Earnings Call: Q4 2015

Feb 23, 2016

Day, ladies and gentlemen, and welcome to the Masimo Corporation 4th Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to turn the call over to Eli Cameron. You may begin. Hello, everyone. Joining me today are Chairman and CEO, Joe Kiani and Executive Vice President of Finance and CFO, Mark Dorad. This call will contain forward looking statements, which reflect Maximo's current judgment, including certain of our expectations regarding fiscal 2016 financial performance. 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 ks and Form 10 Q. You will find these in the Investors section of our website. We will also discuss certain non GAAP financial measures. A description of each non GAAP financial measure and a reconciliation of each non GAAP financial measure to the most comparable GAAP financial measure can be found in our earnings press release. I'll now pass the call to Joe Kiani. Good afternoon and thank you for joining us for Masimo's Q4 2015 earnings call. We finished 2015 exceeding our targets as our diversified product portfolio and geographic reach generated good growth despite one less shipping week in Q4 2015 versus Q4 2014, a continuation the significant year over year FX headwinds as well as a weak flu season. Our Q4, 2015 core product revenues grew to $159,800,000 including a 35% year over year increase in rainbow revenues to a new quarterly record of $19,100,000 Some other important highlights from our Q4 included, we shipped a record 48,500 oximeters yielding 2015 shipments of nearly 183,000 oximeters excluding our handheld and finger pulse oximeters and increasing our global installed base by nearly 8% year to year to more than $1,400,000 Our international sales grew by approximately 18% on a constant currency basis. The adoption of Root accelerated, which has now become the fastest growing hardware revenue product in our history and is laying the foundation for increased adoption of our core technologies. Our Q4 2015 GAAP earnings per share were $0.46 which includes approximately $0.06 in net benefits related to various unique Q4 2015 transactions that Mark will discuss in more detail. For the full year, our product revenues increased to $599,300,000 up nearly 8% and up 11% on a constant currency basis. At the same time, our full year GAAP earnings per share was 1.55 dollars or $1.49 if adjusted for the unique Q4 2015 items. This $1.55 in GAAP earnings per share was up approximately 19.2% from the prior year $1.30 per share. Our strong finish to fiscal 2015 gives us confidence that we are on track to continue to deliver on our business plan and the improved operating leverage that we have been discussing and now continue into the last 2 years of our 10 year plan. As a result, our outlook for the 2016 is very positive. And as Mark will share with you shortly, we are today providing fiscal 2016 financial guidance that is focused on continuing to deliver earnings per share growth at a rate of at least twice our product revenue growth rate. Operator, as a thumping sound, If you can get rid of it, that would be great. I guess we'll have to flip. Okay. Next, Mark will review our 4th quarter financial results in more detail and then discuss our financial guidance for 2016. And then I will provide more detail on 2015 2016 expectations. Mark? Thank you, Joe, and hello everybody. Reported total revenue and product revenue for the Q4 was $167,300,000 and $159,800,000 respectively. Product revenue rose by 3.8 5% on a constant currency basis versus the Q4 of 2014 as our Q4 2015 product revenues were reduced by $4,200,000 due to continuing adverse foreign exchange rate movements. In addition, if you also adjust for the extra week in the prior quarter, which we estimated on a worldwide basis approximately $5,000,000 our comparable Q4 2015 to Q4 2014 product revenue growth would have been 10.1%. Q4 product revenues came in above our expectations due to a combination of increased OUS revenues coupled with strong capital sales of both Root and our new MightySat finger pulse oximeter. Q4 2015 Rainbow product revenue totaled $19,100,000 up by 35% or nearly 37% on a constant currency basis and that was up from $14,100,000 in the prior year period. The record growth was due to the approximately $3,000,000 in rainbow products related to continued sales to a new large customer in the Middle East and very healthy growth for both rainbow disposable sensors and instruments. In addition, our Q4 SBHB revenues due largely to new Middle East customer increased by more than 60% to $6,100,000 versus $3,700,000 last year. Our worldwide end user or direct business, which includes sales through just in time distributors, grew 4.3% in the 3rd quarter to $137,900,000 versus $132,200,000 in the year ago period. FX adjusted, our worldwide end user direct business grew by 7.2%. And if we also adjust for the prior year extra week, our worldwide end user direct business would have grown by 11.3%. Our direct business represented approximately 80 6% of our total product revenue in the quarter level with the prior year period. Our OEM sales comprised the remaining 14% and rose by 0.6% versus the prior year period. By geography, total U. S. Product