Thursday, November 7, 2013

Masimo Corporation Report 3Q2013 Earnings

Masimo Corporation (MASI) reported 3Q13 earnings after market close on October 30th 2013, posting great results from the perspective of both the financial end and the health of their product line.

From an operational and client standpoint, MASI has gained quite the traction in the past three months. New implementations of technologies into their operational business model is giving MASI a more effective and efficient workplace. In conjunction with new operational capabilities, MASI has also added new customers with major clinics and hospital, including U.S-based hospital St Joseph Health, a large hospital system with 14 major hospitals, and over 4,000 patient beds. But what is more impressive: their ability to retain clients, resulting in a recurring stream of revenue. As new clinical studies post more and more positive results, practical product use, and cost efficiency, MASI retention of clientele is improving.

Positive clinical value from their Signal Extraction Technology (SET) and rainbow SET products proved that the product was a good addition to their portfolio and it continues to strengthen their potential for future revenue generation. Market share gains are driven by the innovation for a company, which is something MASI does not lack. Driver, including rainbow product sales and new shipments of products, are rising substantially. Compared to the same quarter last year, they posted a 33% y-o-y drive growth, attributed mostly to new pulse oximetry contracts, and installation of products in general wards.

On a segmented basis, product revenue was up 11.1% to $124.5MM, weakened by nearly 2% due to a weakened yen, reducing product revenue by $1.8MM. Rainbow product saw another quarter of growing figures, posting a 9.0% growth in 3Q to $12MM, due to “higher instrument and board” revenues, and increased acceptance of original equipment manufacturers (OEM). Direct business, which comprises of 85% of total product revenue and OEM sales, which comprises of 15% of total product revenue, both grew by 12% and 7%, respectively.

On a consolidated basis, total revenue for 3Q grew by 10.4% to $131.4MM vs. $119.0MM last year, falling short of our estimate of $133.8MM and Street estimates of $132.5MM. Gross margin expanded 80 bps to 66.6%, due mostly to a smaller portion of royalty payments attributed to total revenue. R&D expenses increased 13% y-o-y, mostly attributed to new engineering staff and product development. Net income for the quarter was $15.6MM, a growth of 13.1% vs. last year. EPS on a non-GAAP basis were posted at $0.27, a 14.6% growth, in-line with my estimates, and besting street estimates of $0.26.

Due to a positive quarter, EPS for FY13 is being restated to $1.16, from $1.14. All other estimates remain the same, including full revenue and a goal of $50MM attributed to the rainbow product line. It is important to note the new “breakthrough open architecture monitor and connectivity platform” known as Root. It is an information-hub that is integrated into all products that can easily display figures on a screen for easy reading.

Despite the positive news, MASI shares fell. Nothing struck me as “negative” news in their transcript or press release. When researching deeper, the reasoning behind the fall in share price was due to a 20% increase in short sellers. Finally, the company is beginning to rebound in price.

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