Good afternoon, ladies and gentlemen, and welcome to Masimo's Third Quarter 2017 Earnings Conference Call. The company's press release is available at www.masimo.com. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. As a reminder, this conference call is being recorded. 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 fiscal 2017 financial performance. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Risk factors that could cause our actual results to differ materially from our projections and forecasts are discussed in detail in our 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.

Thank you, Eli. Good afternoon and thank you for joining us for Masimo's third quarter review. As we enter the final months of 2017, we are gratified to be in the final stage of delivering on the commitments we made 10 years ago after our successful initial public offering. Our results this quarter were once again above expectations, as we realized the benefits of geographic diversification and a broadened innovative product portfolio. The growth in product revenues was the fastest rate this year at 13%, while our adjusted earnings per share grew at a rate which was double the revenue growth rate no matter how you look at it with or without the stock options, exercise gain. We also achieved one of the best quarters in our history in terms of winning new contracts with prominent hospitals and hospital systems as more hospitals recognize the superior capabilities of our technologies to improve their patient care and reduce their costs. The strength in our business is exemplified by the fact that for the second quarter in a row, we realized more than 50,000 oximetry shipments, as shipments rose by over 11% versus last year to reach 51,100 oximeters to yield a new estimated installed base of 1,566,000 oximeters excluding our hand-held and finger pulse oximetry. This is clear evidence that both our direct and OEM business with Philips, as well as many of our other excellent OEM partners work is bearing fruit for all; them, us, hospitals, clinicians, and most importantly, the patients. Before we move on to the details of our third quarter results, I'd like to invite you all to extend a warm welcome to our new CFO, Micah Young who joined Masimo just two weeks ago. Micah has become fully immersed in Masimo business activities and attended the American Society of Anesthesiologists Conference in Boston last week, as well as meeting with some of our investors in Boston with me. As you know Mark de Raad will be retiring at the end of this year after more than 11 years with Masimo, and Mark is with us today for some closing comments later. I'll discuss some additional business updates later in the call as well. Now, I'll ask Micah to review our Q3 results in more detail and provide you with a final update on our 2017 financial guidance. Micah?

Thank you, Joe. And good afternoon everyone. For the third quarter of 2017 we reported total revenue including royalty and other revenue of $193.7 million, which reflects growth of 15.6% or 15.4% excluding the impact of currency. Our product revenue grew approximately 13% on both a reported and a constant currency basis to $181.3 million for the quarter. This represents another quarter of double-digit growth, which was driven by strong performance across our international markets, complemented by increased adoption of our newer technologies. Rainbow product revenue grew 20% to $21.5 million, due primarily to continued strong revenue from Saudi as we begin to ship against the most recent tender award. SpHb revenue grew 72% to $10 million for the quarter with the strength again related to our Saudi business. NomoLine capnography, O3 cerebral oximetry and SedLine Brain Function Monitoring along with the Root connectivity platform delivered aggregate growth of 34% for the quarter. Our worldwide end user for direct business, which includes sales through just-in-time distributors, grew 16% to $159.1 million. Our direct business represented approximately 88% of total revenue, total product revenue in the quarter versus 86% in the prior year period. While OEM unit sales grew, our OEM revenue declined approximately 3% to $22.2 million representing 12% of product revenue as compared to 14% in the prior year period. By geography, our U.S. product revenue grew 4% to $119.3 million, compared to $114.6 million for the third quarter of 2016. Our international product revenue grew 36% to $62 million or 35% on a constant currency basis, driven by strong contributions from our Saudi tender and solid growth across the rest of the Europe, Middle East and Africa region. Based on these strong results, international revenue represented approximately 34% of total product revenues in the quarter as compared to…

