Good afternoon, ladies and gentlemen, and welcome to Masimo's First Quarter 2021 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 am 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 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 year 2021 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 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.

Thanks, Eli. Good afternoon, everyone, and thank you for joining us for Masimo's first quarter 2021 earnings call. The first quarter results illustrate the resiliency of our customers and our business, following a year in 2020, where we achieved over 20% revenue growth and shipped over two times the usual number of drivers due to the rise of the COVID pandemic. We delivered double-digit revenue growth and driver shipments that exceeded expectations in the first quarter. We're happy to see the size of the pandemic receding in most states in the United States and in many countries with a successful development and deployment of vaccines and expect hospital census to eventually improve to pre-COVID levels. We met the moment in 2020 not only by fulfilling unprecedented demand for a product, but also by delivering new innovative products that are lifesavers. There are more advancements ahead, which we believe will be well received by our existing and new customers around the world. I'll discuss more later in this call. Now, I will ask Micah to review our first quarter results in more detail and provide you with an update on our 2021 financial guidance.

Thank you, Joe, and good afternoon, everyone. We have begun 2021 with a solid start. Our adhesive sensor revenues are up sequentially and our gross margins have improved at the same time. In addition to our shipments of technology boards and monitors are very much on track to reach our target for the year. Our customers have meaningfully expanded their monitor bed counts while simultaneously increasing their sensor orders to use with those new monitors. The business is moving back towards our traditional mix for sensors and capital. During the quarter, we shipped 66,000 noninvasive technology boards and instruments, which exceeded our expectations for the quarter. In turn, we have shipped approximately 2.2 million technology boards and instruments over the last 10 years. As of the end of the first quarter, we expect that our installed base has grown approximately 16% over our installed base at the end of the first quarter of 2020. For the first quarter 2021, our product revenues were $299 million, reflecting growth of 10.9%, or 9.5% growth on a constant currency basis. If you recall from our earnings call last April, we delivered 17% product revenue growth in the first quarter of 2020 due to higher than usual demand for our sensors, as hospitals began preparing for COVID. Despite the tough year-over-year comparisons, we delivered double-digit revenue growth this quarter that exceeded expectations. Our worldwide sales of technology boards and instruments were up 36% due to strong demand for Masimo SET pulse oximeters and related equipment. Also, our worldwide sales of single patient use adhesive sensors were down 1% due to the tough year-over-year comparison I just mentioned. What's most encouraging is that we saw our first quarter of 2021 adhesive sensor revenues increased 3% sequentially when compared to our fourth quarter 2020 results, despite hospitals using up their higher-than-normal COVID-related sensor inventory. This improvement reinforces our belief that we are seeing a steady rebound in surgical volumes. Moving down the P&L, our non-GAAP gross margin for the first quarter decreased 290 basis points to 66.1% compared to 69% in the prior year period. The year-over-year decline was primarily due to a higher than usual proportion of revenue last year coming from our adhesive sensors related to stocking for COVID preparedness, with sensors having higher margins than our other products. Also, we are still incurring COVID-related expenses that weren't fully present a year ago. These extra costs include increased inventory charges and freight expenses in addition to the expenses related to the safety protocols we've implemented to reduce the risk of COVID within our manufacturing facilities. It's important to note that we saw our first quarter 2021 gross margins of 66.1% improve 260 basis points sequentially when compared to our fourth quarter 2020 gross margins of 63.5%. These results confirm our original guidance assumptions that gross margins will continue to recover as our product mix returns to normal throughout 2021. Our non-GAAP selling, general and administrative expenses as a percentage of revenue decreased 90 basis points to 31.7% compared to 32.6% in