Eli Kammerman - VP-Business Development & Investor Relations Joe E. Kiani - Chairman & Chief Executive Officer Mark P. de Raad - Executive Vice President & Chief Financial Officer.

Chris Lewis - ROTH Capital Partners LLC Tao L. Levy - Wedbush Securities, Inc. Brian D. Weinstein - William Blair & Co. LLC Alexander D. Nowak - Piper Jaffray & Co (Broker).

Good afternoon, ladies and gentlemen, and welcome to Masimo's Second Quarter 2015 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 question-and-answer session. I'm pleased to introduce Mr.

Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations. Please go ahead..

Thank you. Hello, everyone. Joining me today are Chairman and CEO, Joe Kiani; and Executive Vice President and CFO, Mark de Raad. This call will contain forward-looking statements, which reflects Masimo's current judgment, including certain of our expectations regarding fiscal 2015 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 SEC filings, including our most recent Form 10-K and Form 10-Q.

You will find these in the investors section of our website. We will also discuss certain non-GAAP financial measures. A description of each non-GAAP financial measure and a reconciliation of each non-GAAP financial measure to the most comparable GAAP financial measure can be found in our earnings press release. I'll now pass the call to Joe Kiani..

Thank you, Eli. Good afternoon and thank you for joining us for Masimo's Second Quarter 2015 Earnings Call. I am happy to report that we once again exceeded our own performance targets for the quarter with healthy gains for product revenues, earnings per share, and record shipments of SET Pulse Oximeters and rainbow SET Pulse CO-Oximeters.

For the second consecutive quarter, our product revenues rose by nearly 11% and on a constant currency basis we were up nearly 15%.

Strength in product revenues was due primarily to increased demand in our SET Pulse Oximetry products, which were up by 10% over the same quarter a year ago as we continued to benefit from our rising market share as well as overall improvements in hospital census. Encouragingly our Q2 rainbow revenues showed a 16% year-over-year increase.

Our Q2 GAAP EPS of $0.36 per diluted share up from $0.24 in the prior-year period was the result of our strong revenue growth and effective expense control.

Our outlook for the remainder of 2015 has improved and we're confident about our ability to not only deliver on the financial goals we outlined in February and raised in early May, but to exceed them again.

Later in the call, I will provide you with some additional thoughts on our business, but first Mark will review our second quarter financial results in more detail and provide you with our updated 2015 financial guidance.

Mark?.

Thank you, Joe, and hello, everybody. Reported total revenue and product revenue for the second quarter was $155.7 million and $147.6 million respectively. Product revenue rose by 10.6% or 14.7% on a constant currency basis versus the second quarter of 2014. Due to the foreign exchange rate volatility, our Q2 revenues were reduced by $5.5 million.

We believe that the Q2 strength in product revenues are due to a variety of factors, most notably, as Joe mentioned, the much stronger U.S. hospital census data, which we believe is resulting in higher year-over-year utilization levels of our technologies.

Q2 2015 rainbow product revenue totaled $13.5 million, which was up 16.3% or 19.6% on an FX adjusted basis from $11.6 million in the prior-year period. The increase in year-over-year rainbow revenues was primarily due to both strong licensing and sensor revenues.

Our Q2 SpHb revenues increased by 37% to $4.4 million versus $3.2 million last year, also due primarily to strong licensing revenue growth in the quarter, which is a good leading indicator for future sensor utilization increases. Encouragingly, we have continued to see an increase in the number of positive evaluations of SpHb in both the U.S.

and OUS, which is encouraging for the second half of 2015. Our worldwide end-user or direct business, which includes sales through just-in-time distributors, grew 10.4% in the second quarter to $125.1 million versus $113.3 million in the year ago period.

Our direct business represented approximately 85% of total product revenue in the quarter, level with the prior year period. OEM sales comprised the remaining 15% and rose by approximately 12% versus the prior year period. The strength in the OEM business is largely due to both increased sales of sensors and licenses. By geography, total U.S.

product revenue increased by 16% to $106.2 million compared to $91.6 million in the same quarter of 2014. Our OUS product revenues of $41.4 million declined by 1.3% in the second quarter, but on a constant currency basis they actually rose by 11.8% versus $41.9 million in the same period last year.

