Good afternoon, ladies and gentlemen, and welcome to the Masimo Third Quarter 2025 Earnings Conference Call. The company's press release is available at www.masimo.com. [Operator Instructions] 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 CEO, Katie Szyman; and CFO, Micah Young. Before we begin, I would like to inform you that this call will contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in our periodic filings with the SEC. 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 or adjusted 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. Furthermore, these non-GAAP financial measures reflect the continuing operations of Masimo's Healthcare business and includes Sound United business, which is reported [Technical Difficulty] operations for both current and historical reporting periods. Therefore, the financial measures we will be covering today will be primarily on a non-GAAP basis unless noted otherwise. Reconciliation of these measures to the most directly comparable GAAP financial measures are included within the earnings release, earnings presentation 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. I'll now pass the call to Katie Szyman.

Thank you, Eli, and good afternoon, everyone. I just want to do a quick speaker check because we're getting feedback that there is a big echo. Is there any possibility that the echo [Technical Difficulty].

I'm not log to the call...

As I completed my first 9 months at Masimo this week, we are pleased to share that once again, we delivered strong results. Our revenue grew 8% in the quarter, driven by strong underlying demand for our Innovative Technology. We also drove 450 basis points of operating margin expansion and we increased adjusted earnings per share by 38% year-over-year. The strength in our margin [Technical Difficulty] is a direct result of higher revenue and the cost efficiencies and product [Technical Difficulty] over the past year. Now let me highlight some exciting [Technical Difficulty] and strong execution from our [Technical Difficulty] this quarter. First, we closed the sale of Sound United to Harman in September, marking a key milestone in our [Technical Difficulty]. Second, we announced the expansion of our strategic partnership with Philips in early September, marking a key milestone in our collaboration. Within the [Technical Difficulty], we remain significantly underpenetrated relative to our overall share [Technical Difficulty] in the market and [Technical Difficulty] represents a compelling [Technical Difficulty]. We expect that the expansion of our share [ position ] over the next 5 years within the [Technical Difficulty] will have the potential to be even greater than what we have seen over the previous 5 years. And [Technical Difficulty] continues to strengthen. This new agreement advances our joint [Technical Difficulty] commitment to innovation and delivering enhanced value to customers and the broader industry. [Technical Difficulty]. I want to call out that our competitor studies have been performed mostly on healthy patients where it's easier to obtain positive results. We are highly encouraged by the 0 undetected hypoxemia event rate seen in this study alongside spot-on accuracy of less than 1% median bias among critically ill adult patients with both dark and light skin under the most challenging real-world circumstances imaginable. We are looking forward to publication of the fully completed INSPIRE study next year alongside other similar prospective real-world skin tone accuracy studies for neonates and separately for pediatric patients. We believe this new data clearly demonstrates our superior performance for all patients regardless of skin tone.

We're going to try to disconnect and reconnect. It's good.

Sales teams are armed with this new data to continue to drive growth into new accounts. Overall, we're confident in our technology's performance where accuracy matters most at the bedside during motion and low perfusion in the setting of critical illness and procedural care. Now let me recap our strategic and financial goals and the progress we are making. We continue to invest in our core health care business to position for strong, sustainable long-term growth. Specifically, we are focused on driving 3 waves of growth ahead. First, elevating commercial excellence; second, accelerating intelligent monitoring; and third, innovating wearables. In terms of commercial excellence, we are continuing to leverage our leadership position in pulse oximetry to broaden our impact on patients across other advanced monitoring categories. We are consistently winning broader contracts as evidenced by the growth we are seeing in advanced monitoring. Recently, we had a big win for capnography with one of our key accounts in the Southeast region that will drive significant capnography growth within the territory. Collaborations like these exemplify our ability to leverage our portfolio to drive growth and deepen relationships with customers that will create more diversified revenue streams over time. In our second wave, accelerating intelligent monitoring, we are very focused on using AI and machine learning to upgrade our sensors and create next-gen monitors. A key part of this is taking the incredibly advanced algorithms the team had developed for use outside the hospital and redeploying these into sensors for use inside hospitals. One specific example we are working on is to leverage our de novo grant for opioid halo that was cleared in April 2023 for detection of opioid-induced respiratory depression to create a hospital solution that can be integrated into our next-generation of smart sensors and AI-enabled patient monitors that…

