Mindray Medical International Limited (NYSE:MR)
Q4 2010 Earnings Call
March 1, 2011 8:00 am ET
May Li – Director of Finance and Investor Relations
Jie Liu – Chief Operating Officer
Ronald Ede – Chief Financial Officer
David Gibson – President of Mahwah Operations
Minghe Cheng – Chief Strategic Officer
Bin Li – Morgan Stanley
Ingrid Yin – Brean Murray
Jinsong Du – Credit Suisse
Katherine Lu – Oppenheimer & Company
Richard Yeh – Citigroup
Hongbo Lu – Piper Jaffray
Jack Hu – Deutsche Bank
Shaojing Tong – Bank of America Merrill Lynch
David Turkaly – SIG
Joshua Jennings – Jefferies
Yale Jen – Maxim Group
Good morning and thank you for standing by for the Mindray Fourth-Quarter 2010 and Full-Year 2010 Earnings Conference Call. At this time all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections you may disconnect at this time.
I would now like to turn the call over to your host for today’s conference, Ms. May Li, of – Director of Finance and Investor Relations. Please proceed.
Hi everyone, and welcome to Mindray’s 2010 fourth quarter and full-year earnings conference call. Our financial results were released last night and are available on the Company’s website as well as on newswire services. In addition, an archived webcast of this web conference call will be available on the Investor Relations section of our website at www.mindray.com.
Joining today’s call are Mr. Xu Hang, our Chairman and Co-CEO; Mr. Li Xiting, our President and Co-CEO; Mr. Jie Liu, our Chief Operating Officer; Mr. Ronnie Ede, our Chief Financial Officer; Mr. Minghe Cheng, our Chief Strategic Officer; and Mr. David Gibson, our President of North America Operations.
Our management team will review fourth-quarter and full-year highlights, as well as speak to the current financial and market environment in each of our major sales markets, after which management will be available to answer your questions.
Before we continue, please note that this call will contain forward-looking statements made under the Safe-Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. Mindray does not undertake any obligations to update any forward-looking statements, except as required under applicable law.
I will now turn the call over to Mindray’s Chief Operating Officer, Mr. Jie Liu.
Thank you, May. Good morning and good evening, ladies and gentlemen. Thank you for joining us today for 2010 fourth-quarter and the full-year earnings results conference call. During today’s call, I will provide an overview of the company’s overall operational performance.
Our CFO Ronnie Ede will review the detailed financial results. President of North America Operations, David Gibson will then discuss Mindray’s operations in North American region. Before opening the call to questions, Ronnie will discuss the company’s 2011 outlook.
First, let me provide some operational highlights for the year. In 2010, we were encouraged to see recovery in certain geographies in which we operate, especially throughout the second half of the year. Overall, we achieved solid revenue growth of 11.1% year over year at $704.3 million. During the year, we maintained our focus on operational excellence and innovation. We increased our investments in the international delivery channel and our efforts yielded fruitful results.
International sales has demonstrated solid growth of 20% – 20.3% year-over-year, accelerating from 2010 levels. Of this, emerging markets remained our key drivers of growth and developed markets also recorded better than expected growth.
In China unexpected weak government tender negatively impacted our results. As a result, overall domestic sales growth was bad compared to 2009. I will go into details during this call to provide perspectives on key national territories under the Chinese market growth.
R&D continued to be our focus in 2010. Our total R&D spending, pre-capitalization, for 2010 was again about 10% of net revenues. As a result, we were able to launch 10 new products into the market, including one brand new product, MRI system. Launch into the MRI market was a major product breakthrough for Mindray. We are extremely proud of this R&D achievement, optimistic about radiology line’s potential for future growth.
I will now turn the call over to Ronnie for financial details as well some fourth-quarter highlights.
Thanks Jie. For the year – full year 2010, we exclude the $8.6 million tax benefit recognized in the first quarter of 2010. Our non-GAAP net income grew 10.1% year-over-year to $162.3 million, exceeding our financial guidance. We have achieved healthy margins. Our full-year non-GAAP gross margin was 57.7%, non-GAAP operating margin was 24.3% and non-GAAP net margins was 24.3%.
During the year, we continued to make significant progress in North America operations. A number of significant R&D achievements were made under the close collaboration between the China and U.S. teams. Cost synergies were achieved for our U.S. entity, which has improved our overall gross margins.
Another factor that contributed to the gross margin expansion were the shift towards both higher margin products and higher margin regions, as well as lower government tender sales in 2010.