Excluding the impact of foreign exchange rates, year-over-year revenue growth rates were highest in EMEA and Latin America. International revenues represented approximately 28% of total Q2 product revenues, which was down from 31% in the prior year quarter.

However, adjusted for the impact of foreign exchange rate movements, our Q2 OUS revenues would've been 31% consistent with the prior year period. Our second quarter 2015 GAAP product gross profit margin was 64.2%, level with the prior year quarter.

The Q2 product gross profit margin of 64.2% was slightly lower than the mid to upper 64% range we had anticipated and this was due primarily to a slight change in product mix in the quarter. Once again, excluding the impact of foreign exchange rates, our GAAP product gross profit margins would've been 64.8%.

As we've noted in the past, we believe that we will see higher product gross profit margins in the second half of 2015 as the benefit from our ongoing value engineering programs is more pronounced in the second half of any year, as the higher cost inventory at the start of the year, which was built at higher prior-year costs, is replaced with new lower 2015 cost inventory.

Our second quarter total gross profit margin, including royalties was 66.1%, also level with the year-ago period. Reported second quarter 2015 total operating expenses were $75.1 million, up approximately 1% from the $74.7 million in the year ago quarter.

Adjusted for the impact of foreign exchange rates, our year-over-year operating expenses would have been up 3.3% as higher legal and other professional fee expenses were partly offset by lower charitable contributions. SG&A expenses were $59.9 million, level with the $59.8 million in the prior-year period.

Adjusted again for the impact of foreign exchange rates, our year-over-year SG&A expenses would have been up 3.4% for the same reasons that I previously noted. R&D spending of $13.4 million was essentially flat with the year ago period with minimal impact from year-over-year foreign exchange rate movements.

Second quarter 2015 operating income was $27.8 million compared to $18.4 million in the prior-year period, up 51%. This strong year-over-year Q2 operating income growth rate is the combined result of our strong year-over-year product revenue growth and controlled operating expenses.

Q2 2015 non-operating expense was $1.1 million compared to income of $322,000 in the prior-year period. The Q2 2015 expense is primarily related to approximately $650,000 in interest on our credit line as well as the translational impact of movements in foreign exchange rates on our overseas net asset positions.

Our second quarter 2015 effective tax rate rose to 30%, up from 25.5% in the same period last year and was above our most recent projections of a range between 27% to 29%. The higher year-over-year Q2 tax rate of 30% is due to a higher mix of 2015 U.S.

versus OUS revenue as well as the net negative year-over-year impact of the movement in foreign exchange rates.

Our average shares outstanding for Q2 were 53.7 million, a 5.5% decline from 56.8 million in Q2 2014, which was due to our repurchases of approximately 4.5 million shares during 2014 and 2.4 million shares repurchased in the first half of 2015.

In the most recent Q2 quarter, although we repurchased 2.1 million shares at an average price of $34.56, our fully diluted share count declined only slightly from approximately 54 million at the end of Q1 2015 to 53.7 million at the end of Q2.

This was due to the impact of higher Q2 stock option exercises as well as the dilutive impact of stock options outstanding, both consistent with the increase in Masimo's stock price. Second quarter GAAP 2015 net income was $19.4 million or $0.36 per diluted share, compared to $13.8 million or $0.24 per diluted share in the same prior year period.

It's also noteworthy that the net impact of foreign currency transactional and translation adjustments, as highlighted in our new GAAP to non-GAAP reporting, reduced our reported 2015 Q2 earnings per diluted share by approximately $0.07 per share.

In fact, consistent with our new supplemental non-GAAP reporting, you'll find in today's press release separate schedules that do highlight our non-GAAP revenues, gross profit margins, operating expenses, operating income and earnings per share.

