Good afternoon, ladies and gentlemen, and welcome to the Masimo First Quarter 2014 Earnings Conference Call. The company's press release is available at www.masimo.com. [Operator Instructions] I'm pleased to introduce Mr. Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations. Please go ahead, sir.

Thank you. 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. 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 first quarter earnings call in 2014. In the quarter, we achieved solid rainbow and strong international revenue growth. However, a historically weak U.S. acute pulse oximetry business, driven by the impact of low census in Q1, the Affordable Care Act and strong contract renewals with over 150 hospitals in 2013 at new average selling prices that were approximately 50% less than the original contract average selling prices that were contracted years earlier impeded our overall growth. Excluding the $2.6 million that we took out from our revenue due to the distributor inventory adjustment, and Mark will discuss in more detail later, most of the softness was anticipated as we went into the first quarter. In fact, we came very close to our internal expectations. I do want to let you know that U.S. hospitals are recognizing the value of technologies that helped them get things right the first time, and that has served us well in our ability to not only convert hospitals to Masimo, but not have to compete based on price with Covidien. With the advent of the Affordable Care Act, customers are more than ever considering the overall cost of technology choices, which include patient safety, patient outcome and process consideration versus strictly the price. This is not to suggest customers will pay any price, but they will pay a fair price, especially when considering the other factors. As for our international business, we had a 30% increase in the outside U.S. business, with strength in both our direct and OEM outside U.S. businesses. A worldwide 23% increase in rainbow revenues to 100 -- excuse me, to $12.9 million, our worldwide shipment of 41,400 drivers were also strong. This is now the 4th quarter in a row of unit shipments in excess of 40,000 units, forming a continued growth in our global installed base which we estimate rose to 1,231,000, up 10% year-to-year, once again significantly exceeding the overall market growth rate. In conjunction with the 25th anniversary of our incorporation on May 2, 1989, we had plans for many exciting product rollouts. Beginning in May and for the remainder of the year, we expect to introduce at least one new clinically significant product a month, which will either round out our noninvasive measurements, Root or our consumer product category. In fact, in January, we announced the CE marking of our new organ oximetry device, O3, that utilizes Root. And in February, we announced the launch of our new iSpO2 Pulse Oximeter for Android mobile devices. I'll provide additional comments about the overall business in a few minutes. But first, Mark will review our first quarter financial performance and also provide you with an update to our 2014 financial guidance. Mark?

Thank you, Joe, and hello everybody. Reported total revenue and product revenue for the first quarter was $139.8 million and $132.2 million, respectively. As indicated in our press release today, these numbers include the $2.6 million first quarter adjustment, which I will describe in more detail shortly. Having said that, the rest of my comments regarding our Q1 total and product revenues will exclude the impact of that same Q1 product revenue adjustment. First quarter 2014 total revenue, including royalties, was $142.4 million on an adjusted basis, up 4.7% or 5.2% on a constant currency basis versus the first quarter of 2013. Product revenue was $134.8 million on an adjusted basis, up 4.8% or 5.3% on a constant currency basis versus the first quarter of 2013. Compared to the prior year quarter, our 20 -- our Q1 2014 product revenues were negatively impacted by approximately $650,000 due primarily to the weakening of the yen versus the U.S. dollar. Our first quarter GAAP product revenues included a reduction of $2.6 million in product sales related to a true-up of prior period estimated deferred revenues for one U.S. distributor. For the last 9 quarters, we have not been able to secure inventory reports on a reasonable terms from this one U.S. distributor and as a result, we were required to estimate their quarter end inventory levels. In the most recent quarter, we were able to obtain these reports, including reports from prior periods. These new reports indicated that our prior estimates of this U.S. distributor's channel inventory in 2011 and 2012 had been too low by approximately $1 million and $1.6 million, respectively. Because this is a correction of an estimate, we have accounted for this cumulative change in this estimate by reducing Q1 2014 product revenues by $2.6 million. Rainbow revenue…

Thank you, Mark. Despite a lower-than-expected start to 2014 and a slightly lower end 2014 product revenue guidance, we continue to be optimistic about our overall long-term business outlook and our ability to meet both our mission and financial goals. In fact, despite the slightly lower-than-projected Q1 2014 product revenues, mostly due to the catch-up deferred revenue adjustment that Mark noted earlier, we were able to deliver first quarter earnings slightly above our own expectations. As we stated in our initial fiscal 2014 financial guidance earlier this year, and as Mark noted before, we continue our focus on delivering future product cost reductions and have in place additional cost controls designed to allow us to deliver upon the financial leverage that I noted as a key focus for us over the upcoming years. Having said that, we are concerned about what we are seeing in the U.S. hospital marketplace. So whether it is the result of implementation of the Affordable Care Act or whether it is related to the unusually severe winter weather, there is no question, as the Deutsche Bank report indicated, that U.S. hospital admissions were down significantly in the Q1 period. I'm also wondering if the impact of the Affordable Care Act will, as it did in Massachusetts during their mandated insurance program implementation, cause a longer-than-normal level of confusion in the insurance marketplace, which may in turn result in fewer visits to the hospitals until 2018 with less procedures, when it is expected to complete and settle. Also, consolidation of hospitals into large IDN has and will undoubtedly cause pressure on product purchases. But we believe the Affordable Care Act favors products that make a clinical difference as evidenced by our strong contract booking last year and ability to stabilize prices and not get in a…

[Operator Instructions] Our first question comes from the line of Tao Levy of Wedbush.

