Thank you. Good day, everyone, and welcome to the SonoSite fourth quarter and fiscal year-end 2008 results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I’d like to turn the call over to Ms. Anne Bugge. Please go ahead.

Thank you, operator, and good afternoon. This is Anne Bugge, Vice President of Corporate Communications for SonoSite. Before we begin, SonoSite issued its news release on February 12, 2009 regarding financial results for the fourth quarter ended December 31, 2008. You can access the release on SonoSite's website at sonosite.com under the Investors section or call SonoSite Investor Relations at 425-951-1381 for a copy. A replay of the call will be available beginning at 4:30 PM Pacific Time today and available through midnight Pacific Time, February 26, 2009. The replay number for US participants is 719-457-0820 or toll-free 888-203-1112. The confirmation code is 7024347. Additionally, this call is being broadcast over the Internet and can be accessed via the company's website at sonosite.com. I would like to remind you that this conference call contains certain projections or forward-looking statements regarding future events or the future financial performance of the company. Except for historical information discussed in this conference call, the statements made today contain forward-looking statements that involve substantial risks and uncertainties. Actual results could differ materially because of factors listed in the Management Discussion and Analysis section of the company's 2007 Form 10-K and in other filings and reports with the SEC. We do not undertake any duty to publicly update any forward-looking statements. Now I would like to turn the call over to Mr. Kevin Goodwin, President and Chief Executive Officer of SonoSite.

Thanks, Anne. And good afternoon, everyone. Thank you for joining us on the call today. Alongside myself and Anne is Mike Schuh, our CFO. I will start off by makings some comments on the fourth quarter highlights and then move on to the full year. Let me start off by saying that 2008 was an excellent year for SonoSite. We achieved record revenue, profitability and cash flow. We exceeded our initial goal set forth one year ago on revenue growth and operating margins. In the fourth quarter, worldwide revenue grew 8%. Foreign exchange had a 4.2% negative impact on that revenue growth for the quarter. The ongoing success of our M-Turbo and S Series product platforms continued to drive our growth throughout the quarter. Our international business grew 14% in spite of an 8.5% foreign exchange headwind. It was another excellent year for the international team. On a constant currency basis, they grew 22%. Our US business grew 3% in the quarter. This lower growth rate was due to the previously mentioned slowdown in hospital capital spending. We estimate that we lost approximately 20 percentage points of US revenue growth in the quarter due to order delays. As mentioned previously, we are not seeing cancellation of orders, but rather delays in those orders. We achieved operating income of $4.7 million in the quarter. This included $3 million for charges related to discontinued talks with an acquisition target and some severance. Also in the operating expenses line was a $1.9 million increase in stock-based compensation as a result of the change in our forfeiture rate assumptions. We had other income of $14.5 million, which included a $15.7 million gain for the repurchase of $80 million of our senior convertible debt. And we reported net income of $12.1 million for the quarter,…

Thank you very much. (Operator instructions) And first we’ll begin with Raj Denhoy from Thomas Weisel.

Hi, good afternoon, Kevin.

Hi, Raj.

I’m trying to reconcile some of the comments you are making about what you are seeing in the marketplace being mostly delays and not cancellations of orders, and yet you are – very conservative view on 2009, in the sense I think you are backing away from any growth at all at this point for 2009. How do you reconcile those two things? I mean, are you expecting these orders just not to come in the next 12 months, or how do we get some comfort with them actually not being cancellations but delays?

