Good afternoon, ladies and gentlemen, and welcome to Masimo's Fourth Quarter 2013 Earnings Conference Call. The company's press release is available at www.masimo.com again that is www.masimo.com. At this time all lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. I'm pleased to introduce Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations. Please go ahead, sir.

Thank you. Hello, everyone. Joining me today are Chairman and CEO, Joe Kiani; and Executive Vice President of Finance and CFO, Mark de Raad. This call will contain forward-looking statements, which reflect Masimo's current judgment. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Risk factors that could cause our actual results to differ materially from our projections and forecasts are discussed in detail in our SEC filings, including our most recent Form 10-K and Form 10-Q. You will find these in the Investor section of our website. I'll now pass the call to Joe Kiani.

Thank you, Eli. Good afternoon and thank you for joining us today. We call it 2013 the clear evidence of both underlying business and operational strength in many areas including fourth quarter driver shipments of 42,000 bringing our 2013 driver shipments to a record 168,000 and 200 SET Pulse Oximetrs and rainbow Pulse CO-Oximetrs an annual increase of 15% over a 146,400 in 2012 and ahead of our expectations. We also had a 34% increase in rainbow revenues. For the full year our rainbow revenues reached nearly $49 million for 2013 up 21% for the full year. Although this was slightly below our $50 million expectation as we have been able to ship the complete SpCO orders as referenced in the Q3 call we would have exceeded the $50 million. We also had a 9% constant currency increase in fourth quarter worldwide product revenues which contributed to total fiscal year 2013 product revenue of $517.4 million, up 13% on a constant currency basis. We believe that the operational improvements we have been working for the past number of years will become even more apparent in the 2014. The combination of continued positive results from our ongoing value engineering and manufacturing and a continuation of the moderation in our operating expense growth gives us confidence in our earnings potential as we enter 2014. Fiscal year 2014 will mark our 25th anniversary which we hope to celebrate with a variety of new product introductions. We have already announced the first of several products we plan on introducing in 2014. This first product is called O3 and it allows Masimo to deliver its first tissue and regional oxygen saturation monitor. This product which I will speak about in more detail later has many clinical advantages to the existing products and what we believe to be $100 million market opportunity. In a few minutes I will provide some additional perspectives on what we expect in 2014 and highlight some key achievements from both the fourth quarter and 2013. But first Mark will review fourth quarter and full year 2013 financial results as well as share with you our 2014 financial guidance. Mark?

Thank you Joe and hello everybody. Fourth quarter 2013 total revenue including royalties was $142.4 million or up 8% or 9% on a constant currency basis versus the fourth quarter of 2012. Product revenue was $137.7 million, up 8%, or again 9% on a constant currency basis versus the fourth quarter of 2012. The impact of unfavorable foreign exchange rates lowered our year-over-year Q4 2013 revenues by a record $2.3 million and $7 million for the entire year. This was due primarily for the weakening of the year-over-year yen versus U.S. dollar. As I will note later this material foreign exchange change impacted not only our top line but negatively impacts both our product gross profit margins as well as our operating income. Rainbow product revenues were a record $14.8 million, up approximately 34%. We saw continued strength in our consumable sales including very strong Q4 SpCO orders from our international business. Consumable revenues accounted for nearly 47% of total Rainbow revenues in the quarter up from 37% in the prior year quarter. Our worldwide end user or direct business which includes sales through our just in time distributors grew 9% for the fourth quarter to $116.3 million versus $106.8 million in the year ago period. Our direct business represented 86% of total product revenue in the quarter, slightly higher than the 85% one year ago. OEM sales which made up the remaining 14% declined slightly to $18.4 million compared to $18.5 million in the same period of 2012. By geography total U.S. product revenue rose 6% to $89.3 million compared to $84.4 million in the same quarter of 2012. Growth was primarily driven by increased SET Pulse Oximetry center sales to hospital customers, resulting from the strong shipments of drivers this year. This growth was less than we expected…

