Masimo at Needham Conference: Strategic Growth and Divestiture Plans

On Wednesday, 09 April 2025, Masimo Corporation (NASDAQ: MASI) participated in the 24th Annual Needham Virtual Healthcare Conference. The company presented a strategic overview focusing on growth through innovation and divestiture of its consumer business. While Masimo emphasized positive growth prospects and market share gains, it also acknowledged challenges such as tariffs impacting profitability.

Key Takeaways

• Masimo plans to sell its consumer business by midyear, using proceeds for share buybacks.
• The company is launching a new hemodynamic system in 2026 to boost growth.
• Masimo's core pulse oximetry business is growing at 6-8%, with advanced parameters seeing 20% growth.
• Gross margin improvements are expected between 50 and 80 basis points this year.
• The company aims for a 400 basis point improvement in operating margin in 2025.

Financial Results

• Long-term growth target is set at 7-10%, driven by various business segments.
• Pulse oximetry (SET) business is growing at 6-8% due to market share gains.
• Rainbow technologies are surpassing the 10% growth expectation.
• Advanced parameters, including capnography, are growing at 20%.
• Hospital automation revenues are increasing by at least 20%, representing 3-4% of total sales.
• New contract wins totaled over $430 million last year, an 11% increase.
• Unrecognized contract value stands at $1.77 billion, indicating future revenue potential.
• R&D spending is expected to decrease from 10-11% to 8-9% of revenue.

Operational Updates

• A new hemodynamic system will launch later this year, with significant contributions expected in 2026.
• Expansion of monitoring systems in hospitals is ongoing, with a focus on low acuity areas.
• The Rainbow technology, constituting 15% of revenues, is growing faster than pulse oximetry.
• Masimo has an evergreen agreement with Philips, with ongoing negotiations to expand terms.
• Consumer health products have been shut down, with a potential sale of the hearing aid project.

Future Outlook

• Masimo plans to divest its consumer business by midyear, focusing on an outright sale.
• Proceeds from the sale will be used for share buybacks, enhancing shareholder value.
• The company aims for continuous process improvements to drive gross margin enhancements.
• Growth in driver shipments is anticipated in 2025, following inventory depletion in OEM companies.
• Long-term gross margin target is in the upper sixties.

Q&A Highlights

• Masimo's market share gains in pulse oximetry are driven by superior accuracy and a broad technology portfolio.
• The expiration of core patents has not led to effective competition replication.
• Tariff concerns were addressed, with impacts on profitability and the consumer business sale discussed.
• The timing of new contract revenue recognition was clarified, using a simplified approach.

In conclusion, Masimo is strategically focusing on its core medical technology business and divesting its consumer segment to enhance growth and shareholder value. For further details, readers are encouraged to refer to the full transcript.

Full transcript - 24th Annual Needham Virtual Healthcare Conference:

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Twenty fourth Annual Needham Healthcare Conference. I'm Mike Matson, and I lead the med tech and diagnostics equity research team at Needham and Company. I'm pleased to introduce Massimo. With us today, we have vice president of investor relations, Eli Hammerman. Instead of a standard presentation, we are gonna do a q and a session.

If you do have questions you you'd like to ask, you could submit them electronically through the conference Needham website, or feel free to email them to me at mmatson@Needhamco.com, and I'll do my best to fit them in. So with that, we're we're gonna get started here with the q and a. So thanks for joining us, Eli. I guess let's just start with some product related questions. So I know in the past, Matt, some weeks to talk about this growth paradigm with SET growing high single digits, rainbow growing 10%, your advanced parameters, including NovoLine, o three, and SET line growing by 20%, for a combined kind of high single digit growth.

Does that do do all those, growth rates sort of still apply?

Eli Hammerman, Vice President of Investor Relations, Masimo: Yes. Thanks for inviting us, Mike, and, glad to be here today. I can answer yes. Those growth rates do still apply. I can confirm those expectations and share a little more perspective on them.

For our pulse oximetry business, which we refer to as the SET business, SET is our trademark. It means signal extraction technology. We have a combination of market growth and market share gains, both contributing about equally to that six to 8% growth rate. And we've been consistently winning market share for over two decades now and are very much on track to keep doing that. For, the rainbow technologies, which we are calling co oximetry and hemodynamics, as we expand the breadth of, products in that area.

