Masimo Corporation (MASI) Q4 2014 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Masimo Corporation Fourth Quarter 2014 Earnings Conference Call. The company's press release is available at www.masimo.com. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Please note today's conference is being recorded. Thank you. I would now like to turn the call over to your host for today, Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations. Eli Kammerman - VP-Business Development & Investor Relations: 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 reflects Masimo's current judgment, including certain of our expectations regarding fiscal 2015 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 detailed in our SEC filings, including our most recent Form 10-K and Form 10-Q. You will find these in the Investors section of our website. I'll now pass the call to Joe Kiani. Joe E. Kiani - Chairman & Chief Executive Officer: Good afternoon and thank you for joining us for Masimo's fourth quarter earnings call. We ended 2014 on a high note with strong core product revenues of nearly $154 million, higher product gross profit margins, and continued control over our operating expenses resulting in $0.40 earnings per diluted share. Specifically, our SET pulse oximetry business grew by 17% over the same quarter a year ago. Some other important highlights for our quarter are that we shipped 44,000 Masimo SET pulse oximeters and rainbow Pulse CO-Oximeters in the fourth quarter, marking the seventh consecutive quarter in which we've shipped over 40,000 drivers. As a result, our global installed base grew by 9% year-to-year. Adjusted for the impact of foreign exchange rates, international sales rose a strong 15%. And as we expected, our fourth quarter product gross margins improved again, marking the fourth quarter in a row in 2014 with sequentially higher product gross profit margins due largely to the impact of the value engineering initiatives that we initiated over the recent years. Capping our 25th year anniversary marked by breakthrough innovations, 2014 was a very fruitful year for new product launches as we introduced a variety of new groundbreaking products, including fully featured Root patient monitoring and connectivity platform with capnography, gas and brain function monitoring; Radius-7, wearable rainbow Pulse CO-Oximeter and rainbow Acoustic Monitor for ambulatory patients, O3 optical organ oximeter; iSpO2 mobile phone oximeter, MX-5 board for OEMs. We expect multiple new patient monitoring companies to introduce rainbow in 2015 with the MX-5 board, including General Electric and Philips. ORI, Oxygen Reserve Index, rainbow DCI mini-SpHb sensor for infants and small children, TFA-1 transflectance forehead single-patient adhesive sensor, Eve screening application for critical congenital heart disease, and last but not least, Patient SafetyNet version 4.5 with MyView and many other features. Needless to say, with the renewed strength in our core SET business and this type of new product introductions, the future is looking bright. In a few moments, I will provide you with an overview of our focus and overall expectations for 2015. But first, Mark will review our fourth quarter financial performance in more detail and then provide you with our 2015 financial guidance. Mark? Mark P. de Raad - Executive Vice President & Chief Financial Officer: Thank you, Joe. And hello, everybody. Reported total revenue and product revenue for the fourth quarter was $161.8 million and $153.9 million, respectively. Product revenue rose 14.2% or 16.8% on a constant-currency basis versus the fourth quarter of 2013. It's also noteworthy to know that this 2.6 percentage point difference represents a record $3.4 million reduction in quarterly revenues. To be clear, our constant-currency computations are based on the difference between the average current quarter FX rates and the prior-year average FX rates, applied to the current quarter local currency revenues. Also, we did benefit from one extra holiday-shortened week in the fiscal fourth quarter. However, even without that extra week, we estimate that our comparable 13-week revenues were up about 11%, marking the second sequential quarter in which our year-over-year quarterly revenue growth has exceeded 10%. Q4 2014 rainbow product revenue totaled $14.1 million, down by 4% from $14.8 million in the prior-year period. The lower year-over-year rainbow revenues were due partly to the difficult prior-year comparison related to a large $2.2 million order in the prior-year period. Without that order, our year-over-year total rainbow revenues would have been up 12%. Encouragingly, our SpHb revenues rose 12% to $3.7 million, reflecting the continued progress within this important rainbow category. Still, our total Q4 rainbow revenues were clearly below our own expectations and, based on this, in a few moments, Joe will provide some additional comments on this part of our business. In the quarter, approximately 39% of total rainbow revenues were consumables, down from 47% a year ago as the year-ago large OUS rainbow order included a large amount of disposable sensor revenue. Our worldwide end-user or direct business, which includes sales through just-in-time distributors grew 13.6% in the fourth quarter to $132.2 million versus $116.3 million in the year-ago period. Our direct business represented 86% of total product revenue in the quarter, level with the prior-year period. Our OEM sales comprised the remaining 14% and rose by 14% versus the prior-year period. By geography, total U.S. product revenue increased 17.9% to $105.3 million compared to $89.3 million in the same quarter of 2013. We estimate that the extra holiday-shortened week added approximately $4 million in additional Q4 2014 U.S. product revenues. The remaining $12 million increase was due we believe to the impact of the first year-over-year increase in hospital admissions in over a year and most likely this year's early and very severe flu season. Our OUS product revenues of $48.6 million rose 7.1% in the fourth quarter of 2014 or 14.7% on a constant currency basis versus $45.4 million in the same period last year. The increase was due primarily to strong growth in Europe and Canada. International revenues represented approximately 32% of total product revenue or 33% on a constant currency basis compared to 34% a year ago. As Joe mentioned, our fourth quarter 2014 product gross profit margin rose to 65.8%, including a 40 basis point reduction due to the impact of foreign exchange rates compared to 61.5% in the year-ago period. This improvement is due primarily to our ongoing value engineering programs and also due to a more disciplined cost of ownership based pricing strategy and hence more stable pricing. Additionally, the significantly higher sequential product margin revenues allowed us to also benefit by leveraging