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. 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 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 here 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 is being addressed? 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 is a direct result of higher revenue and the cost efficiencies achieved over the past year. Now let me highlight some exciting developments and strong execution from our teams this quarter. First, we closed the sale of Sound United to Harman in September, marking a key milestone in our strategy. Second, we announced the expansion of our strategic partnership with Philips in early September, marking another key milestone in our collaboration. Within the market, we remain significantly underpenetrated relative to our overall share in the market and this represents a compelling opportunity. We expect that expanding our share position over the next 5 years within this market will have the potential to be even greater than what we have seen over the previous 5 years. Our partnership continues to strengthen. This new agreement advances our joint commitment to innovation and delivering enhanced value to customers and the broader industry. 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 zero 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 the 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. 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 healthcare 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 significant win for capnography with one of our key accounts in the Southeast region that will drive considerable capnography growth within the territory. Collaborations like these exemplify our ability to leverage our portfolio to drive growth and deepen relationships with customers, creating 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-generation monitors. A key part of this is taking the incredibly advanced algorithms the team developed for use outside the hospital and redeploying these into sensors for use inside hospitals. One specific example we are working on is leveraging our de novo grant for opioid-induced respiratory depression that was cleared in April 2023 for detection to create a hospital solution that can be integrated into our next generation of smart sensors and AI-enabled patient monitors that are going to launch next year. In 2026, CMS will require hospitals to report opioid-related adverse events as a new electronic quality measure. Our new technology detecting opioid-induced respiratory depression with our smart sensors will help hospitals keep these patients safe and meet the reporting requirements. This is one of several exciting AI-enabled sensor opportunities that we have and that we are planning to launch in the future. As I covered last quarter, our third wave of growth will come from innovating wearables. We recently announced findings from a new study from Dartmouth-Hitchcock Medical Center, demonstrating that surveillance monitoring with Masimo pulse oximetry and patient safety net is operationally cost-effective and saves hospitals money. Previously published Dartmouth clinical outcome studies have shown a 43% reduction in transfers to higher levels of care and a 65% reduction in patient rescues, in addition to zero preventable deaths due to opioid-induced respiratory depression over a 10-year implementation period. In the latest study, Dartmouth-Hitchcock calculated that each 10% reduction in rescues and transfers achieved through earlier detection led to projected savings of about $350,000 to $400,000 a year, respectively, for 200 general floor beds equipped with Masimo monitoring, which breaks down to over $5,500 per rescue event prevented and about $10,700 per higher level of care prevented. We are confident these findings will apply to the other health systems adopting a curve-to-curve strategy of continuously monitoring all patients inside the hospital. In terms of additional growth opportunities, our diverse portfolio of wearable technology and telehealth solutions continues to be successfully piloted globally to address numerous unmet patient needs. We look forward to sharing more details of our intelligent monitoring and wearable innovations at our upcoming Investor Day on December 3. Before I close, I want to thank our global team for their hard work and commitment this quarter. With our highly innovative technologies, we have a unique opportunity to improve outcomes for millions more patients around the world. Our focused execution once again demonstrates the benefits of our recurring revenue contracts and the durable growth profile of our business. We are looking forward to a strong finish for the year as we realize growth from continued demand and new customer installations throughout this year. As a result of our strong performance, we are pleased to raise our adjusted EPS guidance, which Micah will expand on later in the call. Above all, we are confident in our ability to deliver on our goals for 2025 and beyond and execute our mission to empower clinicians to transform patient care. With that, I'll turn it over to Micah.

