Good afternoon, ladies and gentlemen, and welcome to Masimo's Third Quarter 2016 Earnings Conference Call. The company's press release is available at 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.

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, including certain of our expectations regarding the fiscal 2016 financial performance. 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 Investors section of our website. I'll now pass the call to Joe Kiani.

Thank you, Eli. Good afternoon, and thank you for joining us for Masimo's third quarter 2016 earnings call. We are happy to once again be reporting results that surpassed our projections. Similar to the second quarter, we realized strong U.S. adhesive sensor growth due, we believe, to our growing customer installed base as evidenced by shipment of 45,800 SET and rainbow SET oximeters in Q3 and increase in hospital census. Our projected worldwide installed base, excluding handheld and finger pulse oximeters, is not poised to exceed 1.5 million units by end of this year. Here are some of the highlights from our third quarter, we once again achieved double-digit growth for product sales, which rose by nearly 11%. Our Q3, 2006 GAAP earnings per share was $0.52 a share, including a $0.05 per share gain related to the new accounting rules for gains realized on stock option exercises and some other near zero some items that Mark will address later. In the clinical arena, at the recent Annual ASA Meeting in Chicago, new SpHb and PVI study results were presented that showed 30% and 25% mortality reduction at 30 days and 90 days after surgery, respectively, for the group that had SpHb and PVI monitored. Over 18,000 patients were in this French study. These are remarkable results and if they can be repeated at other institutions, it should create a standard of care argument for SpHb and PVI. We also received three important new product clearances in the EU, which I will discuss later. We signed a new agreement with Medtronic that will not only assure our royalties through the first part of October 2018 but minimize the chances for further litigation with Medtronic. We're well positioned to enter 2017 and successfully complete our 10-year plan. Our product portfolio and our customer reach all over the world is continuing to expand, which will help more patients gain better outcomes and more hospitals reduce their cost of care. With Q3 results exceeding our expectations, we are happy to be able to once again increase our financial guidance for the remainder of 2016. Next, Mark will review our third quarter financial results in more detail and also provide you with our updated 2016 financial guidance. I will then discuss some additional Q3 business, product and clinical highlights. Mark?

Thank you, Joe, and good afternoon, everybody. Our third quarter product revenues of $160.3 million rose by 10.8% or 10.3% on a constant currency basis versus the third quarter of 2015. As Joe noted, our Q3 product revenues were above our expectations due primarily to our ability to continue to expand our customer base, as our superior technologies and innovative products are resonating with both hospitals and clinicians. Our third quarter total revenues, which include royalty revenues, were $167.6 million, up 9.9% from $152.6 million in the prior year period. Rainbow product revenues for Q3 totaled $18 million, up by 5% from $17.1 million in the prior year period. Rainbow sales were strong in the U.S. But because of a difficult comparison for OUS rainbow sales related to a large Saudi Arabia order in the year-ago period, it did not repeat. Due to their unexpected financial crisis, the overall worldwide growth rate was adversely affected. Year-to-date rainbow revenues totaled $49.8 million, which is up 16.5% from the same prior year year-to-date period. And we are maintaining our forecast for total 2016 rainbow revenue growth of approximately 10%. Our Q3 SpHb revenues were $5.8 million, up by 24% from $4.7 million in the prior period. In fact, SpHb sales are now up 36% year-to-date and on track to reach nearly $20 million this year. Our worldwide end-user or direct business, which includes sales through just-in-time distributors, grew 14.3% in the third quarter to $137.4 million versus $120.2 million in the year-ago period. Our direct business represented approximately 86% of total product revenue in the quarter versus 83% in the prior year period. OEM sales comprising the remaining 14% were down by approximately 6% due to lower year-over-year sales to an OUS customer. By geography, total U.S. product revenue increased 12.9% to…