Thank you. Thank you so much, Micah. We are happy to report double-digit growth product revenues for Q3 and more than double that rate for EPS growth. As Micah described, our third quarter results have led us to increase our full year guidance for the third time this year. Our ability to realize the potential leverage in our business that we foresaw 10 years ago is rewarding as we see our operating profit margin climb to nearly 25% in Q3. In Q3 we had the best contract booking quarter in our history. We won another top 20 U.S. News & World Report Best Hospital as a new customer, NYU, while also winning a major contract with St. Luke's Hospital in Bethlehem, Pennsylvania. In addition to a strong quarter for getting new customers, we also had our biggest contract renewal quarter ever including Kaiser renewing our pulse oximetry agreement which we are very proud of. Our Q3 oximetry unit volume of 51,100 units is an important leading indicator for a healthy future for our business. A critical factor in achieving this new record level is our expanding relationship with Philips which is presently focused on providing rainbow set Oximetry to our mutual customers. Over the next two years, our partnership efforts with Philips will include availability of additional Masimo technologies such as O3 organ oximetry or cerebral oximetry, SedLine Brain Function Monitoring and NomoLine capnography in Philips monitors. During Q3, we launched some noteworthy new products including our compact Rad-97 monitor into the U.S. market. Our RAS-45 acoustic respiration sensor for pediatric and adult patients and our Trace Software for charting and analyzing oximetry and other data from our monitors. As I mentioned earlier, Mark de Raad will be retiring from Masimo at the end of this year after joining us 11 years ago. His contributions to Masimo are too numerous to mention on this call now, but suffice to say, Mark has played a critical role in making Masimo into what it is today, while positioning us for a great future. I hope that you will join me in wishing Mark a retirement with more time to relax and less time estimating taxes. So here's Mark to offer some closing comments to everyone. Mark?

Thanks, Joe. I'm happy to report that my 40th and last earnings call with Masimo once again includes the type of good results that we have consistently reported, especially recently. While I will certainly miss our quarterly discussions I'm confident that Micah will be able to continue the Masimo tradition. My time at Masimo over the past 11 years has been an exceptional experience, and I'd also like to thank Joe for providing me with a wonderful opportunity to be part of Masimo, its growth and the impact that Massimo has had on patient care. I wish you all a fond farewell and I will be looking forward to Masimo's continued success.

Thank you so much Mark. As excited as we are to have Micah join us, we are equally going to miss you Mark. Thank you.

Thank you, Joe.

Thank you for all that you've done. As we enter the final few – or maybe more precisely two months of 2017, we are happy to be well-positioned to deliver the results we committed to delivering 10 years ago. We will exit the year with more potential for increasing our scale than at any point in our history. Our ever broadening innovative product portfolio combined with a steadily increasing body of clinical data, showing the benefits to patients from the use of our technologies should enable us to continue growing our impact to healthcare. More than ever, we remain committed to our mission to improve patient outcomes and reduce the cost of care and our guiding principles that have helped us steer Massimo to what it is today. With that, we'll open the call to questions. Operator?

Our first question comes from the line of Tao Levy, Wedbush. Your line is open.

Hi, Tao.

Thank you. Hey, How you doing?

Good, how are you doing?

Mark, congratulations on your retirement. I'll start off there and welcome Micah.

Thank you, Tao.

Thank you, Tao.

So maybe we could start off with, you know if you look at the – if you look at the Saudi tender order, how large is that and how predictable is that over the next few quarters?

Okay sure. We are not in a position to give out the exact number, but we do believe, short of some catastrophe, that business should repeat and perhaps grow in the coming year.

Got it. Okay. And historically the international business has been a little bit lumpy and that's kind of why I was asking about the Saudi contribution because obviously that's been a big growth driver for you guys the last couple quarters. And so how should investors think about that maybe the international business might be a little more predictable than we've seen in the past. Is that possible?

I think so Tao, in fact coming into the new year we had predicted a softer census in the U.S. and we're relying more heavily in our international business including Saudi. So we are getting what we expected, so I don't believe there's a surprise here. And last year we had an unusual year with Saudi, because for the first time I think in the history of I guess the West doing business with Saudi they change what they were doing, they been able to – the new King and the Prince, decided they were going to cut back spending by 70% to 90% on every company they were doing business with until they kind of got their arms around what was going on with the oil prices and how they were going to become more oil independent. But I – so that was unusual last year, it was not expected Saudi has always been very predictable. I think we've gone back to a mode of predictability with Saudi Arabia.

Great. And then just a couple more. You talk about how the number of sockets oximeters that you ship is, should be viewed as a leading indicator. So, I was wondering if the last few quarters geographically, do you have a sense of where those sockets are being installed or placed. Is it more international than U.S.?

