Good afternoon, ladies and gentlemen, and welcome to Masimo First Quarter 2020 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. I'm pleased to introduce Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations.

Thank you and hello, everyone. Joining me today are Chairman and CEO, Joe Kiani; and Executive Vice President of Finance and Chief Financial Officer, Micah Young. This call will contain forward-looking statements which reflect Masimo's current judgment, including certain of our expectations regarding trends in fiscal 2020 non-GAAP non-operating income. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Risk factors that could cause our actual results to differ materially from our projections and forecasts are discussed in detail in our periodic filings with the SEC. You will find these in the Investor Relations section of our website. Also this call will include a discussion of certain financial measures that are not calculated in accordance with generally accepted accounting principles, or GAAP. We generally refer to these as non-GAAP financial measures. In addition to GAAP results, these non-GAAP financial measures are intended to provide additional information to enable investors to assess the company's operating results in the same way management assesses such results. Management uses non-GAAP measures to budget, evaluate and measure the company's performance and sees these results as an indicator of the company's ongoing business performance. The company believes that these non-GAAP financial measures increase transparency and better reflect the underlying financial performance of the business. Reconciliation of these measures to the most directly comparable GAAP financial measures are included within the earnings release and supplementary financial information on our website. Investors should consider all of our statements today, together with our reports filed with the SEC, including our most recent Form 10-K and 10-Q, in order to make informed investment decisions. In addition to the earnings release issued today, we have posted a quarterly earnings presentation within the Investor Relations section of our website to supplement the content we will be covering this afternoon. I'll now pass the call to Joe Kiani.

Thank you, Eli. Good afternoon and thank you for joining us for Masimo's first quarter 2020 earnings call. During the past few months, we witnessed extremely challenging situations for patients and healthcare providers around the world related to the COVID-19 pandemic. We've also witnessed incredible leadership, resilience and courage by many people in many walks of life, but no group more than the frontline healthcare providers: our doctors, nurses, respiratory therapists, EMS professionals and others. They are the real heroes. On behalf of the entire Masimo team I'd like to take a moment and thank them. COVID-19 is extremely contagious and damages the lungs. At no time has the value of our first invention SET pulse oximetry and our continued innovation been more apparent. When we founded Masimo 31 years ago, our objective was to address a major challenge with pulse oximetry, to make it not just a fair weather friend, as it had been, but also a foul weather friend. And I hope this will be the foulest weather we will know in our lifetimes. And we delivered. Massimo SET has been the foul weather friend for millions of clinicians and patients, not just today, but for many years. Before we invent this single extraction technology, pulse oximetry's false alarm rates were 70% to 90% outside of the operating room. And on the sickest patients too often pulse oximeters didn't work at all. It was Dr. Swan who first called conventional pulse oximeters as fair weather friend. Outside the areas where clinicians were continuously watching the patients and the pulse oximeters -- by the way, the most worn out button on pulse oximeters were the silence alarm button due to all of the false alarms, clinicians couldn't use pulse oximeters in other areas effectively due to the excessive false…

Thank you Joe and good afternoon everyone. I hope that you're staying safe and healthy during this challenging time. As a reminder the financial measures I'll be covering today will be primarily on a non-GAAP basis, unless noted otherwise. Our GAAP results and reconciliations to GAAP can be found in today's earnings release as well as the Investor Relations section of our website. For the first quarter our product revenues were $269.6 million reflecting growth of 16.9% or 17.5% growth on a constant currency basis. During the quarter we shipped 72,100 noninvasive technology boards and monitors which reflects growth of 13% over the prior year period. Our non-GAAP gross margin for the first quarter increased 360 basis points to 69% compared to 65.4% in the prior year period. The year-over-year improvement was due to a stronger mix of sensor revenues which have substantially higher margins than our technology boards and monitoring equipment. Also, we continue to see positive results from the cost reduction activities we've implemented to improve margins. Our non-GAAP selling, general and administrative expenses as a percentage of product revenue increased 50 basis points to 32.6% compared to 32.1% in the prior year quarter. The higher SG&A spend was primarily driven by sales force expansion, stock-based compensation expense, charitable contributions and incremental investment related to the iSirona Connected Care acquisition. And our non-GAAP research and development expenses as a percentage of product revenue increased 80 basis points to reach 10.1% compared to 9.3% in the same quarter last year. The higher R&D spend was primarily due to increased staffing and project-related costs and incremental investment related to the iSirona Connected Care acquisition. As a result, our non-GAAP operating margin increased 230 basis points to reach 26.3% compared to 24% in the prior year period. Moving further down the…