We hope that this additional disclosure will improve our investors' ability to more clearly see our key underlying business trends, especially the impact that year-over-year movements in foreign exchange rates have had on our fiscal 2015 GAAP operating results.

As of July 4, 2015, our days sales outstanding was 46 compared to 42 as of the prior quarter, and over the same period our inventory turns were level at 3.0. Total cash and cash equivalents as of July 4, 2015 were $119.4 million compared to $134.5 million as of January 3, 2015.

During the six-month period ended July 4, 2015, we generated $28.3 million in cash from operations, $15.2 million from the impact of stock option exercises and we borrowed an incremental $52.5 million.

These funds were used to repurchase $81.7 million in stock, acquire a previously-leased building in New Hampshire for $8.5 million and approximately $12.9 million to fund the build-out of our new corporate headquarters facility in Irvine, California. Now I'd like to turn to our updated fiscal 2015 financial guidance.

As a result of our Q2 results and our continued optimism about the remainder of this year, we are updating our 2015 financial guidance.

We are increasing our total revenue guidance from $608 million to $621 million, including an increase in our product revenues from $580 million to $592 million and our royalty revenues from $28 million to $29 million.

We continue to expect higher product gross margins in the second half of 2015, and as a result, we are maintaining our full year fiscal 2015 gross profit margin guidance at approximately 65%.

We are also maintaining our original fiscal 2015 operating expense guidance at approximately $306 million, including the medical device tax of approximately $7 million. Our forecasted other expense will now be approximately $700,000 to $800,000 in Q3 and Q4, respectively, due to higher borrowings.

And we now expect that our effective tax rate will be 30% for the rest of the year, due primarily to the strength in our U.S. business. Finally we are projecting Q3 weighted shares outstanding in the low $54 million range and Q4 in the high $54 million, neither of which include any additional share repurchase assumptions.

As a result of these updated projections, we're increasing our full-year 2015 GAAP earnings per diluted share from $1.33 to $1.43. And consistent with our non-GAAP reporting, we are now also updating our projected 2015 non-GAAP earnings per diluted share guidance. And we now expect our non-GAAP EPS to rise from $1.48 to $1.61.

The slightly higher increase in non-GAAP EPS is due to the even higher than initially projected impact of the changes in foreign exchange rates on our non-GAAP earnings per share projections. A reconciliation of our updated GAAP earnings per share to our non-GAAP earnings per share has also been provided in today's press release.

And with that, I'll turn the call back to Joe..

Thank you, Mark. In Q2, we once again saw strength in our core SET Pulse Oximetry business with growth well above the reported 2% to 3% increase in hospital admissions.

SET Pulse Oximetry products continued to gain market share while our install base is estimated to be expanding by two times to three times the rate of growth for the pulse oximetry market annually.

In addition, growth in our OUS sales in regions such as Latin America, Europe and the Middle East is tracking to exceed our domestic growth rate this year in constant currency terms.

On a related note, we're seeing encouraging signs of a large scale sales opportunity in other countries and hope to secure sizable orders from some of these regions in the foreseeable future. Sales growth for our rainbow products was encouraging as awareness of the clinical benefits from the rainbow Pulse CO-Oximetry parameters continues to rise.

In Q2 at the European Society of Anesthesiology Conference in Berlin, a study was presented from Limoges Hospital by a leading anesthesiologist who showed 30-day mortality rate decreased by 25% when using SpHb and PVI on 5,500 patients.

This study is on top of the two other clinical outcome studies done at Mass General Hospital and Cairo University, which showed blood transfusion amounts dropped by 90% and 50% respectively while necessary transfusions were given approximately an hour earlier at Cairo with SpHb.

Further on PVI, a recent study published in May in the Journal of the American College of Surgeons found that implementing a multidisciplinary perioperative Enhanced Recovery protocol that included intraoperative fluid management guided by a goal-directed algorithm using Masimo PVI led to significant reductions in length of stay, complication rates, and cost for patients undergoing both open and laparoscopic colorectal surgery.

