Good day everyone and welcome to the SonoSite second quarter results conference call. Please note today’s call is being recorded. At this time, for opening remarks and introductions, I will now turn the conference over to Mr. Kevin Goodwin. Please go ahead, sir.

Thank you, operator, and good afternoon everyone on the call. This is Kevin Goodwin, CEO of SonoSite; along with me today is Mike Schuh, our CFO. This conference call contains certain projections and forward-looking statements regarding future events or future financial performance of the company. And except for the historical information discussed during the 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 2009 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. So with this mind, I’m going to cover today the second quarter 2010 and then our first half of 2010 financial results. I’ll then move on to talk a little bit more about the reminder of 2010 and on to 2011 just a little bit. I’ll start off with revenue for the second quarter; revenue came in at $61.5 million up a solid 18% versus 2009. Our primary care channel which was acquired last year in Q3, recoded $3.8 million of that revenue. Our core business revenue was up 10% representing our best core growth rate in six quarters. Changes in currency had no impact on Q2. Looking a little deeper into the revenue performance compared to last year’s Q2, our US hospital revenue was up 20%. Our US enterprise was level. Our primary care group was up 19% sequentially versus Q1 and the ultrasound portion of those revenues were up very impressively and finally our MSK revenues more than doubled. International revenue was up 2%. We were impacted from a slow down in Europe and we saw strong performances throughout all of other international markets in excellent…

(Operator instructions) And your first question will come from Tycho Peterson with JPMorgan.

Hey good afternoon.

Hi, Tycho.

May be just Kevin, starting off with the profitability you saw internationally, can you talk us to – to maybe what drove that, are there particular initiatives that helped you outside the US?

Yeah. The international management team did a very good job of controlling variable expenses that they felt were controllable and then it would not damage revenue during their first half as they saw the outlook change. So we saw a middle-teens improvement in international sector profitability which was very encouraging given all the stuff going on out there and if you go round the world, obviously Europe had some troubles due to the facts you know about. Very strong performance in Asia-Pacific, up in the middle-teens area and then kind of level this growth in the rest of the world. So that’s how it unfolded.

And then just on the international, can you talk about how you’re looking at or thinking about the NanoMaxx outside the US in terms of ramping the back half of this year in the nut?

Well it continues to do well. It does well in vascular access and you got the entire product ladder plays a nice role for the business depending on the country you’re in. So that ladder we have, NanoMaxx on up through MicroMaxx and S M-Turbo gives us a lot of revenue horsepower in places like Brazil, Russia, India, China, South Korea, places where we see a lot of economic growth and of course there were core part of our franchise in Europe, Canada, Australia. So NanoMaxx is doing just fine, it’s on track. We did see at the end of the second quarter a bit of a pause – a couple of week pause and just remittance of orders in Europe that gave us a little bit of sluggishness, I think everybody is aware of.

And then in the US, can you comment on the strategic alliances is that you signed earlier this year Quadriceps [ph] and Physio-Control, I mean where they kind of key drivers in the channel here or can you just elaborate on what they contributed?

No. They weren’t key drivers. Quadriceps [ph] is expected to be impacted latter in the year as they’ll be setting up a sales force in the orthopedic MSK arena, which will be an addition to SonoSite’s current sales organization and that’ll start to take place in full thrust by September, it’s already about halfway done. So you’ll expect an impact from them from kind of Labor Day forward. Physio-Control, a lot of interest in activity with no material revenue changes, we did have some good results in other field medicine area such as military and couple of other sectors. So in general, if you look, Tycho, across the four verticals acute care, musculoskeletal, primary care and field medicine, we saw pretty positive signs everywhere, some stronger than others, but if you understand that pay a potential details I think you can see good story emerging for us.

Okay. And then lastly, on LumenVu, can you update on kind of time in there?

We’re doing some more clinicals with LumenVu this summer in Europe and we’re still not out of the FDA. FDA had some questions on some pre-IDE work we submitted to them. So we’re still in the middle of that I’d say right now that the more – the more and more we look at it the more I think it’s a back of the year opportunity if it gets through FDA this summer.

Okay. Thank you.

From Barrington Research, we’ll hear from Charley Jones.

Hi, thanks for taking my questions.

Hi, Charley.

Good quarter.

Thank you.

I guess a few questions here on VisualSonics. Do you expect Kevin, sequential revenue – sorry, can you hear me?

Go ahead, I’m sorry.

Do you expect sequential revenue increases for the foreseeable future or are there some seasonality issues we should take into account here?

We don’t have any seasonality issues nailed down with that business just yet. So I can’t answer that 100% accurately. We are not planning on a particular jump sequentially. We’re kind of looking at the business linearly but obviously with the high unit price of their products, so couple of words, one way of the other can bump a quarter around. So at this stage, we’re looking at the next six months. We anticipate $17 million, we’re pretty confident about that. We think their gross margins are solid so that about what we can tell you.