Thank you, Katie, and good afternoon, everyone. For the third quarter, we once again delivered strong results with revenue growth of 8%, EPS rising 38% and operating cash flow of $57 million. Healthcare revenue was $371 million, representing 8% growth. We continue to see strong underlying demand trends as evidenced by Trace data, sales pull-through and other metrics we track. Growth rates this quarter are impacted by unusual year-over-year comparison. Consumables grew 1% this quarter compared to a growth rate of 20% in the third quarter of 2024. Capital equipment and other revenues grew 67% this quarter compared to a decline of 33% last year. When looked at on a 2-year or on a multiyear basis, compound annual growth rates in consumables continue to be double digits and growth rates in capital are low to mid-single digits. The incremental value of new contracts secured in the third quarter reached $124 million, marking a robust year-over-year increase of 48%. As we've talked about this before, it's highly dependent on the timing of large contracts that come up for bid throughout each year. This achievement represents the strongest third quarter contracting performance in our company's history, fueled by the outstanding results delivered by our U.S. commercial team. Notably, as of the end of the third quarter, the amount of unrecognized contract revenue expected to be realized within the next 12 months was $507 million, representing a year-over-year increase of 17%. As a reminder, contract-related shipments account for approximately 1/3 of our overall revenue. This quarter, we shipped 66,000 technology boards and monitors, reflecting a strong increase of 8% compared to the 61,000 drivers shipped in the same period last year. This growth underscores the sustained and accelerating demand for our products, which continues to exceed our initial forecast for the year. Moving…

[Operator Instructions] Your first question comes from the line of Rick Wise with Stifel.

Great to see the strong performance this quarter. Maybe just it's hard to not start off with the outperformance and the resulting guidance. How do we think about the rest of the year and the potential for -- I mean, what can I say for further outperformance in the short run? What would the drivers be some of the new contracts or new product launches? And maybe -- I know it's early to ask about '26. It's hard to resist. How do we envision this setting us up for '26?

Yes. Thank you, Rick. First, I'll start off with -- we're not going to give -- we typically don't give guidance on '26 or the next year on the third quarter call. What I can kind of hit on, and we'll talk about that more later in the year. What I can hit on is where we see the strength in our business. Number one is in the contracting that's picked up in Q3. We expect a strong finish in Q4 to close out the year. We expect that's going to drive a good acceleration in our consumable growth. We talked about unusual comps being in the first or in the second and third quarter this year, and those comps normalize throughout the year. So we expect a very strong finish in the fourth quarter with increased shipments in consumables. And that will set us up well as we move into next year.

And as you think about the profitability side, part of it is due to the share buybacks, right...

Yes. So if you look at the change in EPS guidance, as I laid out, we're up in the guide at the midpoint by $0.15. $0.08 is coming from share buybacks, but we have about $0.05 coming from the operational improvements that we've been making. We continue to see strong expansion of margins this year. A lot of that was throughout the past year, we've done a lot of optimization of costs, becoming more efficient with our cost structure, and that's paying dividends this year.

Great. And just as a follow-up, Katie, obviously, thank you for clearly laying out the 3 priority areas. But just to take one of them, you've been very focused on elevating commercial excellence or enhancing commercial excellence at Masimo. Last quarter or you've recently made multiple hires, realigned the sales force structure to be more regionally focused rather than specialized by product. Just maybe at a high level, I know we'll hear more in early December, but where are we in that process? Or are you pleased with where you are? How much more to go? What's the impact going to be? When are we going to see it? Aside from that, I have no questions.