In 2010, we generated $147.8 million in net operating cash. We also completed an equity offering of approximately $150 million. This, along with our strong operating cash flow generation, greatly helped to increase our cash reserves and strengthened our ability to further develop business.
In continuation of our commitment to shareholders, the Board of Directors has declared a cash dividend on its ordinary share of $0.30 per share based on our net income for the full-year 2010. This is the fifth consecutive year that we have declared dividends after our IPO in 2006.
Now, onto the past quarter. Our overall performance in the past quarter achieved an 11.7% year-over-year increase on the top line for a total of $211 million. International revenues was strong at $121.1 million, up 19.5% year-over-year. This represents 57.4% of worldwide sales. China revenues grow 2.7% year-over-year. Tender sales were down 67.3%, but non-tender sales were up 17.7% as compared to last year.
Non-GAAP gross margin was 55.2% higher than the 54.9% in the fourth quarter of 2009, but lower than 59.5% in the past quarter, in Q3. This is mainly due to the seasonal inventory revaluation pattern and the product mix.
Selling expenses pick up over the last quarter largely as a result of increased investments in the sales channel worldwide. We view this as a necessary investment to accelerate our top line growth in the future.
Our non-GAAP operating margin was 19.8% and non-GAAP net margin was 21.5% for the quarter. EBITDA was $53.3 million during the quarter representing 3.1% increase over the same quarter last year. We generated $67.3 million in net cash from operations due to our operational efficiency improvement and our overall working capital management.
Our DSO in the fourth quarter was 59 days as compared to 68 days in the third quarter of 2010. Inventory days improved to 82 days in comparison to 116 days last quarter, while accounts-payable days were 45 days in comparison to 60 days – 66 days for the previous quarter. These factors have strengthened our cash conversion cycle to 96 days as compared to 119 days in the third quarter of 2010.
This quarter our DSO was lower due to higher sales volume. Given that, we are adjusting our overall sales strategy in China, as well as continuing to expand our direct sales in North America. We anticipate some receivable increases, as well as the fluctuation of DSO due to seasonal sales changes. We will continue to exercise cautious credit policy.
We managed to bring down our inventory level this quarter from last quarter’s level that was not optimal due to forecast misses. We remain committed to maintain a healthy working capital position.
We are also pleased to announce that the company again received the nationwide key software enterprise status for calendar year 2010. The tax benefit of approximately $7.8 million as a result of the status will be recognized in the first quarter of 2011.
I will now turn the call over back to Jie and David.
Thanks, Ronnie. As we have communicated, we have been working on the domestic sales enhancement program that aims to achieve real-time comprehensive monitoring of hospital demand in the second quarter of 2010. This program will eventually improve our visibility of end-user demand and help our distributors in the market identify and captures sales opportunities in a more comprehensive manner.
And the key element of this program, a key core management team has been added and will be built up gradually to focus on driving big orders from top-ranking hospital customers, as well as private sector, its largest sales potential. We are seeing gradual improvement resulting from these efforts.
We are on track to speed the program in the second quarter of this year. Our customer relationship management system, which aims to facilitate more effective order assessment and a customer retention worldwide is also on track for installment in second quarter of this year.
Now, I would like to discuss our international sales, especially in emerging markets. Continuing the momentum from recent quarters, we captured robust growth in our international markets this quarter. The emerging market’s performance, which was again a key growth driver for this quarter, growing more than 20%, in particular, it delivered over 30% year-over-year growth in the Eastern Europe, CIS regions, Africa and the Middle East.
Meanwhile, developed markets including both North America and Western Europe again recorded a high teen growth. We are pleased with our progress towards the enhancement of international sales channels to reiterate what was communicated during the recent quarters.
Our strategy is to develop country-specific marketing and sales strategies, increase the number of local staff, increase the investments in sales and marketing initiatives such as organizing and participating in regional and the local industry forums and to build a solid, and a reliable service platform.
Looking ahead, we are confident that a strong market demand as well as our competitive position in emerging markets will remain a pillar of the company’s overall growth.
Moving on to domestic sales. In the fourth quarter, non-tender sales grew 17.7% year-over-year, and 33.5% sequentially. We saw gradual return in demand for small-ticket items as compared to previous quarters. This partially helped boost our non-tender sales growth.
