Masimo Corporation (MASI) Q1 2014 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Masimo First Quarter 2014 Earnings Conference Call. The company's press release is available at www.masimo.com. [Operator Instructions] I'm pleased to introduce Mr. Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations. Please go ahead, sir.

Thank you. 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 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-K and Form 10-Q. You will find these in the Investor section of our website. I'll now pass the call to Joe Kiani.

Thank you, Eli. Good afternoon, and thank you for joining us for Masimo's first quarter earnings call in 2014. In the quarter, we achieved solid rainbow and strong international revenue growth. However, a historically weak U.S. acute pulse oximetry business, driven by the impact of low census in Q1, the Affordable Care Act and strong contract renewals with over 150 hospitals in 2013 at new average selling prices that were approximately 50% less than the original contract average selling prices that were contracted years earlier impeded our overall growth. Excluding the $2.6 million that we took out from our revenue due to the distributor inventory adjustment, and Mark will discuss in more detail later, most of the softness was anticipated as we went into the first quarter. In fact, we came very close to our internal expectations. I do want to let you know that U.S. hospitals are recognizing the value of technologies that helped them get things right the first time, and that has served us well in our ability to not only convert hospitals to Masimo, but not have to compete based on price with Covidien. With the advent of the Affordable Care Act, customers are more than ever considering the overall cost of technology choices, which include patient safety, patient outcome and process consideration versus strictly the price. This is not to suggest customers will pay any price, but they will pay a fair price, especially when considering the other factors. As for our international business, we had a 30% increase in the outside U.S. business, with strength in both our direct and OEM outside U.S. businesses. A worldwide 23% increase in rainbow revenues to 100 -- excuse me, to $12.9 million, our worldwide shipment of 41,400 drivers were also strong. This is now the 4th quarter in a row of unit shipments in excess of 40,000 units, forming a continued growth in our global installed base which we estimate rose to 1,231,000, up 10% year-to-year, once again significantly exceeding the overall market growth rate. In conjunction with the 25th anniversary of our incorporation on May 2, 1989, we had plans for many exciting product rollouts. Beginning in May and for the remainder of the year, we expect to introduce at least one new clinically significant product a month, which will either round out our noninvasive measurements, Root or our consumer product category. In fact, in January, we announced the CE marking of our new organ oximetry device, O3, that utilizes Root. And in February, we announced the launch of our new iSpO2 Pulse Oximeter for Android mobile devices. I'll provide additional comments about the overall business in a few minutes. But first, Mark will review our first quarter financial performance and also provide you with an update to our 2014 financial guidance. Mark?

