Good morning ladies and gentlemen and welcome to Masimo’s Second Quarter 2020 Earnings Conference Call. The company's press release is available at www.masimo.com. [Operator Instructions] I'm pleased to introduce Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations.

Thank you. 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 trends in 2020. 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 increase 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 earnings 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.

Thanks Eli. Good afternoon. And thank you for joining us from Masimo’s second quarter 2020 earnings call. I'm incredibly proud of a team and how we continue to advance our mission to improve patient outcomes while reducing the cost of care, especially during this pandemic. From the beginning of the COVID-19 pandemic, we have done our best to support our customers as they have bravely been on the front lines of the worldwide response. Our unique ability to meet the needs of clinicians was in full view again this quarter as we reliably monitored their patients as only we could with unmatched reliability, accuracy and versatility, and launched multiple new products including Centroid, bed sore and respiratory monitor, Radius T, a wearable noninvasive continuous thermometer and UniView 60, which offers patient snapshots to help with handoff communication. For the second quarter, our product revenues increased by over 30% to $301 million. And we shipped 165,600 technology boards and instruments, excluding handheld and finger oximeters. I'll discuss more on the call today, but now I'll ask Micah to review our second quarter results in more detail.

Thank you, Joe. And good afternoon, everyone. I hope everyone is healthy and continues to remain safe during these challenging times. As a reminder, the financial measures I'll be covering today will be primarily on a non-GAAP basis, unless noted otherwise. Our GAAP results and reconciliations to GAAP can be found in today's earnings release as well as the Investor Relations section of our website. For the second quarter, our product revenues were $301 million, reflecting growth of 31.1% or 32% growth on a constant currency basis. Excluding handheld and finger oximeters, worldwide sales of technology boards and instruments were up 175% due to increased demand from both our direct and OEM customers. In contrast, our worldwide sells of single-patient use sensors were down 8% due to the reduction in elective procedures, offset to some extent by increased demand related to COVID. Our worldwide direct and distribution business revenues grew 21% to reach $242 million for the quarter. And our OEM business revenues grew 104% to reach $59 million, which represented 19% of our total product revenues in the quarter compared to 13% in the prior year quarter. For the second quarter we shipped 165,600 technology boards and instruments. And as a result we have now shipped over two million technology boards and instruments over the last 10 years. Moving on to the rest of the P&L, our non-GAAP gross margin for the second quarter, decreased 330 basis points to 63.9%, compared to 67.2% in the prior year period. The year-over-year decline was primarily due to higher than usual proportion of revenue coming from our technology boards and instruments, which have lower margins than our sensors. Our non-GAAP selling, general and administrative expenses as a percentage of product revenue decreased 110 basis points to 32.5%, compared to 33.6% in the…

Thank you, Micah. The COVID pandemic has put the spotlight on Masimo, taking care of patients the most effective way the first time is no longer only on top of leading institutions minds, but it's an imperative for every hospital. Masimo's technologies are the best available and have been proven to make a positive difference in the care of patients from neonates to adults, all saving costs and maximizing hospitals precious resources. The strong demand for technology was evident in our OEM business doubling and direct sales growing rapidly as well. For example, a route connectivity platform unit sales increase more than five folds over the prior year quarter. We also experienced increased demand for our Patient SafetyNet in-hospital monitoring system. Patient SafetyNet together with bedside devices like Root allow more patients to be continuously monitored on the postsurgical floor and improve patient outcomes. In fact, multiple studies conducted at Dartmouth-Hitchcock medical center showed that Patient SafetyNet helped eliminate preventable deaths or brain damage due to opioid-induced respiratory depression in Masimo monitor patients over a 10-year period and help them maintain a 50% reduction and unplanned ICU transfers and a 60% reduction and rescue events resulting at about a $7 million savings annually. We're also seeing strong demand for hospital deploying Root with wearable untethered Radius PPG sensors to monitor COVID and other patients arterial oxygen saturation, pulse rate and respiration rate remotely using our Radius PPG wireless sensors, hospitals are able to move patient monitoring equipment outside of a patient's room to ensure continuous monitoring from a distance thereby reducing transmission risks and increasing both clinician and patient safety. The reception today from Masimo SafetyNet, our cloud-based remote patient management solution, which includes Radius PPG, a smartphone app, and a central command console, has been overwhelmingly positive. As many…

Thank you. [Operator Instruction] Your first question comes from the line of Larry Keusch from Raymond James. Your line is open.