Tender sales were light this quarter, down 67.3% year-over-year and 8.8% sequentially, and it continued to be a small portion of our domestic sales, representing 5.6% of total China sales this quarter and 7.5% for the full year 2010. Although, our whole winning tender ratio kept up, the tender activity in the market remains to be very light this quarter.
To reiterate, the timing of government tender sales is not something we can control. Where we will focus is on areas where we can prove our penetration and operational efficiency. The above-mentioned sales enhancement program and the CRM systems have reshaped a more effective, more demand-driving sales model, laying the foundation for our long-term sustainable growth in the Chinese market.
We are also continuing to take aggressive measures to deepen our penetration in both higher and the lower end segments of the market. This year, we have several high-end products across different product lines in the pipeline. We are also ramping up our delivery system, targeting high volume hospitals with increased headcount in sales marketing and services.
We are also lining up low-end or defeatured products to prepare for tender business and the regular sales in the low-end market in conjunction with our more aggressive expansion of our low-end distribution network.
All these strategies are progressing well on track. We continue to believe that the Chinese government remains committed to its healthcare reform budget evidenced by recent announcements of increasing average healthcare insurance coverage to RMB200 per person or by 67% growth in the year 2011.
We are also particularly encouraged by the recent renewed focus on county-level hospitals, which was announced in November 2010. The government has stated its goal to upgrade all county-level hospitals within 5 years. To accomplish this, the government plans to invest a total of RMB36 billion in supporting 2,176 county-level hospitals across the country over the 3 years.
Mindray has significant presence in county-level hospitals and we believe that this announcement could benefit us. A significant part of the government spending for county-level hospitals will be in the form of direct funding instead of centralized tender purchases. In this case, county-level hospitals will decide how to spend the money. Therefore, we think that the policy impact, if any, will be on non-tender sales.
Next, I would like to invite David to add more color on North American Operations.
Thank you, Ronnie, and Jie. Let me very quickly run through the major achievements we have had during the quarter.
We are encouraged by the continuous improvement we are seeing in the North American Operations. Similar to last few quarters, the hospital budgeting and purchasing situation here is continuing its steady recovery.
Total North American sales grew more than 16% this quarter on a year-over-year basis, and 17% sequentially. The performance is also better than last quarter when we reported a 13% year-over-year growth. We are continuing to take market share away from our competitors.
Ultrasound remains the biggest growth driver for the region with the addition of the direct channel. We believe that strong trends we are seeing in the ultrasound market could become a long-term sustainable phenomenon reflecting the pursuit of lower-cost alternatives in the imaging market (inaudible) as well as demand for dedicated ultrasound devices for surgical center, emergency rooms and critical care.
We continue to ramp up our ultrasound sales channel to capture upcoming growth opportunities. And our M7 hand-carried ultrasound platform is performing very well and allows us to compete head-to-head based on performance.
Our next generation patient monitor for the high-acuity markets, the V series, is showing strong sales momentum although it still is in its early launch phase. We are very pleased with the order trends we are seeing with this exciting new product. In addition, the A5, the first of a new-generation anesthesia machines has just received FDA approval and has very positive reviews from the clinicians reviewing the product.
During the quarter, we also installed our largest patient monitoring system in Canada. Although the Canadian market is small, we are pleased with the incremental revenue potential we can now capture, based on our sales and distribution capability in North America, along with our expanded product offerings post-merger.
Our margin and expense structures are also improving, highlighting that our synergy performances are on track. We also expect to benefit from economics of scale as our sales continue to increase. Since the merger, we have upgraded the majority of the product lines along with the introduction of several new products in North America that have dramatically expanded our served markets, allowing us to achieve gross synergies along with cost reductions.
With the new global ERP solution in place, we now have the tools to work on improving our working capital cycle, to improving inventory receivables while maintaining our traditionally lower overall credit risk.
Going forward as part of Mindray’s global expansion strategy, our North American Operation plans to further invest in marketing initiatives to help build a stronger global brand among hospital customers in our region, build our direct sales force outside existing patient monitoring line as well as the product developments strategies for developed markets.
Last and not least, like the rest of the organization, profitability remains a focus in North American Operation.
I will now transfer the call back to Jie, who will comment on the operational trends.
Thanks, David. I have a few additional operational highlights to include. In 2010, we made our product development goal with 10 product launches increasing our total number of products in the market to over 80.
Looking ahead, we intend to launch between 7 to 10 new products in 2011, with the emphasis on both high-end and low-end market opportunities. This year, the patient monitoring and the life-support product line will yield additional products and enhancements.
