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ZOLL Medical Corp. (NASDAQ:ZOLL)

Q3 2008 Earnings Call

July 24, 2008 10:30 am ET

Executives

Richard Packer - President and CEO

Ernie Whiton - CFO

Analysts

Phillip Nalbone - RBC Capital Markets

Joshua Zable - Natixis Bleichroeder

Greg Brash - Sidoti

Jonathan Block -- SunTrust

Darnell Azeez - Lord Abbett

Rob Hosie - Blackrath

Operator

Thank you for holding for the ZOLL Medical Corporation 2008 Third Quarter Results. Today's call is being recorded at the request of ZOLL Medical Corporation. If anyone has any objections you may disconnect now. At this time, all participants will be in a listen-only mode, and a question-and-answer period will follow today's speaker.

At this time I would like to introduce your host, Mr. Richard Packer, President and Chief Executive Officer. Sir, you may begin.

Richard Packer

Welcome to our 2008 Q3 call. Thank you for joining us this morning. I have with me Ernie Whiton, our CFO. We will start this off with a traditional reading of the Safe Harbor.

Ernie Whiton

The matters we will be discussing today which are non-historical information consist of forward-looking statements. Reliance should not be placed on forward-looking statements because they involve risks and uncertainties, which may cause actual results, performance and achievements of the company to differ materially from the anticipated future results, performance and achievements expressed or implied in such forward-looking statements.

Forward-looking statements may contain estimates and actual results may vary materially from estimates. Factors such as overall economic conditions, the demand for the company's products and services, availability of raw materials and manufacturing capacity, risk of non-payment of accounts receivable, risks associated with foreign operations, risks involved in litigation and other risks and uncertainties described from time-to-time in the company's filings with the Securities and Exchange Commission may cause the actual results to differ materially from Management's current estimates and expectations. The company disclaims any current intention to update forward-looking statements in the event of any changes in the facts, circumstances or expectations that underline those statements. Rick?

Richard Packer

Thank you, Ernie. Q3 was another strong quarter for ZOLL from both the revenue and earnings perspective. We continued our recent trend of revenue growth in excess of 20% and even fast earnings growth as we push to gain operating leverage bit-by-bit, quarter-by-quarter. So we are tracking well to complete 2008 ahead of our original plan for the year and we remain bullish regarding 2009. With some caveats we will discuss in a moment.

But first let's look at the pieces for Q3. In the North American hospital market results were quite good again this quarter with a large contribution for military sales which more than tripled from last years levels. Much of this business in the Power Infuser product which seems to be in a strong reorder cycle. Perhaps due to a training program we instituted in 2007 or perhaps due to redeployments. As it always the drivers of military purchases continue to be difficult for us to understand let alone predict.

Looking at the base, non-military hospital business it continued to do well again this quarter as we continue to take share and the AutoPulse slowly gains traction. No huge orders this quarter just a lot of good wins and the team continues to make progress using the newer R Series and the traditional M Series to bracket our competitors offerings. We will shortly release the wi-fi option for the R Series, which is not a huge revenue driver in and of itself but is the first of a number of features and parameters that will be added to the R Series as we build upon that platform. This should allow us to continue our strength in the hospital market.

Turning to the pre-hospital market, the trends continues as previously described, ADs in the public access market continue to grow strongly in excess of 30%. LifeVest and data product both continue to track the plan. The EMS portion of the market showed okay growth this quarter but was one area where we could have done a better job. We had more business slip out of the quarter than usual not necessarily lost to competition just a delay in closing.

Obviously with high fuel prices and talk of budget issues within cities and towns we are monitoring this closely to determine if the economy was the bigger effect or was it our own execution. While we (inaudible) business where funding was delayed specifically due to current fuel price and sudden changes in budget outlooks, the larger portion of the delay seemed to be unrelated to current economic conditions. So like I said, the business was okay in EMS the past quarter but not outstanding, and as we look to the future obviously the effect of fuel prices and city and town budgets and the projections for state budgets our warrants close monitoring. Hopefully what we have seen is not the start of a broader trend in EMS. Our products continue strong that looks good for us.

Looking at international, there was another outstanding quarter with our distributor business particularly strong this quarter. As Ernie will cover the strong distributor mix having effect on our gross margins, but overall this is very positive data point as it is the result of progress we have made over the past few quarters pushing our expanded product line into our distributor countries. No one or two big orders accounted for the success. Rather there were many $200,000 to $300,000 orders that rolled in from many sources, for many reasons.

