from Ben Haynor with Feltl and Company.

On the "Better Care" Program, you said you've been talking to about 40 hospitals so far of the 100 qualifying hospitals you project to offer it to. Have you signed up anyone for that as of yet?

No. We're in contract negotiations with a handful. Like I said, we think we'll have 3 of them completed in Q3. And we're talking to more than 40, but 40 are in serious dialogue about adopting this program.

Okay, great. And then on SpHb, just running the numbers from your press release last week, I get the potential hospital savings of roughly 20% to almost 2/3 of their blood transfusion costs. Does that seem like it's in the ballpark?

Yes. Yes, it is. Hopefully, NATSO [ph] trial will support the Mass General study, although we don't expect it to be as big because they're going to look at heavy blood loss cases, when the Mass General study looked all orthopedic patients. But we believe there should be somewhere between 40% to 90% reduction in blood transfusion when people adopt continuous noninvasive hemoglobin. So given that the cost of blood is typically 5 to 10x cost of Pulse Oximetry sensors, we believe the net savings of that is between $20 to over $100.

So why do you think the uptake has been -- well, maybe I shouldn't say relatively slow so far, but is it more studies that need come out? Is it just the contract renegotiations? What's kind of the hospital's line on the product?

Well, I think it's -- I think unfortunately, I mean, there's a lot of factors. And I really don't like to lead with them because it sounds like excuses. But I think first of all, when we introduced hemoglobin, it's probably the worst time in our history that I remember because we've got, not only the Great Recession, but you've got the Affordable Care Act that had made everybody totally focused on cost. Unfortunately, the whole thought of improving care and quality of care is not in the legal of hospitals anymore, at least not the majority of them. So cost is a big factor. In reality, hospital cost of medical devices is about 5% of their cost. So if you took out the entire -- they got everything for free. They would not impact their total costs. So what we really have to do is help them improve their process of care. Fortunately, hemoglobin is -- gives that opportunity, like we've talked about the blood transfusion. So I think that's got a big factor to the way the mentality of the customers is today. But I think other factors -- or when people get noninvasive hemoglobin, the first thing they wanted to do is to do accuracy studies. And accuracy studies are comparing us many times to a standard that's not really the gold standard. The gold standard is either cyanmethemoglobin, which most hospitals don't do or at best is the Coulter Counter, and we kept getting compared to CO-Oximeters and I-Stat and HemoCue machines. So that has made people wonder, and of course, when they do studies, they're doing anecdotal study. They're not doing that complete study at a full range of hemoglobin and enough patients to get that true picture of the accuracy. The first study, like…

Your next question comes from the line of Spencer Nam with ThinkEquity.

This is Mary, in for Spencer. I just had -- my question is a little bit about the strength of the SpHb numbers. Can you just talk a little bit about what specifically accounted for that strength, and whether it was in line or better than or worse than your expectations with the study that you're just talking about? Do you think it's more hospitals and doctors understanding its benefit more, or the hospital spending, the pressure on hospital spending lightening a little bit? Or what would you say accounted for that?

Well, a lot of good things about any type of monitor is watching the consumable revenues to see if people are using it after they buy it. And the good news is that the consumable volume and revenues were actually much better than the 48% increase we reported. That was the revenue total, which included a softer licensing sales. But, by the way, we shipped more licenses for hemoglobin than ever, but because a lot of them were done under sensor contract, we should make hopefully more and more growth in the future. So I really think it's people getting comfortable that hemoglobin is here. The studies are coming out, they're done better. They're showing the true picture of the product and of course, things like the blood transfusion study from Mass General are not hurting either.

Okay. And in your prepared remarks, I think you said that you noticed that the EMT and Fire House budgets are still under pressure. Just general hospital spending trends, are you -- what are you observing? Are they concerned? Is that lightening up at all?

Well, the CO, carbon monoxide monitoring, the main market for that has been the EMS, which is the fire department's paramedics and their IAFF, International Association of Fire Fighters, National Fire Protection Agency, they all recommended the use of noninvasive carbon monoxide monitoring very early in the game, and things were going superb. But then, we hit the recession in 2008, because we've rolled that product late 2005 or 2005, and the tax revenues that these cities were collecting just dried up, to the point that they're laying off firefighters, which is uncommon. So that is the problem. It's not the hospitals, it's the firefighters and paramedics that are unfortunately not -- they don't have the money and are not buying a lot of new products, including ours, that is anchoring our rainbow growth.

Your last question comes from the line of Bill Quirk with Piper Jaffray.

I just wanted to, Mark or Joe, for that matter, just ask you a little more, I guess, on the distributor side. You're taking up about rainbow products in the third quarter. Obviously, I'm sensibly seeing more of that in the fourth. What -- I guess we have confirmed commitments there, guys, which kind of gives us incremental confidence as we think about kind of how probably the third quarter or fourth quarter should roll out?

Mark, would you like to respond?

Sure. The contracts that we've established, Bill, include various targeted price levels based upon the components of the individual product solutions. And there are also some very minimal commitments related to the overall numbers. So there's no, shall we say, large firm commitment. I think our overall confidence in the ability to allow that channel to begin growing is based more upon the feedback that our own sales team has had relative to working with the sales teams of both of those 2 new organizations. So pricing is established, that gives us a sense of where we think, obviously, at certain volume levels, our revenues would ultimately roll up to. But some of it is guesstimates as well, simply based upon where we think the product is likely to play out, both in Q3 and then probably more aggressively in Q4.

Got it. Okay, that's very helpful. And then lastly for me, Joe, did I hear you correctly on the call, you mentioned that hemoglobin is approaching 50% of rainbow?

Yes. Not the rainbow revenue, but what we said is 50% of the rainbow revenue came from consumables, which is double of that last year. And Bill, we plan to disclose the hemoglobin numbers, like we said, in 2013. So we'll start recording the actual breakout of that, so hopefully it won't remain a mystery. If there are no other questions, then, we're going to end our meeting. Thank you all for your interest, on this summer afternoon, in joining us. We look forward to seeing you in New York.

Thank you. This concludes today's conference. You may now disconnect.