Areas for planned product expansion include patient monitoring, defibrillator and anesthesia delivery. For the IVD product line, we plan to develop more advanced hematology analyzer, as well as several new reagents.
The medical imaging product line plans to unveil the feature enhanced color ultrasound unit and some black-white ultrasound units. In addition, we are on track to establish three new R&D centers in China.
In addition to our organic product development to leverage our strong cash position and to further implement our growth strategy, we are also actively exploring excellent opportunities, which we believe could complement or enhance Mindray’s core capabilities. As we just announced, we have signed an agreement to acquire a controlling stake of Shenke Medical with major businesses in the manufacturing infusion pumps.
We expect to achieve synergies in the transaction by combining our strong engineering, manufacturing, sales and management platforms with Shenke’s brand name, technology, and expertise in the infusion pump area. Infusion pump are medical devices that deliver fluids including nutrients and medications such as antibiotics, chemotherapy drugs and pain relievers into the patients’ body in controlled amounts. It is widely used in operating rooms, emergency rooms and ICUs.
With the great industrial growth potential, we need to complement to our existing patient monitoring and life-support lines. We believe that these collaborations will help us further to provide total solution to our customers.
Now, I would like to turn the call back to Ronnie to discuss our balances for 2011.
Thanks. Last year, we had a very strong performance in international sales, partially offset by weaker than expected China sales as a result of sluggish tender activities and our lack of high-end product offerings.
Going into 2011, there are still lingering uncertainties in some markets such as the potential instability in the Middle East and Africa. Nevertheless, we expect our key international markets, especially emerging markets, to continue to lead growth for the overall organization.
We also expect Mindray to demonstrate decent growth in the U.S., based on the steady recovering market environment there, along with our new promising product launches to further capture market share.
In China, we expect favorable Chinese private and government healthcare spending to continue. Although tender business will continue to be unpredictable, we are encouraged about our non-tender sales, based on the government’s focus on county-level hospitals as well as the progress of our strategic initiatives in which we are seeing gradual improvement and we expect that to continue in the coming quarters.
We expect that the Shenke acquisition agreement will have a minimal impact to our 2011 financial results. As communicated with investors in January, we are remaining our guidance of more than 16% year-over-year sales growth in 2011. Recently, we were notified the policy that grants Mindray VAT rebates related to embedded software sales in China was renewed. We are very pleased with the continuation of such policy.
In 2011, we expect our gross margin trends to be lower than 2010, based on the newly applied city construction tax and additional education tax imposed by the government, which could negatively impact our gross margin by up to 100 basis points, as well as product mix changes. We also expect higher selling and marketing expenses due to our China initiatives, as well as our continual build-up of international sales and support infrastructure.
We intend to spend about 10% of our revenues on R&D this year inline with the longer-term corporate goal. Taking these into consideration, we expect top line growth to outperform bottom line growth in 2011. And we are projecting non-GAAP net income to grow more than 10% year-over-year.
This figure excludes the tax benefits related to the key software enterprise status, particularly the $8.6 million recognized in the first quarter of 2010 and the $7.8 million to be recognized in the first quarter of 2011. Thus, we assume a corporate income tax rate of 15% applicable to the Shenzhen subsidiary.
We expect capital expenditure to be in the range of $70 million to $80 million for 2011. Overall, we expect 2011 to be an investment year for Mindray necessary in order to solidify our platform and better equip us to stay competitive in the marketplace.
Thanks, Jie, Ronnie, and David. We will now turn the call over to the operator to open the lines for questions.
Thank you. (Operator Instructions) And our first question comes from the line of Bin Li representing Morgan Stanley. Please proceeds.
Bin Li – Morgan Stanley
Thank you for taking my question. I have one question on the guidance. You mentioned top line that you expected (inaudible) top line at 10% growth. Could explain the average with the top line and bottom line. Now, I think the earlier the market (inaudible), many people in the market will (inaudible) higher EPS growth of roughly 12% despite the fact that (inaudible). So my question is between now and early January has anything changed to cause a slight decrease in the top line and bottom line forecast? Also, can you also remind us what would be the growth margin outlook for this (inaudible).
Hi, Bin. Thanks for the question. I think, back in January, we provided a guidance of our revenue, but we never provided any guidance in terms of a bottom line. I do believe we did mention about possible other causes increases, but there is no mention about a exact bottom line guidance. And there is no change of assumption between January to now, and I think we – in fact, we are progressing along the same way.