As example, Shanghai EMS ordered another 30 M Series as they continue their standardization to ZOLL a piece of business that we won last year. We got a nice Power Infuser order from the New Zealand military our first order of the F product in that country. Spain a country we have been focusing on lately more than doubled their order this quarter. We did more than $250,000 of defibs with the Polish military partially as a result of attempting to push the Power Infuser into international militaries. So, a lot of diverse activity and results which hopefully speaks to continued future strength.

Turning to the AutoPulse in total, it was a nice quarter with good progress and hospital in international particularly. Again it could have been stronger in the U.S. CMS area but some of the funding issues I just spoke of also affected the AutoPulse.

During the quarter, we also made great progress with the CIRC trial. As we finally got through the final IRB in community consultation hurdles and now have Huston fire randomizing and enrolling patients. This puts our two biggest sites Huston, Texas and Vienna, Austria online and over the next three months we shouldn’t get a good read on what enrollment rates will be and how quickly we might have data. Recall we anticipate needing more of than 2500 patients in the statistical portion of the study to see result. Obviously, we’re thrilled to have achieved this milestone and remained very positive about the potential for the CIRC trial.

Looking forward, Ernie will speak in a moment to provide a broad directional view of 2009, but more generally let me provide an overview. I think we are executing well and that our strategy is proving out. As we have expanded our portfolio adding other resuscitation oriented products to our traditional defibrillation products we are seeing improved sale force productivity, increased cross-selling opportunities and decent financial leverage. We are making great progress with our core defibs taking market share in all the areas on the strength of our new products and continuing to benefit from the weakness at Physio control. At the same time, we have large unique opportunities in front of us with the AutoPulse and the LifeVests which are growing rapidly today and with Hypothermia, which will begin contributing in the not to distant future. So we are very well positioned.

Obviously factors outside our control such as state spending levels, fuel price effects on budgets any global economic slowdown, even the effect of a new presidential administration and interview and actions on Healthcare can put a short-term bump in a road. We have no way to tell on any of these issues and we will leave it to that handicap into you guys. So, generally we are very happy and bullish on our business, but we will remain cautious and conservative with some of the issues I mentioned -- until some of the issues I mention become clear. We believe this is the right way to think about our current strength in the environment around us.

Now let me turn the call over to Ernie.

Ernie Whiton

Thanks, Rick. Let me start with our balance sheet then I move to the P&L and then I will talk little bit about our forward perspective. With respect to the balance sheet, balance sheet remains in excellent shape. We finished Q3 with total cash and related short-term and long-term investments of approximately $60 million. This reflected an increase of approximately $13 million versus Q2. During Q3, we generated approximately $12 million on positive cash flow from operations, we spend approximately $3 million on capital expenditures generated about $4 million roughly from stock option exercises. Year-to-date we have generated approximately $18 million in positive cash from operations.

Our DSOs and AR improved from 74 days, 72 days versus Q2. Our inventory returns increased slightly from 2.89 times to 2.93 times. AP and accrued expense levels remain flat with Q2.

Now let me turn to the P&L, as we indicated in our press release this morning, our revenue growth was broad-based across all markets. Gross margin decreased approximately 0.5 from Q3 of last year. The biggest driver of this decrease, as Rick indicated, was the significant increase in international distributor business. This increase was broad-based with strength in Europe, Latin America, Middle East and Africa and Asia specific. Our international distributor gross margins are significantly less than our corporate average gross margins. This impact was partially offset by a larger mix of LifeVest business which carries larger than average gross margins. There were a number of other noise level fluctuations, each of which individually represented a modest impact.

Now, typically our gross margins will bounce around modestly from quarter-to-quarter depending on mix. During Q3 of last year, gross margins actually ran a little higher. Overall I would say, we are generally in line with history. Next quarter I expect them to return to the 54-55 range. But I’ll come back to next quarter in a moment.

Our Q3 operating expenses decreased as a percentage of sales from 48% to 45% as compared to Q3 of last year reflecting leveraged NR growth. Selling and marketing, and R&D each decreased approximately a point as a percentage of sale, while G&A decreased approximately 0.5 point. Sequentially, operating expenses remained roughly flat with Q2. Other income decreased 900,000 from 1.250 million to 350, 000 because of foreign exchange fluctuations and lower average interest rates.

Overall, return on sales, its operating income as a percentage of revenue improved 2 percentage points from 7% to 9% of sales, reflecting leverage on our growth. Our tax rate was 36% for both Q3 of this year and last year. We continue to anticipate a 36% tax rate for fiscal ’08. EPS was $0.27 versus $0.21 last year and $0.26 street consensus.

