Good afternoon, ladies and gentlemen, and welcome to Masimo's Second Quarter 2021 Earnings Conference Call. The company's press release is available at www.masimo.com. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

I am pleased to introduce Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations..

Thank you and hello, everyone. Joining me today are Chairman and CEO, Joe Kiani; and Executive Vice President and Chief Financial Officer, Micah Young. This call will contain forward-looking statements, which reflect management's current judgment including certain of our expectations regarding fiscal year 2021 financial performance.

However, they are subject to risks and uncertainties that could cause actual results to differ materially. Risk factors that could cause our actual results to differ materially from our projections and forecasts are discussed in detail in our periodic filings with the SEC. You will find these in the Investor Relations section of our website.

Also, this call will include a discussion of certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. We generally refer to these as non-GAAP financial measures.

In addition to GAAP results, these non-GAAP financial measures are intended to provide additional information to enable investors to assess the company's operating results in the same way management assesses such results.

Management uses non-GAAP measures to budget, evaluate, and measure the company's performance and sees these results as an indicator of the company's ongoing business performance. The company believes that these non-GAAP financial measures increase transparency and better reflect the underlying financial performance of the business.

Reconciliation of these measures to the most directly comparable GAAP financial measures are included within the earnings release and supplementary financial information on our website.

Investors should consider all of our statements today, together with our reports filed with the SEC including our most recent Form 10-K and 10-Q, in order to make informed investment decisions.

In addition to the earnings release issued today, we have posted a quarterly earnings presentation within the Investor Relations section of our website to supplement the content we will be covering this afternoon. I'll now pass the call to Joe Kiani..

Thanks Eli. Good afternoon everyone and thank you for joining us for Masimo's second quarter 2021 earnings call. We're happy to report strong second quarter results.

While we expect the driver in capital orders in 2021 to be lower than what we achieved in 2020 due to unprecedented high demand during the height of COVID and expected sensor volumes to rebound as electric surgeries recover as COVID hospitalizations recede, we did not anticipate the very strong increase in single-patient use sensors that we realized this quarter.

This produced higher than expected revenues, leading to an 11% increase in our non-GAAP EPS. Based on our observations and discussions in the field, we believe that not only our elective surgery volumes steady returning to pre-COVID levels, but more hospital beds are monitored beds now.

As you'll hear soon from Micah, we realized a substantial increase in monitor installations during the quarter from record new hospital contracts in 2020 and record new hospital contracts in the first half of 2021.

These installations strengthen our foundation for long-term sustainable growth for sales of our sensors and help hospitals take better care of their patients, I'll discuss more later in the call. Now I'll ask Micah to review our second quarter results in more detail and provide you with an update on our 2021 financial guidance..

Thank you, Joe, and good afternoon, everyone. Our second quarter results came in above expectations as we saw a strong rebound in sensor sales. Further, our shipments of technology boards and instruments are on track to exceed our original target for the year with second quarter shipments above expectations.

We are seeing a step function increase in hospital census and steady expansion of monitoring in hospitals leading to increased sensor cells.

At the same time, a higher than usual number of monitor installations during the second quarter has expanded our installed base, which put pressure on our gross margins for the quarter due to the new accounting standard implemented back in 2019.

From a long-term perspective, we're glad to see the strength in installations because of its implications for higher sensor volumes and higher margins in the future. During the quarter, we shipped 72,500 technology boards and instruments, which exceeded our estimate of $60,000 for the quarter.

In turn, we have shipped approximately 2.2 million technology boards and instruments over the last 10 years. As of the end of the second quarter, we estimate that our installed base has grown approximately 11% over our installed base at the end of the second quarter of 2020.

For the second quarter of 2021, our product revenues increased to $305 million compared to $301 million in the prior year period.

You may recall from our earnings call last July that we delivered 31% product revenue growth in the second quarter of 2020 due to higher than usual demand for our technology boards and instruments as hospitals address the potential shortage of monitored beds for COVID patients.

Despite this very tough year-over-year comparison, we delivered strong revenue performance that exceeded expectations.

For the second quarter 2021, our worldwide sales of technology boards and instruments were higher than in normal years, but down 41% compared to 2020 due to the tough year-over-year comparison associated with pandemic related strong demand last year for Masimo SET, pulse oximeters and related equipment.

Fortunately, this decline was more than offset by a strong rebound in sensor sales. In fact, our worldwide sales of single-patient use adhesive sensors were up 35% versus the prior year period.

Most encouragingly, our sensor revenues rose by 5% sequentially versus the first quarter of 2021, in contrast to the historical average seasonal decline we've experienced for the same sequential periods in normal years. This represents another sign of a step function rebound in surgical volumes. Moving down the P&L.

Our non-GAAP gross margin for the second quarter increased 80 basis points to 64.7% compared to 63.9% in the prior year period.

The year-over-year improvement was primarily driven by a more favorable revenue mix as we delivered strong revenue performance from our margin -- higher margin single-patient use sensors in combination with the revenue decline for our lower-margin technology boards and instruments.