Thank you, Mark. Our third quarter results reflect a great clinical and financial value of our SET technology and the success of our new products such as rainbow and Root, as well as our improved productivity. Our outlook for the remainder of the year is encouraging as illustrated by our ability to once again boost our financial projections for 2016. We are realizing higher sales of pulse oximeters and Pulse CO-Oximeters, as well as solid growth for newer product such as SedLine, brain function monitors, Nomoline capnographs and O3 regional oximeters. We are also realizing higher revenues per driver across our installed base as utilization rises, and even greater numbers of customers incorporate the use of our new rainbow sensors. We're especially happy to be able to say that another premier hospital organization in the country has now become a Masimo customer. Stanford Health Care including Lucile Packard Children's Hospital together with the hospital of the Stanford University School of Medicine, has standardized on our rainbow SET technology. I believe the clinicians at Stanford are equally happy as they get to use our breakthrough technologies to help them better care for their patients. 2016 has so far been a great year to get some of the most sought after conversions for Masimo, as we also reached partnership agreements with Cedars-Sinai Hospital in Los Angeles and Walter Reed Army Hospital in Washington D.C. We're very happy to welcome these and many other prestigious institutions as new customers. We should be able to maintain our steady growth with increases in our customer base, rapidly rising sales of our Nomoline, O3, and SedLine products and a solid stream of planned new product launches. During Q3, we received three noteworthy product clearances in the EU. First, we received the CE Mark for a new…

Thank you. Our first question is from Larry Keusch of Raymond James. Your line is open. Lawrence Keusch - Raymond James & Associates, Inc.: Thanks. Good afternoon, everyone.

Hi, Larry.

Good afternoon. Lawrence Keusch - Raymond James & Associates, Inc.: So couple questions. I think you are pretty clear on most of it, but I was wondering if you could expand, either Joe or Mark, on the OEM sales decline in the customer that you indicated delayed or deferred in order in Europe?

Sure. It was actually tied primarily to a customer who had made a rather large order from us in the same quarter a year ago that for various reasons did not basically replace that order this year. So that's potentially all it was. Lawrence Keusch - Raymond James & Associates, Inc.: Okay. So a comp issue?

Yeah, year-over-year. Yeah. Lawrence Keusch - Raymond James & Associates, Inc.: Okay. And then a couple of other smaller ones. Could you breakout, at least I don't think I heard it, the FX impact in the gross margin and then the U.S. SpHb growth, which you indicated was quite robust?

The overall FX impact in the margin was approximately between $0.01 and $0.02, Larry, in the quarter because we received a little bit of benefit on the revenue line. And then as I noted in our prepared remarks, we also benefited from the movement in the Mexican peso during the quarter, at least relative to the prior year period, so in total, in the range of about $0.01 to $0.02. Lawrence Keusch - Raymond James & Associates, Inc.: Okay. And then...

And the last part? Lawrence Keusch - Raymond James & Associates, Inc.: ...U.S. SpHb growth?

In terms of the reason why? Lawrence Keusch - Raymond James & Associates, Inc.: No, just the growth rates for SpHb, I just missed it.

I think it was 48%?

Yeah. And we said SpHb was up by 24% year-over-year. Lawrence Keusch - Raymond James & Associates, Inc.: Okay. And then just lastly for Joe. Just obviously I recognize that you're not providing 2017 guidance, but I was wondering if there's any sort of high level thoughts that you might provide as sort of how the environment feels as you head into next year.

We're feeling pretty good about next year. We've had multiple meetings, both headwinds and tailwinds for the year coming, and we think all included, it's going to be another great year. Lawrence Keusch - Raymond James & Associates, Inc.: Okay. Perfect. Thanks, guys.

Thank you.

Thanks, Larry.

Thank you. Our next question is from Chris Lewis of Roth Capital Partners. Your line is open.

Hey, guys. Good afternoon. Thanks for taking the questions.

Hi, Chris.