So, overall Q3 was a great quarter from a P&L perspective. You will notice that our backlog decreased above 5 million versus last quarter, but it is close to where it was about a year ago. Typically, our backlog decreases in Q2 and remains roughly flat in Q3. You will recall that backlog did not decrease in Q2 which was unusual. So, given the deals can bounce around from one quarter to another, Q2 looks like a typical Q3 and Q3 looks like a typical Q2. Overall, we ended Q3 about where we typically would from backlog perspective.

So, with respect to 2008, we now expect revenue to be in the high 390s or approaching 400 million. This would put Q4 on-track. And we believe we are on-track to hit our previous annual EPS guidance of $1.10. This is above 10% better than we discussed when we started this year. So, if Q4 comes through as anticipated, it will have been another highly successful year for ZOLL.

Now, I would like to make some observations about 2009. In general, as Rick pointed out our outlook for 2009 is positive. We believe we are well positioned with current relevant products in our core professional defibrillator and public access AED markets. We believe the AutoPulse is gaining traction and offers opportunity for leverage (inaudible) to competitive accounts. We are also very excited about the LifeVest opportunity.

However, given some of the big macro economic uncertainties out there including the US economy, healthcare in general, and the overall political landscape, and the fact that we are now only taking our first real view at 2009 it is important to remain balanced. So, as a first view of 2009, we see consolidated revenue growth of 10% and EPS growth of 25% to 30%. As you think about our 35% year-to-date revenue growth rate in 2008, please remember that 2008 includes about 8.5 million a very low margin California revenue. Our first view of 2009 assumes this business does not repeat.

Furthermore, we are assuming a very modest level of US military revenue in 2009. For example, let’s assume US military revenue of approximately $ 8 million in ’09 down from an estimated annual 18 million in 2008. So, if you remove California and the US military revenue from both 2008 and 2009 numbers, our remaining growth rate would be in the mid-teens range. We think this is reasonable based upon a core defibrillator industry growth rate of 8% to 10%, our opportunity for market share gains and the significant growth opportunities offered by the AutoPulse to LifeVest and their data management products.

Obviously, there are many different possible ways that we might arrive at this potential top and bottom line performance in 2009. I would like to point out again that we are really only taking our first view here and has not begun our detailed budgeting process. So, our thinking is still quite broad. With this in line let me paint one potential scenario to help you think about next year.

This view of 2009 might include mid-to-high single digit growth in the North American hospital market excluding military and large government. With respect to pre-hospital our first view contemplates 20% or so growth. This is based upon mid-to-high single digit professional defibrillator growth, 30% data management in AutoPulse growth, low teens public access AED growth and 50% LifeVest growth.

In international, let’s start with mid-to-high teen growth, on a consolidated basis we think the AutoPulse can grow 30% or a little more as we continue to gain traction. With respect to gross margins, let’s assume we improve a full point reflecting no repeat of the California deal in 2009.

Regarding operating expenses, let’s start with 8% growth reflecting modest leverage. This might include 8% sales and marketing growth, 7% G&A growth, and 10% R&D growth. So, this view would drive another two points of improvement in return on sales, bringing us from 9% in 2008 to 11% in 2009 with one point of leverage coming from gross margin and one percentage point coming from operating expenses. This would also drive EPS growth as I noted before of 25% to 30%, making 2009 another strong earnings growth year for ZOLL.

We believe this scenario also affords us the opportunity to continue to invest in the development of our emerging resuscitation product opportunities including AutoPulse with our CIRC trial, our LifeVest sales organization and our hypothermia products. These investments are important to driving strong business growth in the years beyond 2009.

Now, as you think about modeling the year, it is always wise to model a ramp-up over the course of the year. By the back half of next year, we will have more clarity on the political landscape, state funding etcetera. Now, keeping all this in mind, we’d be growing significantly faster than our market and profit would grow even faster. So, even this conservative view tempered by all the colorful headlines we read every day out there, this would still be quite good.

Remember that this preliminary view represents broad strokes, will give you a real plan for ’09 in November after completing our budgets and see details with more clarity.

So, in summary our outlook for ’09 is positive based upon fiscal year ’08, but as Rick pointed out there is some big macro economic uncertainties out there. So, we believe this is good balance guidance.