Despite the year-over-year improvement in our product revenue mix, our gross margins were below expectations due to a higher-than-usual number of monitor installations under contract during the second quarter.

If you recall from the ASC 842 accounting standard we implemented back in 2019, during the quarter that we install equipment under a contract, we recognize an unfavorable margin impact upon installation and return for the higher sensor margins over the life of the contract.

As a result of the record number of new customer wins last year and during the first half of this year, combined with increased access to hospitals, we experienced a significant increase in the number of monitor installations under contract this quarter.

We believe that our investment in equipment under these new contracts will pay long-term dividends in the form of higher sensor volumes and increase margins over time. Our non-GAAP selling, general and administrative expenses as a percentage of revenue decreased 230 basis points to 30.2% compared to 32.5% in the prior year quarter.

And our non-GAAP research and development expenses as a percentage of revenue increased 80 basis points to 11.1% compared to 10.3% in the same quarter last year.

As a result of the year-over-year improvement in gross margin and operating expense leverage, our non-GAAP operating margin increased 230 basis points to 23.4% compared to 21.1% in the prior year period. Moving further down to P&L. Our non-GAAP tax rate was 24.5%, and our weighted average shares outstanding for the quarter was $57.4 million.

For the second quarter, our non-GAAP net income was $54 million or $0.94 per diluted share. In comparison, second quarter 2020 non-GAAP net income was $49.3 million, or $0.85 per diluted share. This reflects non-GAAP EPS growth of 11% over the prior year quarter. Turning to our GAAP results.

GAAP net income for the second quarter of 2021 was $50.2 million, or $0.88 per diluted share. In comparison, second quarter 2020 GAAP net income was $55.8 million, or $0.96 per diluted share.

Included in our GAAP earnings for the quarter was $1.3 million of excess tax benefits from stock-based compensation compared to $7.5 million in the prior year period. In addition, we incurred a charge of $3.4 million in the quarter related to assisting a long-term OEM customer with their medical device correction in the field.

To summarize the second quarter, our revenue once again exceeded expectations, and further our driver shipments were above our pre-COVID run rate despite an unprecedented driver shipment year in 2020. Also, we delivered non-GAAP operating margin expansion of 230 basis points and non-GAAP EPS growth of 11%.

Most importantly, we saw record single patient use sensor volume and a sequential improvement in our single patient use sensor volume when compared to our first quarter 2021 results, providing evidence of the step function improvement in hospital patient volumes. Now I'd like to provide an update on our full year 2021 financial guidance.

For 2021, we are increasing our product revenue guidance to $1.216 billion, which reflects year-over-year growth of 6.3% on a reported basis, or 5.4% on a constant currency basis. This represents an increase of $11 million above our prior guidance. Furthermore, we are now projecting to ship at least 270,000 technology boards and instruments this year.

This represents a notable increase from our prior estimate of 246,000 drivers. Our non-GAAP gross margin guidance is now 66%, which represents a 90 basis point increase over our 2020 results.

Our updated guidance includes the incremental margin headwinds we are projecting for the year associated with the elevated number of monitor installations under long-term contracts. And our non-GAAP operating margin guidance is 23.8%, which reflects a 70 basis point improvement over the prior year. Moving further down the P&L.

Our non-GAAP non-operating income is expected to be negligible and we are projecting a non-GAAP tax rate of 23.4%. And we are now estimating that our weighted average shares outstanding for 2021 will be $57.7 million.

Based on all of these assumptions, we are increasing our non-GAAP EPS guidance to $3.85, which represents an increase of $0.02 above our prior guidance. And from a GAAP perspective, we are projecting a GAAP tax rate of 18.2% and GAAP earnings per share of $3.83 for the year.

Our GAAP EPS guidance includes projected legal expenses related to our recent complaint filed against Apple with the US International Trade Commission, seeking to exclude importation of the infringing Series 6 watch.

For additional details on our full year 2021 financial guidance for GAAP and non-GAAP earnings per share, please refer to today's earnings release and supplemental financial information within the Investor Relations section of our website at masimo.com.

In conclusion, we are seeing a return towards our traditional revenue mix, which should lead to increasing gross margins. In the face of challenging year-over-year comparisons, we are still projecting mid-single-digit revenue growth and double-digit operating profit dollar growth this year. With that, I will turn the call back to Joe..

Thank you, Micah. During the first half of 2021, we've seen an encouraging recovery in hospital sensors that gives us optimism that things should be returning to normal in most of the markets we are direct in by year end.

This recovery has translated into a step function increase for our single-patient use sensors used in the critical care area including operating rooms and ICU settings. For the second quarter, SET single-patient use sensors and capnography cannulas had year-over-year volume growth of more than 25%.

And our SPHB SedLine and O3 single-patient use sensors had year-over-year volume growth of more than 90%. Our discussions with hospital executives have revealed their intentions to broaden the practice of continuous monitoring to more patients and their institutions.

After being catalyzed by the pandemic, the expansion in monitoring is continuing because of rising awareness of its value and improving outcomes and reducing cost of care.