We, have been outperforming our long term expectation of 10% growth, and we still have 10% as our minimum expectation there. And we should see some sort of boost to that, as we launch our new hemodynamic system later this year with, contributions coming in 2026. For the advanced parameter group, yes, that 20% growth is accurate for our long term expectation as we gain market share. Our market share in capnography and brain function monitoring is substantially lower than it is in pulse oximetry, so we do have a lot of runway there. And one other element that you didn't mention, and that's our hospital automation and services revenues, which we are now seeing very healthy growth in.

That's, in the range of three to 4% of our total sales growing at at least 20%. So, we do expect to achieve long term growth of seven to 10%, based on that composition.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Okay. Got it. And this the hemodynamic system, maybe you know, I don't know if you've talked about that before. I don't remember hearing about it, but so I apologize if you have. But can you maybe just tell us more about that and kind of when you're planning to launch it and, know, how it fits with Rainbow?

Eli Hammerman, Vice President of Investor Relations, Masimo: Yeah. Sure. Our new hemodynamic system is an expansion of the technology that we acquired when we bought Lidco, a UK company, a few years ago. And this is a product that will provide the standard hemodynamics measurements plus one highly differentiated measurement. So we'll have cardiac output, we'll have stroke volume, stroke volume variation, but we'll also have d o two delivered oxygen, which we are uniquely qualified to provide because of having the total hemoglobin sensor that gives hemoglobin concentration in grams per deciliter.

That is a technology nobody else has. And when you know how much hemoglobin is in the blood and you know how much blood is being pumped, you combine that with the amount of oxygen saturation of that hemoglobin, that's the pulse ox value in percent, then you can get d o two delivered oxygen, which is a very valuable thing to know and should make us very competitive against the other hemodynamics monitor competitors out there like, Becton Dickinson, which owns the old Edwards critical care business, as well as the, Baxter Cheetah Medical product and a product, made based on ultrasound from a company called USCOM. So we expect to be able to gain market share by using our presence in pulse oximetry as an entree to present the value of our hemodynamics measurements, including d o two.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: And so to get the d o two measurement, they they have to use your rainbow sensor. Correct?

Eli Hammerman, Vice President of Investor Relations, Masimo: Yeah. That's correct.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Okay. So there's some kind of synergies there where it'll maybe pick up some hemodynamic monitoring, but you also also pulls through the the rainbow sensors. Okay. Alright. And then, you know, I think you already answered my question on on set.

You said, you know, you're you are gaining a fair bit of share there still, but I guess maybe you could talk about what's driving the share gains. I believe you have better technologies, and that's part of it. But, you know, maybe just tell us more there.

Eli Hammerman, Vice President of Investor Relations, Masimo: Yeah. Sure. Well, there's two main factors driving our market share gains in pulse oximetry. First, it's that we have a better performing product in terms of accuracy and reliability, and that means lower false alarms, better true alarm rate, as well as, the ability to get around two major problems in clinical monitoring. That is low blood perfusion, as well as, motion of the hand and feet.

That's where we get our tagline measure through motion and low perfusion. It's especially valuable in the NICU, the neonatal intensive care unit, where we have our largest presence in hospitals. And then we typically expand to other critical care areas like the adult or pediatric ICU and the operating room from there. So better performance in terms of, the overall, reliability of the values we provide. And then secondly, we have a broader monitoring technology portfolio than we've ever had, which makes us more competitive, in terms of being able to match, the capabilities of our main competitor, Medtronic, who we're now competing against with four different technologies.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Okay. Got it. And, you know, just keeping in that line of thought around competition, You know, the some of the corp set patents have expired. So I guess, you know you know, I got this question from an investor, but why haven't you why haven't they been able to more effectively copy, you know, some of your core technologies with with the IP having expired. Maybe you're just kind of a moving target because you keep innovating and adding new features and things that are protected.

Eli Hammerman, Vice President of Investor Relations, Masimo: Yeah. I'd say there's an external and an internal reason for that. Internally, Medtronic was blocked from innovating next generation versions of their pulse ox technology for many years by virtue of the settlement from the patent infringement case we won against them way back in the mid two thousands. Secondly, we did not disclose the nature of all the IP, especially the set algorithms in our patent filings. Some of it was withheld in trade secret form, and that IP is actually contained in encrypted chips on our circuit boards.