Before I turn the call back to Rick in the later note let me just point out that we had a small power outage in the Chelmsford area this morning. So, I am going to give you a phone number to call following the call, if you have any follow-up questions and you want to reach me directly, just call this number and you will either get me or leave a voice mail and I’ll be happy to follow up. That number is 978-394-7672. And with that, I’ll return the call to Rick.

Richard Packer

Great, thank you for that Ernie. Matt if you would now like to moderate a question-and-answer period.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from Phil Nalbone of RBC Capital. Your question please.

Phillip Nalbone - RBC Capital Markets

Yes. Good morning. Let's start with the gross margin in the third quarter. Can you give us some sense or any for how much of a variance was created by the higher than expected contribution from overseas distributors?

Ernie Whiton

Yes, it was close to a point.

Phillip Nalbone - RBC Capital Markets

Okay. And what gives you a sense of conviction about an improved mix in the fourth quarter?

Ernie Whiton

Well, we had any. I would characterize as a extraordinary high mix of distributor business this quarter that's not something I expect to repeat as we look forward in the Q4, and we are looking at the business we are tracking that's what I see. So, I see less of a mix of that and I see the margins going back up to the 54%-55% range.

Phillip Nalbone - RBC Capital Markets

Okay. Let's turn to the fiscal '09 guidance your first swipe at a top line forecast that I hear you correctly you are targeting at 10% growth rate overall?

Ernie Whiton

Yes.

Phillip Nalbone - RBC Capital Markets

Okay. It strikes me as a bit conservative in light of current trend in the business and given the fact that it's barely above an industry rate of growth and your company with lots of nice differentiation in the product mix and a new product cycle. So, is the conservativism and effort to just account for the uncertainties in the macroeconomic environment or is it something else? And then how does Physio factor into your thinking about your fiscal '09 performance?

Ernie Whiton

Okay. So, two points. Number one, great observation Phil, two points. Number one, as I pointed out remember California is in there and we put in what we consider to be very conservative guidance on the U.S. military. So, when you are looking at the growth rate, I know Physio look and see 35% this year why 10% next year. If you back out California and the military you get back into the mid teens which seems pretty conservative to us based upon where we have been, but we are attempting to deliberately filled in some conservatism reflecting all that headlines that we all read about everyday and all that the things that Rick and I discussed in our earlier comments.

Richard Packer

Yes. Let me just add to that specifically on the military as Ernie estimated let's say we do somewhere around $18 million this year. We've often seen strong military orders years followed by weaker military orders years, and I think from a planning perspective we are a lot wiser to plan for $10 million whole if you will then for it to be flat or up. That give us some upside I mean…

Ernie Whiton

Which is exactly what happened in '08?

Richard Packer

Yes. That's exactly what happened in '08 and it's the opposite of how we planned, it was 2005. We were pretty strong in 2004, we counted on our VP when we did get it we were in scramble mode. So, that certainly can turn around but we never been able to predict that we have a hard time figuring out what the drivers are. So, I think that's wise and when you put in a big negative number there obviously that has a fairly Draconian effect on the growth percentage. Ernie, I think has covered California. When you breakdown the individual segments I think you can see that there is some conservative in the EMS number because he has got, we have kind of a single digit growth number there which will mean that we were taking market share if that market continues to move along the way it traditionally moves along. While we are a little bit worried that might not move that way that all those gas stuff in the cities and town might struggle. Maybe they are not spending nearly as much money next year as they did this year. And that are single-digit growth rate really means that we continue to take market share because the market isn't growing very much. I would say of all of the discreet points putting California and military aside that area is the area that we are trying to be the most conservative on.

Phillip Nalbone - RBC Capital Markets

Okay. Final question and I will go back into the queue. In regard to your international growth rate projections for fiscal '09, I am looking for mid-to-high teens growth, again way below the current trend line, guys you have averaged more than 30% top line growth over the past nine quarters in your overseas operations. What's going on with the fiscal '09 outlook?

Ernie Whiton

Again Phil, I will remind everybody that this is highly preliminary and as we look at international we have been achieving some remarkable numbers. Obviously, we begin to roll on comps right, so China is quite strong for us this year and then we are rolling into comps. You read the same things I do Phil about the Chinese economy what's going on and what the post-Olympics is going to bring. And we just don’t feel that it's wise taking recent data points connecting the dots and projecting it to the move. I think we are wiser to structure our outlooks, our plans, our spending ideas to more modest things and then seeing if we can overachieve. Having said all that the plan that we have is going to drive even what you are pointing out is conservative at the top line, we are accounting on driving almost three times the rate of profit growth at the bottom line. And to be honest we are more concentrating on what is that growth of profit going to be than really what the revenue is going to be.