Thank you, Micah. In partnership with our customers and our greater community, we have focused our entire organization on addressing the COVID-19 pandemic, so that caregivers and patients have access to the best solutions available to improve care and outcomes. Our strength in patient safety technologies, signal processing, blood management technology, sensors, software and hardware development and high-volume manufacturing are being combined and leveraged with our ability to rapidly develop new solutions for this pandemic. We've been partnering with our customers to assist them in any way we can to relieve the stress on the health care system, while enhancing their ability to ensure quality care. We've undertaken many actions recently to help our customers and patients during this pandemic, including creating Masimo SafetyNet, a wearable set pulse oximetry and respiration rate and effort monitoring and patient care management solution to aid COVID-19 surge response efforts in remote locations such as the home; offering COVID-19 product kits, which include Root, Rad-97, Radius PPG and Patient SafetyNet enabling our monitors and wireless sensors to better support clinicians in managing the surge of COVID-19 patients in the hospital settings; offering licenses at no additional charge for rainbow non-invasive blood constituent monitoring to help manage hemoglobin given the limited blood supplies during this pandemic. One very helpful use model, given the contagious nature of COVID-19 and insufficient availability of PPE using our Radius PPG tetherless wireless sensor many hospitals moved their patient monitoring equipment outside of the patient's room and into the hallway, avoiding the need for caregivers to enter a patient's room to read the values on the monitor. This change reduced clinicians' exposure to infectious patients and reduces risks for health care staff, while also extending supplies of protective masks and gowns. Together with the new capital equipment, we have sold…

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

Hi, good afternoon everyone. So, I guess, the first question that I wanted to ask was -- I recognize the challenges in trying to ascertain what is preparedness orders or stocking. So, I guess, the first part of the question really is have you been able to wrap your arms around what you potentially think the impact of order activity that could be related to stocking either in the 1Q or 2Q yet?

Well, unfortunately not and that's why it's hard for us to give you projections on the future. As I mentioned, to-date, we have about 220,000 technology boards and monitors either already shipped or sold to be shipped. And we think for the year the number that we have so far that is basically demand forecast, mainly by our OEMS, we're not even putting our own expected sales of our monitors but the numbers could hit over 550,000 for the year. The only thing we know of those numbers with some certainty is that 100,000 of them are for ventilators with our technology in them for monitoring and those have been ordered by the military. Those are most likely going to be used for the surge and then stored. So, the 550,000 let's say for the year, we know 100,000 is unlikely to be used continuously in the future. The other 450,000, assuming it materializes too, we don't know. We don't know if they're going to be used. In less clinical settings as you know a small fraction of the postsurgical wards have monitors on them right now for continuous monitoring. So, what may occur is some of this excess monitors they're buying might end up leading to finally closing the gap for continuous monitoring in the wards or they may get put into storage. We don't know. And that's why it's so hard for us Larry to give you a forecast because we don't know.

Okay. That -- I totally understand. And that color is really helpful. I think you said if I caught this correctly that in the 2Q to-date, you're seeing U.S. sensors down about 12% and OUS, I think if I caught it correctly, up 95%. So, A, first, are those numbers accurate which I jotted down? And secondly, how do we think about -- again the dynamics of what's going on in the U.S. versus OUS?