So it's not accessible in any way that would allow for copying. That's how we've maintained our competitive advantage. At this point, you know, pulse oximetry is not a very fast growing market like some of the other markets that are being targeted by our main competitors. So the appeal of investing in r and d there may have limited value for them.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Yeah. Okay. That that makes sense. And then where do things stand in terms of hospitals expanding oximetry into the general ward? I think that there was an expansion kind of coming during the pandemic and coming out of the pandemic.

You know, has that continued, and what are you seeing there in terms of utilization of those systems that were placed in that that set a part of the hospital?

Eli Hammerman, Vice President of Investor Relations, Masimo: Yeah. We're seeing a steady expansion of bed coverage with monitors next to them, in the low acuity area, meaning general ward or med surg floor. It really spiked upward during COVID, then it, leveled back off to its prior growth rate where you're only seeing, low single digit percentage increases in bed coverage with hardware. The traditional method for monitoring patients in low acuity has been for a nurse to wheel a monitor from room to room periodically. But with some of the productivity enhancement tools that we've integrated into our monitors like Root with Vital Signs, we're able to automate the data capture of all the Vital Signs, which acts to streamline, the, recording and record keeping processes for nurses so they no longer have to write down that information on a clipboard than type it into a computer.

That's helped to increase the presence of monitors next to beds. Now we've been pushing for many years to monitor all patients who are receiving, opioid pain control drugs postoperatively because they have the risk of causing respiratory depression where a person can slip away and die without anybody noticing if they're not on a monitor. But if they are, then the drop in blood oxygen that is linked to respiratory depression will trigger an alarm, the nurses can do something before it's too late. We're still pushing for that. And one of the main missions of our new CEO Katie Zymond is to increase the frequency of monitoring in the hospital because of its value to improve outcomes.

So we're going to see a continued push in that regard, and, part of that involves getting the hardware out there. But we're also developing new form factors of monitoring, including our RadiusVSM product, which is a fully wearable monitoring system, which should help to facilitate that increased bed coverage. And that's because the capital equipment investment for this small wearable system is substantially lower than it would be for a big box next to the bed.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Okay. And then moving on to, you know, to Rainbow. Maybe you could give us an update there just kind of on on the penetration, you know, how many of your customers have have adopted Rainbow. I guess what why haven't why has it happened even faster, I guess? You know, is there any kind of killer out there?

Is it the hemoglobin or monitoring? I think it was that that really was the most appealing part of it.

Eli Hammerman, Vice President of Investor Relations, Masimo: Yeah. With rainbow, it's actually grown to a pretty substantial portion of our sales now. It's about 15% of our revenues, and that's still growing faster than our pulse ox business, so it will continue to rise in proportion to the whole. The two more successful parameters out there in terms of critical care adoption have been the total hemoglobin measurement, which gives you hemoglobin in grams per deciliter and helps to guide blood transfusion decisions intraoperatively. And the other measurement is ORI, oxygen reserve index, which has been very valuable for anesthesiologists as they do their preoperative prep and intubation of patients, helping them to know when they're starting to run out of time to complete the intubation, getting the breathing tube into the lungs to allow gas exchange.

Sometimes there's a difficult anatomy or the patient has some other complications which makes the intubation process difficult. And the anesthesiologist can know from the ORI value when they have to abandon the procedure temporarily and, basically reoxygenate the patient manually using the insufflation bag before they try the intubation again. That parameter has been adopted very successfully O US, and now we're starting to win contracts for it in The US after getting approval for it last year. Those are the main things driving rainbow today. And at this point, it looks like the percent of customers who have adopted it are somewhere in the mid single digit range.

So there's still a lot of upside there because that's just scratching the surface for us. And as the data continues to accumulate, showing a net savings in terms of reduced blood transfusions and expenses, we expect that adoption to continue to rise.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Yeah. Okay. And then can you just remind us the, the pricing, the sensor pricing differential between SET and Rainbow?

Eli Hammerman, Vice President of Investor Relations, Masimo: Yeah. Our pulse oximeters or SET sensors are typically priced in the 8 to $10 range. That's for the single patient use or disposable sensors. And then for rainbow, it really depends on the configuration and the volumes. But those sensor prices can range anywhere between 30 to $100, depending upon how many LEDs and how many measurements are, achievable with those sensors.

At the high end, we have all of the measurements integrated in. That includes hemoglobin, met hemoglobin, ORI, and carbon monoxide, for example. So, we've got variations on that all in one sensor with versions that only have a subset of the measurements. So that's where the price variation comes in.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: For rainbow, are the sensors actually different, or is it just that you're charging more when they enable more of the the the different parameters?