I can tell you, Raj – I would tell you what we know. Okay? First of all, the visibility on our international business remains very good and reasonably predictable, and so far so good although it is early. Our US enterprise business also remained solid in terms of achieving their numbers and being visible to us. The third variable, which is the US direct channel, which is heavily weighted toward US hospital, is the one where the challenges lie of the three. Now, we’ve seen a rise in the inventory of total deferred orders. However, about a third of those orders are presently expected to come in the next three quarters. So the net amount of delays between now and, let’s say, Q3 is expected to drop unless, of course, more delayed orders are added to the inventory, so to speak. So that’s what we know. So, the position we are taking is this. We see, on the one hand, very strong leading indicators of demand. And what I’m talking about is sales pipeline dynamics, leads to various late stage pipeline inventory of opportunities. We have just seen some genuine sluggishness on the issuance and purchase orders out of US hospitals. And we think that relates to the tightness of the credit markets as well as the unemployment psychology. With that said, where we fit in, I think, remains positive in terms of low price point and importance of patient safety. And so it’s not all bad going back to my comment, and about a third of today’s inventory of deals are indeed expected to drop in the next three quarters. So we are carefully managing that. But at this stage, this doesn’t make sense given those dynamics to try to tell you we are absolutely going to grow by X or Y. We could be flat, we could be down a little bit, but if you look at what we are doing, we are putting in growth components, new products, new markets, and we are bringing our expense structure down 5%. So candidly, in a fairly revenue situation, we could still improve our operating income. In anything above bad, we can really jam our operating income up nicely. We do expect that this demand is going to get unleashed down the road. So whether it’s at the end of ’09 or ’10, that’s something we can’t tell you yet.

Sure. That’s very helpful. But if I could just ask a little bit, I mean, the OUS business, it sounds like you’re still doing quite well. Have you seen any deterioration so far in 2009?

Not in there, no. I mean, you’ve got currency problems and then you have the decline of currencies locally that make things more expensive coming through US dollars or other directions. So that said, they are holding steady. That’s what we know at this point. They finished pretty good in Q4, meaning they hit their number and then in Q1 they are on their number. And we’ve had such good visibility now for over two years that I remain confident that we will be able to maintain that. Having said that, we have a 3% or 4% headwind and we are certainly taking a conservative view on overall spending. But that said, that part of the business seems to be steady.

Okay. But then – that's 50% of the business. And then you mentioned the enterprise is doing well, but the hospital obviously is not. But even in this quarter, the US business grew roughly 3%. And it sounds like you are not expecting it to really fall off the cliff here in ’09, maybe it’s more back-end loaded. But if I go back to the guidance you gave in early January of 5% to 10% growth this year, mostly back-end loaded, from your commentary, it doesn’t sound like you are backing away from that. What you guys have put in print, it sounds like maybe you are. And I guess that’s what I’m just trying to reconcile.

Well, Raj, look, we are giving you the information we have. The goal is just straightforward transparency here. And it’s early in the year. We have seen – since I spoke in San Francisco, have seen a rise in delayed orders from where we were. So that’s a data point. So we are passing that through. Could we grow 5% or 10%? We could. Could we be flat or down a little bit? All three are possible. We don’t know how to handicap that just yet. So we’re going to let that sit for the time being until we get greater visibility and give you a better performing profitability business.

Okay. That’s very helpful. I’ll let someone else try and get you on the guidance. Maybe I could ask just one more on the – just a housekeeping on the quarter. If you look at the $3 million of expense you took for the severance and the deal you didn’t follow through and then the $15 million in the other income line, I’m coming with a pro forma EPS number of roughly $0.21. Is that sort of in line with what you guys are coming up with as well?

Let me have Mike handle that.

Yes. So you look around $0.54 I think for the gain and then $0.10 for the other charge. Is that your calculation?

I think that is. Okay. That’s very helpful. Thanks a lot, guys.

Thank you, Raj.

(Operator instructions) And next we’ll hear from Alan from Royal Bank of Canada.

Good afternoon, everyone.

Hi, Alan.

Mike, I apologize if I missed this, but did you give some explanation as to the decline in gross margins during the quarter?

During the quarter, it’s primarily attributable to the fall in the currency, a little over 1%.

Okay. I mean, we’ve seen falling input prices across a range of manufacturing operations given the current climate. Could you quantify whether or not you had any improvement in your manufacturing costs, your input costs? Has that impacted your operations?