the fixed cost portion of our manufacturing infrastructure. Our fourth quarter total gross profit margin including royalties was 67.5%, a notable improvement versus the 63.6% margin we posted in the year-ago period. Reported fourth quarter 2014 total operating expenses were $76.5 million, a 1.8% decrease from $77.9 million in the year-ago quarter. However, recall that we incurred an $8 million legal and related charge in the fourth quarter of fiscal 2013. Without this charge, our year-over-year operating expenses rose $6.6 million or approximately 10%. This increase was due primarily to higher employee and employee-related costs, legal and marketing-related expenses, partially offset by approximately $1.3 million in lower OUS expenses due to the impact of foreign exchange rates. Our selling, general and administrative expenses were $61.5 million, up 10% from $55.9 million in the prior year period for the reasons previously mentioned while R&D spending of $15 million rose by 7.8% from $13.9 million as increased spending on product development and clinical studies rebounded, as we expected from lower levels earlier in 2014. Fourth quarter 2014 operating income was $32.6 million compared to $12.7 million in the prior year period or $20.7 million adjusting for the $8 million prior year fourth quarter legal charge. The increase in operating income was attributable to the combined effects of higher sales growth, improved product gross margins and lower operating expense growth. Q4 2014 non-operating expense was $1.4 million compared to $751,000 in the prior year period. These expenses relate primarily to the negative translation impact of movements in foreign exchange rates but also included approximately $300,000 in net interest expense associated with our line of credit borrowings. Our fourth quarter 2014 effective tax rate rose to 30.2% up from 22.8% in the same period last year and higher than our previous projections of 25% to 26%. The higher than expected Q4 tax rate was due to a combination of factors, including the benefit of the R&D tax credit offset by the unfavorable impact of the Q4 exchange rates on the mix of our U.S. versus OUS income, as well as other cumulative year-to-date tax adjustments also impacting the mix of our U.S. versus OUS income. Conversely, the lower prior year tax rate was due to the impact of the 2013 fourth quarter legal accrual, which again shifted our mix of U.S. and OUS operating income. Our average shares outstanding for Q4 was 53.1 million, a decline from 58.1 million in Q1, 2014 due primarily to our repurchases of approximately 4.5 million shares during 2014, primarily in fiscal Q2 and Q3. Fourth quarter 2014 net income was $21.2 million, or $0.40 per diluted share compared to $9.3 million or $0.16 per diluted share in the same prior year period, or compared to $0.31 if you exclude the $0.15 Q4 2013 special charge. It is also noteworthy that the net impact of foreign currency transactional and translation adjustments reduced our reported 2014 Q4 earnings per diluted share by $0.04. We are encouraged that for the second quarter in a row, we've been able to deliver financial results that demonstrate the inherent leverage within our business model and provide us with confidence as we enter 2015. In the interests of time, I'm going to defer a summary review of our year-to-date financial results but I'll direct you to today's press release and the Form 10-K which will be filed later today for more information on our full fiscal year 2014 financial results. As of January 3, 2015 our days sales outstanding was 45 compared to 52 as of December 28, 2013. Over the same period, our inventory turns declined from 3.7 to 2.8. The decline in our inventory turns over the past year has been directly related to our goal of increasing selected inventory levels to ensure that we can meet our higher customer demand and improve our disaster recovery plan. Total cash and cash equivalents as of January 3, 2015 were $134.5 million compared to $95.5 million as of December 28, 2013. The increase in fiscal year 2014 cash is the result of net cash generated from operations and $125 million drawdown on our credit line, partially offset by the acquisition and ongoing construction of our new corporate headquarters for approximately $56 million, as well as $102.5 million for stock repurchases throughout 2014. Now I'd like to turn to our 2015 financial guidance, which is based on the best information we have available to us. In addition, because of the recent significant volatility in the foreign exchange rates markets and the impact of those rates on our 2015 GAAP financial guidance, we are going to highlight the impact of the FX assumptions on that guidance. We are providing this information because we believe it is important to be able to understand the key improvements that are occurring within the business that unfortunately are likely to be hidden due to the impact of the recent severe foreign exchange rate volatility. Our total fiscal 2015 GAAP revenue guidance is approximately $605 million including approximately $577 million in product revenues and $28 million in royalty revenues. Included in the $577 million product revenue is a reduction of an estimated $20 million due to the expected negative impact of foreign exchange rate movements. Our projected 2015 foreign exchange rates are based on the lowest exchange rate of the major currencies versus the U.S. dollar in the last 60 days. For example, included in these assumptions are euro foreign exchange rate of $1.12, a British pound exchange rate of $1.50 and a U.S. to yen exchange rate of $1.21. The $577 million in GAAP product revenue guidance represents a year-over-year increase of 3.6%. Importantly though, without the impact of FX, our fiscal 2015 product revenues would have been $597 million representing a 7.2% annual product revenue increase. And also, just as we benefited from an extra holiday-shortened week in Q4 of 2014, we will have one less week in fiscal 2015. We estimate that the impact of this calendar change which has already been reduced in the previous growth rates that I mentioned, accounted for approximately 100 basis point reduction. We expect 2015 GAAP revenues for rainbow to be approximately $57 million including a $3 million reduction due to the impact of foreign exchange rates. Without the impact of foreign exchange rates, our projected $60 million rainbow guidance represents an approximate 15% growth rate. We expect our GAAP 2015 product gross profit margins to be approximately 65% including a 50 basis point reduction due to the impact of foreign exchange rates. As in prior years, we expect product margins to be slightly below this average in the first half of the year and higher in the second half of the year. We expect our 2015 total operating expenses including approximately $7 million for the medical device tax to be