Phillip Nalbone - RBC Capital Markets

Okay. Very good. Thank you.

Operator

Our next question is from Joshua Zable of Natixis. Your question please.

Joshua Zable - Natixis Bleichroeder

Hey guys, congrats on another good quarter here. Thanks for taking my call. Just because I know I probably get questions just to clarify this and I know Rick you talked a little bit about the beginning I just want to make sure I understand sort of your view on the market giving obviously gas prices are up and municipality obviously have issues, but just, can you just walk us through or dump it down for me sort of how exactly that plays a role in terms of budget? And sort of when you think about when these people think about new defibs, defib obviously if it's broken into new one but I know you guys are currently have new products and good enhancements just sort of product sales. So, that’s part of it, just walk me through that a little slower just so I understand that fully.

Ernie Whiton

Yes, it’s a pretty simple effect. If you are running a city or town and especially if you are running an ambulance service or fire department or your vehicles are moving often ambulance services their station, they are burning gas, even when they are not moving. The effect of gas prices is something you see fairly immediately and depending on exactly what your town is and how your service is structured, it can create an acute data in your budget. And so, thinking about our products as capital equipment products where, yes if your defib is absolutely broken you need to get a new defib because you can't run without one. But if your defib is purely old you can always kind of limp through if you will and wait to replace it. And clearly we have talked (inaudible) about Physio Control's ability to get their customers to stretch their replacement cycles while they go through their difficulties. And so that's good evidence that can be done.

So someone is going to buy their first AutoPulse or buy a set of new defibrillators. They have it approved it's part of the budget, it's part of the plan for what they were going to do in 2008. And the city council town manager whoever is running the entity gets skittish because they are seeing their budget getting better skewed due to fuel prices. They are worried about what the winter is going to bring. They read the same headlines we read about tax revenues will be down because of the real estate market. They get skittish and they just throughout the brake and say look let's not spend any money until we can sort that out.

We had a nice order for AutoPulse it was about 20 units fairly large city in the south that we are working on for two years. That order was through city council in the month of May. The purchase order should have been cut in June before it was cut this exact scenario played out they got skittish about where their budgets were going to go and just said, hey let's hold off on that. Eventually, they will buy those AutoPulse because they are keen on the product and they want it, but in the time of uncertainty they are little more conservative. So, we've identified something’s that are like that are we seeing the tip of an iceberg or is this just a little bit of noise who knows. And so that's some of what we are trying to reflect rather than just blindly pushing through even though it didn’t affect us very much in Q3. I think it would be silly to just say it is not out there, it is never going to happen and let us just keep pushing through.

Joshua Zable - Natixis Bleichroeder

Great, and then just a follow-up, obviously looking at your preliminary guidance, and I know it is preliminary, top line, obviously on the conservative side, but the bottom-line still seems pretty strong here, looks like you are getting a lot of leverage. Can you just kind of walk us through a little bit or just kind of help me understand better sort of how you are getting that type of leverage. I know Ernie went through the numbers, is it just a function of your critical maths where, like you said, your sales organization is just more efficient, less R&D spend and things like that, I am just trying to understand because obviously that is still a very strong bottom-line number?

Ernie Whiton

Yes, sure. So, as I indicated, we expect to get a point of leverage out of gross margins, and a point of leverage out of operating expenses. The point of leverage out of gross margin really comes from our deciding not to model another California into next year as we sit here today, right. So, without California disaffected, our gross margins in 2008 on an annualized basis of, you know, in the vicinity of a point. So, that basically just comes from the math.

In terms of the operating expenses, I think that we have done a reasonable job of getting to critical math and our North American hospital and EMS sales organizations. There are wholesale additions that are really needed there, and now we have got the opportunity to start driving other products like the AutoPulse, for example, through that distribution. So when we are not re-aligning territories and adding large numbers of people that breed stability and efficiency, and bring in other products through breed leverage. We are going to continue to invest in R&D. We are the product differentiators, so I think we have got a healthy investment in R&D plan relative to our sales growth. And in the G&A area, we are getting leverage and so that pretty much sums it up.

Joshua Zable - Natixis Bleichroeder

Great, and then just one quick follow-up, I know you didn’t mentioned [Radiant] at all and I know the past guys talked about being still developing it, can you give any sense if there is any [Radiant] sales in the 2009 guidance or maybe you will talk about that more when you give us more formal guidance?