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 an 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. Compound annual growth rates in consumables continue to be in double digits, while growth rates in capital are low to mid-single digits when looked at on a 2-year or multi-year basis. The incremental value of new contracts secured in the third quarter reached $124 million, marking a robust year-over-year increase of 48%. 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 one-third 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 down the P&L, our gross margin of 62.2% experienced a decline of 70 basis points compared to the prior year due to tariff impacts outweighing operational improvements. While operational enhancements contributed to a gain of 70 basis points, tariff-related costs caused a margin erosion of 140 basis points. Tariffs increased our cost of sales by $5 million this quarter, aligning with our expectations. Our operating margin of 27.1% increased by 450 basis points year-over-year, driven by operational improvements of 590 basis points, partially offset by a tariff impact of 140 basis points. The cost optimization measures implemented late last year have contributed to solid margin expansion this year despite tariff pressures. Excluding the effects of tariffs, operating margin for this quarter would be 28.5%. We are proud of the substantial margin expansion our team has achieved in recent years and are confident in our ability to continue improving margins going forward. Our margin expansion alongside solid revenue growth was a key factor contributing to adjusted earnings per share of $1.32, representing a 38% increase from the prior year. We generated strong operating cash flow of $57 million and secured net proceeds of $328 million from the strategic divestiture of Sound United in late September. These proceeds were proactively deployed to repay $56 million of outstanding debt and to optimize capital structure through repurchasing $163 million of common stock by the end of the third quarter. Collectively, we have returned $350 million of capital to shareholders through the repurchase of 2.4 million shares over the third and fourth quarters, underscoring our disciplined approach to capital deployment and our unwavering focus on enhancing long-term shareholder value. Now moving to our updated fiscal 2025 financial guidance. We are tightening our full year revenue guidance to be in the range of $1.510 billion to $1.530 billion compared to a prior guidance range of $1.505 billion to $1.535 billion. Changes in our revenue guidance are driven by three factors. First, we are tightening the revenue range by $5 million on the top and bottom end. Second, we're accounting for foreign exchange benefits of $4 million realized to date. And third, we are accounting for the impact of a switch to a distributor model in some international markets that creates a $6 million headwind to our full year revenue guidance that has no impact on profitability. Please keep in mind that we have an extra selling week in the fourth quarter of this year, which contributes approximately 1 point to full year 2025 growth. As a reminder, this benefit has been primarily offset through this fiscal year by various factors, including revenue loss from discontinuing product lines at the end of 2024, our shift to a distributor model in some international markets, among other factors. In 2026, we will return to a typical 52-week fiscal year and provide more details when we initiate formal 2026 guidance. Moving down the P&L, we are raising our operating margin guidance to be in the range of 27.3% to 27.7%, representing an increase of 25 basis points at the midpoint versus our prior guidance range of 27% to 27.5%. We are also raising our earnings per share guidance to be in the range of $5.40 to $5.55 compared to our prior guidance range of $5.20 to $5.45. This represents an increase of $0.15 at the midpoint, primarily driven by improvements in operating margin contributing $0.05, the benefit from share repurchases adding $0.08, and a reduction in interest expense accounting for $0.02. In conclusion, our third quarter results highlight the strong underlying demand for our products despite challenging year-over-year comparisons. We delivered solid contracting performance, successfully securing new business for our technologies alongside higher-than-expected demand for our technology boards and monitors. Our business' exceptional earnings power remained evident with continued significant improvements in operating leverage. Looking forward, we are confident in our ability to close out the year strong, driven by accelerated growth in consumable revenue and solid execution of contracts. With that, we'll open the call for questions.

Your first question comes from the line of Rick Wise with Stifel.

It's great to see the strong performance this quarter. It's hard not to start with the outperformance and the resulting guidance. How should we think about the rest of the year and the potential for further outperformance in the short run? What could be the drivers, such as new contracts or new product launches? I know it's early to ask about 2026, but how do we see this setting us up for that year?

Yes. Thank you, Rick. To start, we typically do not provide guidance for 2026 or the following year during the third quarter call. However, I can highlight the areas of strength in our business. First, there has been an increase in contracting in Q3. We anticipate a strong finish in Q4, which will contribute to significant growth in our consumables. The unusual comparisons we mentioned for the second and third quarters this year will level out over time. Therefore, we expect a very robust finish in the fourth quarter, with higher shipments of consumables, setting us up well for the next year.

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

Yes. 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 achieved through optimization of costs, becoming more efficient with our cost structure, and that's paying dividends.

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 made multiple hires, realigned the sales force structure to be more regionally focused rather than specialized by product. Just maybe at a high level, where are we in that process? Are you pleased with where you are? How much more to go? What's the impact going to be?

Thanks a lot, Rick. Yes, like you said, that we are focused on enhancing and elevating commercial excellence to give specialty categories more resources to match our success in pulse oximetry. You see more partnership from our pulse oximetry top sales force being able to help pull through the reps in the specialty categories. We've made strategic investments in capnography, hemodynamics, and brain monitoring to give those platforms similar commercial horsepower. On the timing, we're starting to see small wins, but given the length of our sales cycle here at Masimo, you'll see it really begin to pick up more momentum into next year.

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

Congrats on a good quarter here. I want to start with you, Katie. Can you expand on the comments you made about share gains in Philips? You mentioned that you foresee growth in the next 5 years compared to the last 5 years. Help us with where you're currently at with Philips share and what kind of share gain you've seen in the last 5 years just so we have some baseline.