Thank you, Joe, and hello everybody. Reported total revenue and product revenue for the first quarter was $139.8 million and $132.2 million, respectively. As indicated in our press release today, these numbers include the $2.6 million first quarter adjustment, which I will describe in more detail shortly. Having said that, the rest of my comments regarding our Q1 total and product revenues will exclude the impact of that same Q1 product revenue adjustment. First quarter 2014 total revenue, including royalties, was $142.4 million on an adjusted basis, up 4.7% or 5.2% on a constant currency basis versus the first quarter of 2013. Product revenue was $134.8 million on an adjusted basis, up 4.8% or 5.3% on a constant currency basis versus the first quarter of 2013. Compared to the prior year quarter, our 20 -- our Q1 2014 product revenues were negatively impacted by approximately $650,000 due primarily to the weakening of the yen versus the U.S. dollar. Our first quarter GAAP product revenues included a reduction of $2.6 million in product sales related to a true-up of prior period estimated deferred revenues for one U.S. distributor. For the last 9 quarters, we have not been able to secure inventory reports on a reasonable terms from this one U.S. distributor and as a result, we were required to estimate their quarter end inventory levels. In the most recent quarter, we were able to obtain these reports, including reports from prior periods. These new reports indicated that our prior estimates of this U.S. distributor's channel inventory in 2011 and 2012 had been too low by approximately $1 million and $1.6 million, respectively. Because this is a correction of an estimate, we have accounted for this cumulative change in this estimate by reducing Q1 2014 product revenues by $2.6 million. Rainbow revenue grew 23% in the first quarter to $12.9 million, attributable primarily to higher sensor sales. In addition, continuing the trend observed last year, approximately 50% of our first quarter total rainbow revenues were consumables. Our first quarter rainbow sales were supported by the direct shipment of the remaining quantities of a large international disposable CO sensor order that we first noted in Q4 2013. And in a few moments, Joe will provide some additional information on our Q1 2014 SpHb revenues. Our worldwide end user or direct business, which includes sales through just-in-time distributors, grew 5.3% in the first quarter on an adjusted basis to $113.7 million versus $108 million in the year-ago period. Our direct business represented 84% of total product revenue in the quarter, consistent with the prior year period. OEM sales, which made up the remaining 16%, rose by 2.4% to $21.1 million compared to $20.6 million in the same period of 2013. By geography, total adjusted U.S. product revenue declined by 3.9% to $90.6 million compared to $94.3 million in the same quarter of 2013. We believe that the decline is the result of a combination of factors, including the near 5% decline in year-over-year hospital census, which in turn may have been caused in part by the unusually difficult winter weather on the East Coast this past quarter and/or the impact of the Affordable Care Act rollout. In addition, as we noted in our last call, we continued to experience the negative short-term pricing impact of having closed a record amount of contract renewals in 2013. Although these contract renewals provide us with the long-term benefit of having secured additional sensor purchase commitments, the short-term negative impact is immediate as the new lower sensor pricing goes into effect. And Joe will speak to the current U.S. hospital environment in a little bit more detail later on. In the meantime, the great news in the quarter was that our international product revenues of $44.2 million rose 29% in the first quarter of 2014, or 30% on a constant currency basis versus $34.4 million in the same period last year. The increase is due primarily to growth in both our EMEA and Asia Pacific regions. And because of the strong first quarter international results, our international revenues represented approximately 33% of total product revenue in the first quarter of 2014, which was up from 27% a year ago. The strong o U.S. growth helped, of course, to offset the product revenue decline in the U.S. acute care business. Together, the combination allowed us to achieve nearly $135 million in adjusted product revenue, which as Joe noted previously, was consistent with our own internal expectations. Our first quarter product gross profit margins was 64.1% compared to 64% in the year-ago period. The first quarter product gross profit margins were negatively impacted by 20 basis points due to the changes in foreign exchange rates on our reported revenues. Our first quarter total gross profit margin, including royalties, was 66%, which was flat from the year-ago period. First quarter 2014 operating expenses were $62.1 million, a decline of 6.5% versus the year-ago quarter. This decline was the result of the Q1 2014 $8 million reversal of an arbitration award and associated legal fees we had previously accrued in Q4 2013. Without the impact of the reversal, our total operating expenses rose by 5.5% versus the year-ago period. This was below our original expectations due mostly to a deferral of the timing of various engineering project-related and selected marketing expenses. SG&A expenses declined by 8% versus the year-ago period to $46.5 million due, again, to the previously noted $8 million arbitration award and legal fee reversal. Without this reduction, our SG&A expenses rose by 7.9% from $50.5 million to $54.5 million, and this increase was due primarily to higher staffing levels related to the full impact of our