revenue increased by 1.3% to 106 point $6,000,000 compared to $105,300,000 in the same quarter of 2014. Once again though recall that we had one less shipping week in Q4 of 2015 versus 2014, which we estimated impact our U. S. Product revenue by approximately 4,000,000 and as a result, on an adjusted basis, we believe our U. S. Product revenue growth was really up by approximately 5.3%. Our Q4 OUS product revenues of $53,100,000 rose by 9.3% versus $48,600,000 in the same prior year period and up 17.9% on a constant currency basis and up 20.3% if you also adjust for our estimated $1,000,000 impact due to the 1 less week in the prior year period. Excluding the impact of FX rates, OUS year over year revenue growth rates were highest in the EMEA and Japan regions compared to the prior year period. International revenues represented approximately 33% of total Q4 product revenues or 35% on a constant currency basis, up from 32% in the prior year quarter. Our Q4 2015 GAAP product gross profit margin was 59%, down from 65.8% in the prior year quarter. However, if you adjust for the impact of the $9,700,000 Q4 inventory valuation adjustment, our gross profit margins would have been 65.1%. In fact, our Q4 product gross margins would have been 66% had it not been for the 70 bps negative impact of the large Middle East order, primarily because we were required to accelerate the capital equipment depreciation and 20 basis points impact of actual Q4 FX rates versus our original FX 2015 rate assumptions. Adjusting for these items, our adjusted Q4 product gross margins of 60 6% would have been the 4th quarter in a row of sequential gross profit margin improvements, which is consistent with the fiscal gross profit margin guidance we provided in February 2015 and importantly reflect the continued benefit we are seeing from our value engineering activities. The Q4 2015, dollars 9,700,000 inventory valuation adjustment was the result of various product end of life decisions and other related inventory adjustments that we made in light of the exciting new line of devices and sensors that Joe will describe in more detail later in the call. Reported 4th quarter 20 15 total operating expenses were $64,900,000 a decrease of $11,700,000 versus 76 $6,500,000 in the prior year period. The decrease was attributable to a $25,000,000 settlement from Mindray, which was then partially offset by the reaccrual of a $5,400,000 award that the District Court had vacated, but was reinstated on appeal just late last week. Also during the Q4, we made a $5,000,000 dollars charitable contribution to the Massimo Foundation. Excluding the impact of this net legal benefit and the charitable contribution, Q4 2015 adjusted operating expenses would have been $79,500,000 up by $3,000,000 or 3.9 percent, reflecting the continuation of our disciplined control of operating expense growth. Adjusting for the three items I just noted, but also recognizing the currency benefit we realized in our operating expenses, our year over year operating expenses would have been up 5.9%. SG and A expenses were $70,700,000 including the $5,000,000 charitable contribution donation. Without that donation, our SG and A expenses would have been 65 point $7,000,000 up 6.8 percent versus the $61,500,000 in the prior year period. Adjusted and for the benefit from foreign exchange rates, our year over year SG and A expenses would have been up 9.4%. R and D spending of $13,800,000 declined by 8.1% versus the year ago period due primarily to lower clinical trial and engineering project related expenditures. 4th quarter 2015 operating income was $36,900,000 compared to $32,600,000 in the prior year period. Excluding the impact of the unique Q4 adjustments, Q4 2015 operating income was $32,000,000 essentially level with the prior year period despite having one less selling week and the negative year over year impact of foreign exchange rates. Q4 2015 non operating expense was $1,900,000 compared to an expense of $1,400,000 in the prior year period. The Q4 2015 expense includes approximately $741,000 in interest related to the reinstatement of the 5 point $4,000,000 award that I noted previously. In addition, we incurred approximately $800,000 in net interest expense related to borrowings under our line of credit. Our 4th quarter 2015 effective tax rate fell to 28.4%, down from 30.2 percent in the same period last year. The final Q4 effective tax rate was slightly below our most recent expectation due to the permanent implementation of the R and D tax credit, which was signed in December 2015. Our average shares outstanding for Q4 was 52,900,000 down from 53,100,000 in Q4 2014. This decline was primarily due to the impact of our fiscal 2015 stock repurchases, largely offset by stock option exercises and the impact on fully diluted shares outstanding of a higher stock price. In Q4 2015, we repurchased approximately 600,000 shares bringing our total repurchases for the year to 4,100,000 dollars 4th quarter GAAP 2015 net income was $24,100,000 or $0.46 per diluted share, including the $0.06 per share benefit related to the special Q4 2015 adjustments. This adjustment this adjusted $0.40 per share was equal to $0.40 per share in the