Good afternoon, ladies and gentlemen, and welcome to Masimo's Third Quarter 2012 Earnings Conference Call. The company's press release is available at www.masimo.com. [Operator Instructions] I am pleased to introduce Sheree Aronson, Masimo's Vice President 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 best current judgment. However, they are subject to risk 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 the most recent Form 10-K. You will find these in the Investors section of our website. With that, I'll pass the call to Joe Kiani.

Thank you, Sherry, and thank you, all, for joining us today, especially our friends and investors who are joining us from the points that have been hit the hardest by Hurricane Sandy. We're sorry you had to go through that and we hope for you a speedy recovery, but we also thank you for being diehards and joining us today. We finished the third quarter with 15% year-over-year growth in product revenue, fueled primarily by our direct business in the U.S. and abroad. We shipped 33,100 new Pulse Oximeters and Pulse CO-Oximeters in the quarter and now estimate our worldwide installed base to be 1,056,000 monitors, representing an 11% year-over-year increase and demonstrating continued adoption of our technology by hospitals worldwide. Importantly, sales of rainbow products topped $11 million in the third quarter, representing a 41% year-over-year increase. This was fueled primarily by a 92% jump in total hemoglobin revenue as more care providers recognize the potential of our continuous spot-check hemoglobin monitoring to help reduce unnecessary blood transfusions, identify occult bleeding and detect anemia. Also, during the quarter, we strengthened our future growth potential with the introduction of new breakthrough products which we displayed and announced at the recent American Society of Anesthesiologist Annual Meeting, and with the acquisition of PHASEIN, a developer and manufacturer of best-in-class capnometry and anesthetic agent monitoring solutions. Reflecting our confidence in Masimo's long-term potential, the board has declared a special cash dividend of $1 per share based on December 11 -- payable on December 11 to stockholders of record as of November 27. This action demonstrates our commitment to enhancing stockholder value, and by making the declaration now, Masimo stockholders can take advantage of current dividend tax rates, which may increase in 2013. This is the fourth instance of a special dividend being paid by Masimo in the past 6 years, and it's the third since we became a public company in 2007. Including the dividend announcement today, since becoming a public company, Masimo will have returned approximately $220 million to stockholders in the form of special cash dividends and another $62.5 million in the form of purchases of our common stock. Together, these represent approximately 88% of the cash generated from operations between 2008 and September 2012. Our ability to do this underscores the power of our innovation and recurring revenue model to generate strong cash flows, a healthy balance sheet and expectations for future growth. I will provide additional perspective on our business and strategy in a few minutes, but first, Mark will review the details of the third quarter financial performance. Mark?

Thank you, Joe, and good afternoon, everybody. In the third quarter product revenue rose 14.8% to $112.1 million reflecting primarily increased sensor sales to hospital customers. Movements in foreign exchange rates resulted in a decline of approximately $1.1 million in Q3 2012 product revenue compared to the prior year quarter. On a constant currency basis, product revenues therefore rose 16%. Third quarter product revenue also included approximately $900,000 in revenue from Masimo Semiconductor, which we acquired in mid-March 2012, and $1.5 million in revenue from PHASEIN, which we acquired in late July 2012. Excluding the impact of these acquisitions, our total product revenue rose 12.4% versus the year-ago period or 13.5% on a constant currency basis. Masimo's third quarter 2012 total revenue including royalties rose 14.4% to $119.1 million versus $104 million in the year-ago period. Rainbow product sales grew 41.3% in the third quarter to $11 million. Encouragingly, we saw significant year-over-year growth in rainbow consumables, which suggest to us that utilization of our rainbow products continues to increase. Specifically, as Joe mentioned, SpHb was a standout performer in the quarter, and it was up 91.6%. Our worldwide end user or direct business, which includes sales through just-in-time distributors, grew 15.2% in the quarter to $95.2 million versus $82.6 million in the 1-year-ago period. In total, our direct business represented 84.9% of product revenue in the third quarter, consistent with year-ago levels. OEM sales, which made up the remaining 15.1%, rose 12.9% to $16.9 million, compared to $15 million in the same period of 2011. Excluding the impact of acquisitions in 2012, our direct business grew 13.7% while OEM revenues grew 4.6%. By geography, total U.S. product revenue rose 12.6% to $79.2 million in the third quarter compared to $70.3 million in the third quarter of 2011. Once again,…