Yes. Thanks, Jason, for the question. We have a duty of confidentiality with Philips, and so we can't disclose our specific position in their installed base. However, when the first agreement was signed back in 2016, Masimo had very low market share in the Philips installed base. We've made progress, but we still see ourselves as under-indexed in that market. We see this as an 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 global opportunities. Is that the opportunity more so than advanced parameters with Philips? And then Micah, can you confirm that the incremental contract figure was strong this quarter, and how can we interpret the trend line in that unrecognized contract revenue considering the strength of contract wins?

Yes. Let me start with the contract revenue. Remember that one-third of our revenues are contracted and come through in shipments of those contracts. We are seeing very good strength. This will be a good driver for us. It's not to indicate that our overall revenues grow at that level, but there's good strength coming from the contract wins we're getting this year.

Jason, to clarify on the relative installed base, it's about equal between those 2 categories of opportunities.

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

I have a question about the third-quarter performance, specifically the 1% consumables growth. Could you remind us what was unusual about last year's comparison, and can you reassure us that the consumables line will return to a normal growth rate in the upcoming quarters?

Thanks, Mike. One point to start is that inpatient admission growth last year was running around 4%. We kept seeing stepped-up consumer revenue and that drove a tougher comp, at 20% growth last year in third quarter. If you look at it on a 2-year basis, we are seeing double-digit growth in consumable revenue. We expect to see that normalize out by the end of the year.

We expect to see increased shipments in Q4 as well, so we anticipate things picking up as we move into the fourth quarter.

On the $6 million distributor call-out, can you clarify if you're shifting from a distributor model to direct and if this is new news for your guidance?

That's correct, Mike. Our guidance includes the $6 million revenue headwind for the full year due to moving to a distributor model in some international markets. We believe this will give us more durable growth moving forward.

It's important to note it's a shift from direct to distributor, not the other way around.

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

Congrats on the progress. I wanted to clarify consumables to see if there was anything onetime-ish in there, especially looking at the sequential move from 2Q to 3Q.

Yes, Jayson. We had sizable consumer revenue in Q2 driven by a large international contract. We expect to see higher shipments in Q4 under that contract as well, which will contribute to our increase in consumable revenue in Q4.

We're observing acceleration in growth in advanced monitoring categories that's consistent with our strategy. We have a goal of double-digit growth for those categories, and we've seen good results as we implement our cross-selling strategy.

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

Can you clarify if your wearables strategy is based on existing products like the W1 and the wireless pulse oximeter, or does it require new hardware?

Yes, that's a great question. We already launched a product called the Radius VSM, currently being piloted in major institutions both in the U.S. and globally. We've been perfecting that technology for 2 to 3 years, and we expect a full market launch in the future. Regarding the W1, it is focused on the telehealth category, with pilots ongoing outside the U.S. We have also piloted the Radius PPG, which is a wrist-worn unit for pulse oximetry that will connect to Philips monitors; this product is also in pilot phase.

Can you provide any more detail on the timing for the AI algorithms? Will they require navigating the FDA, and what is left to commercialize?

For OIRD, we already have clearance for the algorithm and are submitting it to be placed on our monitor with our new Smart set technology. We anticipate launching toward the end of next year, and we will cover everything at our Investor Day in early December.

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

I wanted to clarify on the Q4 guidance. It looks like about 10% growth at midpoint. Adjusted for the extra week, would that be roughly 6% to 7% growth? What are the factors impacting growth in Q4?

We expect stronger growth from consumables in Q4, with lower capital growth due to year-over-year comparisons. Strength should come from increased shipments tied to our contracts, particularly in consumables.

I recall back in 2017, the first agreement led to projections on share gains. Could you provide a retrospective view on those predictions over the last 5 years? What could lead to improved results over the next 5 years?

Thank you for your question. While I wasn't here during that time, gaining share with such contracts takes longer than anticipated, especially starting from a very low position. We've made progress but realize we still have gaps to close.

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

After using the sale proceeds from Sound United to repurchase stock and pay down some debt, could you discuss your broader capital allocation strategy moving ahead?

We will outline more at Investor Day, but currently, we will lean into share repurchases. Another important area for us is investing in tuck-in technologies to augment our portfolio in hospitals.

How will the expanded partnership with Philips influence your product roadmap and revenue mix over the next few years?

Since a large portion of our advanced sensors, including rainbow sensors, are sold through Phillips monitors, it's going to help us continue our growth. The challenge is getting our solutions integrated effectively into their systems, which takes time.

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

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.