prior year period, again despite the extra selling week. And in addition, as highlighted in our GAAP to non GAAP reporting, the impact of year over year FX rate changes reduced our reported Q4 2015 earnings per share by approximately $0.02 as compared to Q4 2014. As with prior quarters, we have provided supplemental non schedules, which illustrate our non GAAP gross profit margins, operating expenses, operating income and earnings per share. We provide these schedules primarily in order to show the impact that year over year movements in foreign exchange rates are having on our fiscal 2015 GAAP operating results as we do not engage in any kind of hedging activities unlike many other sizable medical device companies with worldwide exposure. In the interest of time, I'm going to defer a summary review of our year to date financial results, but will direct you to today's press release and the Form 10 ks. As of January 2, 2016, our day sales outstanding was 46 compared to 45 as of January 3, 2015. And over the same period of time our inventory turns increased to 4.2 reflecting the benefit from the inventory valuation adjustments that I previously noted. Total cash and cash equivalents as of January 2, 2016 were 132 $300,000 compared to $134,500,000 as of January 3, 2015. During 2015, we generated approximately $114,000,000 in cash from operations, dollars 28,000,000 from stock option exercises and we borrowed an incremental $60,000,000 on our line of credit. During the year, these funds have been primarily used to repurchase primarily to the final build out of our new corporate headquarters as well as the acquisition of a building in New Hampshire, Connecticut. Now I'd like to turn to our fiscal 2016 financial guidance, which is based on the best information we have available to us. In addition, because of the continuing volatility in the foreign exchange markets and the impact of those rates on our 2016 GAAP financial guidance, we are going to highlight the impact of the FX assumptions on that guidance. We're providing this information because we believe it's important to understand the underlying improvements occurring within our business that unfortunately could be somewhat obscured by the continued adverse foreign exchange rate volatility. We are projecting our total fiscal 2016 GAAP revenues to be approximately $670,000,000 including $640,000,000 in product revenues and $30,000,000 in royalty can't be certain and therefore should there be any changes, we will can't be certain and therefore should there be any changes, we will certainly let you know. Included in the $640,000,000 in projected product revenues is an assumed negative impact of approximately $4,000,000 in FX rate movements when comparing our planned 2016 FX rates to the actual 2015 FX rates. For example, our 2016 FX rate modeling assumptions include the Japanese yen at approximately $1.18, the euro at $1.09 and the British pound at 1.44. Dollars We expect 2016 GAAP revenues for Rainbow to be approximately $68,000,000 which will be up approximately 11% from the prior year period. We expect our GAAP 2016 product gross profit margins to be approximately 65.4%, including approximately a 10 bp reduction due to the impact of foreign exchange rates. And as in prior years, we expect our product margins to be slightly below this average in the first half of the year and then higher in the second half of the year. We expect our 2016 total operating expenses to be approximately $17,000,000 reflecting a modest increase of 4.2 percent over our adjusted FY 2015 expenses from continuing operations of about $304,300,000 which excludes the impact of the Q4 legal matters and charitable contributions that I previously described. Importantly, as we noted in our press release on December 18, 2015, our projected 26 GAAP operating expenses includes approximately $7,000,000 in reinvestment into R and D and other infrastructure development for new projects tied to the suspension of the medical device tax. Based on current fiscal 2015 mix of U. S. And OUS income, including the impact of the foreign change rate assumptions, we expect our effective tax rate to be approximately 29% to 31 percent. We expect our annual interest expense to be approximately $4,000,000 based upon current borrowing base levels. And we're projecting our average weighted shares outstanding for the year to be approximately $53,000,000 to $54,000,000 growing ratably throughout the year. And I'll also note that this projection does not assume any additional share buybacks beyond those already executed through the end of last year. Based on all these assumptions, we expect our 2016 GAAP earnings per share to be approximately 1.69 dollars With that, I'll turn the call back to Joe. Thank you, Mark. Looking back on 2015, I am proud of the achievements by the entire Masimo team in bringing our technologies to more customers and patients, which has enabled us to help more patients and exceed our financial targets. Last year, we realized a noteworthy acceleration of growth for rainbow sales and steady increase in our installed base, leading consistent above market growth rates for our set pulse oximetry products. All of this occurred in the face of a