Good afternoon, ladies and gentlemen, and welcome to Masimo's Second Quarter 2017 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 am pleased to introduce Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations. Sir, you may begin.

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 fiscal 2017 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 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 for Masimo's 2017 second quarter earnings call. We are happy to report product revenues and earnings per share that once again exceeded our expectations. We were able to achieve double-digit product revenue growth, which provides solid evidence that our technologies and systems continue to be adopted by more hospitals focussed on improving patient care and reducing costs. Encouragingly, we are steadily gaining new customers for our core technology platforms and also beginning to see higher revenues from our newer products including Root, normal and [Indiscernible] cerebellar oximetry and SedLine brain function monitoring. Our Q2 product revenues grew to nearly $183 million an 11% increase. We are very proud to have achieved a new milestone for our oximetry shipments which reached a record 50,000 units producing a new estimated installed base of 1,545,000 oximeters excluding handheld and finger oximeters. Our Q2 2017 GAAP earnings per diluted share were $0.83 up from $0.57 in the same prior year period. In a moment I will review some important business updates. But for now, I’ll ask Mark to review our Q2 results in more detail and provide you with an update on our 2017 financial guidance. Mark?

Thank you, Joe, and good afternoon everybody. Our Q2 product revenues rose to $182.8 million which was up 11.1%, or nearly 11.8%, a difference of approximately $1.3 million on a constant currency basis, versus the $164.6 million posted for the second quarter of 2016. The strong growth was attributable to demand for our core technologies in OUS markets as well as increased contributions from some of our new products Joe just alluded to including Root. Our Q2 OUS revenues benefited from higher than expected follow on orders from our prior citing tender award as their demand has continued to increase. And encouragingly, we just received word this week that we have been successful in securing a new tender which will cover the July 2017 through June 2018 period. In addition to the strong OUS growth, we realized 30% growth in our Nomoline capnography business as well as more than a 200% in revenues per Root and at associated measurements, such as O3 cerebral oximetry and SedLine Brain function monitoring. Q2 total revenues which include royalty revenues were $192.9 million which was up 11.8% from $172.6 million in the prior year period. In the second quarter, we were able to recognize approximately $1 million in our Phillips in our e-revenue [ph] related to the completion of work again related to one product. Due to some new technological testing requirements we now expect to recognize the remaining $3.4 million in Q3 that we had originally expected to be able to recognize in the second quarter. Rainbow product revenues for Q2 totaled $17.1 million, an increase of 14.6% compared to $14.9 million realized in the prior-year period. The year-over-year growth was due primarily to the strong Saudi order volume which I just noted and which we now expect to recur over the next…

Thank you, Mark. As you just heard our strong second quarter results have given us the confidence to once again move our full year guidance. As we achieve double-digit growth for product sales once again, we were able to post growth for adjusted earnings per share, which was more than one and a half times our sales growth a 20% growth year-over-year. Our other accomplishments during Q2 included a number of clinical and commercial success that I’ll now describe in more detail. One important milestone is the announcement of our first the Masimo Open Connect partnership with the Root patient monitoring and connectivity hub. The MOC-9 and MOC-C program represents a great value opportunity for our customers who can get access to innovative technologies developed by third parties for our Root Patient Monitoring and Connectivity Hub. The MOC-9 announcement with Mdoloris is only the first of many formal MOC-9 and MOC-6 collaboration for Root which are now underway. Watch for more announcements in the future about these MOC-9 and MOC-C offerings. By partnering with Masimo these emerging innovators gain quicker access to the hospital market while our customers benefit from an ever expanding measurements and applications for Root that increases Root’s clinical value to clinicians and hospitals. Masimo has now executed formal agreement for seven partnerships with our MOC-9 or MOC-C technologies and later stage discussion with an additional 20 companies for such agreements. As I stated at the beginning of the call today, we are encouraged that Root and two Masimo parameters that are used with Root, 03 and SedLine have had aggregate sales in the quarter which were more than three times the year ago level. We anticipate continued rapid growth for our Root Monitoring and Connectivity portfolio as additional parameters in future from Masimo and our MOC-9…

Thank you. [Operator Instructions] And our first question comes from Tao Levy with Wedbush. You may proceed.