approximately $306 million reflecting a modest increase of 3% over our FY 2014 operating expenses of $297 million which are adjusted for the $10 million credit resulting from the legal award reversal in 2014. The $306 million in projected 2015 GAAP operating expenses includes a reduction of approximately $6 million due to the impact of foreign exchange rates. Without the impact of foreign exchange rates, our constant-currency operating expenses would be up approximately 5%. Based on current foreign exchange rate assumptions, we expect our effective tax rate to be approximately 27% to 29%, and we expect our annual interest expense to be approximately $2.5 million, based on the assumption that we will continue to borrow approximately $125 million throughout 2015. We are projecting average weighted outstanding shares for the year to be approximately 54 million. Based on all these assumptions, we expect our 2015 GAAP earnings per share to be approximately $1.30, including $0.15 per share reduction due to the impact of foreign exchange rates. Also, recall that our 2014 $1.30 earnings per share included a $0.09 gain related to the Q1 2014 legal accrual reversal. So, excluding this legal expense reversal, our 2015 GAAP EPS guidance of $1.30 is up 7.8% from 2014. Excluding the same 2014 legal accrual reversal and the estimated $0.15 negative impact of foreign exchange rates in 2015, we would have seen an approximate 20% increase in earnings per share in 2015 over 2014. Unfortunately, as you can see, the extreme FX movements have made it more difficult to see the underlying growing strength in our business and the leverage that we believe our business can generate. Therefore, as we go through fiscal 2015 we expect to continue to present both our GAAP results as well as highlighting the impact of these foreign exchange rates on those results. In addition, as a result of foreign exchange rates on our 2015 financial results, we are also evaluating other non-GAAP reporting structures that will more accurately reflect our core financial operating results. And with that, I'll turn the call back to Joe. Joe E. Kiani - Chairman & Chief Executive Officer: Thank you, Mark. We have many reasons to be optimistic about our outlook, the first of which is the confidence we have in our ability to realize accelerating growth in our earnings. As Mark mentioned, our expectations for an expanding gross margin coupled with strong discipline for controlling operating expense growth will, we believe, will continue to produce visible leverage, which should be rewarding to our shareholders. Our 2015 guidance reflects these expectations which are clearly illustrated when currency effects are taken out. Our core SET business is performing well and we expect this performance to persist as we continue to win market share. Improvements in U.S. hospital census trends now materializing also provide us with a positive view for greater utilization of our large install base. We believe that our prior multi-year investment in our OUS business sales, clinical and infrastructure, will allow us to continue to see strong above market growth in many international locations, including Europe, Latin America, India and the Middle East. We are seeing evidence that our longstanding investment in our rainbow technologies, including SpHb and SpCO support a more positive outlook for rainbow that our Q4 results seem to indicate. Our sales pipeline of probable new deployments for SpHb has expanded significantly and our ability to secure new hospital is rising with each successful deployment. As I have said in the past, although we don't know when the inflection point will occur, we do know that our SpHb list of interested hospitals is increasing. In fact, we are seeing rising visibility for our continuous non-invasive hemoglobin monitoring technology with the recent journal publications of two clinical trials that showed clear value for this parameter. Acknowledgement of the value of SpHb led to our first large scale deployment at Allegheny Health System, which encompasses all of Masimo's FDA-cleared monitoring solutions across an entire health system including continuous non-invasive hemoglobin monitoring in concert with Pleth Variability Index, SedLine brain function monitoring, Masimo SET pulse oximetry, Masimo capnography and Patient SafetyNet. We believe that Allegheny Health System is the first of many world-class health systems that are beginning to recognize how Masimo's full suite of innovative solutions can help hospitals address their patient care and financial challenges while improving patient safety and outcomes. It is significant that eight additional thought-leading institutions within and outside the U.S. have made the clinical decision to broadly deploy continuous non-invasive hemoglobin monitoring in concert with PVI and as such have submitted their requests for the capital budget to purchase licenses for SpHb and PVI. An increasing number of hospitals have now made the clinical decision to broadly deploy SpHb across multiple departments and although the capital budget approval process takes longer than we would like, we are happy to see an increasing number of hospitals moving forward with their budget approval process every quarter. Another positive development for rainbow includes the recent updated Fire Rehabilitation Standard, NFPA 1584 from the National Fire Protection Association that now requires firefighters exposed to smoke at incident scenes and during training to be assessed for carbon monoxide poisoning. The previous version of the standard issued in 2008 did not include a formal requirement for the assessment of CO poisoning. We believe our rainbow SET technology provides the only non-invasive measure of carbon monoxide in the blood and also provides two other vital signs measurements required by the NFPA 1584 standard: oxygen saturation and pulse rate. With the support of Congressional Fire Services Institute and other organizations, Masimo will expand its efforts to help departments and agencies nationwide implement the new standard. When additional major OEMs begin the introduction of their new monitoring platforms that include rainbow functionality which we anticipate through 2015, rainbow opportunities should continue to grow. Rainbow or SET, we intend to deliver on our 10-year plan which was initiated seven years ago from SvO2 to ORI, SpHb to PVI, SpCO to SpMet, Root to Patient SafetyNet, MightySat to iSpO2, RAM to Capnography, SedLine to O3, value engineering and a couple of more innovations we're working on that have the chance to not only further reduce our costs but to enhance our product offering. We intend to make 2015, 2016 and 2017 not only the best years for our customers and the patients they serve but the years our long-term shareholders have been waiting for. With that, we'll open the call to questions. Operator?

