Please standby. Good day everyone and welcome to the SonoSite first quarter 2009 results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Ms. Anne Bugge. Please go ahead, Ma’am.

Thank you, Operator, and good afternoon. This is Anne Bugge, Vice President of Corporate Communications for SonoSite. Before we begin, SonoSite issued its news release on April 27, 2009 today regarding financial results for the first quarter ended March 31st, 2009. You can access the release on SonoSite's website at sonosite.com under the Investors section or call SonoSite Investor Relations at 425-951-1381 for a copy. A replay of the call will be available beginning at 4:30 PM Pacific Time today and available through 9:59 PM Pacific Time, May 11th, 2009. The replay number for US participants is 719-457-0820 or toll-free 888-203-1112. The confirmation code is 8899954. Additionally, this call is being broadcast over the internet and can be accessed via the Company's website at sonosite.com. I would like to remind you that this conference call contains certain projections or forward-looking statements regarding future events or the future financial performance of the Company. Except for historical information discussed in this conference call, the statements made today contain forward-looking statements that involve substantial risks and uncertainties. Actual results could differ materially because of factors listed in the Management Discussion and Analysis section of the Company's 2008 Form 10-K and in other filings and reports with the SEC. We do not undertake any duty to publicly update any forward-looking statements. Now, I would like to turn the call over to Mr. Kevin Goodwin, President and Chief Executive Officer of SonoSite.

Thanks, Anne, and good afternoon to everyone who joined us on the cal today. Also along with Anne, myself, is Mike Schuh, our CFO. I am going to start with first quarter highlights and then move on to our overview on forward looking environment. We navigated through a tough quarter relatively well we believe. As expected, we continue to be affected by slowdown in US hospital capital spending and negatively impacted by changes in the US dollar. Q1 worldwide revenues were essentially flat with prior year of $51.8 million down about 1%. Foreign exchange had an 8% negative impact on total revenue for the quarter. US revenues were up 5% in total to the strong growth in our enterprise channel. Our US direct channel, which is primarily hospital based was up 14%. International sales were down 6% as a result of 14% negative foreign exchange impact. On a constant currency basis, net revenue was up 8%. Currency also had a major impact on gross margin accounting for 2.5 points of the decrease from Q1 ’08. Gross margin was essentially level at the fourth quarter of 2008. We managed our operating expenses down 5% at $33.5 million. These included a reduction of SG&A expenses by 12% or 7% on a constant currency basis alongside plan investment in R&D which was up 24% in the quarter. Operating income or what we call EBIT in Q1 was $1.6 million down from the previous year and included a negative $2.8 million foreign currency impact. EBITS which excludes stock compensation expense was $4.1 million compared to $4.3 million in the prior year. For SonoSite, operating income and EBIT are essentially synonymous. Other expense below the operating line totaled $204,000 this included $2.6 million in interest expense of which $1.2 million was a non-cash charge from the adoption of the new FASB 14-1 accounting rule for convertible debt. Other expense also included $1.3 million gain from the repurchase of convertible notes. On a current outstanding basis, our convertible notes totaled $120 million. We reported net income of $863,000 for the quarter or $0.05 per share compared with $190,000 or $0.01 per share in the prior year quarter. Both periods reflect the adoption of the new accounting rule APB 14-1 for convertible debt. Without the impact of adopting the new accounting rule, net income previously would have been $3.2 million or $0.18 per share compared the $1.2 million or $0.07 per share that was actually reported. For several years, now, SonoSite has been focused on EBIT and EBIT assets result is more direct correlation to cash flow, our comp plans are also tired to this. Now, moving over to the balance sheet and all comparisons there with 2008 year end. Cash and liquid investments totaled $258 million. Our days sales outstanding increased to 104 days versus 85 days driven by purchases from our US government. Payments have subsequently been received since quarter end however. The inventory turns were 2.3 times compared to 3.1 times in the last quarter. This is due to seasonality of our business. Net liquidity was $138 million at the end of the quarter. I would like to make some commentary on the key drivers of our business in the quarter. With respect to the US hospital market, it deals as though we may be bouncing along the bottom. As things have not worsen significantly although they certainly are not robust. Internationally, currency changes fast, pretty good performances in a number of revenue centers. The international markets are not as bad as the US market and there appears to be some thawing from the first quarter internationally. So, it would appear we are heading the right directions. The M-Turbo and S-Series drove over 60% of Q1 revenue and as noted currency deterioration was the primary reason for the declining gross margins on a year-over-year basis. An additional factor was the mix we are getting with a rise in number of S-sales versus last year Micromax in the first quarter. We are not dropping prices and in fact we have begun to firm that a bit as we exit the quarter. One of our primary competitors, GE, continues to price at any level, oftentimes competing with themselves just to buy a deal into a quarter. Our priorities are to position ourselves for growth and even greater earnings leverage in 2010, 2011, and 2012 such as we did in 2008. We are leading and refining our business model and using the situation that we are right now to turnover every stone at the Company with an eye on the future. We are decreasing our overall operating expenses but not at the expense of muscle. We actually have increased the number of US sales territories since year end alongside a very robust R&D pipeline and the step wide expansion internationally. We remained on-track for the introduction of a series of products in the innovations during the year that will address new markets and enhance our leading position on the marketplace. It does appear that we are potentially gaining market share on the point-of-care visualization market in the last quarter, and before opening the call for your questions, I would like to make a few comments on our outlook. Our forward planning assumes that the economic slowdown will continue throughout 2010. We will continue to manage very carefully our cost structure. We expect the economic environment to continue to affect the US hospital capital spending for the remainder of this year and end of 2010. We have also adjusted our foreign exchange dollar assumptions from 3% to 4% impact on revenue up to 4% to 5% impact on revenue. For these reasons, we are now planning the revenue could be flat or positively down 10% for the year and we are therefore increasing our targeted goal of reducing operating expenses to a range of 5% to 10% for the year. This is an increase from the 5% reduction we originally targeted and mentioned at the last call. As noted, we will continue our investment and new product development and increasing our sales channels as appropriate. We are financially strong and we will continue to make necessary investments to lead the point-of-care visualization marketplace. We are a very strong position offering products and save money time and most importantly improve safety and healthcare. And with that, we would like to open the call for questions. Thank you.