the prior year quarter. We continue to demonstrate a clear improvement in operating leverage, as our SG&A expenses grew at a much slower rate than our product revenue growth. And our non-GAAP research and development expenses as a percentage of revenue increased 140 basis points to 11.5% compared to 10.1% in the same quarter last year. This was primarily due to increased staffing levels and higher project-related costs, as we continue to invest in delivering innovative technologies to the marketplace. As a result of the year-over-year gross margin headwinds and increased R&D investment, our non-GAAP operating margin decreased 340 basis points to 22.9% compared to 26.3% in the prior year period. Moving further down the P&L, our non-GAAP non-operating income, which is comprised of interest income, decreased 98% to approximately $62,000 for the quarter compared to $2.8 million in the prior year period. The decrease was driven by lower interest yields realized on our invested cash due to the impact of Fed rate cuts. Our non-GAAP tax expense in the first quarter was $16.4 million, resulting in a non-GAAP tax rate of 24%. And our weighted average shares outstanding for the quarter was 57.9 million compared to 57.6 million in the prior year period. For the first quarter, our non-GAAP net income was $52.1 million, or $0.90 per diluted share. In comparison, first quarter 2020 non-GAAP net income was $55.9 million, or $0.97 per diluted share. Turning to our GAAP results, GAAP net income for the first quarter of 2021 was $53.4 million, or $0.92 per diluted share. In comparison, first quarter 2020 GAAP net income was $64.5 million, or $1.12 per diluted share. Included in our GAAP earnings for the quarter was approximately $4.3 million of excess tax benefits from stock-based compensation compared to $9.6 million in the prior year period. To summarize the first quarter, we exceeded expectations for driver shipments and delivered double-digit revenue growth against a very difficult year-over-year comparison. Most importantly, we saw sequential improvements in our adhesive sensor revenues and gross margins when compared to our fourth quarter 2020 results. Now, I'd like to provide an update on our full-year 2021 financial guidance. For 2021, we are now increasing our product revenue guidance to $1.205 billion, which reflects year-over-year growth of 5.4% on a reported basis or 4.5% on a constant currency basis. This represents a net increase of $5 million above our prior guidance, which is comprised of a $10 million increase due to stronger sales volume, partially offset by a $5 million reduction in foreign currency benefits due to the strengthening of the U.S. dollar against most major currencies since year-end. As a result, our guidance now includes $10 million of year-over-year currency tailwinds compared to our prior guidance of $15 million. Our non-GAAP gross margin guidance remains unchanged at 67%, which represents a 190 basis point increase over our 2020 results. And our non-GAAP operating margin guidance remains unchanged at 24.5%, which reflects a 140 basis point improvement over the prior year. Moving further down the P&L, our non-GAAP non-operating income is expected to be negligible, and we are projecting a non-GAAP tax rate of 24.3%. And we are now estimating that our weighted average shares outstanding for 2021 will be 58.3 million. During the first quarter, we repurchased approximately 550,000 shares of Masimo common stock. The impact of these share repurchases on our weighted average shares outstanding is reflected in our updated financial guidance. Based on all of these assumptions, we are increasing our non-GAAP EPS guidance to $3.83, which represents an increase of $0.03 above our prior guidance. And from a GAAP perspective, we are now projecting a GAAP tax rate of 20% and GAAP earnings per share of $3.83 for the year. For additional details on our full-year 2021 financial guidance for GAAP and non-GAAP earnings per share, please refer to today's earnings release and supplemental financial information within the Investor Relations section of our website at masimo.com. To conclude, 2021 is off to a good start for us in terms of revenue growth and profitability following a very strong 2020. Despite the difficult year-over-year comparisons, we are projecting mid-single-digit revenue growth and double-digit operating profit dollar growth this year. It is also important to highlight that when you look at it from a two-year stack growth perspective, our updated 2021 product revenue and operating profit dollar guidance imply compound annual growth rates of 13% and 15%, respectively, when compared to our fiscal year 2019 results. With that, I will turn the call back to Joe.

