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Mindray Medical International Ltd. (NYSE:MR)

Q1 2007 Earnings Call

May 14, 2007 8:00 pm ET

Executives

Lisa Li - IR Manager

Xu Hang - Chairman and the Co-CEO

Li Xiting - President and the Co-CEO

Joyce Hsu - CFO

Analysts

Jinsong Du - Credit Suisse

Bin Li - Merrill Lynch

David Clair - Piper Jaffrey

Vicky Chen - UBS

Amit Hazan - CIBC Capital

Matthew Newton - Zephyr Capital

Jack Hu - CIBC Capital

Matthew Buten - Sapphire Capital

Robin Roberts - Jayhawk China Fund

Jinsong Du - Credit Suisse

Presentation

Operator

Thank you for standing by for Mindray’s First Quarter 2007 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 meeting over to your host for today’s conference Lisa Li, Mindray's Investor Relations Manager. Please proceed.

Lisa Li

Thank you operator. Hello everyone, welcome to Mindray’s first quarter 2007 earnings conference call. Our first quarter 2007 earnings results were released earlier today and are available on the Company's website, as well as on Newswire services. In addition, an archived webcast of this conference call will be available on the Investor Relations section of our website at www.mindray.com.

Today, you will hear from Mr. Xu Hang, our Chairman and the Co-Chief Executive Officer; Mr. Li Xiting, our President and the Co-Chief Executive Officer; and Ms. Joyce Hsu, our Chief Financial Officer. After their prepared remarks, they will be available to answer your questions.

Before we continue, please note that the discussion today 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 obligation to update any forward-looking statement, except as required under applicable law.

I would now turn the call over to Mindray's Chairman and the Co-Chief Executive Officer, Mr. Xu Hang. Mr. Xu?

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Xu Hang

Thank you. Good evening, everybody. I know you are waiting long for our first quarter results. So we are very pleased to have you here today. At this morning in China, I’m pleased to report that Mindray achieved year-over-year net income growth of 79% in the first quarter 2007, and the gross and net margin expanded, as we continue to drive down half.

Top line revenue for the quarter increased more than 40% after adjusting for the large central government tender in the first quarter of last year. This year we are seeing a great number of smaller government tenders coming from the provisional governments. It’s not likely we will see such a big tender from central government.

In quarter one our product continue to grow in popularity with medical professionals, especially our newest product. In fact sales of new product accounted for 60% of revenue growth for this quarter, product such as the Beneview T8 and the T5, which is a high end patient monitor.

And the five-part hematology analyzer, BC-5500 and the DC-6 Doppler ultrasound imaging system, color one, enjoying strong customer demand. And in April 2007, we released BS-400; a fully automatic biochemistry analyzer targeting higher market segments.

This is also the first of this kind in kind in China medical device manufacturer can provide. We are optimistic about its potential both in China and internationally. The BS-400 shows our ability to successfully develop products tailored for specific market.

This new product showed stronger returns we are seeing from our R&D investment. In fact we expect to have a total of a 1000 R&D staff by the end of this year, which will help us to further lower cost of existing product like we’ve seen from this quarters result and to bring more new product to the market in the future. R&D is one of our big engine for future growth.

I will now turn to Mr. Li our President, and CEO to discuss our market outlook and strategies.

Li Xiting

Thank you, all again for joining us on the call this morning. As we discussed on our annual earnings call we expect the macro environment in China to be much healthy than last year. We are optimistic about the domestic industry outlook for the remainder of 2007, as the government plans to increase spending on rural area hospital and community clinics.

And we expect to see domestic sales return to a high level of growth, as we benefit from our broad portfolio of products and the largest distribution network of any medical device manufacturer in China. Also our leading R&D gives us a unique competitive advantage in gaining a significant market share from new government spending as we continue to drive product costs down while increasing functionality.

Internationally, growth remains robust, with revenue from international markets up 60% year-over-year. In the first quarter of 2007, the United States became our largest international market followed by Germany, in fact our own brand sales more than doubled in North America during the first quarter of 2007.

We are particularly encouraged by these trends as we are starting to see returns from our investments in establishing overseas sales and distribution networks. We believe that acceptance of Mindray's product in our overseas market would continue to accelerate as we continue to build our teams distribution base and the brand recognition.

Now I will turn the call over to Ms. Joyce Hsu, our CFO, to take you through the financial highlights.