new worldwide blood management sales team now being on board and higher legal fees. R&D spending of $14 million was flat with the year-ago period as some engineering project and related equipment and supply spending has been deferred until later in the year. First quarter 2014 operating income was $30.2 million, up 22% compared to $23.1 million in the year-ago period. The $7.1 million increase in operating income was primarily attributable, again, to the $8 million arbitration award and legal fee expense reversal as I previously mentioned. Nonoperating income was about $200,000 in the first quarter, primarily due to the translation impact of movements in our foreign exchange rates. This compares with nonoperating expense of $2.3 million in the year-ago period, which was primarily attributable to the negative effects of changes in the value of the U.S. dollar versus the yen and euro. Our first quarter 2014 effective tax rate was 26%, up from 21.2% in the same period last year. The lower prior period rate resulted from the Q1 2013 recognition of the R&D tax benefit from 2012. This 26% was slightly lower than our original expectations of 27% to 29% due to the changes in our projections of our U.S., o U.S. revenues and a decline in the projected 2014 loss of a noncontrolling entity which we are consolidating with our financial statements. First quarter 2014 net income was therefore $22.6 million or $0.39 per diluted share compared to $16.4 million or $0.28 per diluted share in the same prior year period. Our first quarter earnings per share included benefit of $0.09 per diluted share due to the $8 million reversal of the arbitration award and legal fees. Excluding the $0.09 per diluted share, our Q1 2014 earnings per diluted share would have been $0.30, up from $0.28 in the year-ago period. As of March 29, 2014, our days sales outstanding was 51 compared to 52 as of the end of December 28, 2013, and over the same period, inventory turns declined slightly to 3.4 from 3.7. Total cash and cash equivalents as of March 29, 2014, were $117.5 million compared to $95.5 million as of December 28, 2013. The change reflects net cash generated from operations, offset partially by capital expenditures. Now I'll discuss our updated 2014 financial guidance, which is based upon the best information that we have at this point in time and assumes a slightly more conservative outlook for our fiscal 2014 U.S. acute business based upon the current overall macro U.S. hospital environment and is reflected in the lower part of our updated product revenue range. With that, we're now updating our 2014 financial guidance as follows. We are increasing our projected 2014 royalty revenue range from our original $8 million to $28 million to $28 million. This is being done because we did not receive notice of Covidien's intent to discontinue its covenant under the royalty agreement. And at this point, we expect royalties to continue until about October 2018 in view of expiration dates in our current patent portfolio as it relates to the N600. We are now expanding our projected 2014 product revenue range from $570 million to a range of $560 million to $570 million given that we now have to account for the $2.6 million less in revenues related to our Q1 distributor inventory adjustment; also, additional census pressures that we believe are possibly related to the Affordable Care Act implementation, and the downward adjustment of our U.S. acute care ASP assumptions for some of the reasons we noted earlier. In addition, due to the adjustment of our projected ASPs for the remainder of the year, a slight reduction in our projected favorable purchase price variances and the impact of potentially lower total product revenues, we now believe that our product margins will be approximately 65% to 65.5%, slightly lower than the original 66% guidance. Importantly, this revised product gross profit margin will still represent a significant improvement over our 2013 product gross profit margins. And therefore, despite the factors impacting revenues that I noted before, we still expect to deliver the product cost reductions that we had included in our original gross profit margin guidance back in February. We are lowering our revised operating expense guidance, excluding the medical device tax, from $292 million to $284 million. This new guidance includes the $8 million Q1 reduction due to the arbitration and related expense accrual reversal. And importantly, this new operating expense projection includes our best current assessment of our 2014 legal expenses. Although the second half 2014 [ph] trial dates with both Philips and Mindray have been budgeted in these numbers, we still cannot project with any certainty whether our budgeted legal cost for 2014 are sufficient for these or any other legal matters. Because of this unusual level of uncertainty of our legal expenses, we will continue to update you as the year progresses and as we begin to gain some more clarity on the status of the various legal matters currently in progress. Finally, we now expect that our fiscal tax rate will be in the range of 26% to 28% compared to 27% to 29% previously. The slight decline is due to a more favorable mix shift in our updated 2014 revenue forecast as well as the reduction in losses related to a noncontrolling interest entity, which we are required to consolidate. So as a result of these assumptions, we're now projecting a 2014 GAAP earnings per share of $1.24 to $1.33. To reiterate, the $1.24 earnings per diluted share assumes $560 million in product revenue and $28 million in Covidien royalties, while the $1.33 earnings per share assumes $570 million in product revenue and $28 million in Covidien royalties. With that, I'll turn the call back to Joe.