Thank you, Mark. Before I begin, let me say what a pleasure it was to see many of you at our inaugural Investor Day in New York in 20th of September. We enjoyed the opportunity to give you an in-depth overview of our key growth strategies and technologies, and explain why we have a strong belief in Masimo's future. If you were unable to join us for the event, we hope you'll take the time to visit our website and listen to the archived webcast, particularly the clinical panel discussion, which offered enlightening perspectives on how doctors and respiratory therapists use our technologies every day to enhance the care they provide patients. For us, it was a proud reminder of the importance of our mission and guiding principles, especially our drive to always do what is best for patient care. To that end, we made good progress in the third quarter on a number of financial and operational fronts. As a result, year-over-year growth in our product revenue and installed base continue to be significantly above industry growth rates. We view this as proof that we are cementing our market position as the clear technological leader known for providing products that help clinicians solve critically challenging problems, while also helping to usher in practices and standards that improve patient care, save lives and reduce costs. Our focus on proven superior performance and innovation was on full display earlier this month at the American Society of Anesthesiologists Annual Meeting in Washington D.C. Masimo technologies were the subject of 18 clinical studies, many of them highlighting the positive clinical outcomes and patient safety impact of total hemoglobin, PBI, acoustic respiration rate and SEDLine brain function monitoring. In addition, more than 200 clinicians attended a symposium to hear leading anesthesiologists discuss their experience…

[Operator Instructions] Your first question comes from the line of Bill Quirk with Piper Jaffray.

It's actually Dave Clair here for Bill. First question from me. I didn't hear an update on guidance. Does your prior guidance still apply?

Yes.

Yes. Okay. That was easy. And then I was hoping for a couple of more details on the Better Care program. So what kind of conversion rates have you experienced in the program to date?

Well, as we mentioned, we are now in advanced discussions with 50 hospitals worldwide. And we have converted at least 3 hospitals, 1 directly under the guarantee program and 2, like I said, they just decided they're just going do it. So that's where we are today.

Okay. And then any updates on GE and Philips? When should we expect to see rainbow-enabled monitors?

Well, while I can't be certain of the answer I'm about to give you because it's a lot of work by the OEMs, and they are the ones that have to kind of be the owners of the date. Our expectation is, by this time next year, we should have Philips out with rainbow and soon after, GE. I think you already know that many other companies from Welch-Allyn to ZOLL and Physio-Control already have rainbow in their products today.

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

We have next year from the med tech tax about $5.5 million, $6 million net of tax. Does that sound about right for what you're thinking?

In general, Joanne, I think our answer would be yes. The problem is that, as I said in our prepared remarks, that we too are still evaluating the specific rules of the tax, and so therefore we can't be exactly sure what kind of revenue will ultimately be associated with the tax. There is some product that is includable, there's some product that's not includable. But directionally, I think, in your model, you've got, as you said, after tax about $6 million, if I remember, implying something in the range of about 8, 8.5 gross. I think that would be probably on the high end of our expectations today, but it's close.

Okay. And could you give us an update on how the initial sales of the Pronto-7 with your 2 distributors went in the quarter?

Not well. We're going to be short to answer it [ph], I guess [indiscernible]. Not well, but we're hopeful that's just at the beginning of them getting up to speed. Some of them did not have their sales meetings. And as you noticed, one of them got acquired by another company so that could have something to do with it. So we're watching that carefully.

Okay. And then just when I take a look at your operating margin, I mean, I know there were several pieces of the puzzle in the quarter which pushed that down lower than I would have expected. How do I think about a recovery in margins over the next coming quarters?