Hi. Good afternoon, everyone. Joe, I'm wondering if you can talk a little bit about any sort of stocking or destocking dynamics that may have occurred during the 2Q. Or how we should be thinking about the third quarter or second half of the year? Just trying to wrap arms around kind of what hospitals are doing as it relates to sensors?

The best information I have, Larry, is that the stocking that happened in Q1 stopped in Q1. And in Q2, it seems to be more of a FIFO. So what we saw with one major customer, for example that created a three-month inventory, they continue to maintain that inventory, while still buying sensors for their normal pace. So I'm not aware of stocking in Q2. One thing that did happen in Q2, some of the orders that we had for boards – technology boards for ventilators did get reduced. I think you remember in Q1, we reported that we had about 100,000 boards associated with ventilators, and that number dropped by about 50,000. So we are not seeing the demands of ventilators increase and, in fact, go down. And on the sensors, as I mentioned, we're no longer seeing stocking.

Okay. And just a clarification on that and then one other quick question. So last quarter on the call, you had been pointing towards 550,000 or more boards for 2020. Obviously 100,000 of that was with ventilators. Now you're talking about 50,000 less I suspect. So does that mean that you're now thinking more towards 500,000? Is that the right way to think about it?

That is right, Larry. We’re looking at 500,000 and also, I think, last quarter, we were implying or saying the best we could that we think the ventilators may not end up being utilized on a regular basis. So we thought of the 550,000, 100,000 of them may end up eventually getting stuck for future need. Now we think – while we're down to 500,000 for the year, which is still over 2x or normal rate, only 50,000 of them may get stocked. The rest might find themselves use day in and day out, even post-COVID-19.

Okay. Great. And then the second question was just, again, wanted to understand how you're thinking about your supply chain. You've seen tremendous demand over the last couple of quarters. In the 2Q, were you able to ship all your orders as sort of a normal course of business would have it? And again, are you having any issues just meeting your demand given the rapid buildup in sales?

Well, I have to say that in a couple of different ways. So to be – to answer your question precisely, we did have a backlog going into Q3. Historically, big backlog. However, we've not disappointed any of our customers are not meeting the time frame that they wanted for the products. So we're meeting the demand of our customers. I've just blown away by what our team has been able to do in making sure even when people are sent home because of COVID, we're protecting the rest of the cells and not seeing a disruption in our production, but instead, an increase in production, dramatic increase in production in certain areas. So yes, so we did not ship everything that was in our ability to ship in Q2, but we also did not disappoint any customers either.

Okay. And Joe, I’ll get off now. But just anyway you can quantify that backlog so we can think about it?

Larry, I think just to give you some context, the numbers that I mentioned, all included backlog. So when I spoke about earlier where our worldwide sales orders are up by 40% in the quarter, driven by 150% increase in boards and monitors and then adhesives are up 1%, those numbers are including our backlog. So that will give you some perspective on the first four weeks of the third quarter as we're looking at the month of July, what we've seen so far.

Okay. Traffic. Thanks guys. I appreciate it.

Thank you, Larry.

Thank you.

Your next question comes from the line of Rick Wise from Stifel. Your line is open.

Good afternoon, Joe. Hi, Micah. Maybe you could help us understand the sensor; help us through the sensor numbers as well? And maybe break it down geographically. Clearly, OUS was stronger than U.S. declined 11%. I guess a couple of questions. Help us understand maybe different trends. Are you seeing any recovery, particularly in the U.S.? What's driving the OUS sensor volumes? Just how do we think about current trends on that business?