Those numbers are accurate. And I think what's happening is that given that elective surgeries for the most part around the world have been put on hold, you're seeing a reduction in natural sensor volume that you're seeing in the U.S. which has been predominantly buying single-patient use sensors to minimize infections from patient to patient and clinicians. What -- the reason there's a growth outside the U.S. is outside the neonatal ICU most of the world use reusable sensors. But the COVID-19 has made a lot of hospitals switch to disposable sensors. Whether they'll continue using disposables after the COVID-19 pandemic is over we don't know. But for now, there's been a large migration to single-patient use sensors outside of the U.S.

Okay, perfect. And then last one for me. Just again on the program to help hospitals with managing their blood inventories for transfusion and the ability to utilize SpHb. Maybe just remind us again how many of the installed base is enabled or I should say ready for rainbow usage? How much is actually being used currently? And are there any observations albeit I recognize the time line is short in terms of interest from customers in getting going on SpHb? I know that you had a really strong fourth quarter contracting period, so just curious how that's all playing out? Thank you.

Sure. Sure. The majority is rainbow ready. We've been shipping rainbow-ready products since 2006 and except for customers that require very low power and a very small size they have all transitioned to rainbow for the most part. So, that's your first -- the first answer. So the majority is rainbow ready. Secondly, as far as the whole business of improving our rainbow sensor volume and rainbow revenues this -- part of the answer to your first question, those hospital contracts at the end of last year, some of them we've not been able to implement due to the lockdown of hospitals. That's the bad news. The good news is, places that were already using or had rainbow-ready equipment have quickly switched to it and are using it and in fact our rainbow sensor volume is up 12% and we're seeing a continuous increase in that adoption rate.

Okay. Very good. Thank you very much. Appreciate it.

Thank you.

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

Good afternoon, Joe. Hi everybody.

Hi.

Hi, Rick.

Joe, maybe just to start off with your expansive comments on Masimo SafetyNet, your wearable device, I mean clearly this story has evolved rapidly from a technology point of view. From an opportunity point of view, you're highlighting the number of hospitals signed up to the number of hospitals in the process of deploying. Can you help us think through in a little more detail, how that's going to evolve from here? And how we think about the incremental revenue either I guess the opportunity -- both the opportunity and the potential let's say 12 months run rate from this -- from SafetyNet acceleration? I'm not sure exactly how to phrase it, but it just seems like this is a big incremental negative that's coming sooner and more pervasively for the benefit of hospitals and patients obviously as well?

Well Rick, if we could have it our way, we wouldn't have this pandemic, no matter how it’s positively impacted our trajectory. Overall, it’s a net big negative. However, this pandemic really changed the definition of telehealth from a cardiac-based or diabetes-based thinking to a respiratory-based thinking. And our customers tell us there's nobody out there that has what we have. We're the only product they can trust. We're the only real product everything else, its wafer wear. And that is reflective of how fast people are taking up this technology and frankly how fast, we're able to get even FDA to allow us to begin market it. We were sitting in a staff meeting where we started thinking you know what, this product we made for opioid safety could really help with the surge. Let's contact the FDA and see if they have appetite to work with us to release it before we get the clearance for opioid SafetyNet. And within two hours from the time, our team contacted FDA even though the person actually was out on vacation from what I understand he responded. And literally a week after that also with the help from Dr. Peter Pronovost, the FDA decided to allow us to market it. And we at that time began the pilot at UH and St. Luke's and I'd just say the rest is history. But what's going to come after COVID-19 is hopefully opioid safety. That was the intention of the product. We see a continued demand for monitoring the lung regardless of COVID-19. So, obviously we're going to go and pursue that. But I think the biggest opportunity still remains safety of people taking opioids at home and we're still working with the FDA to clear it for that indication. But what's been incredibly useful while we've been helping people, they've been helping us because they have helped us now under the supervision of nurses and doctors wring out all the wrinkles of this technology or later when people are just using it on their own without someone 24/7 monitoring them.

Yeah. Let me come at this another way. I mean, obviously this is a complicated year. It's complicated to give guidance. I understand why you pulled it. But I wanted to think about two things with you if I could. One, if we think about -- just a big picture question if we think about Masimo's long-established 8% to 10% revenue growth trajectory with potential upsides from Hospital Automation and opioid safety given the environment, given these new opportunities again ex the noise of this extraordinary period and maybe a period that will follow we don't know that could be softer, do you think -- are you thinking about your -- Masimo's long-term growth rate differently? Or more -- should we think about it, Joe, Micah more optimistically now because of some of these new opportunities?

