Good afternoon, ladies and gentlemen, and welcome to Masimo's First Quarter 2019 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 Chief Financial Officer, Micah Young. This call will contain forward-looking statements, which reflect Masimo's current judgment including certain of our expectations regarding fiscal 2019 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 periodic filings with the SEC. You will find these in the Investor Relations section of our website. Also, this call will include a discussion of certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. We generally refer to these as non-GAAP financial measures. In addition to GAAP results, these non-GAAP financial measures are intended to provide additional information to enable investors to assess the Company's operating results in the same way management assesses such results. Management uses non-GAAP measures to budget, evaluate and measure the Company's performance and sees these results as an indicator of the Company's ongoing business performance. The Company believes that these non-GAAP financial measures, increased transparency and better reflect the underlying financial performance of the business. Reconciliation of these measures to the most directly comparable GAAP financial measures are included within the earnings release and supplementary financial information on our website. Investors should consider all of our statements today together with our reports filed with the SEC including our most recent Form 10-K and 10-Q in order to make informed investment decisions. In addition to the earnings release issued today, we have posted a quarterly presentation within the Investor Relations section of our website to supplement the content we will be covering this afternoon. I'll now pass the call to Joe Kiani.

Thank you, Eli. Good afternoon and thank you for joining us for Masimo's first quarter 2019 earnings call. This month, we are celebrating the 30th anniversary of Masimo's Incorporation. And it's great to be able to report that first quarter results once again exceeded expectations. Our first quarter results illustrate the strength of our breakthrough technologies, and their ability to improve patient care and reduce the cost of care. Our product revenue increased 14% on a constant currency basis to reach $230.5 million. And just as important as a fore-teller of future patient benefit and future revenue is the technology shipments. In Q1, we shipped a record 63,700 noninvasive technology boards and monitors. And better yet, we expect to ship over 60,000 technology boards and monitors quarterly for the rest of 2019. Due to the strength we saw in the first quarter, we are once again raising our revenue and earnings guidance in 2019, as we expect that the strong momentum of our business will continue. I'll discuss more in the call later. Now, I will ask Micah to review our first quarter results in more detail and provide you with an update on our 2019 financial guidance. Micah?

Thank you, Joe, and good afternoon everyone. Before I get started with the financial update, I want to take a moment to discuss the new lease accounting standard ASC 842, which we had to adopt during the first quarter of 2019 using the current period adjustment method of adoption. At a high level, the most significant impact of the new accounting standard is that ASC 842 changes the accounting for two primary types of transactions here at Masimo. Number one, for long-term customer contracts with fixed sensor purchase commitments, we will now recognize revenue and costs related to the monitoring equipment at the time that the equipment is made available to the customer as compared to being recognized over the term of the contract. While this may impact the timing of our monitoring equipment revenue and costs, it should not impact the overall economics and related cash flows of our customer contracts. Number two, for operating leases where we are the lessee, we will now recognize the right-of-use asset and related lease liability on the balance sheet for our obligation to make payments under the operating leases. The implementation of the new accounting standard resulted in adjustments for the current quarter that increased our product revenues by approximately $2.5 million but decreased our product margins as a result of the lower profit margins associated with the monitoring equipment revenue. We expect that the new accounting standard may impact the timing of our equipment revenue and costs, but should not impact our full year results for 2019. I will discuss the impact of ASC 842 in more detail in just a moment. Moving on to our financial results for the quarter. Let me remind you that the financial measures that I'll be covering today will be primarily on a non-GAAP basis,…

Thank you, Micah. We had a very productive first quarter with key customers as well as introductions of innovative new products and services. To start, we are seeing more customers embrace our system solutions for improving patient care, which are unmatched in terms of delivering positive patient outcomes and reduce cost of care. Our noninvasive monitoring solutions provide unprecedented porosity and breadth of patient information which is critical in either way hospital looks at it. One, the need to get patient care right the first time, because more and more, they are not paid for secondary issues arising out of substandard care. Or two, the need for reliable data for data analytics that is if a hospital looks at it from the perspective that we are in an age of data harnessing, analytics, predictive algorithms and decision support, they will need good data. If you have garbage going in to these data analytics systems you get garbage out. And now with Root based solutions such as IARS, UniView, Replica, MyView and Patient SafetyNet we're not only optimizing clinicians ability to have better situational awareness and mindfulness from our patient monitor, but from, everything in the room and potentially outside the room, such as the data available from their electronic medical record. As an example, in March, St Luke's Hospital University Health Network in Pennsylvania announced that its regional network of 10 hospitals and 320 affiliated sites is expanding their use of a variety of Masimo hospital automation technologies following impressive outcome results at a pilot site. Starting with a 34-bed orthopedic trauma ward in Bethlehem in 2015 and implementing changes in clinical practice and alarm management, St Luke's installed Masimo Patient SafetyNet together with Root and our Radius-7 tetherless wearable Pulse CO-Oximeters. Then in 2016, a year after implementation of…

[Operator Instructions] And our first question comes from the line of Matt Taylor with UBS.