In your question regarding to the growth margin, it will be slight changes due to, as we mentioned, clearly in terms of the city construction tax increases and also some product mix changes.
Bin Li – Morgan Stanley
Yes, and you mentioned about a 100 basis point higher tax impact. Does that include the product mix or it does not?
Not including the product mix, but it will be approximately around that. It’s not going to – the product mix will not have a huge – and that is our estimate for that.
And our next question comes from the line of Ingrid Yin representing Brean Murray. Please proceed.
Ingrid Yin – Brean Murray
Hi, hello, everyone. My question actually is also following what Bin just asked about margins. Going forward, we know there is a inflation pressure in China and how do you – how should we model about the expenses, going forward. I know you talked about sales expense will go up, but how about G&A?
Our actual number will go up, but in percentage wise, we do not believe that we actually will be able to increase our efficiency upon G&A expenses.
Ingrid Yin – Brean Murray
Okay. So overall, about sales and marketing and G&A, how many basis points should we expect, it will go up for the year?
As I mentioned, I don’t think that there will be percentage increases on G&A. And I think sales, marketing side will be going up a little bit, but not into – more higher than the Q4 number. The Q4 is always the highest among the full year’s numbers, as you can see, historically, that’s always the case.
Ingrid Yin – Brean Murray
Great, thank you. And you talked about CapEx expenditure will be in the range of $70 million to $80 million. Would you please provide more color on your plan, where you’re going to spend?
The CapEx – in addition to the normal CapEx maintenance, we are starting to build up some additional factory capacity in different locations. That’s why we need to spend the CapEx as we planned.
Ingrid Yin – Brean Murray
Okay, great. Thank you for taking my question.
And our next question comes from the line of Jinsong Du representing Credit Suisse. Please proceed.
Jinsong Du – Credit Suisse
Hi, thank you for taking my question. Could you just tell us some updates on your sales force restructuring in China and also how well is your – or how much will be turnover of your distributors in China as a result of the sales network restructuring? And also, what is the details of the other income that’s below the operating income line and what’s your expectations of that other income for 2011? Thank you.
Hi, Jinsong. This is Jie. I’ll answer the sales force restructuring first and then back to Ronnie to answer the second part of the question. For the China domestic sales force restructuring, as we said in the statement, we built up additional key and core management team to focus on the strategic accounts, such as big hospital for the big sales opportunity. And also, some of them will be focusing on the private hospital. That will be another potential growth driver for the China market. That’s the additional team to run independently. But also, that’s not enough.
We noticed there’s much opportunity in the county-level hospital upgrading activities. We have already set up the team – really identified some person to be in-charge of individual county-level projects. They’ll be create some other opportunity to really realize the sales in the future.
Jinsong Du – Credit Suisse
Right, so what is the related changes for the distributors as a result of the restructuring? Like, how many of your distributors have, you know, a kind of a have changed?
For the distributors deal, we use a multiple distribution policy. This program will change a little bit. We are working together with a big distributor to really – who has a good sales-force team – and working together with our sales team to partner, as a partner, to really cover all the hospitals. For some hospitals – for some distributors, that don’t have their sales force, we’ll be on the eliminated list. A gradually centralized distribution and encourage the distributor to growing bigger, growing together with Mindray – with Mindray’s expansion.
Jinsong, you asked about the other income. It’s mainly due to government subsidies. And as you can tell, in the last year, we actually received subsidies for almost every quarter. This year, we mostly receiving the subsidies in Q4. Those are unpredictable timing and whatever happened, we recorded into our book.
(Operator Instructions) And our next question comes from the line of Katherine Lu representing Oppenheimer & Company. Please proceed.
Katherine Lu – Oppenheimer & Company
Hi, good evening. Thank you for taking my question. I’d like to go back to the guidance a little bit. I’m just wondering, Ronnie, if you can talk about some of the geographical growth assumptions in your revenue guidance. And also, maybe going to your bottom-line guidance, it seems like you are expecting growth margins to have a modest decline about 100 basis points, and then R&D to have – as a percentage of revenue – to have – increase about 140 basis points, while SG&A, we just assume, relatively flat. So to get to your bottom line 10% growth, should we be expecting some increase in the other-income line? Thank you.
Hi, Katherine. For the revenue guidance, I can give you some indication on the geographical basis. For the emerging markets – for the international markets, the emerging market will be in the high-teen growth, and therefore, the developed countries will be low-teen growth. And then China will be mid-teen growth. It will be the higher than the industry average.