Well, it's probably too early to draw any trend lines, but since you asked, we're seeing more demand for adhesive sensors than we did in the last quarter in the first four weeks of this quarter. Where in the past quarter, this – we were helped a lot by OUS sensor volume to make up a very low demand for U.S. sensor volume. We are seeing an uptick in U.S. sensor sales demand as well as a downtick in the over demand from OUS. So in general, it's looking a bit more normal than it did in the past.

Good. That's exactly I was getting at. So when we think – I mean, in very rough normal tons, 80% of your revenues are sensors, and that business was up 1%, I think you said, Micah, in the first four weeks. I mean, I assume we're thinking about worldwide total sensor numbers in positive territory in the second half. And I think you're saying, Joe, that you're seeing a recovery in the U.S., maybe return to normal or U.S. – again, I'm just trying to get to – I mean you're not projecting and trying to make sure I'm understanding the trends.

That’s correct. In Q1, we saw hospitals go to standstill on elective surgeries, focused only on COVID-19. What we're seeing so far in Q2 is that hospitals are opened up again for elective surgeries, but still capable of handling the COVID-19 surge. So we're kind of seeing both things happen at once now. And I think the only reason there might be still lower levels of elective surgeries isn't no longer because of the supply, but because of the demand. I think people might be reluctant to go in for elective surgeries, but hospitals can certainly handle them now.

Yes. Maybe you could help us understand. I suspect that one of the questions I'm going to get asked a lot after the call is, what about the board numbers? I think you all did a good job of breaking down and explaining it, but it might be better if you all help people understand? I mean, I'm not freely can test my numbers were too high this quarter. What do you think the Street didn't understand about their board projections? And should we be concerned? I don't think the answer, I think, is no, that the board numbers for the full year might be more in the 500 range. I don't think that says anything about the health of the business or the growth of the business, but if you think I'm wrong, here's a good moment to correct my thinking.

Well, I think there can’t be anything seem negative from the growth in the board business. It's phenomenal. What I believe is happening, and we all know until the dust settles post COVID-19 is that low acuity beds are turning into critical care beds. The way hospitals are handling COVID-19 patients as well as elective is that pretty much every bed in the hospital now is becoming a monitored bed. So I – there's nothing negative that I can see about what is happening to our business. The only thing potentially in the out years there might be a reduction in capital sales by our OEMs, so there might be less demand for our boards in the – after the dust settles, but I don't know. I can't really predict that. All I can tell you right now, it all is very positive.

Yes. Now it seems clear. And just two more. If we – and again, you are giving guidance in the second half. But as we contemplate – maybe is a question for Micah. As we contemplate, Micah, trying to think about normal growth and we are going to have to think about growth for 2021. How do we normalize for all this? And are you still going to be a – do you think the potential is there even with the difficult comps to be a double-digit – low double-digit grower in 2021 and beyond? Or no, given everything that's happening this year is just not going to be possible. How would you frame it for us?

Yes. Rick, I think the best way to look at it is, you always – whatever you've got so many swings in business patterns we're seeing right now, the best way to look at it is on a two-year growth basis. So I would look at it as kind of 2019, growing kind of our historical growth rate with our what we've guided to in our long-term plans, which we've been guiding more recently to the upper end of that growth range of 10%. So growing it for 2020 and 2021 but look at it is on a two-year growth – two-year average growth rate. That way, you can normalize the quarters and kind of understand the full year because there's a lot of – there's still a lot of cross currents that are happening, and it's still a lot of uncertainty around what hospitals will do moving forward, especially, as Joe mentioned, with the capital. So I think it's just way too early to get ahead of ourselves on 2021and just really look at it as a two-year growth comp.

Yes. Maybe I’d like to add to that, Rick is that and I'll start off by saying it's something I think you all know. I'm optimistic by nature. Otherwise, I the company. So what I want to tell you is that I still see a lot of people not getting elective surgeries because they're afraid of getting COVID-19 from the process of visiting their doctor, getting to know they have problems and then ultimately going to hospitals. So I think when COVID-19 is over, I think you're going to see a huge surge in hospital procedures. And given that we've had historically high number of drivers now getting out there, where people are choosing our technology over others in times when they wouldn't have, but as I mentioned in my prepared remarks, we've come to a world where it all matters now and some of the terrible excuses why people didn't use our technology kind of a gone away now. So I think we're going to be in a world that we are doing better when the world opens up again. So if you think about 2021, depending when you think will either – or would be normalized for COVID-19 through whatever means, I see a strong demand for our sensor volumes.

