Masimo posted fourth-quarter sales of $142 million (up 8%) and adjusted earnings of $0.31 (up 18%), which amounted to a top-line miss versus the $145 million consensus. Fewer hospital admissions and not fulfilling a Rainbow order and two SET orders were cited as reasons for the shortfall. Adjusted EPS of $0.31 were spot on consensus, driven by gross margin expansion and a slowdown in spending.

Once again SET placements of 42,000 were very solid, though the lower utilization per driver held revenues down. The Rainbow product line saw revenues of $12.5 million, which were essentially in line with expectations, though the continuous hemoglobin number was down sequentially and is still struggling for consistency.

As for the Covidien royalty situation, we continue to be amazed at how much attention and confusion this brings to the Street. Management has laid out a case with and without the royalties and for now we have taken out the royalties beginning in the second quarter, though we could easily drop them in at some point during the year. Regardless of the scenario that plays out, it is our opinion that the royalty should not the affect stock much since the cash flows would accumulate to around $1.00 per share if paid through 2017.

With respect to 2014 guidance, we view product revenues as slightly disappointing on the top line for each of SET, total Rainbow, and continuous hemoglobin. We note the company has already seen a weaker-than-expected January and is building in the need for a very strong fourth-quarter impact from its blood management salesforce. On the bottom line, better gross margins and controlled spending are expected to more than offset the revenue shortfall in our model and will push our EPS target up $0.05, to $1.13 (in line with guidance). Consensus is $1.16, with some analysts well above $1.20, and we expect to see this come down in the coming days.

Overall, the fourth quarter was a bit disappointing in terms of revenue performance and we are a bit nervous about the ramp-up implied in the 2014 revenue guidance. In addition, the Rainbow growth of only 20% is certainly not indicative of any type of inflection point happening in the near future and we believe would be a disappointing outcome if it came to fruition. We note that the company has interesting new products in 2014 that could become a bigger part of the story, but it is tough to give credit just yet.