Thanks, Micah. Thank you very much. Optimism for the future is increasing, as we're hearing reports from the field that COVID case counts and hospitalizations are on the decline in most places. Obviously, we understand what is happening in India and Brazil, and we're regretful of that. But in most countries where we do business, hospitalization due to non-COVID is increasing, and we're seeing higher sensor utilization as more hospitals open up for elective surgeries and implement continuous monitoring for patients in lower acuity settings. There are now monitors next to more beds than ever before. Many of those beds are no longer being reserved for potential COVID patient admissions. COVID made clear the value of Masimo technologies and what our mission of taking noninvasive monitoring to new sites and applications means. No other company has the accuracy and reliability, as well as the breadth of measurements Masimo offers for noninvasive monitoring of vital signs with technologies like SET and rainbow. With our innovation history and our continued research and development investments, we are well-positioned to meet the demands of our existing business and expand our business. We expect 2021 to be an eventful year for Masimo based on the many new products we have recently launched or will be launching, as well as the multiple new markets that we are entering. We're significantly broadening our business through internal development of technologies and acquisitions. The operations of the acquired NantHealth Connected Care business and TNI Medical are fully integrated, and this integration has already led to next-generation products emerging from both businesses. The recently closed acquisition of Lidco hemodynamic monitoring business is proceeding well with integration activities underway. Our hospital automation business is also accelerating. On a year-over-year basis, hospital automation revenues increased more than three times. Our investment in innovation is bearing fruit as we introduce many other new products during the first quarter, which hold considerable potential for improving patient care and generating meaningful revenues. These products include the new Radius PCG, a tetherless entitled carbon dioxide monitor that can connect to Root with all the advantages of Root's larger screen and automation and connectivity capabilities. We also announced an upgraded version of our Rad G multimodal pulse oximetry, a compact handheld device adapted for use in the field that now includes a non-contact thermometer function. During the first quarter, we also announced the initial U.S. launch of softFlow high flow nasal cannula therapy for treating patients with respiratory distress. Within our core parameters business, our rainbow, NomoLine, SedLine, and O3 product lines grew strongly due to the rise in elective surgeries. We are gearing up for the launch of SafetyNet for opioids for use in CE countries in Europe while we await FDA approval in the United States. The clinical studies for SafetyNet for prescription opioids and illicit opioid use are ongoing with very promising early results. We expect this product will further deliver on our mission to improve patient outcomes, reduce the cost of care, and take noninvasive monitoring to new sites and applications. In closing, we see great potential for 2021 to be a year that includes a growing contribution from the many new products we have developed and acquired as they gain adoption worldwide. With that, we'll open the call to questions.

Thank you. Your first question comes from Lawrence Keusch from Raymond James. Your line is open.

Great. Thanks, everyone. Joe, could you provide some insights on the sensors and the number of bed monitors related to them? You briefly mentioned this in your prepared remarks, and I recall you provided additional details during the fourth quarter call regarding the field feedback on the utilization of those new beds with monitors. Is there any update that can help us understand that utilization issue which is often raised?

Certainly. Certainly. I think as Micah mentioned, we saw a sequential growth of 3% in sensor volume, but that doesn't really tell the story. And this is after a few quarters where sensor volumes were either flat or declining because elective surgeries were being delayed due to COVID. But there isn't enough to tell the full story because we've seen some of our customers who purchased stocking inventory this time last year in Q1, where we saw a huge sense of volume increase, which made our gross margins look really good because of the percentage of sensor business to capital. Most of them have depleted that inventory. So, we think the sequential growth is stronger than the 3% that we've reported. One of the great things as we continue talking to our customers who purchased all of that extra sets of monitors last year is they seem to be utilizing them. These beds that were before non-monitored beds have turned into monitoring beds. As we predicted that eventually, they would become monitoring beds, they have Patient SafetyNet, with that technology we used to increase the number of general floor bed monitoring by several thousand a year. We think last year that number increased by maybe 100,000 to 200,000 beds. It feels like the general floor monitoring market has gotten penetrated. From surveys we've done with our top 30 customers that received these new drivers, it seems like they're utilizing them and their growth rates sequentially have been even stronger, maybe close to an order of magnitude more than what we've seen on a worldwide basis.