Hi. Good afternoon.

Hi, Tao.

Hi. So, congratulations on a great quarter. I just have few questions on my end. Any sense to tease out or just still the Philips contribution to the number of higher Socket placement that you had in the quarter, or is there no real contribution yet?

Great question. Yes, Philips definitely helped us achieve this record number. The Philips year-over-year quarter volume increase in sockets were over 50%, and I can tell you from a historical volume perspective we’re on a run rate to do twice as much as we’ve done historically with them. So already we’re seeing incredible cooperation, credible results from our new Philips agreement,

Okay, great. And I don’t know if I’m – you talked about this before, but in terms of the rainbow revenues and the guidance, I don’t think provided guidance or you didn’t update the rainbow guidance. Given that you now have more confidence around the Saudi Arabia customer payments. How should we think about the movement in rainbow sales throughout the year?

Well, I think given that rainbow is still relatively a small portion of our business. It’s a lumpy business from quarter-to-quarter. So while, we’re very happy with Saudi Arabia’s second quarter orders and what we expect for the next 12 months. Given the ebbs and tides – ebbs and flows that comes with small tide here, we feel good about the years guidance, but don’t feel good about increasing at this point.

Got you. Okay, And then just lastly, when I look at my model and analyze sort of product revenue per install, that continues to trend higher. Should our expectations be that trend continues as long as you introduced new products and adoption continues to move favorably?

Yes. We have had a wonderful run with increase in Socket shipments, increase in sensor volume shipments, and on top of that with the new products, and I think they are kind of feeding into each other, but I mean, if you know the last few years, beginning with our 25th Anniversary, we’ve been introducing about a dozen product – new products per year and three to four of them each year brand new market product, where we’re opening ourselves to new opportunities. As we’ve said in the Analyst day, we are very bullish about the future, in fact, increased our projections of our revenue growth to between 8% to 10% per year because of one, Philips, and two, these new products.

Perfect. Thanks a lot.

Thank you, Tao.

And our next question comes from Rick Wise with Stifel. You may proceed sir.

Good afternoon, everybody. Hi, Joe.

Hi. Good afternoon. Welcome to our call.

Thank you very much and I apologies in advance for my occasionally naive question here as I learn more about Masimo. I’d like to come back to Philips if I could, obviously you’re making progress. You gave us some good comments there and good data. When I go back and look at some of the comments in the Analyst Day, can you talk to us in little more detail and sort of lay out a roadmap of the agreement and the joint initiatives. What should we expect in terms of joint selling, joint marketing, market development, development pipeline? How do we think about what’ coming next over the next 6, 12, 24 months?

Well, I have to be careful here, because I don’t want to disclose anything that’s confidential and I know our partners sensitivity to that. There was a lot of redlining I think to the contract because of that, but what I can say to you is one, we’ve increased – we’ve seen this increase volume with Philips without even to rollout of the marketing programs. We expect that marketing programs to rollout in Q4 and we’ve seen this improved volume dramatic volume increase without even some of the new products that are suppose to come up, for example product with SedLine, Nomoline and 03. So, we remain really optimistic, it’s been a fantastic role we have and incredible relationship from the CEO of the company, Chairman of the company to the key stakeholders in the business and it’s really wonderful to see how our relationship has turn around and blossom for into a good friendship, partnership agreement with them. So forgive me for not disclosing more, I’m just hesitant because I don’t know – I was not involve with the redlining, so I don’t know what’s in there, what’s not. So, maybe if sense maybe Eli and Mark are more familiar with that. If you guys want to add anything more to what I just said, please free to do so.

Rick, I just want to add that in general the co-marketing agreements plan for both companies to make rather notable financial commitments to those programs. And as Joe said that’s been in development now for the last couple of quarters. And hopefully we’ll begin to see some of those efforts rollout towards the end of this year. Ideally having an impact as we’ve been saying mostly 2018 and then 2019, so I mean, there is a real hard dollar commitments that have made by both companies to support the kind of partnership that Joe was just alluding to.

That’s great. Turing to Root, just curious at Root account how quickly you’re seeing pull-through for other parameters. And just where are you having beyond the Saudi tender where do you feel like you’re seeing the most success with Root placements? Current Masimo users you’re opening up new accounts? Again any more color would be really welcome.