(Operator instructions) Your first question comes from the line of Alan Robinson - RBC Capital Markets.

Could you discuss the enterprise channel? There is clearly some strength there in the quarter. Can you give us some colors to what were the drivers of the strength in that challenge here in the quarter?

Well, that challenge, Alan, handles a range of accounts that are primarily if you will business-to-business or business-to-government and so we had strengthened all aspects to that channel including, of course, the government. The government is about half of the revenue base in that channel and the government transactions are largely military. So, we have had a strong position in the military market, a very strong franchise now for many, many years and as you probably know that business ebbs and flows. We have had simply good execution, good performance there alongside growing revenue sources elsewhere within the channel. So, in general, we started to see some more consistent growth and impact from US enterprise and actually over achieved in Q1.

What was very contribution? Was there any impact of the stimulus spending that hit that channel or is that something that you have not seen yet?

Not we can tell, no, not at all.

Okay. You mentioned that there was a push of, I believe, accounts receivable from the first to second quarter. Can you quantify the size of that?

Let us see here, well, that will relate to orders that came in, I believe, in the previous quarter. But Mike, any comment there?

Alan, it is primarily related to the receivables from the government with just a little bit longer term and that added 12 days to the DSO.

Added 12 days, okay. And then, generally speaking, could you discuss the differences you were seeing in hospital spending trends in the US versus international and to what extent of international markets insulated perhaps from the macro concerns that we are seeing domestically? Could you give us some idea what you are seeing there?

Well, the first quarter was affected by a broad range of situations internationally. We had the banking crisis in the Ukraine for example it costs us the revenue alongside some other factors in Eastern Europe. We have little dribs and drabs, here and there. Now quite interestingly those have quickly thawed out. We just had a worldwide review last week and we are not hearing from the international organization the constraints on their business and orders that we have seen in the US hospital market. So, there is no question that they are not on the same position as the US hospital market. I am talking about international. The biggest competitor there is the US dollar. That has obviously wiped out a lot of value on a year-over-year basis. But other than that if you look underneath that we are pretty pleased with what was happening. We are seeing pretty good progress, quite encouragingly some of the countries where you would have expected to have more negative outlook such as the UK, other Western European countries, and maybe Japan did not provide that here recently. So, we are cautiously optimistic that some of the things that went wrong in Q1 internationally will improve themselves in Q2 and Q3 and on the US side, US hospital markets based on the map, it would appear that we are bouncing around the bottom, it so appears anyway.