Okay. That's really helpful. And then, I guess, just the second one for me. I know it's obviously difficult when you're engaged with the FDA, but just again want to take your temperature on how you're thinking about Opioid SafetyNet clearance here in the U.S. And I know in the last quarter, you sort of indicated that you'd be disappointed if there wasn't commercialized this year. So again, just wanting to get your updated thoughts there. Thanks.

The pandemic was an unprecedented event, and we experienced a significant impact last year. To our surprise, the FDA acted more quickly than we have ever seen before, particularly with the approval of Masimo SafetyNet for COVID patients. However, the influx of new technologies related to COVID has caused delays in FDA processes, and they have communicated that they are overwhelmed and are working to address the backlog. Despite the tragic rise in opioid overdose deaths last year, we still do not know when we will receive clearance. The FDA is aware of the effectiveness of our product, so it's not purely a matter of urgency; they are making progress, but I can't specify the timeline. We have CE approval, so we are planning to enter the European market. While the opioid issue is widely discussed in the U.S., it is not as prominently addressed elsewhere, possibly due to cultural differences. However, we believe the problem is just as significant in Europe. Our survey of leading European countries, including Germany, France, the UK, Italy, Spain, and Switzerland, indicates that they face similar issues and are eager for our products. Therefore, we are preparing our distribution channels in Europe and Canada and hope to be operational by mid-year. If all goes well, we might also be cleared in the U.S. by then. Regardless, we are moving forward, with or without U.S. clearance.

Okay. Terrific. Thanks, Joe. Appreciate it.

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

Maybe, Joe, you could talk about two aspects of incremental innovation. You highlighted a couple of the transactions you've done recently and it seems like they're going well. But maybe talk about your thoughts or if you think that kind of innovation process is likely to continue in 2021, or how urgently you're focused on it. But I've learned to listen to you carefully over the years and I thought it sounded like you were hinting in your opening comments about other new products. Am I over-listening? What else could we see in 2021 and beyond?

Rick, you have great listening skills. Before this call, we reflected on our mergers and acquisitions. Over the last couple of years, we have completed a few, but in the last decade, we've executed about nine in total. All but one have delivered significant business results and have been successful. The remaining one will soon show promising results. We've been satisfied with our acquisitions and have avoided any poor picks. Our due diligence process is robust. There have been several instances where we nearly finalized deals, but despite our fondness for the teams and companies, we opted out when the data didn't align with our initial expectations. To address your questions, yes, we are still active in M&A, although there are no immediate closings on the horizon. We remain open to any opportunities that can enhance our existing businesses and are receptive to new ideas. Our mission is to improve patient outcomes and lower the cost of care while providing noninvasive monitoring across various settings and applications. We are open to anything that can help us achieve this goal. Regarding your inquiry about new products, we believe we have some exciting developments that will see the light this year. We are quite enthusiastic about them and hopeful that they will significantly expand our total addressable market and our capability to fulfill our mission.

And just to make sure that should we imagine that could be incremental this year to the forecast projection, or no, it's more likely impactful in subsequent years?

We believe it will be incremental revenue wise. There might be costs associated with the rollout on the expense side, so it may not be incremental earnings wise. But we think there are great future opportunities. And we haven't yet put them in our numbers because we don't want to count on anything, including our own R&D pipeline until the products are out. We're very meticulous about what we rollout. We want to protect our brand and ensure that it delivers on the promise of our quality and everything. So, because of that, based on all the history of 32 years, we're not going to get ahead of ourselves. However, as I said carefully in my proposed statement, we have a lot of things that have already been launched that we're very excited about and even new things. Together, we feel like it's going to be a really good year.

Yes. Sounds exciting. And just as a second, we recently spoke to a number of hospital administrators, and certainly beyond the ICU, beyond the general ward, I left feeling like there were increasing opportunities post-COVID for Masimo in two other ways, one in sort of specialty areas of the hospital, like the cardiology suites or orthopedic areas. And I'd be curious to hear about that. But also, one hospital was discharging patients directly from the emergency room, directly home monitored by Masimo equipment. How do we think about these new opportunities or these niche areas and how they could be meaningful going forward? Thank you.