The Enhanced Recovery program included ingestion of a carbohydrate drink two hours prior to surgery, perioperative multimodal analgesic regimen, goal-directed therapy with Masimo PVI, intraoperative low-dose spinal morphine, limiting intraoperative opiates, intraoperative infusion of ketamine and lidocaine, early mobilization, and oral intake postoperatively.

In this study led by Dr. Robert Thiele at the University of Virginia, researchers observed that as compared to the standard of care group, patients in the Enhanced Recovery program had 2.3 fewer days of hospitalization, reduced mean direct cost of $13,306 versus $20,435, fewer surgical site infections, and less fluid administered.

In summary, we are seeing increased interest and demand for SpHb and PVI and we hope that we can soon get on the steep part of the technology adoption rate for these parameters. This increased interest and demand is coming just-in-time as Philips is about to launch their high-end monitors with rainbow post-recent FDA clearance and CE Marking.

As Philips has a dominant market share of over 60% in the U.S. and abroad, we believe this bodes well for clinicians and their patients as they gain access to integrated rainbow parameters in Philips monitors. We also have made noteworthy progress in winning adoption for Root, our patient monitor and connectivity hub.

We were very happy to win a large-scale contract for Root, Radical-7, rainbow, SedLine and our ISA capnography products in Q2 with Changi General Hospital in Singapore, a major hospital that serves the eastern Singapore metropolitan region.

Another major win for us during the quarter was a new contract with a prestigious hospital in Turkey, Malatya, Turgut Ozal Medical Centre Liver Hospital, to include Root, SpHb, PVI and our SedLine brain function monitor.

A third significant sale for us in Q2 was the purchase of nearly 500 EMMA capnography mobile units for the New South Wales Ambulance Service in Australia. In June, we announced the introduction of new features for Root, non-invasive blood pressure and temperature measurement capability.

Our strategy for Root is working well as we are seeing a very strong initial uptake in unit volumes for this exciting new advanced feature monitor and connectivity hub.

We expect Root to become a material portion of our business in the future, synergistically driving demand of many of our rainbow optical and acoustic monitoring technologies, as well as our optical and electrical brain and optical airway monitoring technologies, O3, SedLine, and capnography/gas monitoring.

As suggested by the update to our fiscal 2015 financial guidance that Mark just reviewed, we have an optimistic outlook for the remainder of the year as we continue to focus on delivering on the final stretch of our 10-year plan. Our leading SET Pulse Oximetry and rainbow SET Pulse CO-Oximetry technologies are continuing to gain additional traction.

Our value engineering efforts put in place three years ago are continuing to pay dividends and you'll see more evidence of this in the second half of 2015. And as we have continued to demonstrate we're also very focused on controlling operating expense growth.

In closing, we remain excited about realizing our 10-year plan and long-term goals of improving patient care, while helping our customers reduce their costs, and simultaneously building shareholder value. With that, we'll open the call to questions.

Operator?.

Thank you. And our first question comes from the line of Chris Lewis of ROTH Capital Partners. Your line is now open..

Hi, guys. Good afternoon. Thanks for taking the questions..

Hi, Chris..

I wanted to start on the core business, the SET business. I think the fourth consecutive quarter of double-digit year-over-year growth. Last quarter you had talked about a strong flu season which gave you a little boost. First, kind of a two-part question.

Did that continue in the second quarter? And then I guess secondly, can you just elaborate on how much was driven of the core underlying SET strength was driven by the improved census versus share gain? Thanks..

Sure, Chris. I don't believe the flu season impacted us much in Q2. But we do believe that there was census increase and mainly due to – not required surgeries, but optional surgeries that I think were higher. And that also led to the mixed higher shift on adult sensor sales for us than the neonatal sensors.

But I think that gain was only a fraction of the strength we saw in Q2. We think the bulk of the strength came not only from market share gains, but also the new way we have focused the sales force.

So I think the combination of those two probably had more impact than census but obviously census created a strong wind in our back that helped our customers take better advantage of our technology..