Thank you, Mark. As you’ve just heard Masimo has a grown into a company with sales approaching $600 million annually and significant growth prospects. We began 2014 with mix field; on one hand we see positive business trends, such as high driver shipments, strong label growth, significant product introductions and the prospects of GE and Philips entering the market the rainbow products this year. But we also know the weak senses in U.S. hospital, which has resulted in lower than expected revenue growth rates in the first six weeks of this year. Overall though we remain optimistic and believe that any sluggishness in the first half, we more than offset by a strong second half in 2014. Last year, we achieved appreciable market share gains as seen in our new driver shipments and in our sales growth. The 11% increase in our installed base is directly attributable to our break through Pulse Oximetry, Pulse CO-Oximetry and Patient SafetyNet technologies. These technologies enables to consistently when compared to Pulse Oximetry agreement with new and existing hospital customers. In fact, in 2013, we had a record year for such new contracts with new hospitals around the world including the Mayo Clinic, St. Joseph’s Hospital Sytem, Children’s Hospital of Atlanta, St. (inaudible) Health Care, Oklahoma University of Medical Center, Resurrection Health Care, University of Colorado Hospital, Kremlin Hospital in Ireland and Papa Giovanni the 23rd hospital in Italy. Further we continue to gain new installations into the general wards of the hospitals as the value of continuous monitoring for all patients become more apparent. For the past seven years we have focused on building a strong and knowledgeable worldwide sales and marketing organization, capable of expanding both our SET and rainbow businesses. In 2013, we had another incremental investment in our new worldwide…

(Operator Instructions). Your first question comes from the line of Tao Levy with Wedbush.

Good afternoon.

Hi Tao.

So, just a couple of quick questions, first Joe you mentioned the hemoglobin number is sequentially a little bit lower, I know things are still lumpy there, but on the flip side, you had brought on -- you did bring in bunch of new sales reps there. How should we think about how that unfolds throughout 2014? And when do you get a better sense of whether that was a good investment in terms of resources, in terms of expanding that group of sales reps?

Thanks Tao. Well, we have that sense already that that was a good investment and I’ll tell you why. From the profit history of non-invasive hemoglobin, we have 9 hospitals that implemented across multiple departments non-invasive hemoglobin, 5 of them being the better care accounts. But I can happily tell you that because of this group, we now have 35 new hospitals that have decided to deploy SpHb across multiple departments. And I think probably 1 out of 7 or 1 out of 10 times they require a better care type of a guarantee and that’s because while a year or two ago they have to have the guarantee to get hospitals interested in the cause was the major factor, I believe through the efforts of the sales force, through the education of clinicians they are beginning to see the value of non-invasive hemoglobin to not just be away to reduce cost through blood transfusion reduction, but to help with patient safety through detection of occult bleeding. So, we’re feeling pretty bullish about non-invasive hemoglobin’s growth and especially because of this new team that’s been deployed mostly in the U.S., but worldwide.

Great. And you mentioned regarding the Covidien royalty, obviously you can’t really say too much about that, but you mentioned April 2014, what’s important, why the April of next I guess of this year in terms of what you expect to say more about?

Well, we are close to get a 60 day notice from the date that Covidien wishes to stop making the payment. So today is February 13th we haven’t got such a letter, but we have 60 days from tomorrow and that gets us to April 14, 2014.

Okay. And will you guys put like some notice out if you get a check and it has all more and more royalty than you expected, we won’t find until I guess May when you report numbers?

Well, that’s a good question, I have to think about that, but I think right now we’ve given you a range. And while I’m being maybe more pessimistic and I should be prudent about that from what we are seeing out there, we’re not expecting it to end in Q2 either whether it goes for the full year who knows? But again, it’s all a guess work for us. We just have to see. I guess one thing for sure, if we do get the lever (inaudible) that we’ll do in 8-K on.

Okay, great. Thank you.

Thank you.

Your next question comes from Bill Quirk with Piper Jaffray.

Hi, good afternoon everybody. It’s Dave Clair in for Bill. So, first question from me, I am just hoping you can give us a little bit more details on what’s included in the Rainbow guidance. What needs to happen for you guys to hit that number?

Well I think, A, the blood management team use to deliver and we’ve been very conservative compared to what they have in their pipeline and they have in their quotas. Secondly, we expect a VP of SpCO order that we got last year towards the end of the year that we talk to you about we think that will continue to happen. So, I think some disaster [recurring] I think the number that we have given you is quite conservative and we should be able to meet it. Some of the positive signs are out there that may makes us feel better for example with SpCO, we see the cities and the states becoming more solvent and have more financial wherewithal which should eventually trickle down to the fire department, which should trickle down to us, and purchase of SpCO. So I think some good things so far that makes us feel that $60 million number we gave you is one that we can achieve.