Thank you. Our first question comes from the line of Brian Weinstein from William Blair. Matt R. Larew - William Blair & Co. LLC: Hi. Good afternoon. This is Matt Larew asking question for Brian, today. Joe E. Kiani - Chairman & Chief Executive Officer: Hello, Matt... Matt R. Larew - William Blair & Co. LLC: Joe, you answered some of the new products there at the beginning – I think you mentioned maybe as many as six or eight that were sort of brought forth in 2014. Wondering if you could give us an idea of just how much those products are actually contributing to revenues right now, and how that might move through the next couple of years, how meaningful some of those products could be? Thanks. Joe E. Kiani - Chairman & Chief Executive Officer: Well, in 2014 they added about $2 million to $3 million of revenue. We expect that will hopefully about double in the New Year but over time we believe they will become, in the next three to four years, about 10% of our revenues. I think, as you may know, introducing products in the medical space unfortunately doesn't get traction overnight in hospitals. There's usually a 17-year period from the time something that's considered clinically necessary and good for patients till when it's broadly deployed and that's one of the things we've been dealing with with hemoglobin. But the great news is we have many of them out already, many of the ones, the 11 products I mentioned are not only out internationally but many of them are out in the U.S. through the FDA clearance process that we've gone through. Matt R. Larew - William Blair & Co. LLC: Okay. Thanks for that, Joe. And then just thinking about the SpHb pipeline that you mentioned, obviously have Allegheny onboard, could you just maybe discuss the time it from when Allegheny had their budgeting process approved when they really achieved what you consider a run rate state with your products and how that process might play out with these other eight, and if they're similar in nature or in size to Allegheny, just anything you could to help us think about how these potential contracts, if they sort of get through the process, how they might contribute to results? And then I'll jump back. Thank you. Joe E. Kiani - Chairman & Chief Executive Officer: Sure. Sure. Allegheny Health Systems, from what I understand, from the moment clinical usefulness was proven to them during their evaluation, it took about a year before the budgets were created and the contract was executed. Allegheny Health System has a unique situation where they're owned by the insurance company, I forget their name now, but – so they took a very active role in looking at what the value of our measurements were to them, for not only improving patient safety but reducing the overall cost of their system. So, while I think Allegheny's process is instructive, the fact that the payers or the people that were looking at this closely, I think potentially makes them a little faster than most institutions who the payers are not being consulted with as they're making these decisions. Matt R. Larew - William Blair & Co. LLC: Thanks, Joe. Joe E. Kiani - Chairman & Chief Executive Officer: You're welcome.