You're welcome, Rick. We think they're going to be meaningful. While we jumped in to help with COVID, over 200 hospitals at least got to experience firsthand the power of our Masimo SET and a wearable tetherless product that could be sent anywhere, whether it was a parking lot or the patient's home. What was seen as COVID is receding in those hospitals, they're taking that technology home now helping with high-risk patients, whether it's heart patients or lung patients. It's pretty exciting. One of the best things I can say is that look, a lot of times you rollout a new product, it sounds cool, but it doesn't deliver. This product truly delivered. People who got to see it firsthand dealing with COVID and this terrible problem have become really strong believers. Some of them are the bellwethers in hospital systems in our country and in other countries. While I'm not at liberty to state names or give more detail to your question again, I think telehealth and telemonitoring at home could be big opportunities for us and could be a real thing that drives our business forward.

Thank you very much.

Thank you, Rick.

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

Hi. Thank you for taking the question. I wanted to clarify your comments there on guidance and from the last call. I remember through the transcript, you talked about a number of things that are just kind of starting to get off the ground, not really contemplated in guidance that could be sources of upside like opioid, like TNI, the nasal cannula, and some of these other new products. Is that true? Is that upside potentially? If you do get upside this year, do you think that's the most likely source of some of these new products or would it be further improvement in the environment or something else?

Matt, yes, you're absolutely right. We had not put softFlow business in the U.S. in our guidance. We had not put SafetyNet for opioid in our guidance. Already we have a really good pipeline for softFlow in the U.S., so hopefully as it becomes real, it could be a nice way for us to grow out of the number, the percentage points, maybe to just single-digit growth that we are projecting. Of course, SafetyNet for opioid could be big. It just depends on how well we execute on distribution, which is a new area for us. Other areas that we've not baked in include the growth of things like hemoglobin, SedLine, NomoLine, and O3 that are used in the OR, which could become significant as census improves and people feel comfortable going into surgery. There's talk that by mid-June, the U.S. could be out of the woods by having enough people vaccinated that will lead to herd immunity. All of those could be additive. We have in the past several years promised 8% to 10% revenue growth and double-digit earnings growth. We're comfortable with that. Last year, when things went better than expected, we took advantage and ran with it. So, we'll have to see how the year turns out.

Okay. Great. I was hoping you could just talk about the fact that you bought a lot of shares back in the recent period and the stock has done really well over the last couple of years. How did you think about that purchase, and maybe you can talk about plans for ongoing new purchase, or was this kind of a one-time thing?

We buy just like you guys when we think the stock is undervalued. Also, you have to remember, we've gone from generating $50 million, $60 million of cash flow to about $200 million of cash flow a year. So, the amount we bought was not small; it’s within our ability to buy. We think the stock price, like beauty, is subject to the beholder. We find it beautiful too. We thought it's a good idea to buy some shares. And then we did.

Okay. Fantastic. I let others jump in, but thanks a lot for the comments.

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

Hi. Good afternoon, everyone. Thanks for taking the questions. I wanted to come back to the guidance topic here in a different way. I think you made a comment on the call in the prepared remarks that were on a path to returning to critical levels for procedure volumes through that's what you're seeing in your business. I think you've talked about this before. But maybe update us on what your assumptions are qualitative or quantitative towards those procedure volumes look like here the balance of the year? Is that what's influencing the slight raise to guidance here today?