Joyce Hsu

Thank you Mr. Li and thank you everybody again for joining us today. I will not repeat all the numbers in the press release but rather focus on certain key results and contributors to our first quarter 2007 results, and some financial highlight for this quarter.

Please note that certain measures I will discuss are non-GAAP in nature, and we believe that you are, both management, investor benefit from referring to these non-GAAP financial measures to help understand the underlying business performance and operational trend of the company and we’ll continue to provide these measures in the future.

Specifically, in the first quarter 2007 results these measures excludes RMB$13.3 million of share based compensation expenses and RMB4.7 million net income impact related to amortization expenses resulted from the April, 2006 acquisition of our minority interest. You can find a reconciliation of non-GAAP figures to GAAP figures in the financial tables at the end of our press release.

We reported net revenues of RMB422.4 million or US$54.7 million for the first quarter 2007. As Mr. Xu mentioned earlier, after factoring out a benefit attributable to the central government tender in the first quarter of 2006, first quarter 2007 net revenue growth would have been 40.6% year-over-year, which is in lined with our revenue guidance for the full year 2007.

Net revenues generated in international markets in the first quarter 2007 increased by more than 60% to RMB214 million, from RMB133 million in the first quarter 2006. Net revenues generated in China in the first quarter 2007, increased to RMB209 million or US$27 million from RMB185 million in the first quarter 2006.

Adjusted for the tender mentioned above, the first quarter 2007, domestic net revenue growth would have been 24.7% year-over-year, which is also inline with our expected growth for the domestic market in the first quarter.

During the quarter, our patient monitoring devices segment contributed 39% as a percentage of total net segment revenues in the first quarter 2007. The diagnostic laboratory instrument segment contributed to 32% as a percentage of total net segment revenue.

The ultrasound imaging system segment contributed 28% as a percentage of total net segment revenues in the first quarter. New product introduced since beginning of 2006 accounted for more than 60% of the revenue increased year-over-year.

Our consolidated gross margin for the first quarter 2007 expanded to more than 56% from 53.8% achieved in the fourth quarter last year and from 51.5% achieved in the first quarter in 2006. This substantial increase was primarily due to our continued effort to improve product margins as well as an increase in sales contribution from higher margin product.

Gross margins for our diagnostic laboratory instrument segment and ultrasound imaging system segment continue to improve over the last year and are now at levels similar to gross margins generated by our feature monitoring devices. Thanks to continued effort by our R&D and manufacturing team to improve our cost structure.

While our gross margin tends to fluctuate quarter-to-quarter, on a full year basis we expect steady incremental improvement year-over-year as we have seen over the past four years.

Selling expenses for the first quarter 2007 were RMB48 million or US$6.2 million, representing an increase of 9% from the first quarter 2006. As a percentage of total net revenue, selling expenses decrease to 11.4% from 13.1% in the fourth quarter of 2006.

We do expect to see some expenses as a percentage of total net revenues for the full year 2007 returned to historical levels as we grow our sales headcount in both; domestic and international market and as we increase our investment in setting up overseas offices.

We accrued RMB13.3 million in share based compensation expenses during the first quarter this year, which represents an increase of more than RMB10 million from the same period last year.

Non-GAAP operating profit in the first quarter 2007 increased by 78% to RMB143 million or US$19 million from the first quarter 2006. Non-GAAP operating margin was 33.8% in the first quarter 2007 compared to 26.1% that we achieved in the fourth quarter last year.

First quarter 2007, non-GAAP net income increased 96% year-over-year to RMB140 million or US$18 million in the -- from RMB80 million in the first quarter 2006. First quarter 2007 GAAP net income was RMB122 million or US$16 million. Non-GAAP net margins were 33.8% in the first quarter of 2007 compared to 26.1% in the fourth quarter 2006.

Our income tax expense increased more than three fourth in the first quarter 2007 from the same period last year as our effective tax rate increased from 7.1% in the first quarter 2006 to 15.7% in the first quarter 2007. Despite the increase in our accrued income taxes and share-based compensation expenses, we’ve reported nearly 80% year-over-year increase in GAAP net income.

Our diluted non-GAAP earnings per share was RMB1.25 or US$0.16 in the first quarter 2007. Average share count used to calculate the diluted earnings per share increased 31% year-over-year to reach $111.9 million shares due to share issuances as well as new option grants that occurred in the past 12 months.