Eli Hammerman, Vice President of Investor Relations, Masimo: The sensors are actually different. The way they differ is in the number of LEDs or wavelengths of light that they contain. We have a four LED sensor, an eight LED sensor, and a 12 LED sensor. And because they have more components, they cost more as you go up that scale.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Okay. Got it. Got it. Alright. And then, you know, back years ago when when I picked up coverage, there was a lot of attention paid to the this Phillips agreement.

And I I know that you've subsequently kind of updated that until 2020. But where do things stand with that now? And is that something I mean, is that still adding to your growth, or is that kind of, run its course now?

Eli Hammerman, Vice President of Investor Relations, Masimo: Yeah. The Phillips agreement is an evergreen agreement, and we are looking at, you know, expanding the terms of that. So we're actively in negotiations with Phillips. It's been very productive for us because it led to an increase in our penetration in their installed base on a run rate basis very substantially. On a full installed base basis, our penetration is gradually improving because of that increased, presence on a run rate basis.

And so, we will definitely pursue a continuation of that. Philips committed to integrating four different Massimo technologies into their monitors as a customer option, and those were, the rainbow measurements as well as our capnography, our brain function monitoring, and our cerebral oximetry technologies. So with all those readily available, it provides the customers with a lot more choices for adopting Masimo, which works to both companies' advantages. Since, Rainbow is available from other big OEM companies, it only makes sense for Philips to also offer it. And, the the end result is that the the hospital customer benefits because our technologies are superior, and they can achieve better patient outcomes with them.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Okay. Alright. And then just on the on the advanced parameters of capnography, brain monitoring, organ monitoring, maybe can you tell us about kind of where your share is with those and, you know, what's driving the growth, I guess, points of to the degree you're differentiated versus some of the competitors?

Eli Hammerman, Vice President of Investor Relations, Masimo: Sure. For that advanced parameter group of capnography, brain function monitoring, and cerebral oximetry, we estimate our share is in the eight to 10 percent range overall, so there's still a lot of upside there. For capnography specifically, we sell disposables in the form of cannula that carry the exhaled breath up to the monitor that will fit many different brands of capnography devices, not just Masimo brand. So that's different than all of our other sensors, which only work with our own hardware. As a result, we've seen very rapid growth in the sales of those disposables to the point where they now represent a very substantial portion of our total capnography sales.

So that's going very well. We expect to see continued growth there because capnography has been broadly acknowledged as a very valuable measurement in hospitals. It measures exhaled carbon dioxide, which is a great indicator of lung function to make sure that oxygen and CO2 are being effectively exchanged for good oxygenation of tissues. So we see a lot of upside here as we continue to leverage the Pulse Ox presence to gain share for these other smaller revenue products.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Okay. And then just wanted to get a similar update on on hospital automation. I think you said it's three to 4% of your total sales, if I remember correctly. But it it's kind of it's one of those things that's kind of hard to, I think, for investors to get their arms around or understand because it's not like a single product. It's there's a service component.

So maybe just talk about kind of the business model there, you know, how the deals are sort of structured, how much revenue per, you know, hospital per year you could potentially generate from that.

Eli Hammerman, Vice President of Investor Relations, Masimo: Yeah. Sure. Hospital automation refers to our suite of products comprised of both hardware and software, which are designed to automate information based processes. So we can automate the capture, transmission, display, and analysis of all the information coming from all the devices around a patient, no matter what brand they are. So at the front end, we've got our connectivity hub known as root that serves as a collection station.

For all the data coming from different devices like monitors, ventilators, anesthesia machines, IV pumps. All those things can serve as sources of data that flow through Root and then go to a second hardware component known as Iris Gateway, which is a dedicated server to translate that data stream into the HL7 or other similar programming languages that can allow the data to be inserted into the EMR, the electronic medical record. From there, the data can also flow back out into the Operating Room and be reconfigured and reformatted in a very easy to read and comprehend style using a software module called UniView, which provides one integrated view of all the different values from all those different machines on a single video screen. That allows doctors and nurses and technicians to all be on the same page at the same time in the surgery suite so that they can manage the patient more effectively. Alright?