Ernie Whiton

I wouldn’t anticipate anything of any significance of hypothermia coming in 2009.

Joshua Zable - Natixis Bleichroeder

Okay. Great, guys. Thanks for taking my questions, and congrats again.

Ernie Whiton

Thanks.

Richard Packer

Thanks.

Operator

Our next question is from Greg Brash of Sidoti. Your question please.

Greg Brash - Sidoti

Hi, and thanks for taking my call.

Richard Packer

Welcome Greg.

Greg Brash - Sidoti

Thank you. Just curious on the competitive front, I am wondering if you are hearing anything about a Physio return, and you are seeing any conversions overseas now that the consent decree applies there?

Richard Packer

So, I hear every single day about a Physio return as we have since August when they began shipping products. I don’t think anything has changed in the United States as a result of the consent decree. As I pointed out last time, their shipping rate in the professional market which is the market that drives all, was about 40% of pre-shipment, pre-shutdown levels, right. So shutdown is a relative term. Their recent consent decree does not seem to indicate anything will slow down there, it seems to allow them to ship as much as they want to any government funded agency, and it is not clear whether government is just Federal government or is it cities, town, states and -- which is drives much of healthcare. Our assumption is that it is the broader definition. So it is not clear to us what the math is going to be in the United States, but we do know that they continue to ship, they ship everyday, and if you are Physio sales person, since last August you have the credibility to stand in front of a customer and say if you give me an order, and it is an emergency, you can fill out this paper work and we can get product to you. So I think that dynamic has not changed. From an international perspective, it is uncertain exactly what is going to happen. Again, there are 10% vacant ship as much as they want up to 10% plus all of the government entities, how do they look at all of the government entities, international, does that count or not count, no one is going to be quite certain until we see what their shipping levels are come August when Medtronic reports.

Assuming that they cannot ship very much, you are still going to have the same affect that we have seen over the past year and half. They will take order like they have always had internationally. They will put that into backlog and the vast majority of customers are comfortable waiting to get their capital equipment. So there won't be immediate effects, if you will in the professional market. And the professional market is what really drives Zoll’s pulse. In the AED market, the public access market, the dynamics are a little bit different. There, their share is going to go to the other players; we are a smaller player in the AED business, so we will get our share, but it is not going to make a huge difference on our numbers, and we presume that they are not going to ship very much into the public access market either domestically or internationally until this whole thing gets cleared up. Does that make it clear --

Greg Brash - Sidoti

Yes, that was very help. Thanks, Rick. And then just from an economic standpoint, the majority of the EMSs in the U.S. today rely on State budgets, or they are publicly funded?

Richard Packer

It is about 70% that is publicly funded somehow, that’s cities, states, towns, counties. A lot of the town money flows from State revenue sharing and stuff. So the most important thing is to keep an eye on what is going on with State budgets, State projection of surpluses or deficits. When last this market really went through a downturn in 2003-2004 it was really driven state deficits.

Greg Brash - Sidoti

Okay. And then just…

Richard Packer

Having said that Greg, when you look at, that’s kind of a general economic stuff when you look at gas prices. The public, the private guys are the ones that are probably most acutely aware of that because they do most of the transport in the business as opposed to the 911, and that is going to be most affected by the gas prices. So, I would think, the whole market has got different reasons to be a little bit sketchy right now.

Greg Brash - Sidoti

Okay. And just, I am near the story, can you may be just help me understand back in 2003-2004, I mean, what that -- the impact on your sales in that EMS market?

Richard Packer

I think we did not rode during that period of time.

Greg Brash - Sidoti

Okay.

Richard Packer

I suppose the market was contracting, and our market share gains were not great enough to allow us to overcome that.

Greg Brash - Sidoti

Okay. And then just regarding the LifeVest, I know you are spending heavily on it this year, curious what your plans are for ’09, do you plan to keep that in more reps or you are at a point where you know how to derive profitability from this business?

Richard Packer

It is a good question and I will talk about it in November when we finalize our plans. It is very much a choice of what we do with that business. We could turn it profitable if we slow down the rate of reps, we could let it breakeven or still add in reps, or we could do what we did this year which was to invest some money so that we can add a lot more reps, and that is very much dependent on the strength of the rest of the ZOLL business and what we can afford to do while still driving our bottom line.

Greg Brash - Sidoti

Okay. All right. Thanks, great. Thanks for taking my questions.