Moving now to our balance sheet at March 2007 we had RMB1.479 billion or US$192 million in cash and cash equivalence and short-term investments. Average account receivable days outstanding came in at 22 days in the first quarter 2007 compared to 23 days in the first quarter 2006. Inventory turnover was 72 days in the first quarter of 2007, compared to 72 days we achieved in the first quarter of 2006.

Now for the outlook for 2007. For the full year, we’re increasing both our topline and bottom line guidance, we are raising the top-end of our full year total net revenue guidance from RMB2.120 billion to RMB2.170 billion. The revised topline guidance range reflects a 40% to 43% year-over-year increase.

We are also raising the top-end of our full year 2007 non-GAAP net income guidance from RMB585 million to RMB600 million. The revised non-GAAP net earnings guidance range reflects a 37% to 44% year-over-year increase. Non-GAAP net income per share as expected to be between RMB5.08 and RMB5.36 on a fully diluted share basis, assuming an estimated diluted share count of 112 million shares.

We do wish to emphasize to you that our practice is to provide guidance on a full year basis only. This forecast reflects our current and preliminary views, and which are subject to change and the actual results may differ materially.

With this, we have concluded our prepared remarks. And now I will turn the call over to the operator to begin the Q&A session. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jinsong Du with Credit Suisse. Please proceed.

Jinsong Du - Credit Suisse

Hi, good morning, Joyce, Xu Hang, Li Xiting. Hi Lisa. My question since there's only one question, I mean, can be asked? Basically, could you share with us more details in your product sales breakdown? Like for example, you have the highest growth in the first quarter in the diagnostic instrument, diagnostic lab instruments segments.

Could you, let us know what is the reason for the high -- much high profit in the other segment? And also what is the breakdown between the sales of consumables, the reagent kits and the sales of the equipments?

And also for example for ultrasound imaging systems segment, you had the lowest growth in monitoring segments. What is the reason, and also could you share with us the breakdown between the new, the service of the front and new color ultrasound system, and black and white systems? Thanks.

Xu Hang

Do you have the number?

Joyce Hsu

Jinsong, thank you for your question. You have a lot of questions within one question, but I'll take it one by one. On the reagent sales breakdown for the diagnostic laboratory instrument. In the first quarter, this year we had 11% of our diagnostic segment revenues coming from the agents. And this is up from 9% that we've achieved in the first quarter last year.

If you look at our hematology, domestic hematology market, the actual figure, the actual percentage that we're generating from the agent actually went from 14% in the first quarter last year to more than 18% in the first quarter of this year. And this is within area where we have a much stronger reagent distribution manufacturing capability, and we view that as a better indicator of our reagent sales growth.

Going back to the larger part of our growth, I think on the ultrasound side what we are seeing in the first quarter is that we had an overwhelmed response from our customers for our color ultrasound. And therefore a lot of our distributors -- because we are still in the initial stage of ramping up, we didn’t have enough time of preparation to get separate additional distributors for our color ultrasound, a lot of our existing ultrasound distributors opted for color ultrasound itself. And therefore you are seeing a much slower growth in the black and white side.

And what that means is also on the supply side, because we initially did not anticipate such a big ride in the color ultrasound within the first quarter of this year, we also weren’t able to supply enough color ultrasound during the first quarter. And all this had led to a very good color ultrasound sales during the first quarter and a slower growth of overall ultrasound segment.

What we had started to do during the end of the first quarter is really trying to compartmentalize our distributor network by dividing the color ultrasound and the black and white ultrasound, as well as having additional people for the color ultrasound on our sales team.

Jinsong Du - Credit Suisse

Yes. Could you just share with us the number of units sold for the color ultrasound?

Xu Hang

Okay. Let me put it this way. Remember that we mentioned that 60% of first quarter growth comes from new product. Among then 50% is from color ultrasound. Why you see a little slow of ultrasound growing. Joyce has just mentioned because our distributors are too excited about color one, but we cannot supply enough ones.

And the second that most of them, the existing channel is in the older one, so they shifted the sales part to color, so they left it the black and white not fully coverage. From this call on we noted that this happens. So we will divide, dedicate a channel for both for color and for black and white. So from this quarter on we can expect that a steady, also a strong black and white growth, as well as color growth.

Jinsong Du - Credit Suisse

Thank you. I will be back in the queue.

Operator

(Operator Instructions) Your next question comes from the line of Bin Li with Merrill Lynch. Please proceed.