It certainly does, Alan. This is Kevin. We had primarily a foreign exchange induced drop in gross margins in Q4. Otherwise we are pretty much on the same trend line we’ve been on. And yes, we do expect on a going-forward basis to improve our cost of goods. So that’s something we’ll comment on more as we realize it.

Okay. Let me see – cost cuts. The operating cost cuts, are they going to be weighted towards any particular area within the company? Whether – I mean, is R&D going to be particularly impacted, for example?

No, actually not at all. In fact, we are cutting absolutely no muscle. We are not cutting any heads. There will be no headcount reduction. What we are cutting are some other variable expenses in the SG&A area and corporate overhead area that we feel we can reduce. And so we are looking for – we are setting a goal of taking those costs down by about $8 million year-over-year. We think we can do that. But the mantra this year is more about stoking the investment. You will see two new products. R&D is full blast with increasing spending. Two new market entries and then, of course, continuation of our innovation in existing markets. So we are not going to slow this thing down. We see this as an opportunity given our strong cash position to accelerate.

Okay. On that subject of cash, what are your intentions there? Are there opportunities to further retire your convertible debt? How are you thinking about your cash budgeting this year?

Well, there certainly are those possibilities, but we’re more focused on other things. We have a goal to try to get our return on capital up with all that cash. So we will be putting the cash to work on behalf of shareholders most shortly this year. And we’ll just have to give you insight on that as we go. But we are very aware of that. We want to raise our returns there and we will.

What kind of options are there on the table to return – to improve shareholder returns, acquisitions or buybacks?

Well, certainly acquisitions continue to be a possibility. Buybacks are a discussion item. And then just organic growth itself, you will see some of the cash flow into the organic growth activities that we’ll be highlighting going forward. But we’ve got a lot here. We just had a Board meeting this week and our Board commented that they have never seen us with so many opportunities in terms of the product technology we have as well as the market. So it’s all about really staging in 2009 a bigger, faster and more innovative company with greater profit power. And that’s really what you should focus on, I think.

All right. The last question is kind of a broad, general one. What information are you receiving regarding potential healthcare infrastructure-related government stimulus spending in your international markets, if any?

International markets, not a lot. Actually – obviously the stimulus bill here is supposed to spend many billions on healthcare IT. That’s not going to be – that won’t hurt us certainly. On the other side, haven’t seen anything in particular come out of the woodwork on healthcare infrastructure spending negatively by any means. And certainly in China they are stimulating there and they are stimulating the healthcare spending. Elsewhere I don’t really have any comments.

Okay. Sorry, one last – I apologize. What communication are you getting from your hospital channel regarding what those customers need to see to get more comfortable to resume their purchasing patterns? What are they looking for? Are they looking for a balance in the economy? Are they looking for anything specific that we can watch out for ourselves?

From what we can tell, Alan, the first driver is, in our opinion, the tightness of the credit markets and the credit facility and just the flow of short, medium-term credit hospitals. Number one. Number two is the rising unemployment rate and reduced insured roles have some psychological effects. So there is a wait-and-see factor there. It’s a little bit of both is what we think. And we are studying that more. We hope to have more information for you as we go. It’s not a disaster. It’s just not optimal. It’s robbing us of on a quarterly basis 10-ish points of growth at least, but could be worse, could be better, and we’re going to weather it.

All right. Thank you. That’s all I’ve got. Good luck.

(Operator instructions) And next we’ll hear from Charley from Barrington Research.

Hi, good afternoon. Thanks for taking my questions.

Hi, Charley.

I actually want to start on the pro forma, not a question I would normally ask. But when I calculated pro forma, I took the $1.9 million in stock comp, that’s a one-time effect. Correct? That’s going to be something we see each quarter now that you’ve changed the extension on these options, right?

Yes, that’s true, Charley.