Well, let me start by just saying that implied in my answer to the first question about guidance, obviously, since we're not changing our guidance, that implies that we're looking forward to a rather robust Q4 period. Historically, the Q4 period for us is relatively strong as we enjoy the seasonality that typically occurs as we move into the fourth quarter. And so because of that, you can infer that given our year-to-date results that we announced today, we're expecting some pretty sizable sequential growth on the product revenue side and as -- hopefully, my comments included some inference of, we hope, continuing improvement on the product gross margin side. Operating expenses, as you know, Joanne, the fourth quarter for us is typically our high quarter in operating expenses because of various items, primarily our increased trade show activity. So we would expect our overall operating expenses, as they usually do, to rise as we go from Q3 into Q4. Having said all that, from an operating income standpoint, I think that will get us to a higher operating income number certainly in the fourth quarter than we had in the third quarter. And for the whole year, obviously, it should get us very close to where the original guidance and expectations were. Unfortunately, for next year, since your question alluded to a couple of quarters, I think it's a little too early for us yet to get into some estimates of where we think next year's numbers will be, but directionally, we would hope to continue to see improvements in those same very areas that I just mentioned for Q4.

Your next question comes from the line of Brian Weinstein with William Blair. Brian Weinstein - William Blair & Company L.L.C., Research Division: Question is on the competitive dynamic. The royalties have ticked up a little bit. Just curious if you're seeing any more traction from Covidien in the market. And then the follow-up to that would be, can you comment a little bit on pricing trends and if things have stabilized a little at all there?

Sure. I think -- first of all, as our competitor has been bragging about a handful of accounts they've taken from us in the past 10 years, their -- that did affect our revenues and maybe have affected our expectation on the royalties a bit. But I just want to remind you all that in the past 10 years, we're 1 for 100. For every 100 contracts we convert, they've converted about 1. And as far as pricing is concerned, we saw our ASPs stabilize the last couple of quarters, so -- compared to the same period a year ago. Brian Weinstein - William Blair & Company L.L.C., Research Division: Okay. And then, Mark, you had talked about some of these cost improvements in automation and whatnot. You started talking about that about a year ago. Where is that versus where you expected it to be at this point? And is there any kind of quantification that you can give us to give us an idea about what kind of contribution that, that provided?

Sure. Well, I think, implied in the comments that I went through earlier was really our attempt to provide everybody with some directional guidance in terms of what the impact of those kind of programs have essentially already had on our margins, if you exclude the negative impact of the X-Cal cost increase that, again, I alluded to before. So if you think through those numbers I think you can get a pretty good sense of the kind of impact that those changes have already had for us this year. The good news is that we think we're well on our way to realizing some of those benefits, but our expectations are as we go into 2013 that we'll continue to see an improvement in those kind of operational changes, ultimately resulting in incrementally higher gross profit margins. So the good news is we've already seen a fairly sizable contribution, relative to the numbers that I mentioned earlier. The even better news is that we expect those kind of improvements to continue increasing, and I would say, frankly, over the next couple of years.

The next question comes from the line of Matt Dolan with Roth Capital Partners.

So just a follow-up on 2 components of the guidance comment. Rainbow needs to step up, so I know you said that the Pronto office distribution program didn't go as well as you hoped. Is there some of that baked into Q4 for rainbow?

Yes. Absolutely, Matt. I mean, as you point out, we didn't change our original $45 million for the year. Obviously, in order to achieve that we're going to need a very strong fourth quarter, and implicit in that assumption is a fairly sizable increase in the amount of revenue associated with those 2 new distribution partners. As Joe said, Q3 was a little bit underwhelming, but we're still very hopeful that the pieces are in place now. But at Q4, we'll actually see a very notable increase in overall activity. And clearly, that's part of the reason why we're sticking by the original start of the year guidance.