Hi. Thank you for taking the question, and nice result. I just wanted to ask one question about the Board's number for the inclusion of capnography. Can you talk about how much of a difference that made. I just want to try to get an apples-to-apples comparison with the prior year?

Yes, Matt, if you were to -- this is Micah by the way, if you were to strip that out the capnography are normalized year-over-year instead of 18.8% growth would have been about 15% growth year-over-year. So, still very strong, but it definitely help contribute to that number. But as I mentioned in the prepared remarks, we do expect that that's going to generate recurring revenue stream with that new disposable cannula line.

It's about 2,000 units.

Yes, about 2000 units.

And just to be clear that 2000 was just in this year, but not in last year or that was because of outsized growth?

It's in this year. We just -- we included in the metric because we're now launching that product line.

Got you. Okay. And then you mentioned you're seeing more transit people adopting total solutions. Can you talk a little bit about that in more detail, any anecdotes or evidence that you're seeing more of the high value parameters or rebuild metrics being adopted?

Yes. We have a rich pipeline of customers who are looking at implementing hospital automation. We also have many pilots going on. We've had already customers that have used pieces of hospital automation like St Luke's which I mentioned or other customers here in California, but it is expanding and we are expecting a large amount of revenue on the full year first year we're launching the full suite. As far as the other parameters like Rainbow, SedLine, NomoLine, O3, we're seeing over 20% growth in those product lines, which is obviously with Rainbow we're the only Company. But with the other ones, we think it's at least twice the rate of market expansion.

Great. Thanks very much for taking the questions.

Thank you, Matt.

Thank you, Matt.

And your next question comes from the line of Rick Wise with Stifel. Caller, your line is open.

Thank you. Hi Joe, hi Micah. It's a great 30th anniversary start to the year.

Thank you.

Micah, I should make sure I understand a lot of moving pieces here, when your comments on by quickly, you talked about the product gross margins down 120 bps, if I understood you correctly, because of the accounting change. But if I understood you correctly, again, you offset all that with cost cutting. So a couple of things. Is that -- is this the new steady state of affairs, and this will optically look just like the first quarter, roughly as we go through the year? Can you keep offsetting at as you dial in the accounting change for the year-end? And I know you have larger longer-term manufacturing product gross COGS efficiencies. Is there more beyond what you've just offset? Just help -- just put it in some more perspective, if you could.

Yes. So, Rick just to address ASC 842. So, as we mentioned, it resulted in $2.5 million of additional revenue this quarter. Our forecast tells us because historically we have higher placements of our equipment in Q1. If you go back historically that tells us that this is more of a timing on the full year, timing issue. So on the full year, we still -- we're not changing our revenue guidance as a result of 842. And we're also not changing our gross margin or our margin guidance as a result of 842. And that's just because we do believe it's a timing. If you were to exclude ASC 842, we're tracking in line with our expectations and even maybe slightly better than expectations in terms of the cost reduction initiatives, we had lower inventory charges year-over-year, but we're tracking where we expected this quarter. So I think it's -- I think that's how you need to look at it more of a timing issue this year.

Okay. And obviously the driver shipments were sold very impressive numbers. Should I assume -- should we assume this is largely Philips, does that sustain, sorry, from here. Joe, you said, great more than 60,000 drivers per quarter, but where are we in the whole Phillips thing? Is this only Philips or is it more broadly based from all your OEMs?

More broadly based from all of our OEMs. In fact, soon we're going to announce an expansion with an existing OEM that will continue to add to our installed base drivers. But yes, it's really across the Board, and not related to Philips.

And can you update us on how things are going with Philips? And just any color would be great.

Yes, things are going well with Philips. We expect not only our continued rise and adoption with Philips in terms of integration of Masimo SET and Rainbow SET into their product line, but we expect SedLine and NomoLine and O3 will be made available through Philips. We've had some delays, it looks like Sedline and NomoLine will be released before the end of this year and O3 by middle of next year. I may have one of those next up, SedLine, next year, NomoLine, O3 before end of this year and SedLine next year and overall we're doing well with that.

Great. And just last from me, I mean, just stepping back and obviously a lot of moving pieces in the Masimo story. But when you talk about, we know about the NomoLine, SedLine and all the products, you've been talking about in recent months and quarters. Now you're saying you hope to announce a new product every month in honor of your 30th year. How do we think about all that? Is this accelerate growth, is this incremental to the plan, could this -- is this going to have an impact in '19 or obviously, it will have an impact longer term, but just help us understand that. Thanks so much.