Alright, thank you. I will step back in line.

(Operators Instructions) Your next question comes from the line of Greg Brash - Sidoti & Company.

On the US enterprise part of your business, just curious, what percent of your US sales come from enterprise and with the military contracts and you said all areas were strong; was this something you expect to repeat or it is just too lumpy where it is right now?

Well, now, the business flows lumpy but it ranges between 5% and 8% of revenue and it is growing better than it has in the past. That is good news in terms of sustainability and that is pretty much. I hope it answers your question.

Yes. Is it 5% of total revenue or of US revenue?

Total revenue.

Okay.

The bigger percentage of US revenue.

Okay.

So, it has certainly contributed that they are being able to grow and more than offset the 14% decline.

Okay. And then you mentioned, GE a little bit, are you seeing pressure on price with GE willing to take down their prices to any level?

Well, GE has been doing this for a year, as I have said it is slightly more accentuated today but the more we watch them they have pretty much almost competed with themselves. They would go into a deal and try to get somebody to bring in this quarter by giving an order they are going to win anyway at discount, and they have gone into many accounts and said whatever SonoSite offers we will offer less and we still won the business. So, I bring that up not to talk about them but to also say we have been firming our prices up and in parallel with them doing what they have always done and then some.

Okay. So, you are not getting anymore pricing pressure than you have in the past?

No, no. But I do think you have to be aware what they do. So, it is a kind of interesting.

Okay. And then curious, in the first table you have noted on the new accounting rules, showing what it was in the quarter with $0.05 and then without it would have been $0.18, I guess I am just not understanding the jump from other income loss or a loss of $200,000 to a gain of $3.5 million and the impact on the quarter was only $1.2 million.

Mike?

Well, there are two impacts to that number. One is we had a gain in the quarter and for the new APB 14-1 rules, the gain would have been around $4 million that was reduced down to $1.3 million and then in addition to that you have got $1.2 million of additional interest expense recorded in the quarter.

Okay. That makes sense. It is just the gain is confusing, okay, and then just one more on the international. You mentioned some of the issues in Eastern Europe, in Croatia, were you also seeing a slowdown in the western countries, in the UK and Japan?

We did not and we expected too frankly. We really did not. They finished strong and we have a recent update just a few days ago and not only were the Eastern European forecasts coming back around but the UK and other Western European nations were not, if you will see in the blues. It is not a free ride up; it is a tough market from a vantage point of just competition and economic pressure but at least at this juncture, that is the mindset that we are hearing.

Okay. So, assuming some of the other issues are that you have improved in Eastern Europe, you can bear the possibility. You can improve on the constant currency growth you saw in the quarter overseas?

That is hard to say. What we were doing is taking a pretty conservative view on currencies. We are following a couple of the major banks’ recommendations on US dollar conversion. We can say that, in our view, conservative as indicated on the call here that implies 4% to 5% negative headwind on revenue for the Company worldwide and about double debt internationally since we are about 50/50 US and international and then our international business is heavily weighted in some level currency business. So, bottom line is we think we are taking a conservative view, hopefully we are and if that is the case, we will get better overall results.

Your next question comes from the line of Tycho Peterson - JP Morgan.

Maybe just on the market color, following up the NHA survey which is out today, can you give us a sense as to whether you are seeing any sort of lengthening of the selling cycle or cancellation because it sounds like, because you mentioned you are bouncing along the bottom but what do you think of the dynamic with the customer base here in the US right now?