very adverse FX environment and a weaker than usual flu season in Q4. We believe the growth in U. S. Hospital admissions in Q4 was similar to Q3 being in the range of 2% to 2.5%. Considering that small increase, we are happy with the growth of our Core Set pulse oximetry business in 2015 as we shipped a record 183,000 oximeters including the record 48,500 oximeters shipped in Q4. Our annual driver shipments rose by over 6% in 2015, while our installed base increased by 8% last year, roughly 2 times the rate of published market growth for pulse oximetry, boding well for increases in sensor revenue in 2016. Our new installed base now stands at more than 1,400,000 oximeters excluding handheld and finger oximeters. We are gaining market share due to the clinical benefits of Masimo Technologies for improving the quality of care while reducing costs of care. Accordingly, we achieved numerous clinical and commercial milestones in 2015, including the rapid adoption of Root, providing a new source of revenue and platform for our core technologies that is on pace to readily boost our year over year sales this year by 1% to 2%. Note that this adoption occurred despite that lack of approval in the U. S. For Protection Association requiring firefighters exposed to fire and smoke to be assessed for carbon monoxide poisoning on-site, strengthened the basins for adoption of our rainbow carbon monoxide monitoring technology. Studies showing the value of our new ORI, which is oxygen reserve index as a leading indicator for imminent drop in oxygen saturation, which is still pending FDA clearance. Studies illustrating the benefit of our PVI measurement for contributing to significant reductions in length of stay, post operative complications and overall cost of care. A study finding that the combined use of our SPHB and PVI technologies generated a 25% reduction in 1 month mortality for 6,000 patients undergoing surgery under general anesthesia. Significant new customer wins in the U. S. And around the world including institutions in Brazil, India, Saudi Arabia, Turkey and the UK further indications to our installed base for patient safety net, which as of now has expanded to 365 hospitals and continues to rise quarterly. In addition to those customers and clinical milestones, we launched a number of important new products last year including MyITiSAT with PVI measurement and the Rx version of MyITiSAT. Patient Safety Net Series 5,000 with Iris Connectivity and MyView, Root with blood pressure and temperature measurement. As we turn our focus to 2016, we are excited about the potential for this year. We have a substantial number of pending product clearances at the FDA for products which have already received the CE mark. Our outside U. S. Sales of these products have been encouraging and we are looking forward to adoption of these new Masimo technologies in the U. S. Beginning with root with blood pressure and temperature monitoring, which as we noted before just received 510 clearance. Pending U. S. Launches ORI03 regionalthermal oximeter and Midasat with RRP, which is respiration rate from the placenta graph. Our newer products are now contributing to an acceleration of product sales growth. Sales of many products have been rising faster than our aggregate average, including Rainbow, for adoption is seen in the sales of single patient use SPHB sensors for 2015, which rose by triple digits year over year. For 2016, we have a confident outlook for additional gains as we are well positioned to realize increases in product adoption and selling efficiencies from 2 relatively new sources. 1st, we expect sales of Root to pull in sales of Masimo Technologies beyond SET and Rainbow. For example, our SedLine brain function monitor along with our capnography and O3 regional oximetry monitors all work with ROOT and can be easily adopted by customers once the Root unit has been installed. Secondly, we have instituted some important changes within our sales force recently, which we believe should make our sales staff much more effective. We have realigned our blood management and SedLine Brain Function Monitoring sales force to now integrate their selling efforts, simultaneously creating incentives for driving sales of SPHB, PVI, SedLine, O3 and ORI when they're approved based on route through this team. On a continuing basis, our earnings growth for 2015 exceeded our product sales growth due to well executed planned control of operating expenses and an expanding gross margin adjusted for the year over year impact of FX rate. Throughout 2015, we were able to improve our gross margins adjusted for foreign exchange and the unique Q4 items despite the normal annual ASP reductions due largely to the significant progress we have achieved with our value engineering work over the past 3 years. We view 2015 as a key turning point for Masimo in terms of our ability to demonstrate the gain in real earnings power that we can achieve. A major milestone and our ability to achieve such gain stems from our R and D prowess as exemplified from the recent introduction of sensors code named Red Diamond and called RD, which improves upon our LNOP and LYNX sensor line. In fact, we have begun a transition