Okay. Thank you. And then in terms of the blood management sales force, are you at that 60 headcount level and then what percent of these reps would you say are kind of fully up to speed and fully ramped at this point?

We have about 50 with another 10 to go, we believe by the middle of the year they will all be quota carrying and at full capacity.

Okay. Thank you.

Thank you.

Your next question comes from the line Joanne Wuensch with BMO Capital Market.

Thank you for taking the question. I’m a little bit confused by something. There was a lot of discussion about taking out the royalties for 2014, because it was unknown. And now it’s sounds like you are putting back to royalties in some way for 2014, given your range. And I just want to know if there is something that has shifted in your conversions, your thought process? And then secondary question is how do you budget quarter-by-quarter not knowing when this money is coming in? So would you -- will you let it just flow through to the bottom-line (inaudible).

Well Joanne, unfortunately we don’t, we can’t give you anything more than we've already said, but let me repeat what we have. They need to give a [60 million] in orders, we haven’t gotten one yet. From reading from (inaudible) both what they’ve said in their earnings calls and what we’re hearing on the street, we’re not expecting that to change dramatically. And that’s why we’re taking these that might continue. And as we said that’s not Q2 -- not for the whole year at least for Q2. But again, like I said earlier if we do get a order, we’ll make an announcement of that so you will know. But as far as the second part of your question, how we’re managing the business. We are assuming we’re not going to get those royalties beyond what $8 million that Mark mentioned. So therefore, we’re managing our business, so we were not going to get it. And if we do get it, while we’re going to let majority of it fall to the bottom-line and that’s why you see a big earnings difference between with and without, we are going to spend a little bit more than we have planned and things like sales, marketing and maybe some philanthropic measure.

Okay. And then my second question is, as you’re talking about gross margin outstanding, a fair amount between 2013 and 2014, call it 130 basis points, how do you get there from point A to point B?

Well we had decided a little while ago, maybe a couple of years ago that in preparation for the royalties ending to do -- take our very best people, not all of them, a lot of them, and our engineering department and manufacturing group and have them go to a full value engineering from our sensors to our devices. And the team has done amazing job. We are seeing some amazing differences in our cost going forward and as we bring in line the newly value engineered products into our production; we expect to see dramatic drops in our cost of goods. And given that we believe our sensor pricing, Pulse Oximetry pricing stabilize, we expect that improvement in the cost of goods to help bolster our margins.

Okay, thank you.

You’re welcome.

Your next question comes from the line of Brian Weinstein with William Blair.

Hey guys good afternoon.

Hey Brian.

My question is on operating expenses can you let us know what the incremental cost is of the new reps in the ‘14 number and sort of what the underlying growth rate is excluding those reps it seems as if your operating expense growth is expected to slow down pretty dramatic where things were in prior years if you back that out if my math is correct so can you give us any kind of inside on that? Thanks.

Directionally on an incremental basis to complete not only the build out but of course next year we’ll have that new entire sales force on board for the entire year where as they were hired throughout 2013 of course best guess is that will add an incremental 4 million-ish range to our spending in 2014. So that’s part of the additional operation expense that guidance that we’ve provided and frankly you are right if you remove that if you look at the core underlying operating expense growth of without that we’ll be hovering at the lower end of the numbers we talked about a little bit before in about that 7% range which historically obviously for Masimo is very much at the low end of the range but again very consistent with the overall direction that Joe just articulated in terms of the focus of delivering overall leverage in the model.

Okay. And then I might have missed it, but when you give the guidance to rainbow for next year, could you please provide what you expect the percent from consumables to be specifically, what their contribution is expected to be from SpHb? Thanks.

So, the SpHb portion, we expect our revenue to go to $18 million from the $12.8 million that was in 2013. As far as the contribution of the consumables, I know this year we ended up, we got 47% in the quarter. And I think that run rate is probably right rate, so I’d say about 50% will be consumables.

Okay, thanks guys.

Thanks Brian.

Your next question comes from Matthew Dodds with Citigroup.

On the product revenue guidance for 2014, the last couple of years it’s been pretty consistent in the growth between U.S., OUS. I know Joe your comments about kind of the U.S. volume in the fourth quarter. Directionally, is that going to be the same in your estimation for ‘14 or is there more of a spread in the guidance?

Mark?