Would you mind just – kind of it’s a one-time event, helping this out with what you think your operating expenses are Mike and or if you’re not willing to do that I understand.

Operating expenses for what?

For VisualSonics for the second half.

Yeah. Well, if you just take the current guidance, we had $17 million of revenue.

Yeah.

Roughly about 70% margins and they’ll be about breakeven at that and then you got the $7 million of additional charges.

And that’s not including any sort of corporate overhead in that yet, is that right?

Yes it does.

It is already included. Okay.

Yeah.

Fully allocated.

And then, I guess Kevin you commented on this initially with Europe. We’re obviously hearing conflicting results from different companies and due to the various dynamics, but I was wondering if you could comment a little bit more about what you saw on bookings and a little bit more of what you saw on – in revenue? Do we see the impact yet this quarter at all or should we start to see in over the next quarters and then it sounds like you’re alluding to maybe some softness next year as a result of bookings but maybe I’m reading too far into it?

Well, certain European markets had a tough second quarter and certain of those markets were strong. So it’s a mix bag in our European direct markets or you want to call the EU markets. The one thing we saw following the Greek crisis and the close up of the initiatives by the governance – governments were that that was a bit of a slow down in purchased order of issuance for a while. Things have seemingly got more fluid since then. So it just created some uncertainty. We’re not predicting anything just yet for next year. We’ll continue to manage it at this quarter and next to get a better beat on the flow through. We haven’t seen any policy changes in Europe at all that directly affect health care – it certainly not for the worse and so we’re – we’re optimistic but when you see a slow down like that obviously you got to be look cautious. That said, we still had a strong business there. It still expandable there and we don’t see it as a dire straights kind of problem we’re just taking a cautious view and more importantly we’re trying to the point of the fact that, let’s say – let’s say it ends up being a slower market opportunity for us for a couple of quarters or longer. The overall business the way it has the potential to scale still offers a very strong structural profitability growth opportunity and we have a lot of other growth arenas we’re going after that are working.

Just a couple of quick questions and then I’ll jump back in queue for a follow-up. Could you give us the enterprise number and could you frame out how large do you believe the musculoskeletal market to be and are you just penetrating a portion of that or are you penetrating most of that market?

Well, enterprise is – was basically what was it like, a less than 10% of revenue for the quarter.

About 7%.

About 7% for the quarter, so that – that and remember enterprise is SonoSite’s lumpy. So we make it a point to tell you that it was as expected. Enterprise can certainly do better in the second half and in general we feel pretty good about the order potential in that sector. So the MSK area is a red hot. We see that as a very large market, possibly the biggest single market we go after worldwide and it seems to be taken off very nicely. Our business doubled in the first half, more than doubled. And the number of applications, the number of potential users, the number of this general opportunities in that space. We handicap that as a feel of $700 or $800 million. So we’re still very small with a long runway to run – to go down I think.

Are we seeing it more in like knees or all joints?

Small joints is one area. The use of orthobiologics is another area and, just needle injection guidance, visualization of fluid. These are about a half a dozen of applications that reduce the time that takes to check a patient of, reduce the cost to healthcare directly and in general this makes things better for the patient faster. So this is a very high leverage technology for the orthopedics MSK community and it’s in the first inning, without question, first inning.

Great. Thanks a lot.

(Operator instructions) From the Royal Bank of Canada, we’ll hear from Alan Robinson.

Good afternoon.

Hi, Alan.

Hi, Alan.

Hi. You mentioned Kevin, backlog and momentum were strong at the end of quarter, was this strength similar to what you saw at the end of Q1 or I recall it that so, I mean, you mentioned bookings were running at twice the growth rate of revenue. As said, did you see a similar dynamic at the end of the second quarter?

Well, bookings came in strong and the backlog didn’t drop. It was stronger, exiting the quarter. So that’s – that’s the indicator we’re trying to give you meaning that we didn’t drain the backlog to make the number.

Okay.

That it was stable. And I’d say it’s fair to say momentum was strong in the second quarter. We saw linearity throughout the quarter, pretty good flow through all the way. The only real hiccup in the quarter that I could point to was that couple of week slow down in Europe that’s followed the Greek crisis and they sort of all took a look at that and that was it.

Okay. Did – are you able to provide anymore granularity with backlog, I mean did the international backlog got pickup?

Well, we don’t – well, Alan, we don’t normally do that rather than we would certainly try to be upfront with you at the backlog we’re extremely high or low. But we just want you to have confidence that backlog was stable and that’s a good variable.

Okay. And then could you give us an update on the GE co-marketing efforts that you have in place?