Operator

Your next question is from Jonathan Block of SunTrust. Your question, please.

Jonathan Block -- SunTrust

Thanks, hi guys. First one, Ernie, I think for you, just when I look at 2008 guidance, it seems like you took revenues to just about 400 million, but you left the bottom line at around a $1.10. So, just, maybe if you can help me out there, are there any additional investments that you have built into the model just for balance of the year?

Ernie Whiton

No, I don’t think so, I think that was, something closing in around 400 million, reflects the higher level of revenues in Q3, reflecting the higher distributor mix. So, I think if you look at the Q4 revenue, it gets us to something closing in at 400 million, is kind of in line with where we had expected Q4 to be previously.

Jonathan Block - SunTrust

Okay, and then maybe just a -- push you a little bit further there, also in regards to ’08, if I look at what you have done for the first three quarters and then your full year guidance in terms of what it implies for 4Q, even if I normalize for California, I have got 4Q accounting for about 27.5% of full year revenues, and that is down materially from the past year. So, is it reflective of just the massive quarters you have had here early in ’08 or is it just you guys being conservative, some color would be helpful?

Richard Packer

I think it is some combination of that, we have been running ahead this year. We certainly think that if we achieve at a bottom line of more than 10% above our plan, we are going to be pretty down proud of that. In the face of some uncertainty, as we have talked about, this doesn’t seem to be the time to put the pedal to the metal.

Jonathan Block - SunTrust

Okay. Certainly fair and then, well this one is for you, I believe, when I look at AutoPulse, and I apologize if I missed Ernie breaking that out when you went for the preliminary guidance, but if I look at AutoPulse, and now you have got the two biggest sites up and running and you are looking for roughly 2500 patients, and maybe we get that late ’09 or early 2010, is that sale change for your reps in 2009, in other words, they are going out there and people say hey, you know what, you have got this great trial up and running, I am going to wait six or nine months for the final data. Is that going to be a little bit more difficult?

Richard Packer

I don’t think so. As we have said before, we are dealing with people that by now are still very much early adapters, penetrations, low-single digits fairly makes the radar screen. They buy because they are buying on logic, they are buying on blood flow, they are buying on safety, saving labor, lots of different reasons. We need the trial to get beyond those people and to get the people that will only buy when they have to buy because somebody is saying, look the data says you can save more lives and it is your duty to save lives, so get spending. So, I don’t think it really changes the dynamics for ’09. I don’t think we will have any positive in ’09 as a result of [Cirk], but I certainly don’t anticipate that being an excuse for not buying.

Jonathan Block - SunTrust

Okay. Great, and just one more, if I may, I know you said you will give more specifics around LifeVest when we get to, I think it was November, but can you just help us to where we may end in terms of ’08, in other words, I think the last metrics that we got were 30 reps, critical mass seems to be around 108 or 120. Are we half way there at the end of ’08, or are we more than half way there at the end of ’08?

Richard Packer

Why don’t we talk about that in November when we can try and lay a little more stuff out?

Jonathan Block – SunTrust

Fair enough guys, thank you.

Operator

Our next question is from Darnell Azeez with Lord Abbett, your question please.

Darnell Azeez - Lord Abbett

Hello, guys.

Richard Packer

Good morning.

Darnell Azeez - Lord Abbett

Just a couple of quick questions, North American Hospital, I think you guys had 16% growth year-over-year last quarter and then 42% the quarter before that and, I think you have here 11% this quarter, just, can you just maybe explain what is going on with that? Secondly, the adoption of R Series, of that allied selling, and lastly has there been any meaningful changes in the competition for the sales rep, mainly are you paying more [Genproxy argument] to try that growth on the same AutoPulse or on any other products?

Richard Packer

So, let me take the backwards forwards here. In terms of compensation, we have driven more of the compensation towards the AutoPulse. We have done that gradually over the years that we have had the AutoPulse. I mean the AutoPulse is harder to sell because it is a new product and you have to find a new stream of revenue for it. So, in the hospital it has been more difficulty and certainly we want to be fair with our sales people and reward them for the extra work that it takes to get the AutoPulse going. So, that is something that we have been doing all along. In terms of the R series, we continue to be very happy with how it has been received in the market place this quarter. The percentages were a little bit lower then they had been. As you recall, we are using the R Series to step up the M Series as the kind of fighting piece, and we are using a bracket strategy.