And just the last from me, you can – as you emphasized just the steady expansion in the technology portfolio is incredibly impressive. When you think about the next few years Joe, and you think that the products now that we understand the environment we're in, is it Masimo SafetyNet adoption that you highlighted, is that going to be the biggest incremental driver or puller through Masimo technology in the post-COVID hopefully world we're going to enter? Thanks so much.

Yes. Yes, but there's a lot more coming. We're going to be executing on a really cool plan, because of competitive reasons I cannot talk about it. But yes, we have things in the pipeline that, I think, will be very exciting.

Thank you very much.

Thank you.

Your next question comes from the line of Matt Taylor from UBS. Your line is open.

Hi, thanks for taking the question. So the first one I wanted to ask about was Joe, you mentioned there are some signs that you're seeing hospitals use monitoring more broadly. And that's something that you've talked about for a long time has been a big opportunity on the general floor. I guess, can you just talk about some of the signs or the feedback that you're hearing to prove out that thesis? And how durable do you think it will be? Do you think it will last post-COVID?

Yes, I do think it is going to be durable because the studies, not just at Dormant-Hitchcock, but every hospital who has put monitoring in their postsurgical awards, has seen a dramatic improvement in patient care and safety and dramatic reduction in their costs. So now that they're forced to do it because of the surge, they're going to see the difference it makes, and I think it will be sticky because the product really works.

Okay. And we've talked about a lot of the interesting products that Masimo has come out with over the last few months and quarters. Could you give us any color? I mean, last quarter, I think you gave some numbers around Masimo SafetyNet. Are you seeing continued momentum around that? And anything you can quantify with that or some of the others?

Yes, I think, last quarter, I mentioned we had about 70 installations of Masimo SafetyNet, with about 600 in the queue. Right now, we have about 120 installations, with 1,500 in the queue. So the demand is continuing to grow. And it's allowing hospitals to scale and within a hospital, a little alone taking patients outside the hospital in a manner that they never expected. They always thought they had to go by capital, and now they just get the sensors and wireless information to wherever they want the information sent to.

And just one last one from me, are you still seeing momentum around noninvasive hemoglobin?

Yes, we are. Yes, we are. We saw, basically, I think in Q1, I mentioned about 15 hospitals had taken advantage of the hemoglobin offer we've given because of shortage of blood donations. Now I think by the end of Q2, we had over 130 hospitals who have taken advantage of that.

Great, thanks a lot for the color.

Thank you.

Your next question comes from the line of Mike Matson from Needham & Company. Your line is open.

Thanks for taking my questions. I guess I wanted to start with the gross margin. I mean I understand it was mainly an issue of mix just with the high-volume of the boards that you were placing or selling in the quarter. But were there any kind of inefficiencies in the plans just due to the aggressive volume ramp you had to go through? In other words, like shipping things overnight or anything like that? Or is it really just an issue of mix?

Yes, that’s a great question there Mike. Just to answer your question, we did see some other things. If you look overall, it's primarily almost entirely driven by the unfavorable revenue mix. If you were to adjust that back out, we'd be closer to our original guidance for the year and kind of where we've been tracking of about 68% gross margins. But we did see some higher costs as we had to expedite some shipments of products, and that drove some higher freight costs, but nothing material to the quarter.

Okay, thanks. And just to be clear, I think on the last call, you talked about that kind of guidance you gave around the board number. And I know it's gone from 550,000 now to 500,000 because the decrease ventilator orders. But I think there was a potential for some portion of those to be canceled. So I guess, based on what you are seeing there really weren't any meaningful cancellations or if there were, they were kind of canceled out by new orders. And so can you just remind us out of that 500, how many of those at this point could be – or aren't kind of locked in?