Well, because of our direct business in places like Saudi, international has seen some growth, but the bulk of our volume comes from our OEM business, not direct from the installed base perspective. And from all that I know that growth in this quarter has mainly come from the U.S., as Philips who has had between 50% to 60% market share in the U.S. and abroad, is shipping more and more Masimo in the U.S. marketplace and other parts of the world.

Got you. And then just the last question, when you ship a product to Philips. Are you seeing – in the past you've talked about how that has increased nicely since you signed the partnership agreement. Does that get recorded in international revenues or domestic, and that's it? Thanks.

Sure. I believe the OEM business reports the revenue depending where the company is based out of, and I think Philips is based out of the U.S., I think it comes on the U.S. revenue side. Now if you look at our OEM business, unit volume wise, we had a nice increase quarter-over-quarter, as Micah said, but revenue decreased. And that actually has more to do with some of the consumables sales that were going through OEMs last year that did not happen this year, whether that's because of the slower census that we foresaw in the U.S. or maybe we took some of that business direct is not clear to me at this point. But what I can tell you is that the drivers that we're seeing are coming in some high-quality institutions, where Philips and Masimo and other OEMs are placing them in and not parts of the world where either we're not going to get the types of sensor volume per socket we expect or potentially not even at all.

Great. Okay. Thank you so much and congratulations on the NYU. You know my son will be certainly happy about that.

Thank you. I hope your son doesn't have to visit NYU, but now if you do, we'll be there.

Thank you. And our next question comes from Rick Wise with Stifel. Your line is now open. Frederick Wise - Stifel, Nicolaus & Co., Inc.: Good afternoon. Hi, Joe.

Hi, Rick. Frederick Wise - Stifel, Nicolaus & Co., Inc.: Just you highlighted that the product gross margins were less than expected. And it sounds like for a good reason as you suggested, because of the greater placement of monitors and related amortization. But thinking back to the Analyst Day, clearly, the message was gross margins are going to improve, in general, product gross margin specifically, because of volume, because of mix, because of cost reductions. How do we think about all the moving pieces and where the product gross margins go from here over the next few quarters, 12 months, et cetera?

Great question, Rick. Nothing's changed with our thesis. We expect a 0.5% increase year-over-year with our gross margin expansion from all the factors, including our RD line rollout, as well as increased sensor revenue and volume from our Philips agreement. So that that should not change. We are seeing some major deals with heavier equipment or monitor placements than we had anticipated. So that has caused some temporary hit to us. Also if you'll remember, given the positive cash flow we received from the stock option exercise gains, we increased the speed of scaling our manufacturing facility, a second manufacturing facility in Mexico, which then also kind of kept gross margins in check in Q1. But I think these are all temporary, I think the broad, macro view of things is that we anticipate gross margins improving 0.5 percentage point annually. Frederick Wise - Stifel, Nicolaus & Co., Inc.: Right. And looking – and I know you're not providing 2018 guidance yet, but this was a good quarter. Many moving pieces here. But you're certainly locked up to your 8% to 10% growth goals looking good. Does this set us up for – in 2018 just conceptually so, when the – that certainly at the upper end of your sort of organic growth range and potentially better? Do you feel like – are you feeling more confident about that kind of a set up as you look ahead?

Rick, we still believe 8% to 10% growth rate annually for the foreseeable future is attainable. We of course are going to do everything we can to beat that rate. Some of the new products we've introduced like Nomoline capnography, SedLine Brain Function Monitoring and O3 regional oximetry have – are growing faster than we had anticipated. And our international business seems to be growing faster than we anticipated. We also have invested in more countries in our direct strategy and that should bear fruit. But that's kind of all part of what we think should be an 8% to 10% growth rate that we can rely upon. And we'll do everything we can to hopefully beat it like we have this quarter. Frederick Wise - Stifel, Nicolaus & Co., Inc.: Two last quick ones from me. Should I assume that weather and hurricanes didn't have an impact, since you didn't call it out? And maybe for Micah, I mean Mark has been fantastic as we all know, but any professional is going to bring some new perspectives or thoughts to the job. What Micah – how should we think about our priorities or perspectives that you take over this critical role at a very exciting time? Thank you.