Yes, okay. And the other general comment was on placements. And I think you'd hoped the second half of the year to exceed the first half. Can you just walk through what the environment is in getting drivers installed out there?

Sure, sure. The 33,100 that we reported this quarter I think was -- we would consider probably just a little bit light from where we'd expected. We expected maybe 34,000 or 35,000. Given that, we always expected that in order to achieve our second half of the year driver guidance that we would have to have a very, very strong fourth quarter. The good news is that sitting here today, we're very encouraged about what we're seeing from a driver standpoint, both our OEM drivers as well as our direct drivers. And then as Joe alluded to in his comments, the new technology, the new board-in-a-cable technology is going to allow us for the first time ever to put those type of new drivers into the marketplace in the fourth quarter. And so we're actually counting on that new technology to be part of the reason why we expect a very strong fourth quarter driver number, which should, we believe, get us very, very close to that second half of the year driver guidance and in fact the entire full year guidance that we provided back in February of up to 150,000 drivers for the year.

I'd also like to add, Matt, that we would have achieved our own internal volume of drivers in Q3 had it not been for a mistake in border crossing. We had a couple of thousand units that unfortunately got stuck in the border because of improper labeling by one of our vendors. So we actually had orders to achieve what we had expected, but couldn't because of inability to manufacture the products.

Okay. So those will pull into Q4. All right, that's helpful. If I could sneak 2 more quick ones in. Mark, on the X-Cal and the ReSposable, can you just tell us where you are as a percentage of total sensor volume today and then how that plays out on going forward as that becomes a bigger percentage of sensors as it relates to gross margin?

You mean, Matt, in terms of volume shipments?

Yes. What percent of sensors are either X-Cal or ReSposable? And is that going to -- if it's 10%, do we have more of a drag on gross margin coming or vice versa? Have you already seen it be the majority of the business so far?

No. Essentially -- let me start with X-Cal. Remember, we started shipping X-Cal in the fourth quarter of last year, which essentially meant that every sensor from that point forward contained the X-Cal technology. In other words, the incremental cost to those sensors was already embedded in the shipment cost of those drivers. And since we've been essentially shipping everyone of our sensors since then with the X-Cal cost, essentially, all of that cost is already, if you will, embedded into our model, certainly, in the first, second and third quarter results this year. And that's one of the reasons we've been calling out the impact of those additional costs this year. So to your question, those costs are also already essentially embedded in our model. The only reason they would theoretically increase from here is courtesy of increased sensor volume. Then, obviously, we're as I just implied, we're working feverishly to reduce the cost of that incremental technology, and over time, we think we will bring it down. But essentially every sensor that's been shipped since early Q4 last year really has contained the incremental sensor -- the incremental X-Cal cost. The amount of ReSposable sensors that we're shipping is still a very, very small percentage of our total sensors. So really, not even impacting, if you will, the overall cost equation so far.

Okay. Great. And then, Joe, it sounds like with the dividend we know how you think the election will go. Can you give us your perspective on the device tax and just Masimo's philosophy in terms of managing profitability relative to that extra burden next year? Is that something you're going to try to offset? Or do we just live with it and grow out of it?

Well, I think the administration is going to be driven by data, and I think that, just like the Constitution has 27 amendments, there's nothing wrong with the Affordable Care Act having a few. So we're working very hard with the administration and people in the Senate and Congress to, at minimum, delay the tax if not, I guess, repeal the tax or dramatically reduce it. I think I'm preaching to the choir. I know you know all about that. But as far as what Masimo is going to do to deal with the tax, we're just going to have to have it be part of our expenses. We don't want to cut back on any of our strategic initiatives. We just think it's the wrong time to do that and long-term value will be lost.

Your next question comes from the line of Larry Keusch with Raymond James. Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: Could you talk a little bit about how you're thinking about the cash that you have on your balance sheet. Obviously, with the special dividend you still have very healthy cash levels, certainly north of $60 million. And just how you think about allocation to M&A and share repurchase.