Thank you. And our next question comes from the line of Tao Levy from Wedbush.

Yeah. Hi. Good afternoon. Joe E. Kiani - Chairman & Chief Executive Officer: Hi, Tao. Mark P. de Raad - Executive Vice President & Chief Financial Officer: Hi, Tao.

So maybe we could start on the guidance front. How should we think about the cadence of the quarters when we think about the flu season and how that might affect your first quarter? Mark P. de Raad - Executive Vice President & Chief Financial Officer: Well, I think, in general, Tao, the strength that we saw in the tail end of last year continues into the first part of this year. So that's very encouraging. We do think that if you look at our year-over-year revenue growth by quarter that simply because of the fact that we had a fairly slow or slower early part of 2014 that we actually expect to see some pretty nice year-over-year revenue increases in the first half of the year. And then those are likely to moderate a little bit towards the end of the year, based upon the strength, obviously, that we've seen at the end of fiscal 2014.

Okay. Perfect, helpful. And then when I look at – when you talk about the share expectations, shares outstanding, you're not assuming any repurchases? Mark P. de Raad - Executive Vice President & Chief Financial Officer: Correct. For now that's our assumption. Joe E. Kiani - Chairman & Chief Executive Officer: It's interesting because, as you know, we've assumed another $125 million draw on our line of credit.

Correct. Joe E. Kiani - Chairman & Chief Executive Officer: Yet we've not reduced the number of shares. At this point, given that we don't have an acquisition target, if we do draw the money that means shares will be reduced. But until it's done, we do not want to project it.

Okay. And then if we could talk a little bit about the rainbow performance in the quarter. I didn't quite understand or hear the reason why the Q4 was below expectations. I know it sounded like, at least from the prior quarter, there were a couple orders that might have slipped into Q4. Did these further slip? And then thinking about 2015, you are expecting some growth, so I wasn't sure again if these are orders that are shifting around a bit? Joe E. Kiani - Chairman & Chief Executive Officer: Yes. Unfortunately the rainbow numbers in Q4 did not pan out to what we had expected. We have about $20 million of rainbow business that are in big chunks and some of those big chunks, again did not come in as we'd expected. So going forward as we projected our rainbow revenues for 2015, we actually took out those big opportunities entirely. So, the $57 million to $60 million depending on FX that we projected does not include any of those opportunities that together add up to about $20 million. Now, if we do take the big chunk out of our business going backwards too, year-over-year Q4 wasn't as bad as it looks. It did grow in double digits if you take out that $2.2 million. But, again, it was still below our expectation predominantly because we did not get the big – some couple of the big chunks of business that we had planned for Q4 2014.

Got you. And then just, lastly. Joe, you mentioned expectations that GE and Philips would incorporate the new OMX board this year. Is that sort of the expectation that they will include that in sort of a higher end patient monitor at some point this year? Joe E. Kiani - Chairman & Chief Executive Officer: Yes. Yes, at least for Philips, we expect them to launch their high-end monitor towards the middle of this year. Philips has already launched their low-end monitor with rainbow worldwide, and we expect GE to launch their low-end monitor by midyear as well.