Thank you. Thank you. Well, I think it will help certainly our plan going forward in 2020 and on. But they will have positive, in fact no doubt in 2019. It's one reason despite broader markets feeling soft, we feel bullish about the year. And we increased our guidance based on our beat instead of being conservative and just keeping that extra cushion. Some of the products we're about to launch, I think we'll have the potential of having really large impact on our business. I mentioned the opioids SafetyNet project is one of them. We're waiting and working with the FDA to release that product. We hope that will be a product we'll release in second half of the year. And that will be truly our first healthcare consumer product. And given the problem that's -- and epidemic proportions and how we've seen a solution already helped in one state Utah where they've used a more expensive solution to deal with the problem, that could have very big profound impact to our business. Now we're not putting that into our guidance because we've never been in consumer healthcare business, but we've seen for other companies how digital that business can be, it could be either nothing or could be really big. And we're putting a lot of effort, hoping that it will be big, but it's not projected in our numbers in this year.

Thanks, Joe.

Thank you so much Rick. Look forward to seeing you.

And your next question comes from the line of Bill Quirk with Piper Jaffray. Caller, go ahead.

Great, thanks. Good afternoon, everybody.

Hi, Bill.

Hi. So, Micah, I'm sorry to go back to ASC 842 again. But was there something that was contemplated in the original guidance? I just -- I didn't see a reference to it in the fourth quarter transcripts. I'm just trying to -- I guess kind of...

No, we were, I mean, we knew of the change of course because we've been working through it over this past year, but it takes -- it took a very lengthy process of working through a lot of contracts. So we drove more clarity of that early in the first quarter and we continue to work through it. And now we feel like we have a much better understanding of the timing of when that will impact us based on the timing of when we make equipment available to customers. So that's why we call it, we want to make sure that we're clear on the amounts that impact us in the quarter. So you can understand the impact on the growth rate, but we, again we -- when you strip that out, we still had a extremely strong quarter on product revenue. It would have grown 13.1% without that $2.5 million. So very strong first quarter. And as I mentioned before, it's just -- it's more based on the timing of shipments throughout the year and going forward. So we don't -- it does not impact the overall economics of a contract or the related cash flows of our contracts.

So for the year, we don't think it will make an impact. So while in this quarter, we saw an increase, in the future quarters we'll see a decrease. And then for the year it will be flat. But we have projected it. I think you know ASC 842 is impacting every company, it's not just Masimo. So we had predicted it a couple of years ago, when they announced that we had to go effective with ASC in 2019. And again, we thought it would be flat and it looks like it's going to be flat.

Okay, that's very helpful. Thanks. Thanks, Joe. Thanks, Micah. And Joe going back to an earlier comment that you had regarding interest from hospitals in terms of the systems based approach. Can you expand upon that? And maybe help us think a little bit about the revenue capture and if we should be thinking about this meaningfully contributing in '19 or if this is something that you should be building over a period of several years? Thanks.

Sure, Bill. I can tell you the excitement is high, both from our customers and our own team. We've had customers from just a few miles away to thousands of miles away, tell us they want to implement, we're working with them to implement. I think of all the new products that's launched, we've associated the highest amount of revenue in the year of launch than we've ever done before for hospital automation this year. So we are expecting pretty big size revenue this year. And from what we can see the pipeline still tells us we can accomplish that and that's going well. So I'm hopeful this will become a sizable business. We will at the Analyst Day share with you what we think the size of hospital automation business could be for us and as well as opioid SafetyNet two new things that we've been talking about. So hopefully, you'll have a better sense for what we are projecting.

Very good. And then just last one from me, ORI, anything to update us on that product?

ORI, we launched in 2014 and have been working since then with the FDA to get it cleared obviously outside the US is being used every data that's come out from any reserve studies have been extremely positive and people are using it to a great extent. Keep your fingers crossed, we're hoping to get clearance soon so that we can start marketing it in the US.

Got it. Thanks guys.

Thank you so much, Bill.

And your next question comes from the line of Mike Matson with Needham & Company. Caller, go ahead.

Hi, Mike. I think we've lost Mike.

Hello, Mike.

And Mike, your line is open.

Can you guys hear me?

Yes. We can now.

All right. Sorry about that. So I know that you guys have kind of broken out the business between SET, Rainbow and then the other kind of three measurements and you talked about kind of 6% to 8%, 10%, 20% growth respectively for each of those categories. But your overall revenue growth has been kind of far exceeding that combined growth if that implies. So just wondering if you could maybe break it out in terms of those three categories where -- what's really driving the upside? Is it just across the Board or is there -- is Rainbow doing really well for example.