Yes, Katherine, for the second part of your question regarding how we derived to the 10% with other income. A couple of things – let’s make sure we’ll be careful about it. We’ll just say that we’re going to spend again 10% of our total revenue into R&D, but that is a spending – if you look to this prepared script, last year we also spent around 10% of our total revenue into R&D. That’s before certain capitalization of software in regard to the GAAP requirements.
So if you look at the actual expense side for the R&D, it will be somewhere in the – I believe 8.6% of the total revenue was spent in 2010 in R&D. And we do anticipate we will spend again 10% of our revenues into R&D for 2011 to invest in this area. But as a percentage of our total expenses of our total R&D as our total revenue, it will possibly remain the same percentage. And thus, this will not be severely impact our bottom line.
And our next question comes from the line of Richard Yeh representing Citigroup. Please proceed.
Richard Yeh – Citigroup
Hi, thanks for taking my question. I have a couple questions. The first question is, on the selling expenses, I noticed that this quarter it’s around 20% versus significantly higher than other quarters. I just want to get a sense of what actually was driving up the selling expenses, is that because the rebates to the distributors are getting higher than other quarters or any key reason behind the increase?
And my second question with regard to the competition coming from multinationals, it seems GE recently launched their global project. And I would like to know how would Mindray – to face the challenge from those multinationals? How are you going to structure your sales force to cope with the competition?
And then, thirdly, on the medical imaging side, I noticed the growth is around 4.3% versus – there seemed to be a significant increase in the North America sales. How would that imply to sale China growth, and was there increase or was it that the China sales is actually growing negative or it’s still positive? Thank you.
Richard, I think, let me try to answer your first part of question on selling expenses and I leave it to Jie to answer the other two parts of the questions. Expenses in Q4 – our selling expenses has always been the highest among all the quarters, and historically, that’s always the case.
Partially, it’s because, in Q4, we have a lot of tradeshows. And this year, we actually do a lot of – a little bit more in terms of different tradeshows and expanded our presence in the major tradeshows, like the MEDICA in Germany and also the RSNA in the U.S. In addition to that, we also spent the expense portion of the CRM system. This is a one-time, but it’s nevertheless is a major spending and this was being included in Q4 spending. As you heard Jie, talk about in the prepared remark about that system and the importance of that system moving forward.
So these are the major factors causing the Q4 selling and marketing expenses came up to be higher. And partially, it was anticipated as Q4 is always the higher quarter. I leave to Jie to answer the remaining two questions for you.
As well as compared to the GE global project, I think we are on the right track to really pair up with a competitive sales force and then really cover all their potential markets. As I pointed earlier, we are not only focusing on strategic markets such as some big hospitals, but also there are private hospital which is emerging recently and they could create some opportunities for the many medical device companies, but that’s not enough.
We also had our special force to really cover the county-level hospital upgrades that could create some other growth. But to point out this is a – for the – some township hospital or some countryside hospitals, in the past it was potential. But now, gradually it becomes a reality with the government spending to put more money, more funding on this poor areas, the potential becomes more opportunities.
That’s why we put more sales force and to really capture the potential opportunities. I believe we are restructuring and we are optimizing the sales force in the right time and at the right market. And we believe after these, we can potentially identify any opportunities, as well as we do well. We can get a lot of sales in the future. That’s for the compare with GE global projects as well.
For third question about the medical imaging system, there is a growth rate for the major reason is the black white ultrasound system is shrinking and especially in China, the tender of the black white ultrasound actually decreased more than 60%, but in terms of the ultrasound sales, strong growth in North America, I would like to turn to David Gibson to maybe give some other colors.
I think there is a couple of important parts to the North American growth story, and ultrasound has definitely been a strong one. The performance, as I mentioned in the prepared remarks, the M7 is a great platform; it’s got excellent performance, beautiful image quality. And we’ve been expanding our direct sales channel and improving the sales execution overall.
We get good synergies from our preexisting monitor sales reps within three of the key emerging ultrasound markets. Critical care, emergency department and in the surgery environment, the anesthetic outpatient, those were all traditional call points for us.
So we were able to get some leverage out of our existing sales force. And it really works well together, great products, great sales execution, you get strong growth and that’s a block and a tackle and that’s what we do.