Bin Li - Merrill Lynch

Thank you. Good morning Xu Hang and Joyce good morning to you. My question is on your outlook for 2007, you’ve just raised the top-end of the guidance, sales guidance by $20 million and yet earnings guidance only up $15 million. So can you explain that, that is the first part of question?

The second part of question is do you think on the upside of your guidance is largely reflecting the upside from the first quarter. So does that mean that for the rest of the year your earnings, you are not raising your outlook for the rest of the year or even, we’re down?

Joyce Hsu

Bin, as we said on the call earlier, I think for the, our process is really to provide the most immediate feedback on our full year outlook. And, therefore, at this time the adjustment in our outlook is really based on our experience and what we have seen so far at the end of the first quarter.

We do not rule out the possibility of increase or decrease our outlook in the future. It depend on the actual situation as we see better in the year.

Bin Li - Merrill Lynch

Yeah. So, about the gap between the top line of $20 million versus the bottom line is up $15 million, can you explain that, is it because you’re expecting your operating cost is going to go up more than your top line?

Joyce Hsu

No, as a matter of fact, if you look at our previous guidance, in our previous guidance we guided 40% to 42% top line increase and at the same time 38% to 40% bottom line increase. In fact, after the first quarter what we’re doing is really raising the net earnings outlook for this year to be growing at higher rate than the revenues.

Xu Hang

Okay. I’ll add some more to that. Why we adjust the guidance, that’s because from the first quarter that operations we receive that well up to net situations in domestic, to anti-corruption campaign influence almost down. And also we see lots of very good welcome for our new product.

And also we see a very strong growth in the U.S. market as Ms. Lee mentioned and also we see that strong demand in Europe and with more sales office we’ll put in the international market, we can see even more growth in the international market. So -- first quarter according to results, we are very happy to adjust our focus for the full year.

Bin Li - Merrill Lynch

Yeah. Great and thanks for the clarification. Question related that is -- and your operating cost, your SG&A, Joyce as you mentioned was lower than your full year guidance and you expect that to turn to back to at a normal historical rate.

What about other cost spending they are also seems to be lower in this quarter? And do you expect them to return back to historical norm?

Joyce Hsu

I think on the other expenses, they are more inline with our historical levels, which is level that we feel comfortable in achieving this year.

Xu Hang

Our general and administrative expense even higher than the last comparable quarter -- last year, one three hospital. R&D will almost relay -- a little bit increase. The sales expense that, we will continue to lower into domestic markets, we have matured sales network. but in the international side we feel that we’re still in the phase of investing, so while keeping -- we’re more source investing in the international side. So, it’s -- in all of that, the sales expense we are all see that’s well matured balance between this year and the last year. So this is the balance results of decrease to net percentages spending and percentage increased in the international market.

Bin Li - Merrill Lynch

Okay, great. Thank you very much.

Operator

Your next question comes from the line of David Clair with Piper Jaffrey. Please proceed.

David Clair - Piper Jaffrey

Yeah. Hi, good morning. Thanks for taking my call. Can you can here me?

Operator

Mr. Clair your line is open.

David Clair - Piper Jaffrey

Hello?

Operator

Your next question comes from the line of Vicky Chen with UBS. Please proceed.

Vicky Chen - UBS

Hi. My question is mainly related to the gross margin, now we’ve seen the gross margin expansion for this quarter compared to last year first quarter and the fourth quarter of ’06.

I am curious to know that where this gross margin expansion come from, is it mainly because of a diagnostics have increased or because of some other segments has a significant gross margin expansion?

Joyce Hsu

Thank you, Vicky. On this point, I think what I said in the call earlier is that, historically as you know the diagnostic as well as ultrasound tend to yield a lower gross margins. Over the last 12 months we’ve done a very good job in improving the gross margin for those two segments.

And now the gross margin for those two segments are actually coming in at similar levels than what we tend to see in the patient monitoring segment and, therefore, over all you’re seeing is margin improvement.

Vicky Chen - UBS

Are we expecting to see continuous improvement over the rest of the year for this year?

Joyce Hsu

I guess what we are saying in the call earlier is that, our gross margin tend to fluctuate from quarter-to-quarter, but over one year, if you have seen in our last four years, what we are trying to achieve at the management side, is we have to achieve a very steady but expanding gross margin. So, we would anticipate that this year we will be able to achieve the same results this year on the full year basis.