Yes, Tycho we have seen that order after order is requiring additional signatures. Our ability to predict in orders arrival in one week is a lot harder than it used to be. What we are finding is it is pretty likely that the order will come in within a two-week timeframe whereas in the past, it might have been predictable or predictive within one week. We did see about a million five in business in the quarter get pushed out a year, a little bit of that evaporated. So, that dynamic is still occurring. However, the total amount of business that you roll from Q4 2008 and to Q1 sort of the total inventory of deals might have been delayed or pushed out a year right around $10 million for us and there was $9.5 million, $9.4 million we exited the quarter at Q4. So, that is the range. We estimate about 60% of that revenue probably would have come in fourth quarter last year and the other 40% probably would have come in this quarter. I am talking Q1. So, the dynamics are more signatures, longer timeframes to get things through. That is true. We are better of predicting business in two week intervals versus one and we did have some business delayed and hence, we are looking at our US business could be down as much as 20% in the US hospital channel this year. Where we fit in, remember, is in the number of value added areas such as patient safety and we are doing well on that side of the equation but in general we are certainly following the tide down like everyone else.

Okay and I think in your comment you talked from a sales perspective of some sales ads and not having to discount, is there anything else from your sales perspective that you are doing differently? I think there is still a trade in program for M-Turbo and S Series, is that right?

Yes, there is. We did fill out 66 sales territories which has growth of about 10%. We did firm prices as we exited the quarter. There is pressure for sure on pricing. I do not want to say otherwise but we are kind of taking a stand relative to the value we have. We have a distinguishing feature in our product line which is a five-year warranty which is worth a lot more nowadays when you are buying these devices at a hospital. So, in general, we just want you to know what we are doing.

Okay, that is helpful and then in terms of kind of the operating expenses, can you give us a sense as to where you maybe looking a little bit more aggressively SG&A versus R&D and how we think about kind of R&D spend going forward?

Yes, SG&A has the main opportunity to bring it down. We could bring it down under certain circumstances depending on revenue levels as low as 133 total of OpEx. SG&A will be the driver of that now. Separately, R&D is expected to grow originally around 10% to 12%. We may come in under that a bit just based on good management, good efficiency and some timing of expenditures and so on. We are not cutting into the projects. We are certainly being extremely diligent about what we are spending our time and money on and then on the SG&A side, we have always believed that we need to get more efficient so we are just really working hard at examining our business model and making sure that costs in fact are properly lined up and they are having appropriate impact. So, I think you will see as we get the back of the year, we are going to keep making improvements and when the news ever gets good, assuming it does one day, we are going to be in very good position to be a bigger earnings machine.

Okay, great and then just one last on your outlook for China and Asia. Can you give us a sense as to how much of your sales focus this year will be on building out that business and what your view is there?

Sure. Those numbers look good. That business represents probably all of the Pacific Rim business represents about 12% to 14% of total revenues that are on track and growing nicely that includes Japan all the way around to Australia. The only problem on both of those endpoints is currency, but otherwise China and India are coming along pretty good and I would say it has been a bright spot.

Okay, did you anything different from a hedging strategy or looking at taking out more contracts?

Mike?

At the moment, no, we have not changed our hedging strategy, primarily hedging the balance sheet but it is always under review.

Your next question comes from the line of Jared Holz - Thomas Weisel Partners.

Before the economic environment really got pretty bad here in the late portion of 2008, the growth trajectory was pretty, pretty excellent, at least 20%. So, I was just wondering discounting everything that had happened over the past nine months and given the product cycle what you think can normalize run rate from a growth perspective your Company generates?

Well, I would say and I think about it and of course, it is my responsibility to be realistic, I think under normal conditions we would have turned in a 14% to 15% growth in this Q1 if we did not have a dollar against this and we have some level of normalcy in the hospital market. So, I would like to believe that as we reestablish normalcy, we will be targeting 15% top line exiting this situation. I cannot tell you exactly when. We do know there is a lot of pent-up demand and we see more and more interest such the interesting thing at the front end of our pipeline. We are seeing continued rise in interests and opportunities and those things that eventually predict revenue and then you add in the exact quantitative impact we have already talked about which is currency and purchase declines and I think 15% is a good number to think about for us as we head out and that is what we will be thinking.

Turning to the new products, you mentioned M Series and S Series did more than about 60%, can you give us a look at what that is going to look like for the remainder of the year? Do you think it will be in that 60% range of revenue?