plan for our LNOP sensors with the introduction of RD sensors. The RD family of sensors is the first of a planned sequence of products, which will provide patients with a much more comfortable and lower profile sensor. Our early market experience with these products has been overwhelmingly positive. We have already launched the SET pulse oximetry RD sensors and will soon roll out Rainbow SET pulse co oximetry RD sensors and a rainbow light set sensor that will hopefully enable rapid adoption of ORI due to its expected cost and lower price point as compared to rainbow sensors. We believe these products together can not only improve care and patient comfort, but have the ability over time to add to our revenue and earnings. I'm also excited to report that in early 2016, we are launching the RAD67 handheld pulse co oximeter with the new Miniclip finger SPHB reusable sensor that incorporates our 2nd generation SPHB monitoring technology. Improvements include reducing the time to take a measurement, improved SPHBs tolerance to motion and the repeatability between measurements. This device will allow us to replace the PRONTO7 SpotCheck device. Additionally, we are launching the RAD-nine and the RAD-ninety seven monitors that will replace Rad8 and the Rad87 oximeters and move our core measurement platforms to the current instrumentation and UI technology with all the features in our flagship products, the RADICAL 7 and ROOT. For our long term pipeline, we have a sizable collection of research and development projects underway today. The recent suspension of the medical device tax will allow us to accelerate the pace of some of these projects while initiating new groundbreaking products that are targeted at improving patient care and reducing cost of care. As we announced last quarter, we have a new plan to buy up to 5,000,000 shares of our stock. During Q4, as we previously mentioned, we repurchased approximately 600,000 shares. In summary, we are happy with our results for 2015 and we're excited about 2 years of our 10 year And as we head towards the last 2 years of our 10 year post IPO plan, we are determined to continue to deliver on the financial leverage that we believe exists within the Masimo business model, while maintaining focus on our mission to reduce the cost of care and improve patient outcomes. With that, we'll open the call to your questions. Operator? Our first question comes from Larry Keusch of Raymond James. Your line is open. Okay. Thank you. Good afternoon, everyone. Hi, Larry. Joe, I'm hoping we could just start with the guidance for 2016 and specifically the royalty and the inclusion of it. Back in 2014, obviously, you had at that point, when facing a situation where there was some uncertainty, decided to provide a range of scenarios. And obviously, you did not do that this time around. So can you walk us through, again, why you're assuming at this point that the royalty does stay in for the year? Since the earnings call we had last quarter, we've had constructive dialogue with Medtronic. And while there's no certainty that a new agreement will be reached, today at this hour, we believe that it's more likely than not that the royalties will continue till October 2018. Now as Mark mentioned, if that changes, we will immediately notify our shareholders. Okay. That's very helpful. And then just 2 other quick ones for you. In terms of the operating margin outlook over the next several years, again, you have been talking about mid-twenty percent range. And again, I was just wanted to see if that's still the right way to think about it and what the appropriate time frame is. And then on route, you obviously indicated that you had successful product sales this year. I just want to make sure I understand the business model behind that. Are you actually selling product, that monitor? Or are you placing it? Or is it a combination of both? Okay. I'm going to answer the second question and then I'll let Mark answer the first. As far as Root, we Root has 3 key features. First, let me answer your question. We are selling it. But the 3 key features is open architecture, it's connectivity hub where we don't charge for the data and the fact that we priced it as a tech product, which is US2 $1,000 So given all that, we have decided not to give away route. So we sell those unlike everything else pretty much that we have done to date, although in those products we did sell some of it. But certainly a greater percentage of root devices that are being placed are being sold than being placed. Okay, perfect. And then Larry, to your question on operating income targets, yes, you're absolutely right. As we've been talking about for a number of years now, the goal is to certainly climb into the 20% range and hopefully over the next couple of years head towards 25% based upon some of the leverage points that we've, I think, provided some guidance that we've provided today, suggests that, that with the guidance that we provided today suggest that, that kind of performance is going to continue. And obviously, we're going to work very hard to make sure that we not only achieve the numbers that we provided today, but hopefully be in a position to do a little bit