Vicky Chen - UBS

Well, thank you. And also relate to the gross margin, because along with the gross in the international market, the sales growth in the international market especially in the U.S. do you expect service revenue will grow? And is that going to impact you gross margin as well?

Xu Hang

It will, so yes.

Joyce Hsu

In the U.S. right now, we are actually not providing services. Most of the service is being done by our distributors, which is of the same for our international market elsewhere.

Xu Hang

Vicky, let me put this way, service is not particular in revenue currently. Its may be a possible gross in the future.

Vicky Chen - UBS

Okay, but not within the recent few years?

Xu Hang

Yeah, maybe.

Vicky Chen - UBS

Okay. Thank you.

Operator

Your next question comes from the line Amit Hazan with CIBC. Please proceed.

Amit Hazan - CIBC Capital

Good morning. Can you hear me? Good morning. Hello? Good morning, can you hear me?

Operator

Your next question comes from the line of Matthew Newton with Zephyr (ph) Capital. Please proceed.

Matthew Newton - Zephyr Capital

Thanks for taking the questions and also congratulations. On a tender what products were there, and do you have the growth rate by segments without the tender?

Operator

Your next question comes from the line of Bin Li with Merrill Lynch. Please proceed.

Bin Li - Merrill Lynch

Hello.

Xu Hang

Hi.

Bin Li - Merrill Lynch

Can you. Okay.

Xu Hang

Yeah.

Bin Li - Merrill Lynch

Great. Thanks for taking my questions again. My next question is on the sales outlook and you provide a very robust sales outlook for domestic and international market.

I was wondering whether you can quantify the impact of increase government business for the rest of the year, that's the middle question. Number one…

Joyce Hsu

Sorry Bin, you are breaking up a little bit, to quantify what impact?

Bin Li - Merrill Lynch

The increase government purchases. Okay, so that's the first part of the question. Second part of the question is on the international business, and you've just mentioned your sales have doubled in the first quarter.

Can you explain the reasons for the strong demand in the U.S. and what I am trying to see is whether we can repeat that for the rest of the year?

Joyce Hsu

Sorry, let me just translate for the benefit of management

Bin Li - Merrill Lynch

Yes. Thanks.

Joyce Hsu

Let me answer your second question first. Your second question regarding our growth outlook for the U.S. market. As we have said several times in the last call and also on this call we have a very, we are very optimistic with the outlook in the U.S. given that we are currently building up the local team and so we have a much larger portfolio now with FDA approved products.

We are very confident that we will continue to grow our U.S. business not just in the first quarter, but for the remainder of this year and even for the, a few years to come.

On your first question related to the impact on the whether now we can quantify the impact of the Government tender on our domestic business? Well, we have to say is that we are very well positioned to benefit from the overall government spending.

But as far as quantifying that impact as you know in China there is not a centralized channel nor there is a set timetable on the government spending and especially now most of the government spending has been decentralized to the local government. We are closely monitoring the development in each local market.

However, it will be very difficult for us to quantify the actual impact that we are going to see in this year, given that government spending tends to have uncertain timeline.

Bin Li - Merrill Lynch

Thanks. Just two quick follow up if I could. On the U.S. front, can you tell us on the new business? Is it coming from or increased revenue is it mostly coming from the existing vendors or coming from our new vendors? That’s one follow up. The second follow up on China market. Can you break down the sales from central government versus local government?

Joyce Hsu

On the questions, I think on -- so your first question in terms of growth drivers for U.S. market I think we are coming -- we’re seeing growth both from our existing distributors that are increasing the volume that they’re ordering from us, as well as from sales order from the new distributors that we are signing up this year.

So, the growth is coming from both sides. Second question related to whether or not the tenders are coming in from central or local government? What we are seeing this year is that, most of the tenders tend to come in from the local government.

We haven’t really witnessing a large tender that are coming in from the central government. But this is also inline with the announced policy of -- from the government of localizing these tenders.

Bin Li - Merrill Lynch

Great, thank you.

Xu Hang

I think these kinds of model is mostly benefit to Mindray because if the order, tender coming from provincial government, since we have a biggest sales network across China, so we are most benefit from that. If that have big tender from central government that’s sometimes is not so good for us.

Operator

Your next question comes from the line of David Clair with Piper Jaffrey. Please proceed.

David Clair - Piper Jaffrey

Hi, can you hear me?

Xu Hang

Yeah.