Then at the furthest back end, we have our most advanced software. These are the decision support and analytics modules such as the HALO sepsis index, which looks for signatures or patterns and vital signs and care history that can indicate developing sepsis. And if you can flag that early, even before you get a confirmation from a blood culture, you can have the medical team consider administration of antibiotics early, which may save the patient's life, because sepsis can develop quickly and become life threatening. So that's what hospital automation is. As far as the way the business is structured, we are selling it as a subscription.

So it's a SaaS type of service where we can charge a certain amount per bed per year. And we're looking at fees that range anywhere between $500 up to $5,000 per bed per year depending upon the setting. It would be lower and low acuity because they're using less software and higher and high acuity. At this point, most of our service revenues are based on service and maintenance plans that allow for periodic upgrades of the software, so they're at the low end.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Okay. Alright. And then just in terms of the kind of the mix of the products that you're you're selling, your board shipments had have sort of slowed down a bit. I know there was kind of a boom and bust there during the pandemic or coming out of the pandemic. But maybe just talk about what's driven the two year decline that we've seen there and, you know, what you're expecting for 2025.

Eli Hammerman, Vice President of Investor Relations, Masimo: Yeah. In 2023 and '24, hospitals basically were recovering from the very high enthusiasm levels that they had for obtaining new monitors to improve bed coverage related to fears of running out of ICU space from COVID patients. So there was a lot of monitor purchasing going on, and things kind of came back into balance last year. Now in 2025, we're expecting to see our driver shipments grow again as, you know, any excess stock that, the OEM monitor companies had in their components inventory has been successfully worked down. And we are expecting to see growth this year with the driver shipments coming in anywhere between 240,000 to 260,000 against the 235,000 we sold last year.

So things are definitely on track there, and that relates to the expansion in our installed base, which now is running at a rate of about 3%. That's not the best indicator of growth for us. The best indicator of growth is the new contract wins that we quantify each quarter. We show those as incremental new contracts, which means it's either new business with brand new customers or expanded business with old customers. And you can see those amounted to over 430,000,000 last year and we're up 11%.

So that's a good proxy for the kind of growth that we can achieve. Our typical contract is about five to six years, so you can look at those revenues flowing in on that type of apportioned basis. We also give our total unrecognized contract value in aggregate, which includes renewal business as opposed to that incremental contract value. And in the total aggregate, we've got 1,770,000,000.00 in unrecognized contract value that represents product yet to be shipped. So you can see there's quite a predictable stream there of revenues that will accrue to us as we fulfill the shipments for those contracts.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Yeah. Okay. Alright. And then just wanna move to a different topic. So I wanna ask about the consumer separation.

I think, you know, with the management change and the new board and everything that that shifted from this JV effort to just an outright an attempt to do an outright sale of the business. Is that still right? And is that still what you're aiming for, I guess, at this point?

Eli Hammerman, Vice President of Investor Relations, Masimo: Yeah. We're only looking at an outright divestiture involving a sale. We're no longer considering the other two options, which would have been a joint venture or a stock dividend to shareholders to spin the business out to holders. So we're concentrating on a sale. We're talking to potential buyers actively now.

They're conducting their diligence, and our objective is to get to a transaction by midyear. Timing of a close could be a little bit hard to predict depending upon whether it's a strategic buyer or a financial buyer because a strategic buyer may have to go through significant antitrust reviews in various countries, which could slow the process down getting to a close. But, at the very least, we're aiming to have a definitive agreement in place by midyear.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Okay. And has all this, you know, tariff turmoil and whatnot, like, weighed on on this or slowed this down at all?

Eli Hammerman, Vice President of Investor Relations, Masimo: Well, it seems a reasonable assumption. I can't say definitively because, I haven't been involved in the deal team. But if there are changes in the, you know, potential profitability of of the audio business related to the imposition of tariffs, of course, that would make a buyer reconsider, the valuation. So if that's happening, it's likely unfolded in the past two weeks, and I'm not sure how it's affecting the process overall. But at the very least, you would expect people to rework the numbers.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Yeah. Okay. And just but putting that aside, so the the numbers you're reporting or the guidance for this year, I mean, it's essentially with that business already excluded. So when you do sell it, you're going to you've said, I think you're gonna use any proceeds to repay debt. And so it seems like almost regardless of what the valuation is that you end up getting, you're gonna it should be accretive.

Right? Because you're you're gonna pay some amount of debt down. We just don't know how much that's gonna be, and that's gonna lower your interest expense. I mean, is that a fair summarization?