Well, what I can say, I think last time, we kind of gave you the numbers that we thought we had for the quarter and then mentioned roughly where we thought things might go. And we said everything past 90 days is cancelable. So right now, we've got to date, what, 370,000 that's already happened, either we've shipped it already or it's not cancelable. So really about 130,000 to go over the next five months.

Okay. So some portion of that 130,000 though would be within the next 90 days, so that would be – so maybe rough numbers half that or some portion of that wouldn't really be effectively able to be canceled at this point?

Yes. I want to caution you. We're not promising 500,000, we're only saying what we know the orders are, but they're cancelable. The only portion that we are telling you, we have right now, I think, in first month of Q3, we have 140,000 boards that are in that are not cancelable, which what we've shipped so far gets us to 370,000. And that excludes the finger pulse oximeters and the handheld pulse oximeters. We're only talking about things that we think will be out there consuming our consumables.

Okay. Sorry I got that now. I was confused. All right, thanks.

Thank you.

And you next question comes from the line of Marie Thibault from BTIG. Your line is open.

Hi, thanks for taking my questions to night. I wanted to ask one on revenue associated with the hardware that's being shipped. My understanding was that there's an ASP linked to sort of these real-time orders that are going out the door. And I wondered if you could break that down for us a little bit more as we think of these boluses near term?

Yes Marie, I think, what you are referring to is a lot of our drivers that we – our technology boards we ship out for OEM business and relative to what we have in terms of our direct instruments. As far as the mix, I don't think we're going to get into those type of details on the call. But overall, that margin percentage. If you look at on a margin basis, margins are about 50% on our technology boards and monitors and much significantly higher on our sensors. So the just – I want to give you some perspective on the mix that we're seeing that's going through gross margins.

Okay. Okay, go it. And then thank you for those metrics on SafetyNet. I'm glad to see that it's taking off so quickly. Would you mind breaking out for us any detail on how much of a revenue contribution that was in Q2? I recall some numbers given where there were 10,000 kits shipped at $150 a piece, which would be $1.5 million, but I don't know if there's much more material beyond that that you can tell us about.

Yes, I mean, all I can give you at this time, Marie, it was north of the 1.5 million for quarter. And as Joe mentioned earlier, what we're seeing in terms of customers that are deploying Masimo SafetyNet, we've got about 120 customers that are deploying now versus last quarter is about 76 customers.

Great, thank you for that.

Thank you.

Your next question comes from line of Ravi Misra from Berenberg Capital. Your line is open.

Hi, good afternoon. This is Iris on for Ravi. Thanks for taking the questions. So on SafetyNet, a couple of questions here. You mentioned that there are 120 customers that have deployed a solution. I'm just curious, have you seen any uptick more recently, given that we are seeing a second surge of COVID cases? And then now that you have added a temperature measurement function, has there been any change in pricing and reimbursement for the product?

Yes, to answer your first question, we've seen a steady level of ordering. We're seeing customers even reorder in terms of Masimo SafetyNet, so making good progress there. In terms of your second question regarding to temperature, please keep in mind that we just really sat within the last – actually yesterday, in terms of when we announced the release of that. And it's still in a limited release, so we're still navigating through some of the pricing and preparing it for broader market release, but we'll be able to update more on the next call.

Okay, thanks for that. And then just one more question on UniView: 60. So since your launch in mid-June, can you speak about the demand that you're seeing with the solution? And do most of the demand come from your existing customers?

Yes, so that's another technology that we recently released as far as our digital charging solution that's outside the room, and it really optimizes the display for customers or clinicians – as they to enter into a patient's room. That's a new product, again still limited release, but we've had it deployed with some large customers here recently that are starting to pilot that software, and we're getting good feedback so far.

Okay, thank you.

Thank you.

I think that’s our last question. Turn it back over to the operator. Thank you.

Ladies and gentlemen this concludes today’s conference call. Thank you for your participation, you may now disconnect.