Good. And then, Joe, you mentioned in your prepared remarks large scale sales opportunities in international markets, some sizable orders I think you mentioned there.

Can you elaborate on those potential opportunities, potential timing? And have you assumed any of that coming through in the guidance?.

Yes. Sure. We have recently won a large tender in the Middle East.

However, because this is a new business for us, we decided not to put it in our guidance because it's a new business opportunity that we haven't had before, and we just wanted to see us getting the actual orders that come from winning this tender, delivering the product through our distributor and agents to the final customer before we further elaborated on it.

But we are very happy with this wonderful new tender we won. It's across our entire product line. And assuming it all comes in, it will provide significant upside to our business over the next three quarters at least..

Okay.

Just to dig a little deeper, would you be willing to quantify how much that would be for, potentially?.

Given again that this is a new business for us, I prefer not to. As you know in the past we had tried to estimate some out-of-routine business for ourselves that didn't mature, so we decided to take the approach of we'll report it as we see it.

So if you don't mind, in order not to create expectations that we possibly won't meet, I'd rather leave it for future. Hopefully we can talk about it post-Q3. And at that point, we will have had the experience to know what it truly is. And that's why we did not put it in our updated guidance..

Understood. And if I could just sneak one more in. Mark, for you, product gross margins in the quarter little bit lighter than expected. You mentioned mix. Was there anything else going on there? And then I guess what gives you confidence that you can still get that 65% level for the year? Thanks..

Sure. Yes. In addition to the product mix issue that we mentioned, it's really more of a – I'll call it an accounting-related topic in the second quarter. And fundamentally what happened was that we created actually more favorable results than we expected.

But as you probably know, we're required to capitalize all those favorable, in our case, variances that we generated in the June month. And so those are now sitting on our balance sheet basically waiting to come into the P&L in the third quarter as the inventory to which those variances were related actually gets shipped.

So that was one of the things that caused us – one of the additional things in addition to mix that caused the numbers to come down just a little bit. I mean frankly, we were looking for about 64.6%, so 64.2% is a little bit lighter.

But when you think of the combination of both the mix and this sort of accounting-related booking of our variances, that really made up the impact. And that's one of the reasons, frankly, why we're optimistic about. We were optimistic before, about our improved product gross margins in Q3 and Q4.

But this fact that we've got some favorable variances sitting on the balance sheet at the end of June actually helps us a little bit more in looking forward to Q3..

Got it. Thanks for the time and congrats on the quarter..

Okay. Thanks, Chris..

Thank you, Chris..

Thank you. Our next call or our next question comes from the line of Tao Levy of Wedbush. Your line is now open..

Hi, guys..

Hi, Tao..

Good afternoon. Hi. And so maybe we'll start with the base business that seems to be doing obviously really well. And I know you've talked about market share gains. But the strength the last couple of quarters, even excluding the flu season seems pretty remarkable.

And at least my understanding of this business is you don't – any big win in a given quarter really doesn't translate into revenues for a few more quarters once you get the installations up and running.

So the strength that you're seeing now, is that from sort of like a year ago type wins? And this is going to – you're going to have this pushing you for a few more quarters? Is that how we should think about it?.

I think you're right, Tao, given our business model, it's not what we booked in Q2 that made a difference, but what we did in 2014 that makes a big difference. So as you know, this is the ninth consecutive quarter that we've shipped over 40,000 Masimo SET Pulse Oximeters and Rainbow SET Pulse CO-Oximeters. So that is a great wind in our bags.

But I think the key may be, if you remember a year ago, we invested in the blood management team. And not only that helped us to assure that we were focusing on the opportunities for Rainbow like hemoglobin and PVI, but I believe it allowed our regular sales force to go back and focusing on our SET Pulse Oximetry and the rest of our business.

Those two together, along with some new ways that we're compensating our sales force and reorganizing them, I believe has put a sharper focus on our core business, while helping us establish what we believe will be the future of our company..

Got you. And that's very helpful. And it's obviously great to see hemoglobin starting to pick up here.