Thank you, Rick. Before Micah answers that. Let me answer the first part of your question or maybe what you were saying regarding the hurricane. We actually do think the hurricane did impact our hospitals census, some of our hospital customers like HCA. So it did have an impact we think on census, but fortunately because of stronger international business, we didn't feel it. As I said earlier, without the hurricane, we had anticipated following 2016 where we saw unbelievable increase in census that there was a likelihood of a slowing down, especially in light of uncertainties regarding Affordable Care Act, but yeah hopefully in the new quarter and the new year, census should get better because hopefully no more hurricanes and normal rate of people going to hospitals for their elective surgeries. Micah, do you want to comment on the second part.

Yeah, so just to answer your question, Rick. So, for me coming in, right now, as Joe mentioned even in his prepared remarks, I'm really just diving deep into the business trying to learn as much as I can. Mark has done a tremendous job of setting the stage and building out a financial organization and just getting more equipped financially to position this company where it is today. And you know based on my prior experiences – at prior medical device healthcare companies, I've had the same similar focus as Mark and Joe have here with trying to drive not only top line growth but also profitability improvement over time. And I think that that's something that I'm going to continue to drive with Joe and the team to really drive that operational focus on the business. I've been very, very deeply involved operationally in my prior companies and that's something I'll continue on, where kind of Mark left off with the executive team. It's a tremendous executive team here and I'm excited to work with them. I think we've got some great opportunities in terms of gross margin improvements that we can make as we continue to execute on the RD sensor line project as well as continuing to vertically integrate that new facility in Mexico. So those are some great opportunities ahead and I think there's other things that we can do to get into the operating expense of the business and make some improvements there as well.

So thank you, Micah. Thank you. Next question.

Thank you. And our next question comes from Larry Keusch with Raymond James. Your line is now open. Lawrence Keusch - Raymond James & Associates, Inc.: Okay. Great. Thanks. Good afternoon, everyone.

Hi, Larry. Lawrence Keusch - Raymond James & Associates, Inc.: Hi. So just I wanted to touch on the SpHb sequential revenue growth. Is that the right way to think about that that the majority of that sequential growth is due to the Saudi contract?

No. No. That is not the case, it's due to our international growth was very strong; Europe, Middle East, Africa, Asia, Latin America -

Australia.

– Australia. So, no, we had a really nice international growth and Saudi being part of EMEA helped and that's why we called it out that there's a nice piece of business, but, no, that is not the case. Lawrence Keusch - Raymond James & Associates, Inc.: Okay. That's great color. And Joe, did I miss it – did you guys actually provide a sense of how big the Saudi revenues were in the quarter?

No. No. We have not provided the actual revenue. We don't think we're in a position to do that, but no, I can assure you, excluding Saudi, the business internationally grew very nicely. Lawrence Keusch - Raymond James & Associates, Inc.: Okay. Great. And then just two other ones, just on the R&D side. I think you had indicated in the 2Q that you had expected that to step up in the second half of the year and I know you called out some delays, but how do we think about R&D spending now just going forward as you move I guess through into the fourth quarters, or do you – do you anticipate that ramps up in the fourth quarter?

We do. We do in fact. If you look at our numbers the way we guided, we guided our beat under revenue fully for the year. We guided our earnings beat $0.02 shy for the full year, because we think we'll spend that money we didn't spend in Q3 in R&D in Q4. And as you know R&D is the one place at Masimo that has consistently delivered, so we're going to keep feeding it and we're not going to slow down for R&D going forward. Lawrence Keusch - Raymond James & Associates, Inc.: Okay, that's great. And then last one, Joe. So, on the last call specifically, you talked about when you're asked about M&A, you were talking about looking at markets that were $3 billion to $4 billion in an opportunity, and growing at or near double-digit rates. Obviously, there aren't a tremendous amount of those types of markets that are sitting out there. So, can you give us any updated thoughts around how you might be thinking about, about M&A and directionally where you might be going?