better. Okay, terrific. Thanks guys. Thank you, Larry. Our next question comes from Tal Levi of Wedbush. Your line is open. Great. Thank you. Good afternoon. Good afternoon. So I guess maybe we could start with Hey, Tal Butchart. Hi, guys. So in terms of the record shipment of new oximeters, I understand the record shipment in terms of the absolute numbers. But then you obviously take some out of the installed base. So you end up with essentially a similar number in your installed base as last year. And I guess the question is, I know part of it is an estimate on your guys' part in terms of how long current systems will be used in the field. But I'm trying to figure out whether the new monitors that are being pushed out or the new drivers, whether they generate more revenue than some of the older products that you have out there. Okay. That makes sense. Overall, really good question, Tayo. Let me try to answer them as best as I can. First of all, you're right, the growth rate, not the number, but the growth rate is the same despite record shipments. And that's because we're assuming that anything that's 10 years old or older has been retired. Obviously, we have it's a theoretical assumption and in fact, most likely we're incorrect about that assumption. Information about the OEM partners of ours is that their products last about 15 years. And as you know, more than 80% of our drivers are OEMs products. But then the second part of your question, do also the newer shipments drive more sensors or drive more revenue? And the answer to that question is yes as well, because early on our OEM partners were not in the OR, the critical care beds, they were in the less acute sites and the new drivers also have revenue associated with rainbow parameters as well as rainbow sensors. So I think I've answered both your questions. Yes. Thank you. Very helpful. And in terms of as you transition to the Red Diamond, I guess, platform, Anything that's going to add potentially to noise in future quarters, whether it's additional inventory write downs or maybe some disruption in how quickly product can get out the door to some of your customers? Well, I think we did a conservative job of really taking care of any of those potential write downs as Mark noted $9,700,000 of it. So I think we should be covered. Obviously, as the installed base converts, there will be patient cable issues. We think we've got a good strategy and we think we're covered for that given some of the other parameters surrounding our business. So no, we don't expect negative surprises. Hopefully from here on, it will be the same or positive. Got you. And nothing from like a sales force distraction if they're spending more time changing out or making sure our customer is happy instead of going after new business? That's possible. That's possible. Although the new so far the customers that have switched to the RT sensors have been very pleased. So usually you get the distraction if something goes wrong or if there's a hiccup and certainly there is potential as we scale from low volumes to high volumes, a hiccup might occur. But we're not projecting distraction. And in fact, in the way we have set our business this year, we've accounted for some of that with some of our expectations and what they're going to be doing. And also don't forget, we have a really large clinical specialist team, which are very nicely aligned with our sales force team in the field. So we think some of that customer service will fall more on the CS team than on the sales force. Okay, perfect. Great. Thanks a lot. Thanks, Dale. Thank you. Our next question comes from Brian Weinstein of William Blair. Your line is open. Hey, good afternoon. Hi, Brian. Hi, Brian. Hi, Brian. Hi, Brian. Hi, Brian. Hi, Brian. Hi, Brian. Hi, Brian. Hi, Brian. Hi, Brian. Hi, Brian. Hi, Brian. Hi, Brian. Hi, Brian. Hi, Brian. Hi, Brian. Hey, just a quick one here on Rainbow, obviously, a strong quarter. I'm just wondering if you can help outside of that large Middle East order, was this primarily or more driven by new customers coming in or existing customers really ramping up or adding indications? A little bit of both, little bit of both. We not only had new customers, we had existing customers expand, We had more sensor consumption. So I think it seems healthy out there. And I think this study from Limoges that studied 6,000 patients and showed really good results. Some of it isn't published yet, I can't talk about it, but the one part that got published in an abstract is 30 day mortality was down by 25%. I think that's huge. And I think that as that study gets more attention from full manuscript release, I think the strength will continue. Okay. Thanks, Joe. And then just thinking about capital allocation here in 2016, can you give us an idea of anything you're seeing on the M and A front, whether there are different opportunities or valuations have changed at all on the private side with some of the public comps coming down, just thoughts on M and A throughout 2016? Yes. We are out there looking at a lot of things. Nothing huge, but a few interesting small opportunities that we are engaged in, assuming the due diligence goes well. We'll hopefully add 1 or 2 new