So I come up – using that 36% tax rate, coming up with like $3 million in tax as opposed to $7 million in taxes was like a $0.30 non-GAAP EPS number. So I guess I’d like to clarify that against the 20-something cents, which looked like you could get there if you included the $1.9 million. So maybe at the end you could clarify what you think your non-GAAP number –

Mike will just comment on that.

Charley, if you do take out – we were just taking out the $3 million charge and the gain. But yes, if you take out the increase in the stock comp, that does fluctuate from quarter to quarter depending on forfeiture. So I can’t say exactly that that’s the realization that you have Q4 from last year to this year. But we will realize the savings over next year and the year after.

So can you give us an idea of what you think the stock comp number will be for ’09, Mike?

Well, we would estimate somewhere around – little shy of $8 million. I think it was $8.7 million or so this year.

Okay. And then I just wanted to confirm, only a 3% to 4% currency headwind for next year, Kevin?

Those are our estimates at this point in time. Mike, do you have any further comment on that?

Based on today’s rates, assuming the dollar stays about where it’s at, that would be about almost 4%.

So, if we take the 67.5% gross margin, we take – add the percent that you got from currency headwinds, are you having you to do a little bit discounting? I mean, I guess I don’t really have a problem with it in this kind of environment, but it seems like there is something else going on there.

Well, there is always a little year-end dip in the US channel so that normal pattern happened, but it bounces right back to where it was, which it has done. So you have kind of a late Q4 dip that affects it. But the other factor driving it is largely international sales mix, which includes the currency but also the international product mix, which has broader use of the product line and some of those products come in at lower margins. So, remember now, the mix for the quarter was much heavier international than historic. And that’s really what’s happening.

You’re right. That’s helpful. I guess I want to go hone in a little bit on the international market. I don’t want to force you into talking about different segments, but I guess I’m sure going to understand why international across the board seems to be strong for medical companies, including SonoSite, when if anything the dollars probably in the fourth quarter stronger than it was earlier in the year and most – a lot of these countries are going through the same headwinds as we are. So I guess I was just thinking that maybe you guys have some visibility. And it seems like you’re fairly confident that it continues over there. So I’m wondering, is it that you have visibility into a couple countries that are finally making significant purchases in hand-carried ultrasound and you kind of know what those order patterns look like, that’s what gives you confidence. So could you talk about what those things – why has it been strong and why are you confident that it continues to be decent when they seem to be faced with a lot of same things as we are?

First of all, we have 15 different geographic revenue regions internationally. So at any one time, the growth rates are varying, and the variances positive and negative are obviously very dynamic and fluid. But remember that virtually all those sectors have healthcare systems or industries. So the healthcare systems in the midst of this tough economic period are not going down the tubes alongside their economy because they have always funded their healthcare systems at a fairly stable rate. So you obviously know many countries are stimulating and certainly are not going to let healthcare fall as a general social strategy. So that’s the thing to remember. The US is a healthcare industry, and therefore there is that connection or direct connection to the economy, unemployment and things like that. Furthermore we don’t think a credit crisis is, at least from what we can tell, having the same effect on a lot of those countries as they are here. The one exception to everything I’ve just said might be the UK where the UK looks like it could be troubled by all this and they have a negative impact this year, hence the more conservative outlook we have for the international business. But beyond that, we are just steadily moving along. I mean, last year we posted double-digit growth in the fourth quarter across the board, those 15 regions. We are budgeting a middle-teens growth across the board in virtually all those regions. We would have been higher is the bottom line if the economic circumstances were not what they are. So that’s really the way to think about it. And we do fit in well. At the upper end of our product line, we are offering a lot more for less, lower cost of ownership at the bottom of our product line, we even do better. And then you’ve got more stuff coming out this year that we think will make our hand stronger. And then our people and the way they are executing are getting better. So we’re seeing some sort of incremental productivity gains as we go and have good stability and good leadership in the international business too.