Thank you, Mark. Despite a lower-than-expected start to 2014 and a slightly lower end 2014 product revenue guidance, we continue to be optimistic about our overall long-term business outlook and our ability to meet both our mission and financial goals. In fact, despite the slightly lower-than-projected Q1 2014 product revenues, mostly due to the catch-up deferred revenue adjustment that Mark noted earlier, we were able to deliver first quarter earnings slightly above our own expectations. As we stated in our initial fiscal 2014 financial guidance earlier this year, and as Mark noted before, we continue our focus on delivering future product cost reductions and have in place additional cost controls designed to allow us to deliver upon the financial leverage that I noted as a key focus for us over the upcoming years. Having said that, we are concerned about what we are seeing in the U.S. hospital marketplace. So whether it is the result of implementation of the Affordable Care Act or whether it is related to the unusually severe winter weather, there is no question, as the Deutsche Bank report indicated, that U.S. hospital admissions were down significantly in the Q1 period. I'm also wondering if the impact of the Affordable Care Act will, as it did in Massachusetts during their mandated insurance program implementation, cause a longer-than-normal level of confusion in the insurance marketplace, which may in turn result in fewer visits to the hospitals until 2018 with less procedures, when it is expected to complete and settle. Also, consolidation of hospitals into large IDN has and will undoubtedly cause pressure on product purchases. But we believe the Affordable Care Act favors products that make a clinical difference as evidenced by our strong contract booking last year and ability to stabilize prices and not get in a price war with Covidien for pulse oximetry sensors. Consistent with our theories on what is going on, our overall worldwide unit placements of 41,400 new pulse oximeters and Pulse CO-Oximeters that we once again shipped into the marketplace indicates that while procedure volume may have dropped, we are continuing to expand our footprint amongst hospitals all over the world. In fact, as I noted earlier, this is the 4th quarter in a row and the 5th out of 6 that Masimo had shipped more than 40,000 drivers in a quarter. In addition to strong driver shipments in the quarter, noteworthy contract wins for us in the first quarter include: Care New England Health System in Rhode Island; Connecticut Children's Medical Center, Hartford; Excela Health in Southwestern Pennsylvania; and Norwegian American Hospital in Chicago. Importantly, we also see overall market interest continuing to expand within the general core of our hospital customers. The value of reliable continuous pulse oximetry made possible by our Measure-through Motion and Low Perfusion pulse oximetry breakthrough in this setting includes reduced failure to rescue events and fewer ICU transfers, both of which have high human and financial cost for hospitals. Encouragingly, during the first quarter, we saw significant revenue contribution from our new blood management team. We expect this new team to continue to increase our quarterly revenue contributions throughout the year. In the quarter, we recorded $2.8 million in total SpHb revenues, including continuous measurement as well as spot-check test and devices, a 46% increase over the same prior period. During Q1, we once again realized continued quarter-over-quarter growth in revenues of monitors and sensors sold by the new blood management team for continuous SpHb monitoring. Even more significant is the continued increase in the number of acute care hospitals that have made a clinical decision to deploy SpHb broadly across multiple departments, with this total now at 42 hospitals and growing monthly, leading to a substantial backlog of pending sales of monitors equipped with SpHb and PVI licenses. Together, we projected annual sensor purchases that will noticeably contribute to our revenues. The blood management team is over 80% staffed and more than 50% of the team has been in place for 9 months or more, which is about the length of time it takes to become fully effective. Through the efforts of this new team, the combination of continuous SpHb and PVI rainbow parameters is being increasingly recognized as a valuable tool in the operating room and in postoperative critical care units to help physicians optimize blood transfusions, facilitate early detection of postoperative bleeding and make patient-centered fluid management decisions, all benefits which lead to improved patient outcomes and reduce cost of care for hospitals. With a typical hospital sales cycle of 4 to 6 months to complete, the steps to make a clinical decision to deploy SpHb and initiate purchase processes followed by a capital budgeting process, we have an expanding list of blood management customers with expectations that notable SpHb purchases will materialize with each passing quarter. Unlike the equipment placement business for pulse oximetry model often used in the hospital-wide SpO2 business, continuous SpHb and PVI sales in hospitals involve capital expenditures for our monitors as well as the SpHb and PVI parameter licenses. On a related note, we now have 4 centers actively enrolling patients in the NACHO trial investigating the value of SpHb for surgical blood management, and there are 5 additional sites that are engaged in the IRB process to enable their participation in the trial. We expect enrollment in the NACHO trial to be complete in 2015. Later this year, we continue to expect GE and Philips to launch their initial versions of devices with our breakthrough rainbow technology. In Q1, we were gratified to see the State of Wisconsin joining 31 other states in requiring all newborn babies to be tested for critical congenital heart disease. Our Measure-through Motion and Low Perfusion pulse oximeter breakthrough had been instrumental in facilitating this type of testing, and Masimo is an active participant in the collaboration with the Newborn Foundation for making birth oximetry routine for newborns under the BORN program. In 2014, Masimo will celebrate its 25th anniversary and its history of innovation for improving health care. As I stated earlier, we intend to celebrate that milestone with a number of new product launches during the year. And as you probably noted from our 8-K filing yesterday, we announced that we have secured a new $125 million, 5-year credit line facility with JPMorgan. This line of credit facility is intended to finance the purchase of our new headquarters in Irvine, and in addition, provide us with additional financial resources for further business expansion opportunities and/or potential stock repurchase activities. We are excited about our new corporate headquarters facility, primarily because we expect to be able to improve our operational efficiencies by combining all of our nonmanufacturing operations in Irvine on one campus. We intend to occupy our new headquarters by the end of 2014. As PHASEIN and Masimo Semiconductor become further integrated, we continue to see significant benefits from these acquisitions. So with regard to potential future business acquisitions, as I have noted before, we are constantly searching for small, high-potential businesses with innovative technology that can complement our portfolio. While we expect to add to our technology portfolio in the future, there are no transactions currently in progress. Also, I would like to take just a moment to introduce Craig Reynolds, who just joined the Masimo board this past quarter. Craig brings a tremendous amount of medical and life science industry experience to our board. In addition, in his prior roles as Chief Operating Officer and Chief Executive Officer, he will also provide us with strong operational experience and perspective. We are very happy to have Craig join the board. And with that, we will now open up for your questions. Thank you.