Perfect. Thank you. Joe E. Kiani - Chairman & Chief Executive Officer: Thank you. Mark P. de Raad - Executive Vice President & Chief Financial Officer: Thanks, Tao. Joe E. Kiani - Chairman & Chief Executive Officer: And by the way the earlier question, the insurance company that owns Allegheny Health is Highmark. I could not remember their name before. Thank you.

Thank you. Our next question comes from the line of Larry Keusch from Raymond James. Lawrence S. Keusch - Raymond James & Associates, Inc.: Hi. Good afternoon. Joe E. Kiani - Chairman & Chief Executive Officer: Hi, Larry. Lawrence S. Keusch - Raymond James & Associates, Inc.: Joe, you sort of finished up your prepared comments talking about the 10-year plan and the outlook for the next three years. Could you remind us again sort of how you're thinking about whether it be top line growth or operating margins where you expect those to be able to get over the remainder of that 10-year plan? Joe E. Kiani - Chairman & Chief Executive Officer: Sure. Sure. Larry, first of all, as you know, we've been successfully shipping over 160,000 monitors a year for over two years now, and we expect that to continue. So that continues to grow our installed base, of course, as it gets bigger in the single digit, but close to the 10% a year. Now the thing that we can definitely control is our cost of goods and our expense growth. And the thing we had done the first several years in this 10-year plan is to spend our resources aggressively towards filling out our product pipeline as well as our sales force worldwide with the clinical support worldwide and the infrastructure worldwide. Those investments have been made. We intend to watch our expense growth very, very carefully and limit it because we think we've got the infrastructure for the next three years to get to where we want to get to. And as far as where we are heading towards, we're heading towards gross margins of about 68% over the next three years with hopefully continued growth of our revenue without the FX issues in the $50 million neighborhood. But if one of those four, five product lines that we have developed over the last several years starts to take off, whether it's rainbow or it's Root or it's general floor monitoring with Patient SafetyNet or airway management monitoring like capnography or RAM. If either one of those hits, then we hope, which is not in our plan, but we hope to expect to grow much, much faster. So even without that big dramatic growth from one of those wells hopefully bursting, we believe we can start having very strong earnings growth over the next three years as value engineering costs, which is part of the cost reduction, expense controls and our normal growth in taking away market share from our competitors at the same pace if not a faster pace over the next three years. Lawrence S. Keusch - Raymond James & Associates, Inc.: Okay. That's really helpful. And then just to finish off on that, thought and then I just have two other quick questions. But, would you mind taking a stab at operating margin? You were kind enough to give us some thoughts around gross margin. But where could operating margin go given your... Joe E. Kiani - Chairman & Chief Executive Officer: I'll let Mark answer that one. Mark P. de Raad - Executive Vice President & Chief Financial Officer: So, Larry, with the overall product margin guidance that Joe just referred to sort of 67%, 68% targeted range, we think the control and operating expenses can be lowered to the low to mid 40%s to the point where we're talking about operating income at a minimum over 20% and edging towards 25%. That's where we'd like to be over the next two to three years. Lawrence S. Keusch - Raymond James & Associates, Inc.: Okay, great. And then just to make sure I understand this, on the comments around rainbow and I appreciate the thoughts around the $20 million and these kind of chunky orders that you said you've not included for 2015. Is the right way to think about that that you just don't have a lot of visibility on those orders and rather than putting them in and coming up short, that you'd prefer to just keep them off to the side and if they get there, great, but if they don't because, again perhaps they don't have the visibility that you typically have, there's no disappointment in the numbers? Joe E. Kiani - Chairman & Chief Executive Officer: That's correct. Those orders are most – or all of it OUS and typically in developing countries where ministries of health are involved and it gets more opaque than our normal direct business that we deal with, so because in the U.S. and in Europe – so because of that, after a few disappointments – and by the way none of those orders have been lost, we still expect to get them, but we just got tired of expecting them for our projection. So hopefully, they will happen and those will be the upside and we'll call them out when they do happen, so you know, kind of what these exceptional orders were. But we expect more and more of those, but unfortunately we just are terrible at knowing what they really mean when they say we're going to get the order next quarter and we don't. So we decide to take them out of our projections. Lawrence S. Keusch - Raymond James & Associates, Inc.: Okay. And then, the last one on rainbow, just to complete the thought is given the mid-year timing expectations for both GE and Philips, are you contemplating revenues in that rainbow guidance from that high-end and low-end monitor from those companies? Joe E. Kiani - Chairman & Chief Executive Officer: In the projections we've given you, again, trying to be conservative, we are not. But trust me, there are realistic and more what we call realistic plus Philips and GE do what we expect them to do and they're in there, but we decided to be conservative with our forecast as much as we could so that we hopefully gain back our reputation of meeting if not beating our revenue and earnings projections. Lawrence S. Keusch - Raymond James & Associates, Inc.: Okay, great. Thanks very much, appreciate it. Joe E. Kiani - Chairman & Chief Executive Officer: Thank you. Mark P. de Raad - Executive Vice President & Chief Financial Officer: Thanks, Larry.