Sure. Sure. I think broadly speaking as you know, we believe we have an amazing company, organically growing it, that's built on very solid foundation of clinically superior products with sensor revenue franchise that kind of makes a business – I don't know if we can get any more fortified from problems unforeseen. But at the same time, as you know over the next five to seven years, we hope to build even a greater company than what's in our own trajectory. And as we look at that, we talk about how we have two goals; not only acquiring the businesses that will hopefully get us to where we want to get to in five to seven years, but also diversifies Massimo, so that in the unexpected case of disruptive technologies in our current space like Kodak had in their space. We're not left with that Kodak moment, I joke about. But the businesses that at this stage we're capable of acquiring without diluting what we already know we have at hand, requires us to have kind of a condition that are hard to find, which you said very well. Big market, growing double digits, yet – be a little bit of a fixer upper so we can afford to buy it without having to dilute our company for it. So having said that, we've had – we're looking constantly at companies that come to us and companies that we go after and in the summer time there are actually a couple of companies I had on my radar that I thought fit that bill. One of those companies we ended up not moving it forward with, as we completed our due diligence we – some things change with our assumptions that we went in and right now we probably have one like the ones I described to you, whether that pans out or not who knows. But we're going to keep looking. But we're also not going to act in haste or buy something that doesn't meet the full parameters that I've laid out for you in the past. So – and that might mean we may not buy anything or buy things like we find in the past, which has been technology tuck-ins and more in line with what we're doing today. Lawrence Keusch - Raymond James & Associates, Inc.: Right. And is it still the right way to think about it that, to the extent you go after something that's a little bit on the larger side. Again you're not really focused in on your current silos if you will that you want to, to use your words, diversify outside of what you've got?

That's correct. But I think the only thing I want to correct for you, right now we're not anticipating getting something our size or that big. Lawrence Keusch - Raymond James & Associates, Inc.: Sure. Sure.

We're looking at buying something that we could turn into our size in time as we optimize our earnings for five years from now. So the parameters are such it's got to be something that we think we can go in and fix and turn it into a shiny beautiful house like the one we have in this neighborhood. But we have to do it within five years, otherwise it won't fit in with our current five-year to seven-year strategy. Lawrence Keusch - Raymond James & Associates, Inc.: Okay. Great. Thanks very much, that was very helpful.

Thank you, Larry.

And our next question comes from the line of Bill Quirk from Piper Jaffray. Your line is now open. William R. Quirk - Piper Jaffray & Co.: Great. Thanks. Good afternoon, everybody. First and foremost, Mark congratulations, and Micah, welcome to Masimo, you picked a good one.

Thank you.

Thanks, Bill.

Thanks, Bill. William R. Quirk - Piper Jaffray & Co.: First question is...

Are on your way to trick or treating, Bill? William R. Quirk - Piper Jaffray & Co.: No. A little later on tonight, Joe, I'll take the kids out.

Okay. William R. Quirk - Piper Jaffray & Co.: First question on U.S. growth, I think I heard correctly that was 4% in the quarter. Correct me if I'm wrong, guys, I think you had a fairly tough comp, although it did look like it slipped a little bit sequentially. Just curious if there's any puts and takes there other than simply the comp?

What do you mean by that, Bill? I'm not sure I understand your question. William R. Quirk - Piper Jaffray & Co.: I think the comment in the prepared remarks was 4% U.S. growth, unless I heard something incorrectly.

Oh, yeah. William R. Quirk - Piper Jaffray & Co.: Whereas I think you posted an 8% number last quarter?

Thank you. Yes, yes. You're asking about our growth in the U.S., the 4%. Yes we did have a tough competitor last year. Because last year, it was the biggest census increase we had seen really for the whole time we've been public. So yeah, that was a tough act to follow. But yeah, nothing on – everything is positive otherwise. William R. Quirk - Piper Jaffray & Co.: Okay. Got it. And then, Joe, you brought up a couple of deal renewals, Kaiser in particular, that you called out. Can you just maybe update us on overall sensor pricing? Is it still trending relatively stable? Obviously, it's been a couple of years since we've seen any issues around refurbished sensors and such. I'm just curious what the overall update is there? Thanks.