[Operator Instructions] Our first question comes from the line of Tao Levy of Wedbush.

So a couple of quick questions. First, just given the reduction in the product revenue guidance, or at least the inclusion of a $10 million lower end, are you assuming that there won't be a recovery later -- throughout the year related to more patients being insured and going to the hospitals?

Tao, first of all, as we have said numerous times, we don't think the Affordable Care Act, while giving millions of people access to primary physicians and pharmaceuticals, will increase the census in U.S. hospitals. And in fact, in our effort as an industry, we presented to legislators data that showed in Massachusetts, which saw the Affordable Care Act go into effect between 2016 -- excuse me, 2006 and 2011, we saw a reduction in both sensor volume and revenue for Masimo compared to other states. Our growth in Massachusetts was 116 of the rest of the country to 117, depending on the neighboring state versus the entire country. So first, I just wanted to say that. And secondly, one of the things we're not sure about, Tao, we're not sure if the census drop in Q1 and also Q4 2013 is due to the harsh winter, or is it due to Affordable Care Act that has reduced the census. If you look at our analysis of Massachusetts, we have a theory that it's actually maybe due to the Affordable Care Act where, one, there's a confusion in the marketplace. People losing insurance before gaining them and deductibles going higher. And secondly, with especially the Affordable Care Act, there's no incentive of getting it wrong anymore for hospitals. If they do a procedure and that requires a second procedure or third procedure, they -- on some of them they won't get paid for it now. And they anticipate in the future, they won't get paid for any of them. So I think there's a census drop with this additional potential procedure drop even for patients. So having said all that and not knowing what's ahead for sure, we thought it would be prudent to assume the census decrease in Q4 and Q1 may have been related to the ACA more than the harsh winter, and that's why we -- one of the reasons we reduced our guidance on the bottom side and gave you a range of $560 million to $570 million.