So a couple of quick questions. First, just given the reduction in the product revenue guidance, or at least the inclusion of a $10 million lower end, are you assuming that there won't be a recovery later -- throughout the year related to more patients being insured and going to the hospitals?

Tao, first of all, as we have said numerous times, we don't think the Affordable Care Act, while giving millions of people access to primary physicians and pharmaceuticals, will increase the census in U.S. hospitals. And in fact, in our effort as an industry, we presented to legislators data that showed in Massachusetts, which saw the Affordable Care Act go into effect between 2016 -- excuse me, 2006 and 2011, we saw a reduction in both sensor volume and revenue for Masimo compared to other states. Our growth in Massachusetts was 116 of the rest of the country to 117, depending on the neighboring state versus the entire country. So first, I just wanted to say that. And secondly, one of the things we're not sure about, Tao, we're not sure if the census drop in Q1 and also Q4 2013 is due to the harsh winter, or is it due to Affordable Care Act that has reduced the census. If you look at our analysis of Massachusetts, we have a theory that it's actually maybe due to the Affordable Care Act where, one, there's a confusion in the marketplace. People losing insurance before gaining them and deductibles going higher. And secondly, with especially the Affordable Care Act, there's no incentive of getting it wrong anymore for hospitals. If they do a procedure and that requires a second procedure or third procedure, they -- on some of them they won't get paid for it now. And they anticipate in the future, they won't get paid for any of them. So I think there's a census drop with this additional potential procedure drop even for patients. So having said all that and not knowing what's ahead for sure, we thought it would be prudent to assume the census decrease in Q4 and Q1 may have been related to the ACA more than the harsh winter, and that's why we -- one of the reasons we reduced our guidance on the bottom side and gave you a range of $560 million to $570 million.

Got you. So it's not as if you've seen sort of some improvement in the last month or 2, so like March, April time frame in any of your data points?

No, we have not. We have not seen that, and I -- [indiscernible] things may pop in the second half of the year or maybe May or June. But while we're seeing strong demand for our products, where hospitals are choosing what they're going to do for pulse oximetry, as we noted, we grew our installed base by 10%. Yet, if you look at our revenue, it increased by 5% roughly. So that means that there's a 5% gap, and that gap could be driven by the census issue, especially in the U.S. in conjunction with the procedure reduction issue.

Perfect. And just one clarification sort of on the guidance. I'm trying to figure out on the EPS front, what does that guidance look like sort of on an apples-to-apples basis versus what you'd issued before?

Mark, you want to take that?

Sure. I think, Tao, it depends upon the initial range of guidance because if you go to the -- initially when we started the year, we were at $1.13 to $1.28. So comparing that now to the new guidance, obviously both of those are up. Part of that is, of course, because of the benefit of the $8 million legal expense and arbitration award reversal that we had in this quarter. Because we've now moved to the upper end of the royalty revenue range that we provided before, there really isn't any overall change related to that. And then as I alluded to earlier, because we're suggesting that our gross profit product margins will come down a little bit from the initial guidance, there's a little bit of EPS reduction as a result of that. So that's -- those are basically the pieces that move you from the original guidance to where we are right now.

Our next question comes from the line of Chris Lewis of Roth Capital Partners.

I wanted to start on the royalty guidance. I understand you changed kind of the methodology there. So maybe just walk us through what's changed since you introduced kind of that range last quarter. I understand they didn't send a notice, so you expect payments to continue. But maybe just walk us through your outlook there, and if there's still a possibility, I guess, they could stop paying regardless of them not sending a notice.

Sure. Sure, Chris. First of all, this is our best expectation. Secondly, we have not had dialogue with Covidien that has resulted in this new projection. The things that made us decide to give you the $28 million instead of the range at the beginning of the quarter because at the beginning of the quarter, there's a 60-day notice period as of March 14 that they could have provided us that notice. And we believe the next time they can provide us that notice is next March again in 2015. And given that we did not get the notice that we anticipate at least in 2014, the royalties will continue. And then when we look at long term, when our patents around the N600 will expire, we -- and we look at Covidien's comment about this issue and the challenges with customers in changing products now, we're getting more comfortable that the most likely scenario is that Covidien will continue paying royalties till October 2018.

Okay. Great. And then on the blood management side, I think you mentioned 50% of the reps had been on board for at least 9 months. So I guess for those reps, how's the productivity tracking along versus your expectations?