I guess, first, just, the second consecutive quarter now if you just look at the core SET sales growth excluding rainbow, it's nearly 12% back-to-back quarters. Can you just spend a minute or two to elaborate just on what continues to drive that core pulse ox growth profile higher? And kind of as we look forward, how should we think about that core business growth rate?

Sure. I think first of all, we're seeing increased demand for our technology. We're seeing it in our direct business as well as our OEM business where a greater percentage of our OEM sales are with our technology. Secondly, we're seeing an increase in sensor utilization, which we believe is due to the increase census in hospitals, both inpatient and outpatient. So, except for some small pockets in the market like UK and France and Saudi Arabia, it's been generally very positive census wise and financial purse wise.

Okay. Great. And maybe just kind of going off of that, we've heard some kind of varying commentary from some of the other reports out there, in terms of utilization, hospital utilization, maybe some softness over the summer months, so it sounds like it's picked back up. But can you just elaborate on – obviously, it sounds like your utilization kind of pull-through numbers are trending positively. So can you just elaborate on what you're seeing in terms of utilization, during the third quarter and what you're seeing so far into the fourth quarter?

Yes. Sure. We've seen – obviously, summertime is softer than Q1 and Q2 and Q4. But from a year-over-year perspective, we saw the similar growth in our summer quarter to the same quarter a year ago, as we've seen in Q1, Q2 compared to the same quarter a year ago. So we did not see that softness, and we're continuing to see the same pattern. As you know, our sensors are single-patient use in the U.S. and some parts of the world. So we think if that gives us a good view of hospital census, so while I cannot predict the future, I can just tell you those last several quarters have been very positive, census wise.

Okay. And then, Mark, maybe a question for you. I think it's been about a year since you announced the new Red Diamond sensor. Where are you in terms of rolling that out across your installed base? What impact is that having on gross margins and how should we think about that layering into the gross margin expansion story over the next 12 months? Thanks.

Sure. Well, the good news is that the product is actually rolling out both in the U.S. and OUS. It's not yet, as we look toward the end of this year, probably not in substantial enough volume to have a dramatic impact on this year's numbers. However, as you know, we've talked pretty openly about the fact that we expect over the next two years, three years as we are able to migrate both new customers and, hopefully, a large percentage of our existing customers to the new RD sensors that we expect that transition to actually result in – or cause one of the reasons why we're very optimistic about our ability to see overall product gross margins continue to rise similar to what they've done over the last couple of years for some slightly different reasons. Of course, as you know, over the last couple years, the value engineering efforts related to primarily boards and some of our other products have yielded the kind of margin improvement that we've enjoyed. Looking forward to the next couple of years, there are number of other cost initiatives that are underway, but the Red Diamond conversion is going to be a key element of why we're confident about the ability to continue to see increases in overall year-over-year product gross margins.

And do you feel that – I think in the past you've pointed to kind of a 50-basis-point goal in terms of product gross margin expansion year-over-year. Is that still kind of the appropriate range or target to think about?

Yes.

Okay. Thanks, guys.

Thank you.

Thanks, Chris.

Thank you. Our next question is from Brian Weinstein of William Blair. Your line is open.

Hi. Good afternoon. Matt R. Larew - William Blair & Co. LLC: Hey. This is Matt Larew on for Brian this afternoon. Just first wanted to ask about couple of the product growth drivers. First if you could just update on where Root stands at this point if you think you're going to hit the number you'd talked about for 2016. And then obviously a nice SpHb quarter. And just wondering if there are other measurements in particular that you're really seeing nice traction on that's helped driving that rainbow total?