Thank you. And our next question comes from the line of Chris Lewis from ROTH Capital Partners.

Good afternoon, guys. Thanks for taking the questions. Joe E. Kiani - Chairman & Chief Executive Officer: Hi, Chris.

First is just around the core SET business that was up double digits again even excluding the additional selling week, excluding rainbow. So can you just elaborate? I think, Joe you mentioned that you continue to take share in that segment of the business. Can you elaborate on what's driving those market share gains you're experiencing and expectations for that to continue in 2015? Joe E. Kiani - Chairman & Chief Executive Officer: Yes. We clearly, there is a huge differentiation between our pulse oximeter technology and our main competitor's. The value proposition is intense, both in terms of saving eye sights of babies, helping detect critical and general heart disease with amazing sensitivity and specificity as well as cost of ownership reduction. Cost of use of our product is significantly lower than our competitors. So we have been successful in retaining 99%, 95%, I don't know what the exact percentage is, but very high percentage rate of accounts that convert to Masimo and then taking more and more. This year, we lost an account named Hartford. Within a year, they came back, entered into a very long-term agreement with us after experiencing what it was like again to go back. We got systems like Queen's in Hawaii, of course Allegheny Health Network, and Mayo Clinic in Scottsdale and Queens and Parkland and Dimension Healthcare, I mean, the list is long, St. Francis Medical. So we had a very robust year, and new agreements as well as renewals. We also continue to increase the number of OEMs that offer Masimo, we're definitely north of 50, maybe even near 100 patient monitoring companies that offer Masimo, and more and more percentage of their shipments are with Masimo. That's why, for the year, I think we did over 170,000 pulse oximeters and Pulse CO-Oximeters. So those together with kind of what we see in the pipeline for the rest of the year makes us feel very good about this continued growth in our business and one of the nice things is that we're getting these business while being disciplined about our pricing. We're offering our sensors for a very competitive price. It's about 40% to 50% less than what pulse oximetry used to cost before Masimo entered the marketplace, when there wasn't competition in this space, but we are able to secure at these prices we believe are competitive and fair instead of going down to the prices our competitors are taking prices to based on not having good technology and only relying on price as the differentiation. So one of the benefits you saw this quarter and you'll see it again in Q1 is that where we used to do renewals a little bit less disciplined that brought our ASPs down dramatically, but get new contracts at lesser prices, we're being disciplined, we're getting the same amount of customers with the pricing that is good for both customers, and us, and on average we believe saves customers. Our Masimo SET pulse ox, not including rainbow, saves customers about $1,000 per bed per year. I mean, so it's $1 here or $2 here north or south does not match up per sensor to what we save hospitals per bed per year. So sorry for the long answer, but I think that was your answer.

No. I appreciate all the color there. And then your comments around improving kind of hospital utilization, quite a bit different than kind of the bleak outlook you provided maybe a year ago. What's your best take of the current macro environment thus far in 2015 with what you're seeing in terms of hospital admissions and spending, both in the U.S. and then in Europe? Joe E. Kiani - Chairman & Chief Executive Officer: Well, first of all in the U.S., the flu season has been a pretty strong flu season compared to the last few years. In fact, I think the last flu season that rivaled this one I think was 2012. It came early and it lasted for a while. So I think certainly that's part of the strong revenues we're showing because of the utilization of our installed base is higher than a year ago. But, overall, you're right. My fear is last year, especially looking at what happened in Q4, then Q1, then Q2, I was worried that we might be seeing the impact of Affordable Care Act on a national level like we've seen on the smaller regional level in Massachusetts when they went through it. And I kind of did my best to forecast it thinking, oh, if that's what's happening then we could be in this thing for a few years. It looks like that is not happening. So, for example, you remember Q4 and Q1 last year, census was down by 4% each quarter. Then it started looking a little bit better in Q2. Finally by Q3, Q4, it wasn't that bad. I think Q4 was the first time we've seen a slight positive increase in census. I've heard about 1%. So that's the U.S. The U.S. we think census has improved, a bad flu season has helped. Worldwide there are pockets of the market worldwide where there's robust growth, pockets where there isn't. But because of the increase in our footprint that we've invested in the last several years, we are taking a healthy market share away from competitors in – whether it's Australia, New Zealand, or it's France and Germany, or it's Middle East or Turkey.