Sure, yeah. No, I think in general math, our expectation is that as I alluded to in the fourth quarter, we were happy with the record of 34% oUS mix. Looking forward to next year on a comparable basis to 2013, we do expect on a percentage basis again to have a higher contribution of total revenues from our oUS business, can’t put a specific number on it of course, but directionally we expect that oUS percentage of total revenues to continue climbing.

And just one follow-up for the total number of installed base into the year the 1.205 million, it looks like that equated to that 17,000 retirements in the quarter which is higher than the recent run rate? Is that right and is that a change or is that kind of bluff when we think about 2014?

Matt, you’re number is right, it actually was about 16,500 units. Directionally, we don’t think it’s really bluff, we think as we had forward the next couple of years. That based upon our standard 10 year life assumption, if you obviously dial the clock back 10 years, those were years in which there were significant additional drivers been put into the market place by Masimo. And so it stands to reason that number will continue to grow. You are right in the sense of this was a market increase from about like 12 to maybe 14 range that we have seen before, but directionally it’s probably the right range to be thinking about for the next year.

Thanks Mark, thanks Joe.

Thank you, Matt.

Your next question comes from the line of Chris Lewis with Roth Capital Partners.

Hello Chris.

First on the general world opportunity Joe, I was just hoping you could talk about the interest levels and overall adoption rate you are seeing from the field there and how that layers into the growth outlook for 2014?

Sure. First of all, maybe it’s circling, but in the circle talk, what I’m talking with feels like general ward monitoring, it feels like low from this 5%, 10% penetration to 80% to 100% some whispers even at CMS where they’re going to recommend monitoring the patient for an opioids, let’s say they talk continuous pretty closely continuous basis. So we’re feeling really good about that market becoming real show some solutions to stop using drugs by opioids that affect respiration rate that the (inaudible) ubiquitous there. So, we had a great year in terms of number of hospitals that implemented patient safety and we think we have a good momentum to increase that in this year.

Okay. And then just for your guidance I think last year when you introduced 2013 guidance you kind of talked about taking a more conservative approach. Can you talk about the methodology you use this year and maybe how that’s change or evolve since a year ago?

Yes. We have the same approach this year. We really have tortured the numbers. We’ve taken what our heads of sales and their managers have given and have dialed it back to numbers that we believe should be more than achievable, but things kind of got to go right, I mean we have this whole headwind with FX in Japan that hops to $7 million of product revenues in 2013, which we didn’t anticipate when we rolled out the numbers. And in Q4 a few things didn’t go quite our way from multiple orders that didn’t happen to big SpCO order that we couldn’t fulfill fully to the sensors drop. So you can never say for sure, but we believe we have made it conservative and we hope we’ll meet these numbers that we are giving you.

And then on the M&A front can you just provide an update on your appetite there and anything worth talking about?

Yes. We are constantly looking -- we had a couple of -- we had three, but I think now maybe two companies on our, not no more big acquisitions these are all tuck-in types of acquisitions like PHASEIN and SedLine and Masimo Semiconductor, so those are different kinds of level of acquisitions.

Okay. Thank you.

Thanks Chris.

Your next comes from Larry Keusch with Raymond James.

Hi, good afternoon. Joe, since as you were mentioning earlier, the general floor seems like really substantial opportunity, it feels like it’s starting to gain some traction and certainly you are certainly, it sounds like you are seeing it in the business. But I am curious given that it could be significant opportunity for the company and it’s sort of right in the core of what you guys do. Is this something that you think you could accelerate the uptake of this in the general floor if you threw more money at it? So I guess where I am going I am thinking about your SpHv guidance for the year going up to about $18 million, up about 40%, which is good, but it seems to me or I guess the question is could that money be spent elsewhere and perhaps growing at a general floor? So, I am just trying to understand the deepen influence of the growth rate on the general floors you could invest more there?