David Clair - Piper Jaffrey

Something must have happened last time. Thanks a lot for taking my call. Joyce I was hoping, lot of my questions have been answered, but maybe you can just give us an update on your pipeline.

It sounds like you launched the chemistry analyzer and are you still on-track for launch, I think its six new products this year. Can you just give us an update?

Xu Hang

Okay, yeah. All the new products are going very well in the process that’s which due at this time. We can see that, we can announce and deliver product as we previously announced.

Joyce Hsu

David, I'm sorry, did you wanted to…

Xu Hang

I’ll repeat again the same -- okay, yeah.

Joyce Hsu

Are you talking about the what the six products will be or you wanted just an update on the timing?

David Clair - Piper Jaffrey

I mean both, it sounds like you got one of the six launched in April, correct the chemistry analyzer?

Joyce Hsu

Right.

David Clair - Piper Jaffrey

And where we’re on track with the other five, I mean if you can just briefly tell us what they are and when we should expect them?

Joyce Hsu

Yeah, I think the BS-400, the biochemistry analyzer we launched in April, most of the other products that we are planning to launch this year are scheduled for the end of this year. And we are on track to deliver that.

David Clair - Piper Jaffrey

Okay. All right. Thank you.

Operator

Your next question comes from the line of Amit Hazan with CIBC. Please proceed.

Jack Hu - CIBC Capital

Good morning. Can you hear me?

Joyce Hsu

Yes.

Xu Hang

Yes.

Jack Hu - CIBC Capital

Yes, actually this is Jack for Amit Hazan.

Xu Hang

All right.

Jack Hu - CIBC Capital

Congratulation for another great quarter. So, actually we have two questions. Number one, so you had about a 25% year-over-year growth and what percentage of the growth come from the unit growth and what percentage come from pricing growth?

Xu Hang

Let me first explain that, 25-percentage growth is just the domestic growth. Our overall growth is nearly 33 if just for the Central Government tender our growth will be more than 40. Our international growth is more than 60%. We have mentioned that, among this growth amount 60% of the growth is from new product, which is T8, T5 the high-end efficient monitor.

The DC6 color and also the BC 5500, which is five parts hematology analyzer, definitely for the existing product the quantity growth is a little higher than the revenue growth because the price are little bit lower. We every year we will lower our price product price point little bit.

Jack Hu - CIBC Capital

Yeah, can you quantify that?

Xu Hang

Do, I answer your question?

Jack Hu - CIBC Capital

Yes thanks. But can you quantify the pricing trend?

Joyce Hsu

The pricing trend I think is consistent of what we have done in the past year, that is every year on average the pricing goes down by 5 to 10% depending on what product they are. But given that we are a price leader in the market we own the largest market share in China.

We typically are the price sector, we don’t -- we’re not price follower. So every year, there is a 5 to 10% price decline year-over-year for the existing products. For the new products of course the most of the new products that we introduced last year and also we are going to introduce this year coming at much higher pricing point and also higher margin point than the existing product.

Jack Hu - CIBC Capital

Thanks, actually I don’t know anybody asked it before, I am sorry if I missed that actually.

Xu Hang

No, you are the first.

Jack Hu - CIBC Capital

So the second question is actually can you give us a little color on your North America new product launch, especially for your distributors and then the product launch of $10 million.

Joyce Hsu

For the North America market, as you know for every product we launched in the U.S. is required the approval. And we started this process about two years ago and last year really the first year that we had suitable product for the U.S. market. Currently, we have a mixed patient monitors as well as ultrasound products. Including our color ultrasound which we have just received FDA in December last year in our portfolio. We do expect that this year we should be getting our first diagnostic product in the U.S. market.

Xu Hang

Let me tell you this way. Our rose mostly from older product since we only had among the new product we mentioned, only the DC-6 we have got FDA approval. For the TAT-5 and five times hematology and also the BS-400, we don’t have FDA. So we believe that, we will put this all throughout FDA but we don’t have -- price little bit later. So you can expect why we are so confident about North America because we have a rich product portfolio.

Jack Hu - CIBC Capital

So just a follow up actually for a suite product, you’ve just mentioned, the new products, what the timeline for FDA approval?

Xu Hang

We haven’t said -- yes, yes next year.

Jack Hu - CIBC Capital

Thank you.

Xu Hang

We hope to get the FDA approval next year.

Operator

Your next question comes from the line of Matthew Buten with Sapphire Capital. Please proceed.