All right, great. It kind of segue in my next question, and that is, can you talk a little bit about next generation products, ambulance, vascular, any other products, whether they can be distributed by you or others? And then specifically if they are going to be distributed by others, are there costs involved in that process that are for some reason excluded from your normal operating expense budging right now?

Everything we are planning on doing is in the budget. So the numbers we’ve given spending around $140 million for the year includes everything. We have a strong new platform that is envisioned to come out in the first half. And then another one, which is unique and different quite possibly in the second half in a series of singles and doubles, so to speak, will come out throughout the year. And largely focused on existing channels, although there would be some channel additions, we believe, made once again contain within the spending constraints we’ve given you. So what you’re going to see us do is get this thing together for greater growth and continue to – we are going to continue to build it out strategically. That’s really what we are focused on. Thankfully, we’re not focused on our stock price right now because how much to look at, right?

I appreciate that. So can you just, I guess, along with that question talk a little bit about what you expect to end next quarter with as far as sales reps and remind us how you ended this year with the number of sales reps, and whether or not some of those additions are going to require additional people?

Yes, we’ll be happy to do that. We ended last year about 60 in the US. It will be going up by at least 10% between now and year-end. The international headcount will go up by about 12, that’s in sales and marketing. So you’re talking about 18 heads there. The G&A headcount in SonoSite will not be rising year-over-year. And then the R&D headcount will be up very slightly on a year-over-year basis. But what drives SonoSite’s long-term success is, as you probably can tell, a gradual increase in sales reps, a continual flow of new products that put us in new segments or strengthen our hands at existing segments. And those are the two poles you might say that we are tying together in our strategy, which is product flow and channel evolution. And then when it comes as to the idea of us looking at acquisitions, for example, adding a channel or two remains top priority because, as I have always said, we have a very wide deep market opportunity. We see more and more evidence of it being there now. And we see more and more reasons to get out there and get after it. And that’s what you will see happen this year.

Just a couple more, sorry for all these. Did you customers, Mike, have any issues with financing for the first time ever and I guess have rates increased from that 8% level where we were at maybe three months ago?

No, we have very good partners and as a matter of fact, rates have come down about 100 basis points from Q4 to Q1.

I save my hardest for last here, Kevin. I guess we probably view unemployment similarly, but I guess I don’t understand the not-cutting people. I respect it. I think it’s a good idea for the country for most companies to do that if they can, sorry for that diatribe, but at the same time, it kind of doesn’t make sense to me in this environment where it looks like you’re probably looking at negative growth in the US, why we wouldn’t see some cuts in people.

Well, we’re finding other efficiencies, Charley. I hear your point, but we have our staffing levels right where we want them. We have continued to strengthen our hand in terms of talent management. I think it would be working against ourselves long-term to cut talent, and we really have talent now. I wouldn’t even refer it as headcount. So we are taking care of our people and we are also making other sacrifices to keep cost down. So some of the sacrifices we are making are people cost related. So it’s not a free lunch by any stretch. So, as time goes on, we’ll elaborate more. But let me say that in lieu of headcount, we are making other sacrifices. And we are doing so with a 100% alignment, and I think it should be considered a good thing if we can take $8 million out year-over-year and – for a company that grew almost 20% last year, that’s not bad.

No, I agree, no. And congratulations on that. I guess my question really is, are you going to protect the bottom line if you can through reductions if it needs to come to that? Or were you trying just rough ’09 and then come out of guns and blades in 2010?

Charley, after this question – I’ll pass it on.

That’s it. Yes, that’s it. That’s it for me.

Yes. We’ll take as it comes. We’ll take as it comes. But I think what I’ve described is what we’re going to do.

I bet I’m the last question anyway. Okay, thank you.

(Operator instructions) Next we’ll hear from Greg [ph] from Sidoti & Company.

Hi, guys, thanks for taking my call.

No problem.

Curious – I know you target the golden triangle and there was a lot of growth there. I think in ’07 you mentioned 85% growth. Curious if you could comment what you’re seeing in the golden triangle here in ’08. Any like segments are there, whether anesthesia or emergency care holding up better in this tough spending environment?

