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Editorial See other Editorial Articles Title: Handhelds Become Instant Hit For Maker Of Ultrasound Devices Handhelds Become Instant Hit For Maker Of Ultrasound Devices By MARILYN MUCH Shortly after SonoSite (SONO) launched its newest product lineup in December, management knew it hit a home run. SonoSite, maker of hand-carried ultrasound systems, had just begun worldwide shipments of its new fourth-generation M-Turbo and S-Series devices The five new offerings only had 40 days in the field for the fourth quarter. Yet they accounted for more than 30% of the quarter's revenue. This was the most revenue — and the biggest percentage of total revenue — generated by new products in their first quarter of shipping, Chief Executive Kevin Goodwin says. The quarter's revenue rose about 20% from a year ago to $65 million, according to preliminary revenue results released on Jan. 7. Full-year revenue grew by about the same amount to more than $205 million. SonoSite will report the quarter's results on Feb. 14. "The new products are largely responsible for the growth uptick in the fourth quarter," said Goodwin. "We then punctuated the year by putting out five new products in the fourth quarter." Surprise Revenue Analyst Alan Robinson of RBC Dain Rauscher says he was surprised at the portion of revenue attributed to the new product platform. "There was a lot of momentum with this new product platform," he said. "I think the momentum in the fourth quarter should catapult sales in 2008." Goodwin concurs. He says he expects the new products will better position SonoSite for growth in 2008 and 2009. Ultrasound uses low-power, high-frequency sound waves to provide real-time images of the body's soft tissue, organs and blood flow. SonoSite specializes in small, lightweight ultrasound systems that weigh about eight pounds or less and can be used at the point of care. The traditional cart-based ultrasound systems weigh about 300 pounds and typically require a physician or highly trained clinician to perform the examination in a centralized imaging department, such as a hospital's radiology department. In contrast, SonoSite designs its products for use in applications where ultrasound had not typically been used, such as emergency medicine, critical care and internal medicine. Its systems are also used by the military. Doctors use its products to provide an immediate diagnosis at the bedside and to help guide interventional procedures such as monitoring the progress of a catheter as it moves through a vein. A SonoSite's system sells for about $50,000 vs. about $100,000 for a traditional system, the company says. With about 40,000 systems installed worldwide, it has the No. 1 market share in its space. About half of its revenue comes from overseas. Goodwin is upbeat about the new products' potential, which, he says, have "crossover" image quality with the larger ultrasound machines. The new M-Turbo system has 16-times more processing power than SonoSite's third generation MicroMaxx system, offers a major advance in image resolution and can be configured for use in all point-of-care applications. The S-Series line combines the processing power and imaging quality of the M-Turbo system with a customized user interface to address the clinical needs of four clinical specialties with separate products. The S-FAST is used in emergency medicine in applications such as evaluating cardiac activity. The S-Nerve is used by anesthesiologists. The S-Cath is for use in the cardiac or radiology cath lab. The S-ICU is for use in the intensive care units. The S-Series consists of the first ultrasound device that can be mounted on the wall or hung on a pole by the bedside, the company says. Analyst Robinson says the image quality of the fourth generation of products is equivalent to the higher end, cart-based systems that sell for about $250,000. Another important feature in the S-Series is that it's aimed at different user groups for specific applications, he says. "It opens far more potential customers because of the application-specific nature of the S-Series," he said. On the financial front, SonoSite is gaining momentum. For two straight quarters, earnings have risen at least 25% and sales by at least 20%. In the third quarter, earnings tripled to 9 cents a share. Analysts polled by Thomson Financial see 2007 earnings rising 7% to 46 cents a share, then 93% in 2008. The company's glowing performance comes after some patches of flat to declining growth. The slow going is tied to high sales and marketing expenses and investments in research and development, says Robinson. Two-Year Cycle SonoSite consistently has rolled out new products or product families every two years. "Each time, the technological leap has been larger and more resources have been put into R&D," he said. Also, over the past four or five years, it has invested heavily on its marketing spend to get the "mind share" of medical practitioners, he adds. He says when the company launched the MicroMaxx platform in 2005, it ramped up its sales and marketing spending a lot. Now, its investments are paying off. "The marketing spend propelled the profitability it has now," he said. "Now, you have a company that's positioned with a strong product platform with the new fourth generation and it also has very strong brand name and brand recognition." The company is poised to ramp up profitability and operating margins in 2008. He sees continued acceleration of earnings per share. He expects revenue to rise at a 20% rate in 2008 and at a 15% to 20% rate over the next few years. 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