Matthew Buten - Sapphire Capital

Hi, can you hear me?

Xu Hang

Yes. Okay, that is clear.

Matthew Buten - Sapphire Capital

On the tender what products were involved in the large government tender? And do you know the growth rates of that tender?

Xu Hang

Last year. Mainly confirmed ultrasound.

Matthew Buten - Sapphire Capital

The old…

Xu Hang

You mean last year or this year?

Matthew Buten - Sapphire Capital

This year.

Xu Hang

This year mostly from ultrasounds and hematology.

Matthew Buten - Sapphire Capital

And do you have the growth rate by segment without the tender?

Joyce Hsu

Sorry, you are talking about the adjusted growth rate without the central government tender last year.

Matthew Buten - Sapphire Capital

Correct.

Joyce Hsu

Okay. For ultrasound if we adjusted for the central government tender last year, it would have been 33% more than 33% year-over-year. And the impact on the other two is smaller.

Matthew Buten - Sapphire Capital

Okay.

Xu Hang

Let me say a few words because I guess that ultrasound operation may frustrate you because this quarter we see the lowest growth from ultrasound as Joyce mentioned that this one reason is that due to our DC-6 reached very strong demand and out of our expectation and most of our distributors paid down their main force on this but we cannot supply them. So, that some of them are waiting for our product.

And the second is that for the fiscal last year the big tender mainly came from ultrasound. So, these two reason put together you see the loss gross of ultrasound.

And the third reason is that we haven’t finished our dedicated channel. In our plan that there will be a dedicated channel one for color, and the one for black and white. And currently, most are black and white also they want they said that they are selling the color ones, because they get high margin and high profit from selling color system.

Matthew Buten - Sapphire Capital

And can you tell me on manufacturing capacity, have you resolved or is this something that’s going to be ongoing in terms of the color system?

Xu Hang

Yes. Not totally in the April, we think that from May this manufacturing bottleneck would be overcome.

Matthew Buten - Sapphire Capital

Okay, great. One other question as it relates to your comments on the domestic growth rate returning to high level, what kind of range are you talking for that?

Joyce Hsu

Matt, historically we’ve done around 30% and we expect that we should resume back to around 25% to 30% this year.

Matthew Buten - Sapphire Capital

Just wanted to clarify. Thank you very much.

Joyce Hsu

Thank you.

Operator

Your next question comes from line of Robin Roberts with Jayhawk China Fund. Please proceed.

Robin Roberts - Jayhawk China Fund

Hi. Historically you have executed pretty well and looks like that your outlook for the rest of the year 2007 is pretty optimistic. Now, when I look at for the EMS expectations, it looks like that the ’07 because street consensus estimate for ‘07 is already exceeding 40% growth and there were also EMS expectations that going to ’08, revenue is going to grow about north of 50%. So I am wondering, can your optimism of ’07 carry into ’08? And what is the likelihood of you're meeting street expectation of 50% of growth in ’08?

Joyce Hsu

Hey, Robin, I guess right now we only have the guidance for 2007 and at this point of time we cannot see any factors in the microplate that would impact our outlook for the future. But, we cannot comment on the outlook for ’08.

Xu Hang

I have two words on that. Yes, we are very optimistic for the year 2008 that due to several reasons, one is the government is spending continuously in '07, ’08 because a lot of provincials didn’t announce their plan yet, and the second that we have so many products were launched at the end of this year.

They will bring us new growths in year 2008. Another is that in U.S. market we have many products that will get FDI approval in the year ’08, so all this put together, we are confident about that.

Robin Roberts - Jayhawk China Fund

Well, I understand your optimism. At the same time, you also said that the pricing trend continues to have the 5% to 10% decline, so…?

Xu Hang

These are the past records, not necessary for the future.

Joyce Hsu

But Robin I think one thing we do want to emphasis that, even though the 5% to 10% decline, I am talking about existing product, as we introduced higher pricing point product, the overall ASP should rise?

Xu Hang

Yes. You can see from this quarter's operating result, we got a relatively high margin of the result. This is due to -- still we don’t raise the price. We don’t, it’s not a model to raise price in this business. But we still can raise our margin. This came from two reasons one is that we have done lot efforts to reduce the cost of the older product and the one that we continue to introduce new product. So there is a combined result, you’ll see higher margin than before.