Was there any sort of like one-timish benefits there? Or was that mostly sensor, consumables, utilization-driven?.

It was really both. We not only saw great adoption for the licenses this last quarter, but also we saw a similar growth in our consumables, the sensors. And then the growth from a parameter basis was across the whole business, from commercial business in the U.S. to outside the U.S. to Department of Defense business.

So I think overall we didn't see any outliers, but some really encouraging adoptions by very, very influential institutions that should hopefully create a great solid future for us..

Got you. And then just lastly, I know you've referenced this a couple times, the final part of the 10-year plan.

Can you just remind us what that final part entails?.

Sure, sure. When we went public August 2007 eight years ago, we talked about how to really assure a plan that could be relied upon.

We needed to invest in R&D with certain product categories that we thought we needed as well as the build-out of our infrastructure, so that hopefully within 10 years we're enjoying much better returns for our shareholders but one that can be sustained. So we're eight years into the 10-year plan. We have two years roughly remaining.

To be fair, two-and-a-half years remaining, because that was an announcement we made in January of 2008 to our entire team. But yes, so we're at the tail end of it.

We believe we're set for solid growth, especially in our earnings area, and with both value engineering, expense control as well as the benefit from a dozen products that we've introduced over the last 18 months, and of course some major categories of technologies that we introduced since our IPO like a non-invasive hemoglobin, PVI, RAM and so forth..

And so just what happens after this phase or this 10-year plan? What does that 15-year plan look like?.

Well, one of the things that – where we are today, our infrastructure and our business, we obviously are doing our sound check to make sure we're ready for another 10 years. And we're certainly doing that for ourselves, but also recognizing at this stage of our company it's more appropriate to begin thinking three-year to five-year plans.

So as we set out a new course, we believe we have to not think short-term quarterly, but not also think a decade either..

Perfect, great. Thank you very much, Joe. Good job, guys..

Thank you. Thank you so much, Tao..

Thank you. And our next question comes from the line of Brian Weinstein of William Blair. Your line is now open..

Hey, guys. Thanks for taking the question..

Hi, Brian..

Hey, Joe. So I was wondering if you could comment a little bit on where you think your market share is today, and what percent of the market do you think that you're winning kind of on a current quarterly basis? And then where does that share get to over time? I think you guys are probably somewhere in the mid- to high-40%s at this point.

But where do you guys think that that gets over time?.

I dare not estimate that market share because I really don't know for sure. And when market share tests are done, you've got to hire economists and pay them a lot of money to figure it out.

But what I can tell you is that for a long time we do estimate that we have been out-shipping all other pulse oximetry companies, including our main competitor, in terms of new shipments of pulse oximeters. And we also know that over the last decade where we've gained thousands of customers, we've lost less than a hundred.

So our gain is probably – I don't know, I hate to again estimate that, but we don't lose much. We just keep gaining. But I think you can see it in the strength of our record number of 44,300 pulse oximeters and pulse CO-Oximeters we ship. And like even this last quarter we gained some notable institutions like Thomas Jefferson hospital system.

We have right now eight of the top 10 hospital systems in the country that have converted to Masimo, and they still keep on coming. So we're having fun, and I think we'll continue doing that. And we also are happy that when we gain a customer, the customer gains better technology and gives better care for their patients..

Okay. Fair enough. You mentioned a couple times the new way you've focused the sales force, both organizationally and from a comp standpoint.

Can you elaborate on the changes that were made there?.

Well, the formula for how to compensate the sales force may have been underestimated by us. Maybe it should be as complicated as the formula of how to measure-through motion. We're still trying to figure it out. But we think we may have hit one, so I think I'm going to keep that a trade secret, but it seems to be working.

I think our sales force is motivated, they're succeeding, they're focusing on the same things that the company sees valuable. So I think I'll just leave it at that, Sean. I mean, Brian. Sorry, Brian.

By the way, is your mom happy despite your market calls?.

Yes. My mom is doing great. She sends her regards..

Please give her my best..