Got you. So it's not as if you've seen sort of some improvement in the last month or 2, so like March, April time frame in any of your data points?

No, we have not. We have not seen that, and I -- [indiscernible] things may pop in the second half of the year or maybe May or June. But while we're seeing strong demand for our products, where hospitals are choosing what they're going to do for pulse oximetry, as we noted, we grew our installed base by 10%. Yet, if you look at our revenue, it increased by 5% roughly. So that means that there's a 5% gap, and that gap could be driven by the census issue, especially in the U.S. in conjunction with the procedure reduction issue.

Perfect. And just one clarification sort of on the guidance. I'm trying to figure out on the EPS front, what does that guidance look like sort of on an apples-to-apples basis versus what you'd issued before?

Mark, you want to take that?

Sure. I think, Tao, it depends upon the initial range of guidance because if you go to the -- initially when we started the year, we were at $1.13 to $1.28. So comparing that now to the new guidance, obviously both of those are up. Part of that is, of course, because of the benefit of the $8 million legal expense and arbitration award reversal that we had in this quarter. Because we've now moved to the upper end of the royalty revenue range that we provided before, there really isn't any overall change related to that. And then as I alluded to earlier, because we're suggesting that our gross profit product margins will come down a little bit from the initial guidance, there's a little bit of EPS reduction as a result of that. So that's -- those are basically the pieces that move you from the original guidance to where we are right now.

Our next question comes from the line of Chris Lewis of Roth Capital Partners.

I wanted to start on the royalty guidance. I understand you changed kind of the methodology there. So maybe just walk us through what's changed since you introduced kind of that range last quarter. I understand they didn't send a notice, so you expect payments to continue. But maybe just walk us through your outlook there, and if there's still a possibility, I guess, they could stop paying regardless of them not sending a notice.

Sure. Sure, Chris. First of all, this is our best expectation. Secondly, we have not had dialogue with Covidien that has resulted in this new projection. The things that made us decide to give you the $28 million instead of the range at the beginning of the quarter because at the beginning of the quarter, there's a 60-day notice period as of March 14 that they could have provided us that notice. And we believe the next time they can provide us that notice is next March again in 2015. And given that we did not get the notice that we anticipate at least in 2014, the royalties will continue. And then when we look at long term, when our patents around the N600 will expire, we -- and we look at Covidien's comment about this issue and the challenges with customers in changing products now, we're getting more comfortable that the most likely scenario is that Covidien will continue paying royalties till October 2018.

Okay. Great. And then on the blood management side, I think you mentioned 50% of the reps had been on board for at least 9 months. So I guess for those reps, how's the productivity tracking along versus your expectations?

Well, no better at the end of this quarter. But so far, we feel like based on the number of hospitals now in the pipeline to purchase noninvasive hemoglobin for the operating room and the postoperative care, so not just onesie-twosies but a whole change in process, we've gone from 35 to 42 since last quarter, where we started off with 9 before this team got together and before we knew how to better get the consumers to know how to test our products. For example, when people wanted to get the accuracy of our noninvasive hemoglobin, now we ask them politely to do 2 invasive blood draws and put them in 2 supposed controlled gold standard so they can kind of see for themselves the variations that occur in the invasive devices, let alone noninvasive because unfortunately, hemoglobin is fickle as far as how you draw the blood. It can really impact the number, and not every gold standard product is a gold standard. So anyway, those teachings from experience in addition to this focus is making us have really good results and -- but given that we're holding out for purchases of these products instead of giving them away for a sensor contract, we're having a delayed time from decision to purchase. So once that latency is gone, I think we'll begin to really start seeing the numbers move hopefully in a nice, appropriate fashion.