Certainly. Truly it is all around. We’re seeing demand for it in U.S., Europe, Asia, Middle East, and the usage is really; right now focus in two areas; the operating room and general floor. Operating room because they like features such as Kite. They like the connectivity hub. It provides and they like some of the parameters like Sedline, O3 and Nomoline. And in the general ward before surgical ward mainly they like the fact that it has vital science capability for spot-checking like blood pressure and temperature. They also have like the new early warning systems scoring that we introduced for it, and that is really is ideal for the general floor because one, that hubs connect everything in the room back to the AMR, two, it gives them the ability to either have tethered or untethered monitoring because of the Radius 7 that can be use with it instead of Radical-7. So, we’re seeing really a nice across the board pattern of interest and sales and also as been told by my sales team, sales leadership that actually Root is so exciting to customers is pulling in Masimo [Indiscernible] conversations. So, it really just like rainbow, it just not doing good for itself, its doing good for our core business.

And just last from me if I could, any update in your thinking Joe, as that you made really compelling and proactive comments at the Analyst Day about your cash usage potentially for M&A, any updated thinking on your part and how we should be thinking about the potential there? Thank you so much and congrats on the good quarter.

Thank you. Thank you so much. First of all again, welcome, we’d love having you covering us and we appreciate you being on this call. But as far as M&A is concerned I think I have said at the call -- at the meeting, excuse me, that we’re looking as M&A because we can grow organically, in fact we have 8% to 10% growth pattern trajectory for the company, all based on organic growth, all without even the five new products that have reach feasibility that we haven’t announced yet. And we’re seeing double digit earnings growth on top of that, great operating margins growth 30%, so why the M&A? Well as M&A one is because we think we can handle it. Two because we want to create diversification for Masimo, I jokingly said, I don’t want the Kodak movement. We’re somehow which we not anticipating, but somehow your core business gets obsolete because of changes, disruption and the new things coming out and you’re left with nothing. So we think it’s prudent upon as to M&A opportunities, not adjacent to our business but totally separate from our business. Of course, we always tuck-ins like we had for last few years, thing that are adjacent, but we’re looking for opportunities in big markets where more than $3, $4 billion size growing either double-digit or near double digit growth and strong preference where the customer get to the close to the choice or what they’re going to use, because we’re confident whatever we’re going to do we’re going to be best at it and therefore we want people to chose us faster than kind of the time lines that we have with our current model. So, but -- because we feel so good our organic growth we’re not interested in buying things that are going to dilute Masimo. We’re not looking for this $1 billion, $2 billion type of acquisition. We’re looking for what I call fixer-uppers in great neighborhood which should mean by definition two things, one, one cost us very much, we can pay for it with our own cash. But two, it means, they’re going need fixing and upping, and therefore it might for a while be a little of a downer on our earnings, but we’d only do it, if we we’re totally confident that its going to pay dividend as we optimize the value of Masimo in a new five to seven year plan. So long story short, yes there were some companies we’re talking with actively, but I can’t say there’s anything imminent given where we are with our due-diligence space.

Very helpful. Thank you so much.

Thank you so much. Thank you.

And our next question comes from Brian Weinstein with William Blair. You may proceed sir.

Hey, guys. This is Andrew in for Brian today. Real question I had was on utilization per driver and sorry if you already talked about it, but just quickly doing the math it looks like utilization is again growing faster than kind of the overall installed base. You guys still see this kind of being equate mostly to reprocessing or is there something else out there that we should be thinking about? Thanks.

Brian, first of all thank you for the question. I’ll first start off by saying we’re not sure exactly, but I can tell you the reasons we think the business is doing better than the drivers with 0.2. We think number one is probably increased in outpatient sensors. In some days I wish we could report our sensor volume on a daily basis for you, but I think it’s probably the best indicator of sensors, because as you know mostly single patient use product and hospitals in the U.S. So think that’s number one. I think reprocessing mostly it's failing on its own because of customers realizing, while they might be paying a lower price. They're getting higher volume purchase. They have to buy more because it doesn't work well and they’re recognizing, the reprocessors [ph] are adulterating the product. They're not making the motion claims that we make. They're not making neonatal claims in the neonatal sensors use on neonatal patients. So yes, we’re processing might be slowing down but we’re not a 100% on that. The best thing we can look to is really the outpatient sensors increase.