Well, on an M&A front, I think as I've stated in the inaugural Analyst Meeting, there was one acquisition that we were very close to pulling the trigger on that we decided against it. So we don't anticipate any sizable acquisition in the next 6 to 12 months. So therefore, we didn't think we needed the cash for that. And as far as a stock buyback, we're considering it, but I think given the likelihood of dividend taxes that we're going to be dealing with next year, we thought this was the right time to do a dividend instead of a stock buyback. But we're going to monitor that and as you know -- as I mentioned earlier in my prepared statements, we have given back 88% of our cash flow to stockholders, and we'll continue to be driven in that fashion. Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: Okay. Terrific. And then 2 other ones. Joe, I just want to make sure I'm understanding this. So you've been shipping X-Cal for this year, all your sensors going out. The capabilities within those sensors to protect from reuse and counterfeiting, are those capabilities now being recognized within all those sensors going out the door?

Yes. Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: Okay. Perfect. And then lastly, just on rainbow, I just wanted to just check, were there any military or sort of onetime big orders in there?

There was military order, but it wasn't a onetime big order. It was kind of the routine amount. Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: Okay. And with that, would you expect that sort of level of military order to reoccur in the fourth quarter?

No. We get kind of this routine order dispersed throughout the year but really at the end of the fiscal year for the government. So September is usually a fun month for us with them, and but it wasn't that big number. It was a nice order but it [Audio Gap]

[Operator Instructions] Your next question comes from the line of Lennox Ketner with Bank of America.

So Mark, first, I just wanted to make sure I understand the guidance for Q4. It's -- I know you're not changing your overall guidance, but if I use your revenue guidance for the year, to get to the $1.11, I have to assume some fairly meaningful operating margin improvement in Q4. But it sounds like you were saying that you expect operating expenses as a percentage of sales to go up. Or were you just saying you expect them to go up on a dollar basis but you expect to see margin finishing [ph] there?

Yes, it was the latter, Lennox. I was talking about the aggregate dollar amount. Yes, I was just pointing out that sequentially our spending is typically in a year is the highest in the fourth quarter primarily because of all of our trade show activity.

Okay. But you still expect to see some leverage there.

Yes.

Okay. And then, Joe, you talked about the fact and I know you talked about this at the Analyst Day, too, but the fact that you expect that over time patients -- your customers will prefer RAM over capnography. I'm just wondering in light of that how should we think about modeling the PHASEIN business going forward. Do you feel like that can still see double-digit growth even if you customers prefer RAM? Or should we not be modeling meaningful growth for that business?

Well, I think it's a small business, the -- both of them. So I guess they're all going to have a better than double-digit growth for a while. I just believe for you the best thing to do is to continue thinking about capnography growing double-digit, but that's not going to be long term. I think it's going to be probably the next year or 2. We see long term for RAM to take off and keep growing at really healthy levels for the next 10 years.

Okay. But so in the near term, you still think you can see double-digit growth?

I'm sorry, I didn't hear your question.

I'm sorry, so in your near term, you still think that you can see double-digit growth?

Yes.

Okay. And then last question, just on the -- I know you rolled out the ReSposable [indiscernible]. Are you guys, one, are you still expecting to be able to see a similar operating profit not on a [ph] -- on dollar basis as your regular full SET [ph] sensors? And two, are you still expecting only a small percentage of your customers to choose that product?

Yes. We expect the operating profit to be the same amount as our normal sensor sales, but it's still too early to tell how customers are going to choose between that sensor and the new one -- and the existing one, excuse me. We are seeing with new customers a strong interest in the ReSposable. My -- if I had to get my crystal ball out, I would think, over time, that could be 20%, 30% of our volume. I think that's our last question. Thank you, again, for joining us. I know that some of you have been through a lot, so for you to get on this call, it means a lot to us. Wish you all the best, and talk to you in the new year.

Thank you. This concludes today's conference. You may now disconnect.