Eli Hammerman, Vice President of Investor Relations, Masimo: Yeah. What we're gonna have to do is pay down the loan that's associated with the audio business that we took on when we executed the acquisition. So that's the first thing we need to do, but we can refinance that loan if we want and use the proceeds from that refinancing to buy back shares. So the original loan needs to go away, but we can still have leverage on our balance sheet that we can use to to do a buyback. Okay?

You know, the magnitude of that is up in the air depending upon the the actual sale price of the business. So that's about all I can say at this point. And, you know, we're looking at the share buyback as our true intention for use of proceeds.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Okay. But no. That that that makes sense. But I guess what I'm getting at is there is there any scenario in which based on the numbers that you guys have guided to for this year that this could end up somehow being dilutive to the current guidance EPS range you've given? It seems like to me it can only be accretive by me, missing something.

Eli Hammerman, Vice President of Investor Relations, Masimo: Well, the the guidance we've given, does not incorporate any assumption based on proceeds from the audio business sale whatsoever. Okay?

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Yeah. So

Eli Hammerman, Vice President of Investor Relations, Masimo: I guess if we get to a completed transaction, we would revise guidance at that point. But I think the answer to your question really depends on what you're assuming for a sale price as well as interest rates for refinancing that loan. So it's very difficult for me to give you a definitive answer here. Sorry about that.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Yeah. No. No worries. Appreciate it. Maybe we can talk about it offline.

Okay. And then just on the so the consumer health business products that you had, like the Freedom Watch in the store, are the those are just basically been shut down. They're they're they're dead. Those aren't gonna be sold separately or part of this consumer audio sale. Correct?

Or could you end up selling those if you found a buyer, or is that not happening?

Eli Hammerman, Vice President of Investor Relations, Masimo: No. We have shut down, the baby monitor store as well as, the development work on the FreedomWatch, the smartwatch. There was one project, that was in motion to develop an over the counter hearing aid based on, an adaptation of music earbuds. That's one thing that could, go with the audio business sale, but it's very much up in the air. But the the the majority of the consumer health effort has now been completely shut down.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Okay. Got it. Alright. And then I wanna move on to some financial questions. So I'll start with one on the tariffs.

I mean, obviously, fluid situation. We had news today that they're rolling them back to some degree, I guess, 10% with the exception of China. But, you know, just from a high level, regardless of the the specific amounts, I just wanna understand, you know, where your exposure is. So I think you do do manufacturing. You have some manufacturing in Mexico.

You have some manufacturing in Malaysia with the sensors that you move there. And what else do you have? And, you know, is is any of your supply chain or manufacturing coming from China at all?

Eli Hammerman, Vice President of Investor Relations, Masimo: Okay. Well, we have two main manufacturing sites, Mexico and Malaysia. In Mexico, we've got exposure of 25% of our COGS, but about a third of that is related to low volume sensors and cables, and two thirds is related to monitors and circuit boards. So there's gonna be a different treatment there related to what's eligible for USMCA exemption and what's not. Okay?

With Malaysia, we're producing most of our high volume sensors, which are pulse oximeters. And, of course, the tariff situation there, as you said, is very fluid, and we're working on, assessing exactly what the financial impact could be there based on all the different factors that, go into that calculation, which include not only just Malaysia production, but also, the various geographic sources of raw materials and components and how the final product gets treated. Lastly, keep in mind that, we have a significant portion of our revenues from OUS customers, so some of the Malaysia production does not even come to The US. Alright? And then as far as China, we do source some components and raw materials from that country, and I can't really comment any further than that on the tariff treatment because those things could be shipped to different locations.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Yeah. Okay. Yeah. Because you have plants in Mexico and and Malaysia. So if they went there okay.

Alright. And then let's see. So you you did talk a little bit earlier about the the contracts. I think you said on the fourth quarter call, new contracts are 413,000,000. So how should we think about the timing of when that converts to revenue?

I mean, maybe you already answered this because you said the contracts last five to six years. So, I mean, does that imply take that and divide that by, you know, five or six, and that kinda gets you to a hang on number, or is it or is that oversimplifying it?

Eli Hammerman, Vice President of Investor Relations, Masimo: No. That's a really good simplistic way of looking at it is you take the 430 divided, say, by five and a half. So that means, you know, year one post signing, you'd be looking at 80 to 85,000,000 in incremental new revenues flowing in. To the P and L, then in year two, it would be the same 80 to 85,000,000. So it would be flat year over year.