Great. Thanks guys.

Thank you. I think we have time for one more question.

And our next question comes from Larry Keusch with Raymond James. You may proceed.

Good afternoon everyone. Yes, I’m sorry about that, I had the mute on. So, just couple questions. Joe or Mark maybe just starting off, I’m actually thinking ahead and just thinking about 2019, and could you talk to you again for philosophically how you’re thinking about filling in the royalty gap that occurs when the royalty expires. Are you still sort of planning to grow through that?

Great question, Larry. We of course are doing everything we can, so that the feel the depth, but as you know that royalty, most people have [Indiscernible] discount; it has full value to them. So it’s not really being part of our multiple in our earnings. So therefore even if earnings from the royalties drop from 2018 to 2019 we are not expecting that to change our valuation or maybe even more importantly given – compared to 2006 when the royalty started and there were more than 50% of our income, by 2019 they’re going to be, I don't know, maybe 10%, 15% of our income, so I think they because a far less important component. But at the meantime as you know because of our 10-year plan and the painful investment we went through with the use of the royalties and the days we couldn’t just let it drop earnings and feel good, we’re now are much more formidable competitor with much broader product portfolio and feel like it won't really matter much. So – but Larry, we are going to do our best to bridge it, but even if we don't I guess my response is, so what?

Okay. That's really helpful. And then just two other ones. On the Saudi tender which sounds great that they’ve come back and they’re now purchasing again. As you look at the remainder of this year in the guidance is there, is there additional Saudi revenues in there or are you treating it as upside if it comes in?

Well, our business has a lot of optionality and ups and downs, so with the guidance we’ve given you, you could say, they’re in there. Obviously if other things come in the number could be better. If other things don’t in, we’ll meet those numbers. As we look towards this second half of the year we see more optionality in Q4 than in Q3 given the summary season. So all-in-all our instinct about the business and how it’s going is the same, it feels good but we don’t want to get ahead of ourselves and you know we’ve been raising our guidance every quarter for almost three years and while we hope we can keep doing that, we don’t go into the quarter expecting that. We are not padding, we are doing our best to give you the best picture we have. So I hope that answers your question...

Yes that’s really helpful. And then lastly, you know last quarter you guys gave some indication of what you anticipate at the stock option benefit would be the EPS. I’m wondering if you could help us think about that in the third quarter. And then on the R&D side, it sounds like there was some capitalization, so just wondering how we should be thinking about R&D spend for the year?

I'll let Mark answer these questions. Mark?

Sure. So Larry [ph] on the stock option your first question, as you know the first couple of quarters it was relatively a new phenomenon and because we had insight into some pretty large activity, we provided some initial guidance in each of the quarters. As it turned out, I think that ended up to be a little bit more problematic at the end of the day because there was always a portion of our guidance that included some of those numbers. So to eliminate that, and to be honest partly because the activity this quarter has been a lot lower than it was in the prior two quarters, we decided just not to attempt to guesstimate that number for Q3 and Q4. We’ll just lay that number into the final quarterly results when we get to the end of the quarter. I think it will be a lot simplier and easier to understand for everybody. And then in terms of R&D spending, I think you know directionally as you know R&D is the lifeblood of Masimo. As a result, we’ve always spent on a relative basis a higher level, with most of our competitors. There is no reason to assume that’s going to change. The numbers as I said this quarter a little bit lower because of some of those reclassifications that we took where we had to reclass some of our R&D expenses related to the Phillips NRE revenue numbers, but over the next couple of years we fully expect to continue to see the kind of investments in R&D that we’ve historically had and in general that puts us in a range of about 8,9 sometimes even 10% of our total operating expenses in R&D.

Okay, very good. Thanks for the clarifications.

Well thank you. Thank you all for joining us today. We really appreciate everyone’s interest and support and we wish you the rest of the summer to be happy and safe. Thank you so much.

Ladies and gentlemen, this does conclude today’s’ conference. And you may all disconnect. Everyone have a great day.