Well, no better at the end of this quarter. But so far, we feel like based on the number of hospitals now in the pipeline to purchase noninvasive hemoglobin for the operating room and the postoperative care, so not just onesie-twosies but a whole change in process, we've gone from 35 to 42 since last quarter, where we started off with 9 before this team got together and before we knew how to better get the consumers to know how to test our products. For example, when people wanted to get the accuracy of our noninvasive hemoglobin, now we ask them politely to do 2 invasive blood draws and put them in 2 supposed controlled gold standard so they can kind of see for themselves the variations that occur in the invasive devices, let alone noninvasive because unfortunately, hemoglobin is fickle as far as how you draw the blood. It can really impact the number, and not every gold standard product is a gold standard. So anyway, those teachings from experience in addition to this focus is making us have really good results and -- but given that we're holding out for purchases of these products instead of giving them away for a sensor contract, we're having a delayed time from decision to purchase. So once that latency is gone, I think we'll begin to really start seeing the numbers move hopefully in a nice, appropriate fashion.

Great. And then just one more, for the OpEx guidance, Mark, can you just walk us through again, I think I may have missed it, the update there and what you're assuming for the med device tax this year?

Sure. The operating expense guidance essentially came down by $8 million for the year, specifically related to the $8 million reversal in the first quarter related to the arbitration and legal fees. So that change is actually very, very clear and very easy to explain. And then in terms of the medical device tax, really no overall change there in terms of the percent. Obviously, it's 2.3% of the product that qualifies for that tax here in the U.S. Clearly, because we expanded the range of product revenues in this new guidance, if we were to see lower net U.S. acute revenues in the year, obviously that would correspond into a slightly lower overall medical device tax number. But directionally, it will probably end up being somewhere in the range of about $7 million to $7.5 million for the year.

Our next question comes from the line of Bill Quirk of Piper Jaffray.

Dave Clair in for Bill. First question for me, I was just hoping to get some additional details on total hemoglobin in the quarter. It looks like it was down sequentially.

I believe it was, yes.

Yes, it certainly was as we would expect coming off a very strong seasonal push at the end of the year in the fourth quarter. I think importantly, as Joe noted earlier in his comments, year-over-year we're up 46%. So we were actually very, very pleased with the first quarter performance.

Yes, we're not surprised, just so you know.

Okay. And then a quick one for market, did you talk last time about additional spending of the royalty that extended in a potential charitable contribution, as well as -- I'm assuming -- it looks like the royalty is going to be collected for the year. So are those 2 things still something to expect?

Yes.

Okay. And then we have a lot of cash on the balance sheet at this point. Can you give us any kind of update what your plans are for, I guess, the media spend, if any?

Well, I believe I mentioned earlier we actually drew on a line of credit of $125 million despite the cash on hand because a lot of that cash is outside the U.S. So with that line of credit, we're not only buying our headquarters, but we have some cash left to either do acquisitions or do a stock repurchase since we haven't done any for about a year now. So that's currently our plan, our thinking. And given the low rate of interest for that line of credit, we felt it was the right thing to do.

And how much should we expect for the headquarter spending for the year?

Well, I think we indicated that the purchase price for the headquarters building is $56 million, and then there will be additional costs over the next 6 to 12 months as we retrofit the building and make it -- or we realign the building in a fashion that will be commensurate with how Masimo intends to deploy and occupy the building.

Our next question comes from the line of Brian Weinstein of William Blair. Brian Weinstein - William Blair & Company L.L.C., Research Division: Just wanted to confirm, I might have missed it, did you guys offer up any additional or changes to the rainbow guidance? Or are you confirming the $60 million?

We have not changed guidance on rainbow. Brian Weinstein - William Blair & Company L.L.C., Research Division: Okay. And then can you talk about what the difference on the hemoglobin side was between spot and continuous and how the spot is trending?

Mark, do you have that information? Are we giving that information?

Well, I think, Brian, in general, as I said in the prepared comments, we're continuing to see over 50% of our revenues from consumables, and that de facto means certainly the spot-check portion of our SpHb business is tracking relatively well. Brian Weinstein - William Blair & Company L.L.C., Research Division: Okay. And then to go back to this Affordable Care Act implementation, I don't want to overread or misread what you're saying, Joe. But it sounds like you're saying that you could see pressure on volumes here essentially through 2018. Am I overstating how you're thinking about things? I don't want to mischaracterize it, but it sounds like that's pretty negative for quite a long period of time here.

So if we're right, it's for the whole health care industry, med tech industry. It's not just for us. But yes, we believe that there's a likelihood-ness of that if you use Massachusetts as the yardstick to decide what's going to happen for the whole country.

[Operator Instructions] And I'm showing no further questions at this time. I'd like to hand the call back over to management for further remarks.

Okay. Well, thank you so much for joining us this afternoon. We look forward to our next call together and hope to see some of you here and on the road and hopefully joining us for our 25th anniversary celebration. If you have not received an invitation and you'd like to join us, please request an invitation. Thank you so much, and have a wonderful weekend. Thanks, bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.