Thanks, Joe. And just one more from me for Mark. Can you quantify – I think you may have mentioned it, but I might have missed it. Can you quantify the contribution of the additional selling week in the U.S. and OUS? Thanks. Mark P. de Raad - Executive Vice President & Chief Financial Officer: Yeah, Chris, our best estimate is approximately $5 million was the benefit because it was a holiday-shortened week here in the U.S. And of that $5 million, about $4 million in the U.S., about $1 million OUS.

Okay. Great. Thanks for the time. Joe E. Kiani - Chairman & Chief Executive Officer: Thank you.

Thank you. And our next question comes from the line of Bill Quirk from Piper Jaffray. Bill R. Quirk - Piper Jaffray & Co (Broker): Great. Thanks. Good afternoon, everybody. First question, actually I kind of want to pick up off the last one. Mark, I realize it's difficult, but is there any way to quantify what the flu benefit was in the quarter? Mark P. de Raad - Executive Vice President & Chief Financial Officer: Bill, I don't think so. I mean, other than what Joe just said, there's no doubt that part of the strength that we saw in this quarter is undoubtedly due to that, and we expect that, frankly, to continue in the early part of the new year as well. But it's real hard to put a dollar figure on it in terms of how much of our year-over-year increase is due simply to that versus, obviously, the impact of the additional 170,000 drivers that we placed into the market since this time last year. Bill R. Quirk - Piper Jaffray & Co (Broker): Understood. And then two more for me. And, I guess, the first one is, you talked a little bit about some sustainable gross margin improvement over the next three years. So thank you very much for the long-term viewpoint. I couldn't help but notice, of course, that since you did expand your DIO, no doubt you're picking up some absorption improvement as well. I guess, is there any way to think about what that gave you here in 2014? Do you feel comfortable with where you are with respect to those inventory levels? And then I've got one more follow-up. Thanks. Mark P. de Raad - Executive Vice President & Chief Financial Officer: Yeah, Bill, I think best guess it probably contributed about 20 basis points or so to our – and I'm taking about full year product gross margin improvement, simply based upon the additional product that was actually manufactured in the year. But remember that a lot of those favorable numbers that are created are ultimately, from an accounting standpoint, hung up on the balance sheet. And they technically don't flow through the P&L until the inventory to which they're related flows through the P&L. But I would say directionally about 20 basis points is the benefit from that volume increase. Bill R. Quirk - Piper Jaffray & Co (Broker): Got it. Okay. So fairly insignificant, then. Okay, that's good to know. And then lastly, I guess, Joe, wanted to come back to the announcement you made with respect to the endorsement around the firefighters and the plans here – they have to start using CO monitoring. Any way to value what that might mean to Masimo longer-term? You've obviously had the benefit of collecting a number of endorsements throughout the years, although this one seems to be the most concrete within that specific stakeholder group. Joe E. Kiani - Chairman & Chief Executive Officer: Yes. I think this year we've even increased our revenues by tune of about $1 million, which isn't much, given that we think with this endorsement 100% of at least the paid fire departments are going to have non-invasive ways of measuring CO. So I think this is the beginning of a full standardization, which over time – I don't have the number of fire trucks in my head right now, but should become a significant part of our business. I think if my memory is right, about 200,000 vehicles and each one of them carries a Rad-57 or a defibrillator by either Physio-Control or ZOLL with CO monitoring, that business should become at least a $50 million – if not $100 million – a year business. And right now, as you probably can guess, it's probably less than $20 million a year. Bill R. Quirk - Piper Jaffray & Co (Broker): Got it. Great. Thanks, guys. Appreciate the color. Mark P. de Raad - Executive Vice President & Chief Financial Officer: Thank you. Joe E. Kiani - Chairman & Chief Executive Officer: Thank you, Bill. Joe E. Kiani - Chairman & Chief Executive Officer: I think that is our last question. So, with that, we'll let those who are dealing with the snow go shovel and the rest of us go get some sunshine. Have a wonderful new year and we look forward to our next call. Thank you.