Well, I would say it is probably going to stay where it is or maybe grow. Remember that last year, it garnered something like 53% of a quarter billion in revenue to its first full year and those devices both the M-Turbo and on the S family are in various forms still fully realizing their potential of the market place. So, I would say that the ratio, the revenue for those two devices should stay where it is or get better and then we will be coming out in the second half with the couple of the modes that look very interesting in this time and day and age relative to performance and values. So, we are pretty excited about the way our product line up is going to set up and those two products themselves are really delivering big for us.

Okay, when you look at the sales of the Company after the quarter, are most of the sales of these products you are just selling one device to one hospital or is it you are selling 10 machines to one hospital, zero to another? Are they coming in big batches because if you look at the number of operating rooms in some of the larger hospitals, you could be selling like 15 to 20 of these per hospital? Are the sales looking like that or is it one device per hospital?

The actual factual trend has been one to two orders at a time per order so one to two units at a time has been the typical. Usually, we see a moderate amount of multi unit deals. There had been some changes to that mix in recent times as a result of our product line being what it is but I do not want to say more than that.

Okay and then lastly on R&D, given that this quarter was the highest percentage of R&D or highest R&D as a percentage of sales I should say in about three years, can you give us a little bit more clarity in terms of what is in the pipeline here because the spending level has or was in this quarter the highest we have seen in a while.

That is right. That is a good point. Well, if you go back to the year 2006, we elevated spending 45% exiting 2006 to 2007. By the end of 2007, we dropped into the market five new products plus the major upgrade. Those new products of course are M-Turbo and the S Series and they garnered 50% and 60% of the quarter billion or revenue last year which is up 19%. So, what we have in the pipeline for fiscal year 2009 and 2010 and 2011 are a series of products that add to the product profile of the Company so they will be not displacing existing products but will be additive. We have a product ladder we use that is going to be expanded on behalf of what the market, it appears, needs and wants from us. There will be very innovative devices so nothing along the lines of what we see from every yield which is kind of mid two moves following SonoSite. We will continue to distinguish ourselves with the way we deliver product and we think if you look at second half 2009 and then you look at 2010 or 2011, you are going to see, I think you will see a good harvest from that R&D investment. We do not expect the R&D investment though as we head forward from 2009 to 2010 and 2010 to 2011 to necessarily rise as it has in the last two years. We could see that R&D line pretty flattish for the next couple of years following what has been about 50% to 60% increase over the last three years.

Your next question comes from the line of Charley Jones - Barrington Research.

I plan some easy ones here for you but I will start at the tough one. Kevin, I realized you guys sounds like in your quarterly guidance but to avoid any second quarter huge ranges, can you give us an idea how you started the quarter? Do you feel good about things and made you sure you would be sequentially flat from here; you have traditionally had a big step up in the second quarter.

Well, we do not give quarterly guidance. There are some reasons why we feel good. There are some reasons why we feel bad. So, what I would say is that the comparable is getting larger, right? What we are comparing to in prior year started to step up and I would say the steps are going to be lighter for the first three quarters this year exactly what we said over the last call. So the one to two to two to three are going to be lighter than they have been and I would say just take a conservative point of view. What you will see us do is we will optimize revenue. We will optimize gross margin and we will be driving expenses down the best we can and we anticipate that over eight quarters, you will see an operating model here get better and better in spite of unpredictable revenue. That is the way I think about it.

That is helpful. So, little bit, you touched on this a little bit with Tycho already but I guess is the range of a 5% to 10% operating expense reduction more dependent on sales levels than anything or is it really just making yours and the rest of the team's ability to go and find the things you wanted to cut.

Sales volumes will push it to the edge meaning if sales volumes are softer, we are definitely more likely to end up at 10%. However, we will be definitely more motivated to get to 10%. So, there is a lot of what we are doing with the model that we accomplished in the first quarter. The management team really did quite a good job in the first quarter of hitting the brakes on expenses and there is more to come. So, I think we are trying to give you a signal that says, hey look, somewhere between 5% and 10% reduction on OpEx, sales volume will help us a little bit, couple of points perhaps the most. But we will do a lot of the work ourselves.

And then as far as product releases go, are you expecting any products releases that really are going to move the needle in 2009 and do you have much plan for 2009 revenue guidance from these new products or do you think that there could be a source of upsides?