technologies and some with revenue to our business, which is not at point assumed in the numbers we provided you. Okay, thanks for that Joe. And then just one real quick one for Mark. I know that you don't hedge at this point, but just wondering, given all the growth you're seeing outside the United States, is that something you've given any thought to moving forward here? And that'll be all for me. Thanks guys. Sure. So we've looked at this carefully several times and we've concluded that we spend real money trying to protect the shadow money and we don't like spending real money. So I don't think we're going to change our strategy. But Mark, you want to add anything to that? No, I think that's correct. But I also think, Matt, as you know, I mean, given where rates have gone over the last couple of years now, it's tough to know whether the opportunity to hedge has already occurred. And if we should see a reverse of what we've seen in the last couple of years, which some are beginning to predict, it would actually be an inopportune time to set up a hedging strategy that would turn the headwinds that we faced for the last couple of years. Instead of becoming tailwinds for us, they remain neutral. So I think for right now, as Joe said, we're pretty well set in our non hedging strategy approach. Okay, great. Thanks guys. Thank you. Our next question comes from Chris Lewis of ROTH Capital Partners. Your line is open. Hi, Chris. Hey, guys. Good afternoon. Thanks for taking the questions. Thank you. Nice day out here. Sure is. Always is. Joe, wanted to follow-up on the previous M and A question. In terms of some of those potential assets you're looking at, can you elaborate a bit on the ones particularly that are already generating revenues? Give us a sense of the type of size of asset you think the company is fit to take on at this point, maybe type of technology and any potential timing details you may have on that? I'd rather not given that we're not done with our due diligence and I don't and I can't tell you if they're going to come through. But what I can tell you is that we've acquired several businesses in the past decade from pure technology with no revenue like Andromed in Canada, which we turn into Rainbow Acoustic Monitoring to Faizan who had significant revenue, although small, but real revenue and profit coming up in Sweden that gave us our capnography and airway gas monitoring. So and every one of these acquisitions, knock on wood, we have really done a great job of integrating. So I think we have a formula, we have a good team of people. And if we were about to acquire a company our own size, I'd say we don't know how to do that and we may mess it up. But these the sizes we're looking at are not much bigger than what we bought before. So I think we should be able to handle it. Okay. I appreciate the color there. And then in terms of the guidance and kind of the guidance methodology you've used for this year, I think a few quarters ago, you talked about excluding some of these larger one time orders that have historically been choppy from quarter to quarter when they come in in terms of timing and such. Have you taken that same type of conservative kind of guidance approach to the 2016 outlook in terms of some of those international tender orders coming in? Yes. Yes, we have. We like how everything felt last year. So we decided to repeat the same process and strategy. Okay. And then in terms of just end markets, you talked about 2%, 2.5% type patient admissions, a little bit of a weaker flu season in the quarter. Can you just give us a sense of what you've seen so far this year about 2 months into 20 16? How have those end markets trended relative to your expectations? Thanks. Mark, do you want to take that? Sure, sure. I think it's interesting in the sense that as we alluded to before, this year's flu season was definitely light as we completed Q4 and frankly, as we started into the New Year. But I also think over the last couple of months, there's been sort of a resurgence of flu activity. Most of the recent data we've seen suggests that this year is nearing very closely 2011, which was a year in which the flu season was late. So we've actually seen a bit of an uptick in the last, I would say, 4 or 5 weeks of activity. And that seems to be cooperated by some of the external data that we've seen as well. So that could bode well for at least versus most people's assumption, I believe, which was that this rather weak flu season was going to continue. So right now, it's actually looking a little bit more positive maybe than it was, say, in December January. But I do want to say no one's coughing around Massimo. So it might be ending. That was a month ago. That was a month ago. What are the perks of living in Orange County, I guess. All right. Thanks, guys. Thank you. Thanks, Chris. Our next question comes from Bill Quirk of Piper Jaffray. So first question, I wanted to go back to an earlier one, Joe, on Root. You guys have obviously had a really nice success with this, here in the still relatively early stages of the launch. Help us think a little bit about because it carries a relatively low capital cost. Help us think about where you guys think