Well, it's interesting you said that Rick. And I wish I could get into -- what do you call that place where people catholics go to get -- to ask for forgiveness what do you call that place?

Confessional? Confessional.

Confessional, yes. I feel I'm in there, but I know we're not speaking just one-on-one and we can't even if we could. But in the middle of trying to deal with COVID-19, we started to quickly realize we got to think about our long-term plans and what do they all mean. And kudos to the team we spent an evening so late hours thinking through that. And without giving you numbers, we came away very optimistic about our future. Taking away any one-time revenues, if we can ever figure out what those are for COVID-19, yes, we see a brighter future than we did before COVID-19. Now that doesn't include what we don't know today. We don't know what will COVID-19 do and how will it end. We're looking at 1918 as our best yard stick. So we're hoping by this time next year it will be over with. I'm hoping 100 years of science and progress, we don't have to follow the same trajectory, but it doesn't seem to be any better yet. So assuming, it's no worse than that, yes, I think we're going to come out this stronger, with a better future than we had going into it.

Okay. And one last big picture, each of these questions are sort of big picture questions a little bit Joe, I apologize. But I want to make sure I understood. I mean, obviously Masimo is impacted on one side in one aspect by the slowdown in elective procedures. Hospitals across the United States are doing fewer non-COVID non-emergent procedures clearly. Less anesthesia is being administered. Can you quantify, can you help us think through that impact on the business in the first quarter? Or that possible impact that drag that's likely be in place in April, May, June as we start to think about a potential reversal I suppose at some point as we go the other way with procedures and we recover?

Yes. From what I hear from many of my peers who have products that are more correlated to the number of elective procedures, elective procedures may be down between 50% to 75% right now. And the irony is that because of that hard-working clinicians that are putting their lives in danger are getting paid less and some are being furloughed, which just drives me insane, because we expect them to run towards the problem and yet we're letting them go when we think we don't need them, which is different topic. But I got to say those same people are thinking that elective procedures are going to come back in June, July time frame maybe by 50% to normal capacity and then maybe by August, September 75% to 100%. And if that were to happen then again we'll probably benefit from that, because there's a pent-up demand for elective procedures. What we don't know is whatever hospitals have purchased for inventory in case they needed given what they saw in shortages from masks and gowns and I guess toilet papers, we don't know if hospitals for a while are going to hold on to that inventory, because they're going to always feel like a bad day might come or if they'll start using up that inventory. And depending how they move, you'll see either an immediate response to our revenue increase from elective surgeries or there will be a period of digestion of what they bought. But most people when I talk to them they think that hospitals are going to hold on to their inventory for quite a while, especially because everybody assumes we're going to get a second wave in the fall time. So to answer your question, we expect there will be increased sensor volume demand on us as soon as elective procedures turn back on again.

Got it. Thank you, sir.

Thank you, Rick.

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

Hi. Thank you for taking the question. So I wanted to ask a couple on just what you're hearing from your customers about their utilization during this time, just to better assess how much of this is kind of here to stay. Are you seeing patterns of monitoring whether it's with the disposable sensors or the remote solutions more broadly across the hospital with COVID patients and without?

Would you please repeat your question? I'm not sure, I got it.

Yes. I'm trying to understand, if you're seeing utilization that you can confirm either through anecdotes or through your data that would help you understand better whether the monitoring patterns post-COVID could actually change and be more broad?

I see. Yes. From what I'm seeing, I think it will be more broad. I believe there was a trend already for hospitals to be -- become critical care beds only. And I think COVID-19, if anything has made that more concrete, more short term. So yes I think there will be a bigger remote broad monitoring outside the hospitals and hospitals will more focus on the patients who need critical care type of care.