We raised guidance by $5 million, even though we thought revenue-wise our revenues would increase by $10 million, because we have a $5 million headwind on the strengthening of the dollar versus most of the currencies we deal with. As for census improvement, we're seeing some hospitals right now, very well-known hospitals, destination hospitals having more than 100% capacity, some even over that. We see children's hospitals at about half capacity of what they used to be. We believe there's a lack of confidence in being able to get safe care in hospitals. That confidence, I think, is going to improve as we get closer to herd immunity. We know that late procedures and issues that people have need to be fixed. Logically, we think it’s going to get better, and even surveying our customers indicates improvement. The 3% improvement in sensor volume utilization from the prior quarter, which even included a reduction of inventory, tells us it is getting better. Micah, if you want to add something.

Yes, Jason, just to add there, as Joe mentioned, we assume basically a steady rebound over the course of the year back to pre-COVID levels. If we see higher patient confidence to come back into the hospital and volume start to pick up, that could be an upside to the guidance provided. But we've assumed kind of a steady rebound.

Okay. That makes sense. Thanks for all that.

And Jason, just one more thing to add is we also saw a stronger trend in volumes as we exited the quarter, in March and April, we saw stronger sensor volume trends than we did back in January and March.

Okay. All right. Very helpful. Thanks, Micah. And then maybe just to come back to an earlier question on the opioid SafetyNet topic. What's the right way to think about that opportunity in Europe and Canada? Is it fair to assume this is going to be a hospital-first offering in your international markets? Or is this going to be an opportunity to take that into the home? Just what's the right way to think about that and the overall go-to-market strategy in those markets, just maybe how that might differ from what you're planning in the U.S.? Thanks, guys.

Sure. We think the international market is roughly the same size as the U.S. market. We consider the market in two segments: prescription opioids post-surgery and illicit opioid use. The markets are very different in each country. Some countries have a lot of over-the-counter business in pharmacies and the pharmacists make the call of what to give to people. In some countries, it's by doctor's order, and in some countries it's both. We are trying to hire people who have experience in consumer marketing and distribution of products like this in pharmacies and other channels. We're gearing up, and we hope we can execute as well as we've done in the hospital business.

Thank you.

Your next question comes from the line of Michael Polark from Baird. Your line is open.

Hey, good afternoon. Maybe a follow-up there on the Opioid SafetyNet in Europe. I'm just curious, what is the reimbursement landscape in pharmacies and physician offices or hospitals getting paid for providing a solution today? Or is that something Masimo will be working on to establish with the local authorities?

Yes. We will be working with local authorities on reimbursement. But we were pleasantly surprised that when we surveyed customers in these countries, a broad majority at the price point where we sold said they would buy it. It's just a matter of proving that to be true and getting the message out. So people know it's there, making sure that the medical community trusts it and recommends it. We believe there is going to be a business we had without reimbursement, as well as with.

Is the ASP that you surveyed roughly what we saw for COVID-19 SafetyNet here in the U.S., the $150 mark, or are you envisioning something different in Europe as you get started?

It's higher. It's higher than that. I don't want to get into it right now, but it is higher than that.

Okay. Maybe the other one on hospital automation. I heard the revenue comment three times in the period. My question is more on the sales pipeline, selling opportunity there, any quantification of that opportunity as you think about the rest of 2021? Is the pipeline up, down, sequentially year-on-year? 如果是这样，那么多少？ 我只是渴望了解您可能在剩余的时间内进行的业务的节奏。 今年及以后，业务。

Well, I'm not going to promise two times growth. I will say that there is strong interest in every corner of the world, literally from the eastern United States, western, southern to everywhere. I believe we have the most complete and well thought out solution as pioneers of hospital automation. What I mean by hospital automation is not just connecting things so that data can go to the EMR; I'm talking about connecting those things and making that data actionable, useful wherever the clinician might be, including the room they're about to enter. Besides that healthy pipeline, another indication of success is we had a variable uptick in Patient SafetyNet installations. Typically, once hospitals implement that, they get interested in the other solutions around it, like Halo ION, like UniView 60, and UniView and Replica. I think even those hospitals, which we had a nice, healthy uptick not only in Q1 but the prior quarter, will be great customers of ours to expand into our vision of hospital automation.

Your next question comes from the line of Doug from Berenberg. Your line is open.