Robin Roberts - Jayhawk China Fund

Right. That's great and so typically is there a reason to expect one year after you’ve introduced a product into the market and then you would reduce the price by 5% to 10%?

Xu Hang

Yes, but we may reduce the cost even more.

Robin Roberts - Jayhawk China Fund

Okay. So, it’s -- in the past you have build out this big pipeline and therefore in ’07 -- now you have 60% of sales from new product. And so going into ’08, should we still expect 60% is coming from new products, or is that percentage is going to decline? Hello.

Xu Hang

Okay. This is 60% growth is not in revenue, in the increased revenue, 60% of increased revenue coming from new product. So, it’s roughly accounts for 10% to 15% outcome from new product that sold. With increase of new products, we will continue this trend. The new product will always be a driving force for the growth.

Robin Roberts - Jayhawk China Fund

All right. Okay.

Joyce Hsu

And Robin, I think, David Clair's earlier question on our new product portfolio, let me just repeat what we have in the pipeline. We currently have -- we have just introduced our BS-400. By the end of this year we have five more product that we are going to introduce across our three product segments and that is in line of our historical track record of introducing seven to nine products a year.

This year we are introducing at least six. So I don't think the pipeline itself, if you worry about the pipeline been dried up. That is not, certainly not going to be the case.

Robin Roberts - Jayhawk Capital Management

Okay. My last question is related to your government tender. Last year first quarter is great that you have won a big government tender, which was about more than $2 million, so this year first quarter '07 you don't have any government tender right?

And so, now its two months into the second quarter, do you have any government tender. Have you won any government tender now in the second quarter?

Xu Hang

Let me explain further. In the last quarter this tender is from central government. We do get a lot of tenders from government, but it's from local government in the first quarter this year.

Joyce Hsu

Robin, I need to translate this to English because the audience largely is the English audience. The question that Robin has is whether or not the tender we have…

Xu Hang

More than $2 million.

Robin Roberts - Jayhawk Capital Management

My question was actually whether…?

Li Xiting

That the reasons why we adjusted the government tender last year from the central government is, because we are now increasingly seeing most of the tenders coming from local government and they tend to come in smaller amount. Its very atypical for us to see a large concentrated amount. Such as the one we saw a last year from the central government

So, I guess the answer to your question earlier that we actually do have government tenders in the first quarter. It just had -- its not in -- it does not have as such concentrated impact from a single tender from the central government. And we are expecting to continue to see tenders from the local government going forward.

Robin Roberts - Jayhawk Capital Management

Right. So, just now in Chinese we clarified that you did won some government tender in first quarter '07, but did not have a time to deliver and now you’re going to book it into second quarter '07. So, those amount is about above or and beyond your guidance or is it included in the guidance already?

Joyce Hsu

Whatever we’ve had seen or we have in our pipeline is included in our guidance. Well, we cannot forecast or include in our guidance is those tenders that have not been budgeted or have not been executed by the local government. As a matter of fact, a lot of government still have not announced a detailed plan for this years tenders and those we cannot forecast.

Robin Roberts - Jayhawk Capital Management

Okay. That’s very helpful. Thank you very much.

Operator

Your next question comes from the line of Jinsong Du with Credit Suisse. Please proceed.

Jinsong Du - Credit Suisse

Hi, just a follow up on my previous question regarding the distribution in domestic market for ultrasound. Could you share with us the new ultrasound color, ultrasound distributors, you plan to add and already added so far? And also do you have any plans maybe in the future to do direct sales in China? Thank you.

Xu Hang

On your second question Jinsong, regarding whether or not we have the intention to go into direct sales? I think right now we are doing a very small program of high-end hospital direct sells but to have a larger program that you direct sales probably not likely in the next couple of years and nor is it our strategy.

The answer to your first question regarding the preparation for dividing up the sales channels for the black and white and color ultrasound, I think right now, we would say that we’re hoping to see some impact resulting from the separation of black and white and color ultrasound in the second quarter this year.

But for the channel to be completed buildup for the color ultrasound will probably take up to a six months, is probably work that would take up to six months to do.

Jinsong Du - Credit Suisse

All right. Thank you.

Operator

Your next question comes from the line of Bin Li with Merrill Lynch. Please proceed. Mr. Li, your line is open.

There are no further questions at this time. I would now like to turn the call back over to management.

Xu Hang

I think that we answered all your questions.

Joyce Hsu

So, thank you everybody for joining us on the call today. We look forward to talking to you on our next call. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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