Okay. Okay. And then, I guess you mentioned that there's this 100,000 boards ordered by the government. When you look at the other boards that you mentioned, I think you said 550,000 which is your current forecast for the year and you had 150,000 in the current backlog. So can you talk a little about what you're assuming to get from orders you have to date to the 550,000?

Sure. Sure. First of all, we shipped 72,000 boards in Q1. And by this call, we had 151,000 boards I believe that were ordered that are not cancelable that we will be shipping and some have already shipped. So that's 220,000 roughly of the 550,000. The other 230,000 are demand forecast that we have received from our OEMs, which they have the right today to cancel them 90 days before shipments, so some of that delta is more than 90 days out, so they could cancel them. But I also mentioned, I have not included in that 550,000 any of our direct shipments of Roots, Rad-97s, Radical-7s and so forth. So I'm only giving you what is currently we have demand forecast.

I see. Okay. All right. That's really helpful. And then well in terms of understanding whether things are being overordered, have you seen any cancellations to date?

No. None. If any very minor stuff. Not anything major that I know of.

Okay, cool. Thanks for the feedback. I'll stop there.

Thank you.

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

Hi. Thanks for taking my questions. I guess I just wanted to ask about the rainbow discount that you're offering. So can you maybe comment on how that's being received? And how many incremental cases of adoption you've seen as a result of that?

Yes. We're offering the rainbow software license, which could be upwards of about $8000 of value during COVID-19 without charge. And we're selling the sensors at a discounted price to our lowest prices we've sold. And I'm sorry, I don't have the numbers in front of me otherwise I'd give it to you, but it's significantly less than most hospitals are paying for rainbow today. Now after the COVID-19 is over, we intend to take away the licenses unless the customers want to pay for them and keep them.

And can you quantify at all the number of hospitals or customers you've seen opt to turn those on given the discount?

Well I mentioned earlier our sensor volumes up 12%, but our revenue has been up 16%. And I think from a number of hospitals, I believe about 15 hospitals have already taken advantage of this offer.

Okay. Thanks. And then just your free cash flow was -- looked a little low relative to where you were last year. It looks like your CapEx was pretty high at $37 million. So is that related to the Connected Care acquisition or something?

No. It's relate -- this is Micah. It's related to some of the expansions we've made into our facilities. So we're -- during the quarter, as Joe mentioned, we've been making some investments. We're expanding facilities in Mexico also our footprint in Switzerland and Irvine. So just as the business is growing there's opportunity for us to expand our footprint there.

Okay. Make sense. Thank you.

Thank you.

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

Hi, this is Iris on for Ravi. Thanks for taking my question. So we have a few questions on the Patient SafetyNet. So in terms of the reimbursement environment for COVID-19 use, should we expect those would be cash paid? Or is it -- are those under reimbursement for now? Have you had any discussion with the FDA on perhaps whether you'll be getting a breakthrough technology status that would give you a faster reimbursement? Just any color on that would be helpful. Thank you.

Okay. Well, currently hospitals buy those from us. As far as what they're doing for reimbursement we've heard various things. Some are seeking it. Some are just mixing it with their DRGs. So we don't have a concrete answer for you on reimbursement yet.

Okay. And then when we think about the launch, do you plan to launch it in your existing customers first and then others? What's the plan there? Can you tell us what, kind of, demand that you are seeing in terms of -- in the U.S. versus other regions? And then you also mentioned that there are about -- there are over 600 hospitals in the pipeline. Just can you tell us a little bit about how much of those -- so what that means when you say these hospitals are in the pipeline? What's the process of enrolling the hospital? And maybe perhaps how long is the process?

Well, on the interest when we held our webinar, we had over 2,000 clinicians join us for the webinar for Masimo SafetyNet with University Hospitals' clinical team, representing 70 countries roughly and over 1,200 institutions. As for the earlier question of is it only being offered to our existing customers? No, we're offering it to anyone who can use it. Some of our competitors' customers have already begun using it. Some of them unfortunately are under restricted contracts, which may prohibit them. But we are trying to offer to anyone who can use it.

Okay. And how long is the process for you to onboard these hospitals?