Thanks a lot, Rick. So yes, like how you said that, that essentially we focus on enhancing and elevating and it's really focused on our specialty categories to give them more resources to match our success in pulse oximetry. So you see more of a partnership of our pulse oximetry top sales force being able to help pull through the reps in the specialty categories. And we've made strategic investments in capnography, hemodynamics and brain monitoring to give those platforms similar commercial horsepower to what we have in pulse oximetry. And so the question about the timing, we're starting to see small wins, but it's something with kind of the length of our sales cycle here at Masimo. You'll see it really begin to pick up more and more momentum into next year.

Your next question comes from the line of Jason Bednar with Piper Sandler.

Congrats on a good quarter here. Katie, I want to start with you and I hope you can expand on the comments you made of the share gains in Philips. I think you said being greater over the next 5 years versus what you've seen in the last 5 years. Help us with maybe where you're currently at with Philips share and/or what kind of share gain you've seen in the last 5 years just so we have some kind of baseline. And don't get me wrong, I really like the confidence, but can you give us a bit more on what gives you that confidence to make that statement? I'm assuming this is coming from some of those advanced parameters, maybe building off the question you were just -- or the answer you just gave to Rick, but any additional color you can provide here would be appreciated.

Yes. Thanks, Jason, for the question. So with -- we have a duty of confidentiality with Philips, and so we can't disclose our specific position in their installed base. But what we do know is that when the first agreement was signed back in 2016, Masimo had relatively almost 0, very, very low market share in the Philips installed base. And so we've kind of gotten to a runway, but we still see ourselves as disproportionately low on a relative market share position versus what we are kind of for the whole market, right? So if you think about us as globally in the 50-ish, 50-plus percent market share globally, we're still under-indexed in the Philips installed base, and that's what we see as this opportunity to run in the installed base.

Okay. And I'll ask one follow-up and then a separate question. When you answered that question, I think you emphasized globally. Is that the opportunity more so than advanced parameters with Philips? And then Micah, a question for you here. And sorry, this might be a little long, but I apologize in advance. So the incremental contract figure was really strong. It seems like you're on pace for a normal year or maybe a better-than-normal year for that metric. But you've been focusing this all on the unrecognized contract revenue figure that's going to be recognized over the next 12 months. That was up 17%. I'm sure you're going to say mid-teens plus is a bit hotter than where we should be -- what we should be thinking about for next year. So -- but as we try to aggregate and dissect these data points that we all now have, how would you counsel us to interpret the trend line in that unrecognized contract revenue? Does that give you confidence in delivering on your revenue growth objectives as we look out over the next couple of years?

Yes. Let me start there with the contract revenue. If you -- as a reminder, I mean, 1/3 of our revenues are contracted and come through in shipments of those contracts. So that's important to understand. So we're getting good growth, and that's really coming through in our [indiscernible] incremental that's feeding into the growth that we're seeing in our -- what's going to be recognized within the next year. And as you know, I mean, it's all due to timing, size, duration of contracts, so that can ebb and flow. But we are seeing very good strength. And I think that's going to be a good driver for us. It's not to indicate that our overall revenues grow at that level, but it's good strength coming from the contract wins we're getting this year.

And just a follow-up question on the...

Yes. Jason, on the relative installed base, I would say it's hard to be specific. I would say it's about equal between those 2 categories.

Your next question comes from the line of Michael Polark with Wolfe.

I have a question about the third quarter performance, 1% consumables growth. You called out a tough comparison. Capital was quite a bit better from a growth perspective. Can you just remind us on the third quarter last year, what was unusual about that compare and kind of maybe reassure us that the consumables line specifically will return to a more normal rate of Masimo growth in the quarter and year ahead.

Yes. Thanks, Mike. So one place to start would be inpatient admission growth last year was running at about 4%. One thing we talked about through the first 3 quarters of last year is we kept seeing a stepped up consumer revenue, and that was being driven by higher ordering patterns from customers. So it's created a tougher comp, 20% growth last year in the third quarter. And -- but if you look at it and what I pointed out to in my prepared remarks is that if you look at it on a 2-year basis or a multiyear basis, you see double-digit growth in consumable revenue. So -- and then very similar, we have another kind of comp going the other direction with last year, our capital and other revenues was down about 33% due to [indiscernible] timing. And on a 2-year stack basis, that growth rate is more in line with low to mid-single digits. So we're seeing things come through as we expected this year. Again, just facing the unusual comp that we've talked about coming into this year, by the time we get to the end of the year, we'll see that normalize out.