We have recently added CPR to the M Series so that we can really come at the hospital market with full CPR feedback whether you buy the M or you buy the R, and that's resonating very, very well. Right now, I am less concerned whether they buy an R or an M so long as our growth rate in the base hospital business is significantly better than the market place that means our strategy is working. So I am pretty happy with the R, and as I mentioned, we are now getting to the point where we are going to be adding things to the R on a regular basis. And so, as we do that I think that will also make a much more stronger product offering in total. And then over time, people will just naturally move away from the M and move towards the R, and hopefully when that happens we will get a little bit of price left there.

I think your third question, I was just trying to reconcile the 11% base hospital rate of growth with the 60% total North American hospital for the year to date. And just the way we talked about North American hospital, it includes all of the US military big government, as well as, the base hospital business in North America. So, out -- I mean we had such good growth in the military business and that's driving all of those percentages. The 11% is a little bit slower than we have had this year, but recall we just had an outstanding growth last quarter. So, as Earnie points out, some of the stuff ships around a little bit from quarter-to-quarter.

Darnell Azeez - Lord Abbett

And that 11% wasn’t below what you are hoping for?

Richard Packer

We are 40% or so -- in the mid 30s, I am sorry, year-to-date for the hospital, we are thrilled with that.

Darnell Azeez - Lord Abbett

Okay. That is all. Thanks.

Operator

(Operator Instructions). Our next question is from [Rob Hosie] of [Blackrath]. Your question please.

Rob Hosie - Blackrath

Good morning, guys.

Richard Packer

Good morning.

Rob Hosie

Most of my questions have been answered. I had a quick question on the military side, why is that such a Black Hole from your point of view of where the orders come from. Do they just pull them down when they want to?

Richard Packer

Yes. Because that's exactly right. And it's not like we are bowing in there projecting out when they are going to buy their fighter jets, right. We are a little stuff to them, and we are stuff that is needed everywhere. So all the services need our stuff whether you are frontline troop, backline troop, special forces, they all have a need for it. So, they just pull it when they need it. Now, it is almost all electronic at this point. So we basically, every morning we look in and it is like Christmas. These orders show up and I go back to my guys and say where did that come from and they say, well, it came from the military. It will be okay you will be a little more specific. Specially on the Power Infuser, we have tried to find out exactly what is going on, but some of it, they don’t want to be telling you that they are loading up to do a redeployment to XYZ place. So, very difficult for us, and we have been a significant player in the military for a decade now. Certainly, it accelerated with the winning of the PMI when we got standardized, and I would say, we are no better at it now then we were when we started.

Rob Hosie

And do they have any sort of volume commitment on an annual or -- the life at a contract basis?

Richard Packer

No.

Ernie Whiton

No.

Richard Packer

The only kind of long-standing contract we had with them is the contingency contract where they paid us to build a bunch of staff and hold it for them, and they draw it out when they want. And so we got some orders that come -- that draw down which were then paid to replenish, and other orders don’t come again to draw down. We cannot figure out why they do one versus the other. And I bet you if you ask them they would not know either.

Rob Hosie

Yes. And could you just finally on that describe the Power Infuser product a little bit more?

Richard Packer

Yes. The Power Infuser is a product that came through an acquisition, I don’t know five years ago, roughly, company called Infusion Dynamics. It was a very small company, about seven employees, and they had developed a product that is about the size of a cigarette pack, runs on AAA batteries, and basically is a very small infusion pump designed to infuse not drugs but [callides] that you need to fight basically bleed out. So, it is a military product and it is there for fluid resuscitation. So if someone has a wound and they need to get blood or fluid into them very quickly in a controlled manner they hook that bag up to a Power Infuser. It does the job. You don’t have, if you ever seen battle field photos, and a medic kind of running with his arm up in the air, holding the bag of solution to find to get gravity to force it in, well the Power Infuser avoids that having to do as one of the obvious expenses.

Rob Hosie

And just overall with the military revenue, does that come into gross margins or is it comparable to your overall gross margin?

Richard Packer

Generally, it's gross margin, yes.

Rob Hosie

Okay. Thanks.

Richard Packer

Okay. I think we are all set, I don’t want to run too long today. So very quickly I would like to thank you for being with us. Obviously, we are pretty proud of another good quarter. We are trying to be balanced here in terms of giving you some view as to what is happening going forward. It is not easy when there is lot of uncertainty out there obviously. So we are trying to continue to be balanced. So, I just remind you that if you need Ernie, call 978-394-7672 and that is the way to get in touch with him until we get power back in Chelmsford and get our switchboard up and running again. Thank you very much. This concludes our call.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.

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