But in year two, you'd be adding in the new contract revenues that you just signed in year one. So it keeps building on itself. So that's how you should look at that.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Okay. Got it. And then just a couple of things in terms of the P and L here. So starting with gross margin, you've seen a nice improvement from moving the sensors to Malaysia. Besides that and putting aside any tariff impact for now, what's the outlook for gross margin?

And, you know, what is it just a matter of, you know, volumes growing and that's just driving more fixed cost absorption? Or are there other thing you know, tailwinds there from things like product mix or or geographic mix or anything else that can help your gross margins?

Eli Hammerman, Vice President of Investor Relations, Masimo: Yeah. Putting aside tariff impact, we expect to see gross margin improve anywhere between fifty and eighty basis points this year, and that was based on continued improvements in processes and component selection based on deliberate efforts of our cost reduction team as well as the benefits of scale. So, gross margin is something that we expect to see steadily improve year by year, with a long term target in the upper sixties. Alright? Now we did see a nice improvement in gross margin when we moved manufacturing of our high volume sensors out of Mexico into Malaysia because labor costs were lower.

Now we have to assess whether or not we're gonna keep that manufacturing in Malaysia in view of the potential tariff situation or if we're gonna consider moving it back to Mexico. So that's an analysis that's actually ongoing.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Yeah. Okay. And all the day to day changes, I'm sure, are making that easy. But okay. And then operating expense, similar question there.

You know, outlook for the two kind of line items, SG and A and R and D. I'd imagine that we're gonna see SG and A grow more slowly than your revenue, probably more like, low to mid single digits or something, more inflationary levels. I mean, is that fair? Are there any other, you know, factors to consider for OpEx?

Eli Hammerman, Vice President of Investor Relations, Masimo: Yeah. Well, firstly, for r and d, we're aiming to, you know, reduce that from its historical levels recently in the 10 to 11% range down to something more in the eight to 9% range, which is still very competitive against our peers. And then you're exactly right on the s g and a line, we do expect to see leverage accrue there as those expenses grow more slowly. You know, we had significant reductions in r and d last year as we eliminated some programs as well as some staff, and, the benefits of that cost reduction will flow through all of this year. You got your first, view of it in our fourth quarter results, and that's where you're seeing a significant improvement in our operating margin this year.

We're expecting to see a 400 basis point improvement in operating margin this year as a result of that portfolio optimization both on the product and project side as well as lower expenses in the operating expense area related to discretionary expenses as well as things linked to the office of the CEO. And then finally, we've eliminated the spending for those consumer health care products that you mentioned before, which further adds to margin expansion.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Okay. And I think you had talked at one point about, you know, some five year EPS target of I think it was I wanna say it was, like, $6 or something, but it almost looks like you're gonna be close to that maybe next year at least based on where people are modeling things. So, you know, I guess, where do we go from there? I know you haven't set guidance for next year, but let's just say that's the number where it ends up. I guess what I'm getting at with this question is you've you're getting a pretty massive improvement in margins this year, which is great.

But to what degree I mean, what I'm worried about is that pulling future margin improvement forward so that, you know, maybe '26, '20 '7, '20 '8, you're not gonna be seeing not say your margins will be down, but maybe they're gonna be, you know, growing more slowly than they might have otherwise been.

Eli Hammerman, Vice President of Investor Relations, Masimo: Well, we still have the same targets long term, and we're approaching those faster than we had anticipated. So, we should be able to reach the endpoint more quickly, which is very good news. Alright? As far as additional margin expansion, you know, our objective is to see operating margin improve by a hundred basis points per year after this year, And that's a combination of both gross margin improvement as well as leverage on the opexes. So I wouldn't say that there's any reason to expect us to plateau.

If anything, what you should expect is once we reach our long term targets, then we'll come up with new targets. And that's something that we fully intend to do, but we don't wanna get ahead of ourselves with that.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Yeah. Okay. Let me just see if we have any it doesn't look like have any questions from the audience, so I think we're gonna have to wrap up there. Thank you, Eli. Hope you have some good news at our conference.

Eli Hammerman, Vice President of Investor Relations, Masimo: Alright. Thanks a lot, Mike. Take care. Bye.

Mike Matson, Lead Med Tech and Diagnostics Equity Research Team, Needham and Company: Bye.

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