Nothing to report. They haven’t really filed backup with us on that and we had been very focused on market execution. So there hasn’t been a lot of dialogue.

Okay. Okay. And then just to clarify, the $7 million of transaction costs you mentioned on the release, I presume that includes the $2.5 million expended in the second quarter?

Yeah. That’s right Alan, but half of is going to be cash transaction costs, the other half will be non-cash.

Okay. Thank you.

And we do have a follow-up from Charley Jones with Barrington Research.

Okay.

Not so quicker than expected. Thanks again. What was the percentage of international revenue, Mike? And how does the VisualSonics differ from that?

Well, let’s see here. International was, Mike…

Well, US was 52% in the quarter.

So international was about 48% and then the VisualSonics business was a little weighted toward the US I believe, I think it’s about 60-40.

And I just wanted to kind of talk through something, Kevin. So I would imagine that the research markets are little lumpier than maybe the core hospital [ph] market, maybe I’m wrong about that. Obviously buyers and sellers buy and sell for different regions but one concern would be that the seller here is a kind of reached their palatal of where they can take revenue on their own in the research market. How comfortable are you that this is a growing market for you, now that you’ve had a chance to own this business for at least a month and are you even really able to comment in on that?

Well, we bought the business believing that the preclinical market was very expandable. Their revenues are heavily concentrated in cardiovascular, historically. They are far from penetrated both in North America, Europe and Asia. So having our platform view just for preclinical, is a great opportunity and we bought the business with a big haircut obviously on their numbers and we feel very good about the growth prospects of their business. They just need to aided and embedded by SonoSite and that’s exactly what we’re going to do. So I would not at all look at this as a business that plateau. They were certainly on a roll when we came across them and expecting to post big numbers this year and next. Obviously they took out some time to sell the company in the first half but its full speed ahead from here and I do believe that you could be right about lumpiness. So we’re as usual not going to give you quarterly guidance, we will continue to monitor their ability to hit their six month objectives which we think are more normal, are more reasonable to think about. So again, we have a $17 million estimate for the second half and this will be our first chance to find out.

And I guess, how long due you think that first commercial application is in place?

Well, you mean how long before we see it?

Yeah.

Well, we’ll initiate actions this year, later in the year on the project to converge those technologies. And we would estimate that you’re about two years out from there but then what you have is something fabulous that…

Yeah. That’s really where I want to go at this is. Should we think of this acquisition, the price that you paid for it really very heavily weighted towards the revenue that you’re generating in out years on a commercial basis or is the research business is actually a meaningful piece of the valuation here as well?

No. Well, it’s a very meaningful piece of the valuation and there is also opportunities for SonoSite technology to end up in the VisualSonics’ channel in the clinic – preclinical research world than in the pharmaceutical world. So we always wanted to do that. We bought the business on the basis of its value as a preclinical basis and its value to grow as a preclinical business. The clinical business opportunity is all upside. We’re going to drive that technology, drive that project, fund that project with a cash flow from the growth of VisualSonics and it’s all upside and it’s big upside too. So we wouldn’t expect investors to put a lot of value on that just yet but I can tell you from being in ultrasound for 23 years, you’re going to see an absolute game change in zero to – skin line to 3 centimeters in a package that I think makes it accessible to medicine, which has never been done before.

Right. Thanks for that and then finally on CDIC, you talked about a strong primary care market. Could you split that up a little bit? How much revenue was generated from ultrasound in that market and going forward what you think the mix is and then finally what was it that allowed you to crack the code? Was it really just time in getting in front of those customers and was it the CDIC customers you’d already been talking to about ultrasound or is it just having feet on the street in that market that really where they maybe weren’t even CDIC customers?

Well, the majority of business was still in the quarter, CDIC original business with their ICG products centers et cetera. However, very nice trend line for the second quarter in on ultrasound. So what we’ve done in two quarters is basically in our view, prove our hypothesis of a market opportunity in primary care as well as you look out what could we do with the primary care business based on the numbers as they are today. Over a three to five year timeframe, we’d like to build that up into a $40, $50 million business. I think it’s very important to note that we went to positive cash flow in the first half on the CardioDynamics acquisition which was not expected. So the revenue momentum and cost management in Q2 tipped us to the positive startup things on cash flow. So we got the business in our view in a nice shape. We have been remodeling the channel as I pointed out since fourth quarter last year that has a direct impact on your revenue performance in your capacity. But the ultrasound piece of that was very impressive sequentially Q1 to Q2, and in general we’ve got some good news here that’s the bottom line.

Great. Thanks for the all questions.

(Operator instructions) And it appears there are no further questions.

Okay. Well, you guys, thank you for your time, enjoy the summer and we’ll – we’ll be back in touch, I guess it is on October. Bye.

Ladies and gentlemen, it does conclude today’s presentation. We do thank you everyone for your participation.