Great. And then just one more, for the OpEx guidance, Mark, can you just walk us through again, I think I may have missed it, the update there and what you're assuming for the med device tax this year?

Sure. The operating expense guidance essentially came down by $8 million for the year, specifically related to the $8 million reversal in the first quarter related to the arbitration and legal fees. So that change is actually very, very clear and very easy to explain. And then in terms of the medical device tax, really no overall change there in terms of the percent. Obviously, it's 2.3% of the product that qualifies for that tax here in the U.S. Clearly, because we expanded the range of product revenues in this new guidance, if we were to see lower net U.S. acute revenues in the year, obviously that would correspond into a slightly lower overall medical device tax number. But directionally, it will probably end up being somewhere in the range of about $7 million to $7.5 million for the year.

Our next question comes from the line of Bill Quirk of Piper Jaffray.

Dave Clair in for Bill. First question for me, I was just hoping to get some additional details on total hemoglobin in the quarter. It looks like it was down sequentially.

I believe it was, yes.

Yes, it certainly was as we would expect coming off a very strong seasonal push at the end of the year in the fourth quarter. I think importantly, as Joe noted earlier in his comments, year-over-year we're up 46%. So we were actually very, very pleased with the first quarter performance.

Yes, we're not surprised, just so you know.

Okay. And then a quick one for market, did you talk last time about additional spending of the royalty that extended in a potential charitable contribution, as well as -- I'm assuming -- it looks like the royalty is going to be collected for the year. So are those 2 things still something to expect?

Yes.

Okay. And then we have a lot of cash on the balance sheet at this point. Can you give us any kind of update what your plans are for, I guess, the media spend, if any?

Well, I believe I mentioned earlier we actually drew on a line of credit of $125 million despite the cash on hand because a lot of that cash is outside the U.S. So with that line of credit, we're not only buying our headquarters, but we have some cash left to either do acquisitions or do a stock repurchase since we haven't done any for about a year now. So that's currently our plan, our thinking. And given the low rate of interest for that line of credit, we felt it was the right thing to do.

And how much should we expect for the headquarter spending for the year?

Well, I think we indicated that the purchase price for the headquarters building is $56 million, and then there will be additional costs over the next 6 to 12 months as we retrofit the building and make it -- or we realign the building in a fashion that will be commensurate with how Masimo intends to deploy and occupy the building.

Our next question comes from the line of Brian Weinstein of William Blair. Brian Weinstein - William Blair & Company L.L.C., Research Division: Just wanted to confirm, I might have missed it, did you guys offer up any additional or changes to the rainbow guidance? Or are you confirming the $60 million?

We have not changed guidance on rainbow. Brian Weinstein - William Blair & Company L.L.C., Research Division: Okay. And then can you talk about what the difference on the hemoglobin side was between spot and continuous and how the spot is trending?

Mark, do you have that information? Are we giving that information?

Well, I think, Brian, in general, as I said in the prepared comments, we're continuing to see over 50% of our revenues from consumables, and that de facto means certainly the spot-check portion of our SpHb business is tracking relatively well. Brian Weinstein - William Blair & Company L.L.C., Research Division: Okay. And then to go back to this Affordable Care Act implementation, I don't want to overread or misread what you're saying, Joe. But it sounds like you're saying that you could see pressure on volumes here essentially through 2018. Am I overstating how you're thinking about things? I don't want to mischaracterize it, but it sounds like that's pretty negative for quite a long period of time here.

So if we're right, it's for the whole health care industry, med tech industry. It's not just for us. But yes, we believe that there's a likelihood-ness of that if you use Massachusetts as the yardstick to decide what's going to happen for the whole country.

[Operator Instructions] And I'm showing no further questions at this time. I'd like to hand the call back over to management for further remarks.

Okay. Well, thank you so much for joining us this afternoon. We look forward to our next call together and hope to see some of you here and on the road and hopefully joining us for our 25th anniversary celebration. If you have not received an invitation and you'd like to join us, please request an invitation. Thank you so much, and have a wonderful weekend. Thanks, bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.