Hey, it's actually Ravi on. How are you guys doing?

Good. How are you doing?

Hi, Ravi.

Thanks for taking the question. I have a question regarding the sensor volumes and the margin profile of the business. Excluding Q1 2020 due to the apparent sensor demand during that period and comparing it to a similar quarter in 2019, it seems that your gross margin has definitely improved since then. You've expanded your install base, providing more opportunities to sell sensors. Would it be accurate to say that your mix is shifting more towards the rainbow and O3, Capnography sensors? How should we consider the impact of the new beds you've onboarded in the last year? Additionally, what are the criteria being used now on the general floor? What potential should we be aware of regarding the longer-term mix benefits that might arise from this?

Sure. To address that, we have a larger installed base for selling sensors. One of our concerns was about the 250,000 drivers added last year in addition to our usual volume. We were worried they might not be fully utilized, and while there’s a possibility of reduced utilization in the future, they are being utilized well so far. This bodes well for an improved sensor to capital ratio. We expect capital and drivers to be consistent with 2019 levels, which should result in a higher gross margin for our company. The other parameters are experiencing similar margins and increased usage; elective surgeries are returning, and drivers once used in the operating room are now being actively utilized. The focus shifted from the OR to ICUs and converted beds during the COVID-19 pandemic. Now, usage of sedation monitoring, brain oxygen saturation monitoring, and Capnography for airway analysis is increasing in the OR, which we believe will lead to higher utilization rates. Regarding the general floor, there might come a time when it resembles ICUs, where all parameters monitored in ICUs will also be tracked on the general floor. Currently, pulse oximeters are essential for patient protection, particularly the SET pulse oximeters that function well in motion and low perfusion scenarios, minimizing false alarms. Other technologies have struggled in such settings. A 10-year study from Dartmouth-Hitchcock indicated that monitoring without technology led to no additional patient deaths while significantly decreasing costs by $7 million annually due to reduced ICU and rapid response team activations. Nurses have responded positively to our product, contrasting their previous frustrations with other devices. With past technology, they faced a false alarm every four minutes. Micah, do you have anything to add?

Ravi, I heard you mention the comparison to gross margins from about two years ago. In Q1 2019, the gross margins were around 65.4%, and now they have increased to 66.1% and are continuing to improve as the mix gets better. We are seeing more revenue per driver and effectively utilizing our installed base. Our engineering and manufacturing teams have made significant strides in reducing product costs over time, which is reflected when we look back at the normalized gross margins from a couple of years ago. This year, we are guiding for a gross margin of 67%, which suggests an increase of about 50 to 60 basis points each quarter to reach that target. We expect to return to the pre-COVID gross margins of 68% by the end of the year.

Great. Thanks. And then, just one more on the automation business. You kind of put it in relative terms, but just curious, what level of revenue do we need to get as a benchmark to start getting some more public disclosure around that revenue stream? And just kind of relatedly, what margin profiles should we be thinking about for that business? Thanks a lot, guys.

Yes. We're not sure it makes sense to break the revenues from the products that are related into the same space with customers, nurses, doctors, and our salesforce. This is a question we're still wrestling with. As far as the level of revenue is concerned, I think it's more about do we think they should be separated; it’s more thinking about new businesses. We started seeing our businesses in a different way. I'm not sure that should be separated, but there'll be new segments and things we're going to get into that we think should, and you'll see them in the future when we do them. But I think these are part of our whole hospital business.

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

Hi, good evening. Thank you for taking the questions. I'm going to start here I think that's kind of a basic high-level question. I just wanted to gauge your feeling about the 66,000 shipped boards in the quarter. I know that puts you well on track for the year-end result, but do you believe anything was sort of pulled forward into the quarter, or how should we be thinking about that cadence going forward? And on a related note there, can you remind us of the Q2 2020 sensor comp? I recall the stocking a year ago for the first quarter, and would love a reminder on second-quarter comp?