Yes. Mike, this is Micah. We're seeing it across the Board. As I mentioned -- I think I mentioned back on the prior call, our last quarter call and assumed in our long-term growth rate of that 8% to 10% is about 6% to 8% of SET growth, 10% of Rainbow growth, and about 20% of those other advanced parameters, capnography, SedLine and O3. And we are seeing strong performance across all three of those that are exceeding our plan. So it's not just one product platform area, it is broader based strength that we're seeing.

Okay, thanks. And then just kind of a similar question on US versus international, I'd hear a ton of comments about kind of the OUS business on the call. So just curious how that's performing. Is it kind of growing in line with US faster, slower? And then -- and just any kind of comment on various regions where you're doing better or worse, I guess. Thanks.

OUS is growing faster almost at a 2x rate of US. Yes, so, we're -- and a lot of that is just in our established markets, there is additional demand for the product, but we are also in certain smaller countries that we weren't direct for as we've gone direct, we're getting more traction.

Okay, great. Thanks a lot.

Thank you.

And your next question comes from the line of Ravi Misra with Berenberg Capital Markets. Caller, your line is open.

Thanks for taking the question. So I think as I have just two quick ones. Just on the guidance accounting update when we kind of neutralize for that, are the kind of three segments of the business for those still growing as you've kind of communicated to us in the past between Rainbow, SET and SedLine capnography in your three franchises? And then second, what kind of reimbursement needs to come into place for this exciting opioid opportunity to really move the needle for you guys? Thank you.

Yes. Ravi, this is Micah. I'll take that first one, and then Joe will follow-up on the second, on the reimbursement. So implied in our guidance, if you look at the $2.5 million of timing on the equipment revenue in Q1, that implies that we will be lower by $2.5 million in the last three quarters. So effectively we've raised our product revenue guidance outside of the accounting change in the last three quarters. And we're seeing -- the strength that we're seeing, as we mentioned before is across our broad based across our product platform, and technologies, and it's also broad across our geographies and distribution channel. So we are expecting to continue to see that outperforming our long-term plan that we laid out. So that -- hopefully that helps answer your question there.

And of course reimbursement we're studying it right now. There might be already recent reimbursement rules like the ones that were passed by 21st Century Cures Act that customers could take advantage of. But we recently did a survey and not only did the clinicians majority will say they would prescribe it, but majority of patients said they will pay for it out of pocket at the prices that we were considering marketing it for. So we're going to look at what reimbursement does, we may or may not take advantage of it, once we fully understand its implications. But we think for the cost that we're considering for the value it brings, we think they will be successful even without reimbursement. And Ravi, welcome aboard.

Thanks. It's been nice to be on the call. Appreciate the...

Expecting to have you, Ravi.

And your final question comes from the line of Lawrence Keusch with Raymond James. Caller, please go ahead.

Yes, it's John Hsu on for Larry. Just a few from me. I guess, Joe, to be clear, the 60,000 plus drivers now, you're obviously including some new shipments for capnography, cannula. But I guess the 2000 in the quarter is the right way to think about it that the net change from what you had been talking about prior is really just due to this change or is there kind of broader based strength that you're seeing outside of capno?

I'm not 100% how about this, but from my memory, even if we take capno out we had record quarter shipments of our normal drivers SET and Rainbow. So we are seeing increased adoption of SET and Rainbow. We chose to include capnography this year because we now have consumable. So for the past number of years, all of our revenue from capnography has come from just installing the hardware and we've not been in the consumable business. So for the first time ever, we are. And not only there's 2,000 plus new capnography technologies that we sold this quarter in Q1, but it is a very large installed base of capnography products, than we have shipped in the past that now we can provide our own cannulas for.

Okay, great. And then just a couple more, on the advanced parameters it sounds like with Philips that will really start to kick in later in 2019 and early 2020. But presumably that should have an accelerating impact on that 20% growth rate, unless I'm missing something, is that fair?

I think so, I think Philips, obviously was such a large footprint 50% to 60% of patient monitors in the world are with Philips, with them launching SedLine, NomoLine and O3, that should put strong wins in our sales for those parameters.

Okay, great. And then the last one, something that you've talked about a little bit less of this year with all the great news, but the natural study is a long-term study looking at SpHb measurements, influence to ability -- the ability to influence blood transfusion over time. So it looks like the study completion date was kind of mid-2019. Is that in fact still on track and when might we be able to see that some of that data?

You're absolutely right and thank you for reminding us to update you on that. That trial has completed in terms of enrollment and our understanding is that the investigators are now doing their data analysis and we'll be submitting it for publication soon.

Okay, great. That's all from me. Thank you so much.

Thank you so much. Well thank you all for joining us today. I hope to see all of you next week it's coming up fast. We're looking forward to it. Thank you so much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.