(Operator Instructions) And our next question comes from the line of Hongbo Lu representing Piper Jaffray. Please proceed
Hongbo Lu – Piper Jaffray
Thank you, good evening. A couple questions. Why is 2011 guidance, just a clarification, well, for the high-teen assumption growth, growth assumption for developing markets, do you feel you have built in enough buffer for the Middle East un-stability, that’s one. And also I didn’t catch assumptions for other income for 2011 in order to get to the 10% year-over-year growth on the bottom line. Thirdly is, we haven’t talked about market share in China for each of your product line for a while. Maybe you can provide us some colors in terms of what market share that you have now in China? Fourthly, is the VAT contribution for fourth quarter revenue? Thank you very much.
Hi Hongbo, this is Jie Liu. For the development market as well as the buffer, I don’t know what do you really mean. I guess – I think, I’m assuming it might be talking about some political instability in the North Africa area. If that’s true, I will answer the question.
For these countries, we have some amount of their revenue there. But we believe we’ve already put the buffer here to make sure we can deliver the high teen in the emerging markets, that’s simple. Yes, we’ve already considered all the situations. For the second question.
Hongbo, you are asking about the other income. Actually, our assumption is a pretty much a flat year-over-year. And I think you are asking for market share update. Other than what we publish on our website in terms of our PPT, I don’t think we are going into more detail of market share update of that.
And last question in regard to VAT contribution for the last quarter, it’s above $5.2 million but just bear in mind, with things moving forward, we will have no retroactive VAT to talk about it. So we probably will just treat this as a part of our overall revenues moving forward. And also another thing is as the government indicated, they will continue this policy. So I don’t think this could be in – it’s necessary if you separate it moving forward.
And our next question comes from the line of Jeff Hu representing Deutsche Bank. Please proceed.
Jack Hu – Deutsche Bank
Thank you for taking my question. I will only ask one. There is a 600 basis-point difference between top line guidance and EPS. And also Ronnie, you mentioned that in the prepared remarks that 2011 will be a year of investment. So my question is if we look forward, when should we expect the inflexion point and when should we expect return on investment?
By the way, just one point I want to clarify. What we have been guiding is based on non-GAAP net income, not the EPS. So I just want to make sure everyone understands that. Yes, we have this gap between the top line revenue growth and also the bottom line non-GAAP net income growth rate. As I indicated, this is the investment year, we indicated also exactly where we probably want to put our money into it, along with other impact which is out of our control, such as the tax increases due to city construction and other issues. But your question in regard to when we would see this investment and get some return, our anticipation is that with – all the investment going in would give us a better – much better growth rate the year to follow. And I don’t think we are – will investment more forever. This is a special investment. As you can see in the past year, since we went public, we have always have demonstrated our bottom-line being outpaced our top line in terms of growth. Even in the last two years, although it little bit slowdown, but the bottom line and top line growth are in sync. Therefore, as a company, once in a while we do need to invest in order to move further ahead with the rest of our competitors. So this is the investment, we are looking into it. And furthermore, even with that we believe we can maintain higher than 10% growth on the bottom line.
And our next question comes from the line of Shaojing Tong representing Bank of America-Merrill Lynch. Please proceed.
Shaojing Tong – Bank of America Merrill Lynch
Hi, thanks for taking my question. I have a simple question. I just want to get some updates on your MRI launch. If you can provide us some quantifiable measures, that will be very appreciative, like how many machines you have sold at launch and how many orders you see and when do you expect to push that to the international market? Thank you.
The MRI launch still it’s the early launch state. We don’t disclose the exact quantity of the systems sold, but it – therefore the 2011 still the early launch state. That’s the answer.
And we’ve got orders internationally. So that’s to address some part of your question.
And our next question comes from the line of Dave Turkaly representing SIG. Please proceed.
David Turkaly – SIG
In conjunction with your guidance, I was wondering can you help us see in 2011 what you think maybe what your operating cash level would be or what a free cash-flow estimate for the year would be? Thank you.
We have been consistently improve our cash flow and every year we see the cash flow increases. I do anticipate 2011 will be again providing better cash flow than what we have in this year.
David Turkaly – SIG
And our next question comes from the line of Joshua Jennings representing Jefferies. Please proceed.