I will. Last question, on share repurchase. Can you just remind me where you guys are on the authorization at this point? Mark, I think you said no share repurchases assumed.

Is that because there's other opportunities that you guys see? Or in light of the share price now, you're not looking to buy back stock at this point? Just elaborate on that comment. Thanks..

Sure. The board has authorized to-date 9 million shares and of the 9 million shares, we've repurchased a little bit less than 8 million. So we have about 1 million left to go under that share repurchase plan. So that was the portion that I was referring to before. There's absolutely no expectation that we will or will not continue purchasing stock.

We simply don't include it in our projections because we don't like to make those kind of assumptions because ultimately the market conditions will dictate whether or not we purchase those additional 1.1 million shares..

Okay.

But you're not signaling any kind of intent of other use of cash, in other words? So there's not like M&A opportunities that are near-term that you guys are shifting your focus to use of cash or anything like that? You're not signaling that in any way?.

No, no. There's no direct relationship to the position on the 1.1 million shares. We're always constantly evaluating new technology opportunities from an M&A standpoint and that's essentially almost irrespective of what we do from a share repurchase plan standpoint..

Okay. Great. Thanks, guys..

Thanks, Brian..

Thanks, Brian..

Thank you. And our next question comes from the line of Alex Nowak of Piper Jaffray. Your line is now open..

Great. Good afternoon, everyone.

How's it going?.

Hi, Alex..

So state budgets have generally improved over the last several years.

I was just wondering, are you seeing this drive any type of uptake on the carbon monoxide side? And maybe if not, how should we expect this to play out over the next several years?.

Well, you're right. With the improvement in tax collection by the cities and municipalities and the NFPA 1584 recommending CO monitoring, we should see an uptake on CO and we have. Clearly in this quarter we saw a nice increase in our carbon monoxide business, but the real growth potential hasn't yet been attained.

We are working on some big opportunities worldwide, and we do hope that in the U.S. the fire departments and the EMS systems will start purchasing again.

Because they were purchasing heavily at the beginning, then the financial crisis occurred, and they went into retreat mode, and we haven't yet still seen them come out strongly, and we hope that will happen..

All right. Great. Thanks for the information. And then I'm looking at Root.

Is the uptake tracking in line with your internal projection since the launch? And how should we expect this to grow for the second half of 2015 and into 2016? And also any initial customer feedback on Root specifically?.

Yes. The growth has been tracking to our expectations when it comes to Root for patient monitoring. When it comes to Root for connectivity hub, that has not materialized yet, and we hope we'll start seeing our team doing a better job educating what's possible with Root.

As far as I can remember and maybe I shouldn't say it, but it's been one of the most successful, if not the most successful, instruments we have ever introduced. So we feel really good about it.

We also, as far as successful customers with it, I mentioned a couple of them in my remarks, but we have a lot more that have bought it, are using it, and a lot more in the queue. So we, so far, are feeling that Root can become maybe the third pillar in our business with SET and Rainbow being the other two pillars..

Okay, good. And then just a last question from me and it's a follow-up to Chris's first question. You spoke about optional surgeries during the quarter.

I was wondering if this was partially due to the larger base of insured individuals and potentially from the ACA?.

It could be. It could be. I'm not certain, but I do believe that given that the mix that we saw was so different than our normal mix where we got a lot more adult sensor sales in the U.S. than neonatal, that tells us it is more people doing surgeries that normally they hadn't done.

So yes, it could be the ACA business that's causing that, but I don't really know..

Okay. Great. Thanks for all the info..

Thank you..

Thank you. And our final question comes from the line of Larry Keusch of Raymond James. Your line is now open..

Hi, Larry.

Hello?.

Larry, check your mute button. It looks like Larry may have removed himself from the queue. And I'm showing no further questions at this time. I'd like to turn the call over to Joe Kiani for further remarks..

Thank you. Well, thank you all for joining us on this beautiful summer day. I wish you the rest of your summer to be enjoyable. We look forward to reporting our third quarter results. And thank you for your interest in Masimo..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day..