this could generate in terms of incremental pull through revenue with some of the adjacent products over the, call it, 3 5 year timeframes? Well, based on what we've seen, people are buying routes for 3 areas, the OR, the ICU and the General 4. In the General 4, it's mainly the main monitor and it does act like a connectivity hub with the rest of the devices in the room to take to the EMR. In the OR, it becomes a specialty monitor that's really pulling in SedLine and in countries where we have approval 03 and other parameters and capnography. But also people are beginning to look at that device in the OR again as a connectivity hub and a cockpit fashion with some of the technologies we have like Kite that allows everything in the room to get aggregated and displayed how the clinician wants it. And then the ICU is a combination of additional parameters and a connectivity device for the devices in the room that needs to get connected to the EMR. So we see it in the next 3 to 5 years of potentially on its own becoming a very a very useful device for networking everything in the hospital. But then it's a natural once it's in there, it's very inexpensive and seamless to add 3 cerebral oximetry, original oximetry to add SedLine brain function monitoring, add capnography or airway anesthetic gas monitoring. And each of those are on their own potentially similar, if not bigger in sensor revenue annually for us. So in 3 to 5 years, if everything goes as we're sniffing out right now, it could help maybe really increase the adoption of these new parameters that we've created. Right now, as you know, we have very little market share even though we have better products in each of those categories. And this route could help those become leading products. Okay, got it. And then another one for you here, Joe. You mentioned the rainbow light Red Diamond. Can you elaborate on that? Certainly, we're obviously familiar with the, I guess, the formal rainbow sensors, but what's the light parameter piece of it? Yes. As you know, the SET sensors have 2 LEDs. Rainbow has 7 plus LEDs, somewhere between 715 depending on the measurement. Rainbow Light will have 4 to 6 LEDs and will allow for not only the measurement of SpO2 pulse rate, PVI, PI, but also ORI. ORI has been really well received by anesthesiologists because prior to intubation and extubation, they fill up the patient with 4, 5 times the amount of oxygen the patient may require to build this reserve while they're fiddling with the airway. And before ORI, they had no way of knowing when they were not doing the airway properly until SpO2 drop, which based on the studies we've seen could be 35 seconds to several minutes delayed. So given what it might do for anesthesiologists and how they care about that, if we could price rainbow light sensors not that far from pulse oximetry sensors, then instead of it being the way it is today, which is 3 to 10 folds the cost of pulse oximetry sensors, it might increase the adoption and really help push a faster revenue growth opportunity from just our installed base, let alone new customers. And so Joe, should we be thinking about the sensor cost being something in the neighborhood of about 1.5 to 2 times that? Is that a reasonable assumption? Yes. I think the cost is not that much more for our light. With Rainbow Light, the cost of the sensor is, yes, like I said, maybe 1.5 to 2x a set sensor. Okay, perfect. Thanks guys. Appreciate it. Thank you. Thank you, Bill. Our next question comes from Ben Haynor of Felt and Company. Your line is open. Good afternoon, gentlemen. Hey, thank you. Hi, Ben. Just a couple of quick ones for you. On the sales force realignment, what proportion of the sales force does that impact? I would assume it's relatively small. Yes. We had nearly 40 salespeople and 20 plus 30 maybe clinical specialists out of about 300 to 400 people total that this impacted. And yes, so it's relatively small. Okay. That's exactly what I was looking for. And then Mark, on the $6,100,000 accrual that impacted Q4, I believe you said that got reversed here recently. Presumably that would hit the Q1 numbers and be factored into guidance? Or did I misunderstand that? Yes. No, I don't think so. That was one of the adjustments. The the adjustments. The $6,100,000 I think you're talking about the legal accrual the reaccrual that I mentioned. That's a combination of 5.4 $1,000,000 plus about $700,000 in at least currently accrued interest. So the total of 15. So there's no carry forward impact of that into 2016. Okay. So I misunderstood that, that legal decision got reversed and would be impacting Q1? Yes. No, the decision, as I said, was just finalized late last week, which, as you probably know, put us in a position where because that exposure existed at the end of the year, we actually were required to take the accrual for it in our 4th quarter numbers. Okay. That makes sense. Sorry, I misunderstood that. That's all I had, gentlemen. Thank you very much. Thank you so much. We appreciate all of you joining us for the call today. Look forward to our next call, which is not that far away. Have a wonderful spring soon. Thank you. Bye bye. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.