Joshua Jennings – Jefferies
Hi, thanks a lot. In terms of your guidance through re-acceleration of mid-teens revenue growth domestically in China, I have just a couple of questions surrounding that. It seems as if it’s driven by government’s rededication to the upgrading of a couple thousand county hospitals. And now first of all, in terms of some of the issues just dealing with manpower or healthcare personnel that have been a bottleneck historically in terms of expanding out and in getting equipment out to some of those hospitals. Can you just talk about where China is in terms of improving the capacity for medical equipment in the rural hospitals? And then secondarily, how is price being maintained in China? Are there significant pressures from smaller domestic players, specifically in the Tier 2 hospital purchasing environment and where is price trending and what have you baked in the guidance in terms of domestic pricing for 2011? Thanks a lot.
This is Jie. In terms of the county-level hospital expansion, you are right for the China always need for training of the medical doctors. But the government has realized that’s the issue. They’ve put a lot of effort to really train more doctors to provide a better service to the patients. And we have a lot of plans, such as 6,000 doctors from different counties to be trained in Tier 3 – Tier 1, class 3 hospitals or some other programs such as another 5,000 doctors who – from the Tier 1 hospital, that’s class 3 hospital, to the county-level hospital, working together. That is to help to improving their medical standards.
After those kind of training programs, there’ll be able to extend their capability to use advanced equipment and also better treat the patients that we – it create some potential use in the future. As the government already realized the issue, but they also use the funding to do this.
In terms of the pricing on the county-level hospitals, I think, we in the past, we were already in the county-level hospitals. We keep the same situation as long as the multinationals (inaudible) they come down, go to the county-level hospitals that you work in, we’re already there. We have already built up our brand name there, we’ve already built up our service structure there. I think the competitive advantage that we already have in the county level hospitals, but compared with the local manufacturers, that’s in the past three years. All the local manufacturers who are in the county-level hospitals, we know how to really compete with them. That’s we say – that’s the reason we say we have the competitive advantage, really winning the competition.
And our next question comes from the line of Yale Jen representing Maxim Group. Please proceed.
Yale Jen – Maxim Group
Good evening. Thanks for taking my questions. Since nobody asked about the recent acquisition or yesterday’s acquisition of Shenke Medicals. And I would like to – maybe you can give us a little more color on that, given that some of our due diligence suggests that the revenue for the company is about a very low double digit. So how do you see that incorporate or actually strategically fit into the overall pictures?
That is a question for our Chief Strategic Officer, Mr. Minghe Cheng.
For this recent acquisition we just find (inaudible) with the company. The infusion pump in China, (inaudible) section because this is a basic instrument for ICU and pediatric, emergency room. The major player in China; internationally, there is big company like Baxter, CareFusion, (inaudible). The Shenke is – the size is not very big, but we’re focused on this product for more than 7 years. They’re the top three biggest infusion pump companies in China. It has similar comparable market size like a patient monitor. So the patient monitors (inaudible). The channel shares a lot – sales channel with Shenke. So we believe the growth rate in this product approximate price of patient monitor. So we believe both domestic market and the international market we’ll work together. There were – a big impact in the future complimentary to all patient monitor life-support product line.
And our next question comes from the line of a follow-up from Jack Hu representing Deutsche Bank. Please proceed.
Jack Hu – Deutsche Bank
Hey, Ronnie, thank you for talking my follow-up question. So you were mentioning 4Q, that international sales achieved around 30% year-over-year growth. Well, in China tender did 17%. How sustainable these growth rates are?
As we said – Jack, as we said in our prepared remark, we feel this – the imaging market is a very – has a strong momentum. And we are seeing this kind of a growth rate sustaining for the last three quarters. By the way, we actually did – there was a 20% growth for the year. So anyway, we will see this growth rate has been – seeing this kind of momentum still growing. And so, as we have seen very encouraging signs of recovery in the North American region and our North American region is doing very, very well, due partially to our newer products as well as our sales team’s effort.
The overall recovery in the Western European region also was pretty encouraging. And all these areas give us confidence that we can get to as Jie point out, high teens of growth in the year 2011.
In terms of China, as you have seen our non-tender growth rate if we look at for the full year, it’s more than 15% growth for the entire year of 2010. Our problem last year was basically in the tender area. With a substantial drop in tender area happened in 2010, we do believe even flat – around flattish growth rate in 2011 on the tender sales will give us approximately mid teen type of growth for China.
I would now like to turn the call back over to Ms. May Li for closing remarks. You may proceed.
Thank you, everyone, for participating in today’s call. As always, we appreciate your support of Mindray. The replay of today’s webcast will be available later today. I with my IR colleagues will be available for questions today. Thank you all for joining us and we look forward to speaking with you soon.
Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.
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