It is fairly quick. It's really easy to implement with less -- literally less than one hour. We can load software for them for the central monitoring dashboard, wherever they want, whether they want in a hospital on a remote setting. And we can set them up with a customized window for their patients to them, give their patients the app and the kits to go home with.

Okay. That's helpful. In terms of pricing and the revenue model can you provide a little bit more color on that? How should we think of the pricing? Is it -- perhaps are you giving -- are you charging any discount for that? Just any color would be helpful.

Sure. The kit I mentioned on the phone, which had two sensors in it that would last eight days with a reusable part that we hope gets returned because that part can be used for a long time, but even with that in there and the app and everything it's $150 per kit and we're not discounting it. That's the price. And so far over 10,000 kits have been purchased.

Okay. That's helpful. Thank you.

You're welcome.

Your last question comes from the line of Marie Thibault from BTIG. Your line is open.

Hi, Masimo team thanks for taking the question, and thanks for the good work you're doing in this crisis.

Thank you.

A quick one on some of the shipments. You have 72,000 in this quarter and over 150,000 already in demand right now. Do you have any feeling on the number of shipments you can do per quarter in terms of capacity? And would you remind us historically what the breakdown is usually between your direct and OEM business when it comes to board shipments?

Sure, sure. First of all, our overall quarterly shipments are about 60,000 boards and monitors a year. And that's typically 80% is OEM, 20% is direct. As you can see in April already, not the full quarter we're over 150,000 boards and monitors. And I believe right now though that is skewed heavily towards OEMs. The 150,000 number is probably more like 90/10. I can get you maybe before the end of the call more precise data if we have it, but that's my understanding. As far as what we forecast, we can't. That's why I gave you the numbers that's in the demand forecast from our OEMs right now minus even our own normal monitor shipments quarterly.

Absolutely. Understood. And no capacity in terms of how much you could ship the quarter at this point?

Not -- so I don't want to jinx ourselves, but no, we've been able to meet the demand. We really did some incredibly creative things, but more importantly the team executed flawlessly. And no, so far so good.

Okay. Great. Last question for you is on the TNI Medical acquisition. You mentioned that it's cleared for both home and hospital use. I'm curious whether you'd plan to deploy that into the home during this pandemic or if it's too soon to -- logistically to get that done?

By the way I think I got some more granular data. I just want to answer your question. I gave 155,000 boards as of -- I think last week -- end of last week. If I want to answer your question about direct, I've got to let you know that total as of today the number is 166,500 boards and monitors of which 27,500 is direct our own products. So by the way, don't get used to us giving you this kind of granularity. You're getting it so long as we can't give you a forecast.

Okay. Hot off the presses. Thank you for that.

Hot off the presses. Would you please repeat your last question?

Yes. Yes of course. It was on TNI Medical. You mentioned clearances for both hospital and home use. I'm curious, if it's something you'd be able to deploy into the home during this pandemic or if logistically that's too soon?

Yes, we are planning to deploy it in the home during this pandemic worldwide. And I want you to know that we know very little about this world. This is a new world for us. So unlike our -- everything else we talked about where I can give you information with a lot of -- I guess 30 years of experience, this one I have very little. What we know about this product is that, it seems to be really good for the patient and it doesn't cause the same amount of damage to the lungs. So if you can avoid a full invasive mechanical ventilator, you're much better off. We also know that there's worries of aerosol leaking out with a noninvasive ventilator which may raise the risk to a healthcare providers, who are in the setting with the patient. So for that reason -- and trust me, we're getting advice from a lot of people telling us no, no that's not the case. It's going to be fine. But anyway, we want to go cautiously for that reason. We're not promoting this product aggressively to anybody. We're taking orders as it comes. And until get scientific evidence that tells us one way or what are the do for clinicians as well as patients.

Perfect. Thank you.

Welcome. Thank you. Well thank you so much all for joining. As Micah said, we hope you're all well. We hope you stay well. And we look forward to a time where we can predict the future a little bit better. Thank you. Have a wonderful, wonderful summer.

Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.