Well, I'm going to let Micah answer, but I want to just make sure I heard right 66,000 boards, not 56. But go ahead.

Yes. Yes. I know 66. Yes.

Yes. 66,000 for the first quarter.

I am saying 66,000. Yes.

So, Marie, just to answer your question. Yes, we still expect to ship at least 60,000 boards per quarter or drivers per quarter for the rest of the year. We're continuing to gain more confidence, especially as we look at the utilization we've seen on the excess drivers from last year. We don't see a replacement or any pull forward into the prior year or into the first quarter at all. We believe looking at the information that last year we had a record-breaking year in terms of winning new customers. That gives us more confidence as that capital equipment is installed this year, so it gives us confidence in that forecast of at least 60,000 drivers per quarter.

That's great to hear. And the follow-up then on the sensors in the Q2 comp a year ago.

Yes. Our sensors last year we're down to 8% a year ago in the second quarter. So we have an easier comp in Q2. And that's when we saw the sensors kind of fall off and then they started to steadily recover back through the end of the year.

Okay. Thank you for reminding us of this. And I picked up my handset, so hopefully I'm coming in more clearly. Wanted to ask my follow-up then on Opioid SafetyNet. Just wanted to kind of go back to the FDA, so if I'm understanding correctly, there haven't been any sort of change in tone from the agency. They're not asking for any extra data or anything like that. It really is just sort of COVID-related delays from your read of it.

That's correct. Since the last couple of quarters, even from the beginning, there's definitely been no change in tone. They're very engaged with us. They're very interested in helping us. Remember, this is a product that they chose as not only a breakthrough technology but one of eight products that could potentially impact the opioid epidemic. This has the attention of the management and FDA as well. Nothing's changed. It's just they've been incredibly busy with COVID-related things, and I think that's spread them very thin.

Okay. Understood. Well, we look forward to seeing what you can do in Europe. Thanks for taking the questions.

Thank you.

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

Hi. Thanks for taking my questions. Just wanted to ask for an update on the Philips agreement. Can you maybe give us some sense of the portion of their installed base that's turned over since the deal started? And then where do you think we stand with NomoLine, SedLine, O3 on their platform?

Our relationship with Philips is strong. They're one of those resilient customers, besides the end users I discussed at the beginning. They're doing really well. In the capital business for patient monitors, Masimo probably had a great year for demand around the world, as well as for ventilators. From what we see, they are going along their 2020, 2019 kind of level. We are becoming an increasing part of their business both in pulse oximetry shipments as well as new parameters like SedLine, NomoLine, and O3. We're still partners and linked together in the power of rainbow, which we believe is a game-changer for predictive algorithms that Masimo is interested in. So are Philips. Things are going great. We continue to increase our footprint within Philips.

Okay. Thanks. I was looking back at your slides from your Investor Day in 2019, just about two years ago, I guess. There were two pipeline projects you disclosed there. I think one was involving malaria detection, and one was a new measurement of partial pressure of oxygen. I was just wondering if you could give us any updates on those and are those some of the things that you were hinting at earlier in the call?

Certainly. The malaria project has progressed very well since our last discussion, and we are planning to conduct large-scale clinical trials in affected countries during peak malaria season this year. If all goes well, we aim to commercialize the product. Additionally, there is promising news regarding a vaccine for malaria that may have about 75% efficacy, which could change the demand for our product, but that would be a positive outcome, as many children and adults suffer from malaria globally. We undertook this project primarily to help in that regard. Unfortunately, the clinical trials for the technology related to the partial pressure of oxygen have been suspended due to COVID. However, as COVID subsides, the countries conducting the trials will resume them, and we hope to have information on its efficacy and our ability to launch it by the end of this year.

Okay. Great. Thank you.

Thank you all so much for joining us. Thanks for the last-minute change from Tuesday to Monday for our earnings call. I'm getting confidence with procedures in hospitals. I'm going to get a small procedure tomorrow myself. So, I appreciate you guys getting with us, and I look forward to our next earnings call. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.