Well, we absolutely at least one needle moving release that is going to happen this year that we are very encouraged about and we have taken a very conservative posture on its revenue. So, baked into the numbers we have given you which are flat to down, 10% lays the launch of a new device down the road here. It is going to be very good. I think very timely and very well executed I believe and certainly an excellent product. So, there is that and few other things coming down the road that look pretty innovative and so I would not, by any means, I would not look at the year with the downside risks being greater than the upside. We are trying to take a conservative view on what we are working on R&D and why it should help us.

Okay, last question here, whether you let it slip or not, a quarter two ago, you talked about having a backlog that was basically 3x as one of your quarters. Would you say that your backlog is you do not have a formal backlog but would you say your pipeline has actually increased as a result of people wanting these but delaying them or are they just kind of taking a step back here and your pipeline is more inline with what it was six months ago?

Well, I do not recall making a comment on backlog; just give it to me backlog and pipeline.

Right, pipeline.

Pipeline, I may have said that our pipeline had been growing nicely and it has been growing nicely and it is a very healthy pipeline that is an indicator that is more long term. You cannot predict it one to one or perfectly but nonetheless, the level of interest in our devices is rising nicely. The bottleneck at the moment is US hospital capital spending and of course private clinic market psychology is also negative but US hospital capital spending is a driving force where the bottleneck on this flow through of our pipeline.

Your next question comes from the line of Jerome Lande - Millbrook Capital.

This is Craig Rosenblum for Jerome. You guys have given guidance on your operating expenses for the year. I was just wondering if you could talk a little bit about what you expect to see on a gross margin line. Margin was pretty flat in Q4 and I was just curios what you think for the rest of the year.

Well the factors that will drive that are threefold. One is pricing and as I mentioned at the call, we have firmed up our pricing so I would hope that that will have a favorable impact as we head throughout the year. The second factor is the cost of goods in our supply chain and conversion. We have made some nice improvements there. They maybe realized down the road but we have to see that happen but there is definitely good progress being made in terms of, well a lot of companies are doing this right now, supply chain, cost improvements on a per unit and component basis and better conversion productivity. That is all happening here at SonoSite. Thirdly well of course is currency and that is a bit of a wildcard. That is predicted to be 4.5% negative I think both to revenue and margin and of course that is a function of mix to international versus US but those are the things driving it. I like to think margins will make it better but we cannot predict that yet.

Okay thank you and then this is the last question I have with the stock comp, I think $2.5 million in the quarter. Is that a good number to use for the remaining quarters of the year if there is some kind of seasonality in Q1?

Yes, that will come down and we should see about a 20% reduction year-over-year.

You have a follow up question from the line of Alan Robinson - RBC Capital Markets.

Just a clarification really, in terms of your revenue guidance for FY09, the range of flat to minus 10, what kind of decline in the US hospital channel is that predicated on? You mentioned the 20% decline. So, is your flat to minus 10 view is based on that kind of decline?

Yes, minus 10 quarterly setting directly to minus 20 in US hospital, Alan.

Okay.

So, that is how we have lined it up and then you got to take the currency situation in there. If you look underneath that, there are number of good things happening. We think enterprise will continue to make good progress all year. We think our US private office sector will continue to grow all year. That will be improved by new product launches. The international business looks good X the currency. All things considered and that is the way I frame it.

There are no specific increments US hospital sales from your new product launch later this year?

No, we are just assuming that we are going to continue to do the right things but the capital spending will be the bottleneck in the US hospitals for a while now.

Got it, okay and then Mike, just to finish off here, were there any changes in your convertible debt balance subsequent to the quarter end and number two, will you be recasting your quarterly results from the quarters in FY08 in your 10-Q coming up?

There have not been any repurchases and yes, we will recast the quarters and I think it is included in the press release as well. You will see the recast in the quarters for 2008.

Thank you very much and at this time, we have no further questions. I will turn the call back to our speakers for any additional or closing remarks.

Well, thank you everyone for the call, joining the call and being on the call and asking the questions you have asked. We did have a couple of big negatives in the quarter. I think we are managing against those pretty well and we are thinking about year two, year three shareholder value creation and I think you will find that we will deliver very strongly this year and being in this business ready to grow more and earn more in the future. So, we hope you will hang in there with us. Thank you.

Thank you and that does conclude today's conference. We appreciate your participation.