Sure. Yes. We are seeing price stability. As you may know when we launched Masimo SET, it was 30 to 100 times better than the competition, yet we offered it at 30% below the competition. And as time went forward, the competition began matching, and then they began dropping. For while we were matching. We finally said, hey, wait a minute, stop here. We have a very valuable clinical tool with Masimo SET oximetry, it's been proven to improve care and reduce cost of care. And there's a fair price that we think pulse oximetry from Masimo should be priced at. We set that threshold. We've not dropped from that line. And as a result, we instituted that about three, four years ago even though our competition as they compete against us in accounts, not the ones they're not competing for, but as they compete with us in accounts, they sometimes offer prices that are maybe 30% to 40% below ours. And yet we win the business due to the clinical superiority of our technology as well as the service that we give. William R. Quirk - Piper Jaffray & Co.: Got it. Thank you. And then last one for me is on Philips. I think Tao asked on it earlier. But we've seen a couple of quarters now, above 50,000 sockets in the quarter. Officially this is ahead of the launch with Philips. And so help us just think, I guess, directionally, guys, once we formally get into the partnership in the fourth quarter, could we expect to see that socket number climb even higher? Thanks a lot.

Sure. Sure. And you're right, Bill. I think we are ahead of where we expected to be volume wise with Philips. But compared to our other OEMs, and now that we have a similar relationship with Philips like the other OEMs, they're still a fraction of where they need to be or they should be naturally, not because of contract, just because of how customers order. So because of that we think there's much more to come. Because we're ahead of schedule, I'm not going to say you're going to see the same kind of growth next year. But I can just tell you, we think overall as we march from 30,000 to 40,000 and now to 50,000, we'll be making the march to 60,000 boards a quarter over time. William R. Quirk - Piper Jaffray & Co.: Got it. Thank you very much.

Thank you, Bill. I think we have one last time for question before I have to go trick or treating so – with my kids. So one last question.

And our next question comes from Brian Weinstein with William Blair. Your line is now open. Andrew Brackmann - William Blair & Co. LLC: Hey, guys. This is actually Andrew Brackmann on for Brian today. A couple questions to start.

Hi, Andrew. Andrew Brackmann - William Blair & Co. LLC: Hey. So you guys said capnography, O3, SedLine and Root were up 34% in the quarter. First, how big is that in dollar terms? And what's the outlook for those businesses? And then similarly, what is the outlook for the SpHb business with that being up 72%? Thanks.

Sure. So, we haven't given out the exact numbers for those but the outlook for organ oximetry or brain function monitoring and capnography is somewhere between $500 million to $1 billion a year. So – and we are pretty much just starting in those businesses. So we have long ways to go. And then as far as hemoglobin, hemoglobin is a new – continuous, noninvasive hemoglobin is a new missionary work that we're after, we've been at it for 10 years now and while we're happy with what we've seen, we think this is probably less than a couple percent compared to what it needs to be. So it's got much, much more to go. We hope one day hemoglobin will be about a $1 billion market. Andrew Brackmann - William Blair & Co. LLC: Got it. Thanks. And then I just wanted to follow up on the M&A commentary. It sounds like you guys would be willing to do a dilutive deal. First, am I hearing this correctly? And then would you be able to quantify how much solution you'd be willing to take for a deal?

Yes. You're right. We are willing if necessary to do a dilutive deal as long as we believe it'll be a very positive deal for us three or four years down the line from an earnings perspective. And as far as how dilutive, we don't mind playing with our cash flow, but we don't want to go much beyond that and of course not all of it, because we have our own operating business to go and we don't want to shock the system too much. But, yes, we are willing to be buying like a private company does, thinking long-term rather than short-term. Andrew Brackmann - William Blair & Co. LLC: Got it. And then just one personnel question associated with that. Would you mind talking who internally is running your M&A process? Thanks.

Yeah, today is a team of people led by our G.C. Tom McClenahan, Eli Kammerman and Paul Jansen and Eli Kammerman and Paul Jansen. We are actually looking for Head of M&A. And we're – we're in the interviewing process. Andrew Brackmann - William Blair & Co. LLC: Thanks, guys.

Thank you so much all for joining us. Our apologies that we did it on Halloween. I hope you guys will have a great evening with yourselves and your families. Thank you so much for joining us.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone have a wonderful day.