Well, all three are holding up fine. The issue isn’t whether they are holding up. In fact, demand is rising there. The adoption continues a level of enthusiasm and just the sensibility of adoption is rising. What isn’t rising obviously is the release of capital from the hospital above those departments. And that’s the real bottleneck right now. So anesthesia continues to do very well the process of regional nerve blocks and vascular access continues to go very strong. Emergency medicine same story with the rising ED visits in America. You see that fundamentally having a strong very market, and this technology helps right at the front end of the care process for clinical productivity, patient throughput helps to manage bed turnover et cetera, not to mention patient safety. And then in critical care, same story. I mean, these products are contributing toward better immediate point-of-care performance. It’s really right down the sweet spot of what hospitals need. It’s not adding cost. You buy our device; you pay for it one time. You use it quickly and immediately, and you start helping patients today. And that’s where we fit in. And so, pretty good fundamentals really – that’s [ph] problem. I mean, our pipeline is rising and we’re actually looking at it more and more carefully to understand what it means. The demand is there. It’s just a matter of that capital spigot opening up in the hospital market.

And then just a question for Mike regarding interest expense for the convertible here in ’09. Just curious what we should be modeling, especially now that you have this new accounting rule in effect.

In our Q – our last Q, we said that charge would be around $5 million to $6 million. Now with the debt repurchase, it would be sort of at the low end of that range. In our 10-K we’ll have more in terms of the pro forma because it affects the restatement of the prior year so that we can get the comparable.

Yes. And then, are you still going to aggressively be repurchasing convertibles throughout the year? Is that the plan?

That’s just something – we’ve got a lot of things that we can do, and we’ll be opportunistic if that is a good decision at the time. We’re very happy with what we did last year. So it’s still a lever we could pull.

Okay. And then just one last question on the operating margin – sorry, the operating expense cuts for this year. Do you view that as something temporary? You’re pulling some things out now, but if the market picks up and ordering resumes, some of those costs will start to show up whether it’s this year or whether it’s 2010?

Well, the expenses we’re taking out are entirely controllable by management. And if we increase them in the future, it will be at our option and not because they have to increase. So we’ve made some strides in terms of just overhead costs and some other things. And we’re actually going to keep working at it. And it’s not out of any crisis mentality, just out of being prudent. And we think, heck, if we get to the end of the year, have a reasonable revenue year, set up two new markets, put in two new product lines and drive those costs increasingly tight that will head into ’10 with an even better earnings model, and then we’re now looking at ’10 and ’11, particularly ’11 where we really feel we could have a tremendously robust year with all the products that we know about, some of which you don’t know about. And it will be very interesting for us.

Okay. Thank you, Kevin.

And next we’ll hear from Tycho from JP Morgan.

Hi, this is Sandy [ph] sitting in for Tycho today. Most of my questions have been answered. So I have two quick ones. One is, what’s your expected tax rate assumption for 2009?

It would be similar to last year.

Okay. And in terms of the first quarter 2009 for revenues, would you be able to give us more color? You had mentioned in early January kind of flat year-over-year growth for the first three quarters. Is that something that still stands or–?

Well, let me just jump in. We haven’t given quarterly guidance since the middle of 2006. So we’re not going to do that now. The idea that revenues are likely to be flattish the first three quarters remains flattish could be slightly up, slightly down or right on top of last year, but that’s sort of where we are right now.

Okay, thank you.

And it appears we have no further questions. I’d like to turn it back to our speakers for closing remarks or comments.

Okay. Thank you, everyone, for the call and your time on the call, your questions, we appreciate them all. We feel very good. I’m not trying to sell you anything. We’re going to move ahead. It’s hard with the company, and things look very good for us. And as the economic situation improves, we will be ready. Thank you.

And that does conclude today’s program. We thank you for your participation and ask that you enjoy the remainder of your day.