I was going to say that we expect to see increased shipments associated kind of in the back half -- in the Q4 time frame. So we also see it kind of accelerating as we get into Q4.

For the follow-up, Micah, I just want to ask on the $6 million distributor call out. I just want to understand exactly what that is. So you're shifting from a distributor model to direct and that's creating the $6 million headwind, can you confirm that? And then can you also confirm that, that $6 million that's new news for your guidance that you're absorbing that in today's update. It wasn't in there before.

That's correct, Mike. So if you look at it, our guidance does include that $6 million revenue headwind for the full year with a large portion of that coming in the fourth quarter. We are moving to a distributor model in one of our -- some of our international markets that's causing that headwind. We think this is the best decision as we look forward because it will give us more durable growth, and it's neutral to our earnings and margins. So we think this is going to drive more sustainable growth within the region.

But it's kind of -- it's going from direct to distributor, not distributor to direct [indiscernible] on the question.

Your next question comes from the line of Jayson Bedford with Raymond James.

Congrats on the progress. Just on the last line of questioning on consumables, was there anything kind of onetime-ish in there? Specifically, I guess I'm just looking at the sequential move from 2Q to 3Q.

Yes, Jayson. So sequentially, just to remind you that we had a sizable consumer revenue in the second quarter this year, and that was driven by that large international contract. We expect to see higher shipments in the fourth quarter under that contract as well, and that's going to contribute to our increase in consumable revenue in the fourth quarter. So that's given us the confidence to -- in our accelerated growth rate that we expect in Q2.

Okay. That's clear and helpful. Katie, I think you called out growth in advanced monitoring. Would love to -- if you could give us a little bit of either the growth rate there or some context as to the growth in 3Q versus the first half of the year.

Yes. So thanks for the question. We really don't disclose kind of the details until the end of the year in terms of breaking out the different product line growth rates. But suffice it to say that we are seeing an acceleration in the growth rate in the advanced monitoring categories. It's really consistent with the strategy. So it's -- we have a goal kind of in that double-digit range for those categories. And so we are seeing us deliver an acceleration of that as we implement the cross-selling strategy.

Your next question comes from the line of Mike Matson with Needham.

So just one on the wearables strategy. So is this really based on products, hardware that you already have like the W1, and I think you have like sort of wireless pulse oximeter. Or is it going to require new hardware? And what's with the timing of that, if so?

Yes, that's a great question. So we already have launched a product called the Radius VSM. And that product is actually being piloted at 5 major institutions here in the U.S. and then a couple of institutions outside the United States. And honestly, Masimo has been working on perfecting that technology from a pilot basis for the last 2 to 3 years. And so what we're seeing is that over time, we expect to actually go more for a full market launch with that. So we -- that product already exists and is in good shape. Related to the W1, the W1 is used more for what I would call telehealth in the hospital to home category. And for that, we do have some pilots that we're working on outside the United States where you have more centralized health care where it's easier to do that through virtual hospitals, et cetera. So that product is available, but we haven't actually decided yet how we will launch that inside hospitals. Does that make sense? And then the last product we have is a product called Radius PPG, which is a very simple wrist-worn unit that can tap in and WiFi connect that has a pulse oximetry on the patient's hand. That product is also in pilot phase and would be part of what we're going to get a full connection with the Philips monitors. And so we'll be able to launch that. Right now, we've also piloted that in several cases with Philips. But as that actually gets finalized with Philips with the collaboration, we would be able to launch that. Probably -- that's harder to say with the Philips timing, but probably in the next 1 to 2 years.