Yes. We do believe we're going to hit our numbers for Root for 2016, as well as for rainbow and SpHb in particular. And obviously, we think what's driving Root is the appeal that product has in terms of not only providing a great way of monitoring and trending the measurements that we have, but also creating a hub in the room for everything to connect into and display the information through the cockpit and send it to electronic medical records. As for rainbow and hemoglobin, we just think not only is the evidence piling up on the outcomes, and there is now three studies on three different continents, U.S., Middle East and Asia and Japan that have shown dramatic blood transfusion on patients with hemoglobin, and now this new study from France that shows mortality reduction. Plus, I think that plus customers' own experiences is driving further adoption. We're getting really great traction with consumables with hemoglobin and rainbow, and we see that trend increasing as Philips has now launched rainbow in not just their low end but their high end, and Philips has been helping get the word out on rainbow. So we expect that will continue to move up. Years ago, we talked about the technology adoption curve for any new technologies that does look like a S shape, I think we're beginning to go up to the steep part of that curve. So, I hope we're right. Matt R. Larew - William Blair & Co. LLC: Okay. Thanks for that, Joe. And then Mark, just one for you obviously. While the top-line has been taking off pretty nicely here, the expenses have been controlled really well. I'm just thinking about, moving forward – I know you talked today about a new initiative to move more broadly OUS., but in terms of the organization here in the U.S. or the size in developed countries, do you feel good about the size of the organization to be able to sustain this really nice uptick on the top-line that you've seen?

Sure, Matt. The quick answer is, yes. We've spent the last seven years, eight years, nine years building the infrastructure of the company to essentially put us in the position that we've enjoyed for the last couple years, and that is one of leverage. We will selectively continue to make investments all over the world, some of which Joe was alluding to before. But it will all be done within the overall guidance relative to our ultimate goal, which is to continue to focus on delivering earnings per share results that are far in excess of the growth rate of our product revenues. And obviously, to do that, we're going to continue to need to see total operating expenses as a percent of revenue continue to decline over the next couple of years, despite making the appropriate selective investments that we need to make all over the world to continue to see the overall aggregate product revenues get to the levels that we think they ought to be able to achieve over the next three years, four years, five years. Matt R. Larew - William Blair & Co. LLC: Okay. Thank you for taking my questions.

Okay, Matt.

Thank you.

Thank you. Our next question is from Bill Quirk of Piper Jaffray. Your line is open. Laura D. Sand - Piper Jaffray & Co.: Thanks. This is Laura Sand on for Bill Quirk.

Hi, Laura. Laura D. Sand - Piper Jaffray & Co.: Can you talk about the transition for the new lightweight sensors? Do you have any programs in place to help accelerate the process within existing customers?

You're referring to the RD sensors? Laura D. Sand - Piper Jaffray & Co.: That's correct.

Yes. Well, yes, it's an important part of our sales force and clinical specialists to transition our customers to RD. The good news is that the sensor offers so much value to the customer, both from its low profile, lightness, and in the U.S., we can't talk about it but it's actually more accurate. So in Europe, we do get to talk about that. So the customers experience is fantastic, and for that reason, it has not been difficult to get them to want to transition to us. So we believe that transition is going to happen, and it will be, as Mark said, a good reason for us to expect improvements in our margin as well next year. Laura D. Sand - Piper Jaffray & Co.: Okay. Great. And can you give us an update on the integration with the dedicated hemoglobin sales force? Are you seeing any early traction here and what are you expecting on timing?

Well, yes, I think it has worked well. We are seeing a better, more productive group that's not just selling hemoglobin and PVI into the OR and critical care, but also the new products that have recently been introduced like O3 regional oximeter, SedLine Brain Function Monitor. So yes, overall, it's been a good move. We're happy we've done it and we'll continue to move on that path. Laura D. Sand - Piper Jaffray & Co.: All right. And then last one for me. Any update on the Philips litigation?

Yes. We've had really good results recently. Judge Stark from Delaware recently ruled on multiple motions, summary judgment motion that were intended to define what's going to happen in the trial coming this January. We were very happy with the results, we believe were set for a great trial in January. Laura D. Sand - Piper Jaffray & Co.: Sounds good. Thank you.

Thank you so much. I think that was our last question. We appreciate you all joining us and look forward to our next call at the beginning of the year and, hopefully, seeing you on person at our Analyst Day here in Irvine, California. Thank you so much.

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