Yes, I mean great question I think certainly I think we will get more if we did have a dedicated sales force they did nothing, but call them to general floor section of hospitals. But I don’t believe though we would get a good return on that because one, we have the ideal of technology for the general floor. The non-invasive process that we made due to a reliability, sensitivity and specificity really has no match and is enabling general for monitoring. So with that and some of the tools -- this volume that we created like patient SafetyNet system, the rule some new products we are going to be introducing, we believe we’ve got the examples, right technology and we have fix sales and clinical specialist sales force in the U.S. they are calling in hospital regularly and the people that are making the decisions to implement module (inaudible) which will remain call point for our regular hospital business. So I feel that while we can get more if invested more, I think the return will be there. I think what needs to happen now if not it’s (inaudible) effort of saying enough is enough we’re trying to having people get invested because they want to be monitored and they would give an opioids when completing. We need something like maybe out the joint commission or CMS or people like that to say, enough is enough you got do it, we’re going to check in behalf that they have implemented this continuous non-invasive monitoring on the general floor. So I think if that happens with their collective business we are already in 1000 of hospitals as the health expenditure, all the health expenditure company in those hospitals. And then the other ones that we’re not in, I can tell you we can cost from them, even though there are (inaudible) account that says look, why don’t you jump for mortuary, and even though we have no force for the rest of hospital, would it come to jump for margin we want to talk to you, are you willing to work with us on a general force area. Yes of course, our answer is yes. So I think well spending more to get more, I don’t think it’s a good investment.

Okay. That's helpful. And then one other question and just one very quick one, again on the timing of the GE and Philips introductions as they are maybe compatible products, you’re now saying second half of ‘14. Obviously that's sort of been moving around over the course of the last 12 months. And so I guess the obvious question is how much visibility do you truly have into the timing of those launches?

We work really closely with them, we have regular meetings but unfortunately as you know with engineering projects, I have never seen a project delivered on time, maybe it happens but unfortunately I have seen many times when project do get push out and that has happened here, Some (inaudible) for example, (inaudible) which is something that every medical company has to comply with is going to be by this June, July, I mean you’re not compatible, you cannot sell your monitors. So that has distracted some of our OEMs and even us in those efforts. But I feel pretty good about second half of 2014.Aand don’t forget these companies are integrating rainbow and not just one platform, but multiple platforms. So I think you also seen some of the platforms from both GE and Philips come out maybe beginning of the second half but some of the other ones towards the latter part of the second half. So, we’re getting close but we’re not quite there yet. And I am sorry that the date has pushed out a bit, but I think everyone is working in earnest and it’s coming soon.

Okay. That’s really helpful. And then Mark, just quickly the $8 million to $28 million on the royalty that you indicated for the year, just so I understand, is that just purely the lower end as if it ends in April and the high end is if it continues through the full year, is that kind of what we’re thinking about here?

Exactly.

Okay. Thanks very much guys. I appreciate it.

Thank you.

Thank you.

Your next question comes from Ben Haynor with Feltl and Company.

Hi gentlemen.

Hello.

Hey, you mentioned that you have the four SpCO orders shipped during the quarter, you would hit the $50 million in guidance for rainbow. Could you perhaps tell us how much would have gone above the $50 million and also how is that shipped so far in 2014?

Yes. It would probably hit over $51 million and we do intend to ship the rest of it this quarter. And we actually, we had meeting for this customer and we expect more orders along that same level in 2014.

Okay. That’s helpful, great. And then this is might be kind of an odd one, but with Apple picking up some guidance from you from C8 Medisensors closing up, Versant up in Canada, some of these (inaudible) place, what do you suppose were up to there and do you have anything that’s in development on the Raman side?

Well first of all I don’t think Apple has picked up C8, Raman technology; we had some insight into that and while it’s an interesting technology, we don’t think that’s the optimal way to go. Did I answer your question?

And do you guys have anything in development on the Raman side?

We -- not Masimo but (inaudible) core is developing or trying to develop noninvasive other noninvasive measurements and we do have an agreement with (inaudible) that if they do, we have to exercise those licenses and those measurements. In fact I think you will notice in our 10-K in Q4, we exercised five new measurements, these are brand new noninvasive measurements, unfortunately they do not include glucose but there are important measurements. And when we exercise that we believe that they reach feasibility on those five measurements. So we are hoping sometime in the future, we will be introducing five additional new noninvasive measurements. As far as glucose we are still working on it and we’ll have to see if ever they get to a point where we think what they have done is useful for our marketplace.

Okay, great. And should we expect any of those measurements to be the ones that our product introductions that might hit in 2014?

No, no those will be probably 2015, 2016 time frame. The 2014 ones, these are products that we are near completion with we will work on it on several years and we hope to on May 2nd if not sooner or later, which is the 25th anniversary of our incorporation to introduce them or at least announce them.

That’s all I have. Thank you very much.

Thank you.

At this time there are no further questions.

Well, thank you all for joining us today. We look forward to talking with you our next call. And as we reach you up (inaudible) or when we come out here. Thank you very much. Have a great day.