Okay. Great. That's helpful. And then the -- just on the AI algorithm. So what -- can you give us any more detail on the timing there? And is this something where you've already -- like the opioid monitoring, I think you've already got an FDA clearance or something, but are any of these going to require navigating the FDA? Will it be 510(k)s? And what do you have left to do there, I guess, to commercialize these things?

Yes. So thanks. So the first thing for opioid-induced respiratory depression, or OIRD is easier to say, 10x fast. But -- so for OIRD, we actually, as I mentioned, have it a clearance for the algorithm. What we are doing is actually submitting it to get it on to our monitor and onto our new Smart set technology. So we would imagine that launching towards the end of next year. And so all of this will be covered at our Investor Day, the first week of December.

Your next question comes from the line of Matt Taylor with Jefferies.

I guess the first one I wanted to ask about was just to clarify on the Q4 guidance. It looks like about 10% growth at the midpoint. So with the extra week days adjusted, would that be roughly 6% to 7% growth? And I guess what are the puts and takes impacting the growth rate in Q4?

Yes. So for the fourth quarter growth, we're expecting a stronger or acceleration in growth rate from consumables. Capital, we're expecting that to be lower in the fourth quarter. So that strength should come from the growth that we're expecting in our consumables business. And we talked about how we'll see acceleration part of that coming from that large OUS contract shipping more in Q4. We expect to see the performance coming off the contract than we did in the third quarter and to finish out the year strong in that area. So I'd say outsized growth in consumables, partially offset by the softness more in capital in terms of comparison year-over-year.

And then can I ask a follow-up on the Philips agreement actually? So I just remember from 2017, '18 time frame when you struck the first one, I think the commentary was that through the course of that first agreement, you had thought your share would kind of get up to your natural share. But then today, saying it's still well below that and you have an opportunity to gain even more share over the next 5 years. So I just wanted to kind of do a postmortem of sort of what happened over the last 5 years and talk -- maybe have you talk about why the next 5 could be better.

Yes. So thanks for the question. I mean -- so I wasn't here, I guess, during that time. But what you have is the fact that when you start at a very low position and how contracts move once every 5 years, it takes a little bit longer to gain your share position inside an installed base than you think. So I would say that what happened is we probably gained a lot of the share that was anticipated, but we still have a gap that we're excited about trying to close.

And your final question comes from the line of Vik Chopra with WF.

Maybe just on Sound United, after using the sale proceeds to repurchase stock and pay down some debt, maybe just talk about what your broader capital allocation framework is going forward.

Yes. Thanks, Vik. We'll outline a lot more at Investor Day, but at current levels, we would definitely lean into share repurchases going forward. We also -- another important area for us is tuck-in technologies to continue to augment our portfolio in the hospital across whether some of those areas and ways of growth that we talked about earlier. So as we look into wearables or some additional sensors or monitoring capabilities in the hospital, that's another area of capital allocation. So those are kind of the 2 main areas of focus for us, especially with where we're sitting at levels.

Great. And then just a quick follow-up. I appreciate all the color you provided on Philips. But I'm just curious at a high level how this expanded partnership with Philips will influence your product road map and perhaps your revenue mix over the next few years.

So thanks, Vik, for the question. I think that we -- since the majority of our -- a large portion of our advanced sensors, even the rainbow sensors are sold through the Philips monitors. It's going to, I think, help us to continue with the same product mix. The question is really for advanced monitoring categories, including kind of brain and capnography, et cetera, can we get a stronger presence? And so some of that is still underway. It takes a while to get our sockets out there. So it's one thing if they can add it, but then it's another for us to be able to get our sockets out there. So I would say it's not going to dramatically change our product mix in the short term, but it will be something that just continues to help us drive our growth and presence, but the mix itself will probably stay about the same.

At this time, I will now turn the call back over to Katie Szyman for closing remarks.

So first of all, I just want to thank everyone for joining today and really thank you for your interest in Masimo. I'd like to welcome you all to listen to our upcoming Investor Day on December 3, where we look forward to reviewing our strategic focus areas, detailing our product pipeline and outlining our longer-term financial outlook. Thank you all for joining, and have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.