Starkman Hitchcock's 10-year study of Masimo SET, pulse oximetry, and Patient SafetyNet in postsurgical wards prove that monitoring outside of the intensive care unit save lives and reduced our costs by millions of dollars annually.

Following a record year of contracts in 2020, Masimo has also experienced a record-breaking first half of 2021 in terms of winning new customers and renewing contracts with existing customers.

We've captured new contracts with sizable institutions, such as the University of Utah, Grupo Angeles in Mexico, and Divontes, Netfork, [indiscernible] in Germany. As for Masimo SafetyNet for opioids, we still do not have FDA clearance, but plan to launch this solution in September in some of our larger European markets.

We expect this system to save countless lives of prescription analytic users of opioids at home. As I mentioned on previous calls with you, we expect to have exciting innovations to announce over the next 12 months.

We've been working very hard to develop some truly remarkable solutions, and we hope our customers and you will be excited about them too when we introduced them.

In closing, we have a positive outlook for the second half of 2021 and remain committed to our mission of improving outcomes and reducing the cost of care and taking on a basin monitoring to new sites and applications. With that, we'll open the call to questions.

Operator?.

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

Good afternoon. Thank you, Joe, and great to see the strong quarter. I'm guessing that despite the incredible driver number that people are going to want to understand better is the gross margin pressures due to the accounting change -- accounting standard adoption.

And I don't want to be dumber than usual, but maybe, Micah, you can just help us better understand, what impact did that adoption have on gross margins in the quarter.

Was it a 10, 50, 100 basis point headwind? What might it have been just to try to understand that impact relative to sort of the overall rest of the business? And if I heard you correctly, you're talking about now sensor volume -- sensor gross margins will be better, how do we think about, in a sense you -- the pace or the magnitude that you got right were, but recapturing some of that gross margin and the timing there? Sorry for the long question..

Yes. Thanks, Rick. Great question. So, the way that I'd size it up for the quarter is, we believe that the headwinds are coming in at about 160 basis -- over 160 basis points of headwinds, higher than we expected in the quarter.

And if you look and kind of going back to your second question, as we place this equipment under ASC 842, we recognize upon equipment installation of lower margins associated with that equipment and return for the higher margins in the future.

So, as you think about the rest of the year, we will see steadily increasing gross margins based on -- that's implied in our guidance. However, we're also contemplating some of the headwinds we expect because we are seeing higher installations this year, and we're seeing stronger drivers going out to customers.

And as we place more of these under contract, we will still have some headwinds for the back half of the year. So, we're happy to make this investment because this strengthens our recurring revenue stream in the future in terms of single-patient use sensors. So that's all implied in our guidance.

We've factored the headwinds based on our best estimate and what the installations we expect right now for the back half of the year, and that's incorporated into our 66% for the full year..

Yes, maybe, Rick, if I could just add just to make sure there's clarity on this. When we sell a capital equipment like a route or Radical 7 or an OEM Board to our OEMs. That comes with its margin, whatever we sold it for minus the cost. And we don't have this 842 issue.

The 842 issue happens when we place the equipment free of charge for, let's say, five-year center agreement. And before 842, we would not take a charge for that capital when we installed it. Now based on the 842 rules, we do.

So the negative is when we have a strong set of new contracts like we've had recently, when you place that equipment you get a hit with the margin at the beginning, but the benefit is, unlike before 842, now as we ship sensors into the account, we get our normal margin.

We don't have to reduce that margin based on the cost of the capital over the five-year period. So when we -- right now, what we projected for you for the rest of the year is based on -- I think a realistic maybe conservative estimate of how many new contracts and how many new drivers we're going to install.

So the only way, so hopefully it could get worse is if we end up doing better and we get more customers than we anticipate to sign up for our five-year contracts, to convert from our competitor to Masimo for the next five years.

So in a way, unfortunately, though there's a margin hit, it's good news and that it tells you we're doing better than we expected and attracting new customers..

Yes. I totally get it. And it does seem like a positive, it's just optically a little confusing. But having said all that, Joe and Micah, how do we think -- I'll invite you to help us think ahead to 2022, 2023.

Just at the highest level, how do we think factoring all that in about gross margin, the ability of gross margins to move higher from this new post-standard adoption level? I mean, are we talking -- I guess, one, we should still assume they can move -- can and will move higher, all things equal.

But any extra color about what that could look like?.

Yes. Well, I guess -- okay, let's do a supposed situation. If we don't sign up any new customers and all we're doing is serving the current customers we have, our margins will approach 70% plus.

If we start to have more customers, which we hope we do, if it's at a conservative rate, it's the margins that we've been talking about and what we updated you on. If we do better than that, then it will be hurting.

So the way you have to think about it, let's say, in three to five years from now, the margins are going to look a lot better because of 842 than they would have due to this new way we have to account for the capital installations..

Great. No, I feel there'll be other questions. I just wanted to get that there. If I could squeeze in just two more, if you wouldn't mind. Just given the strong recovery -- and Joe, you highlighted the recovery in procedures.

Are you seeing -- are you concerned at all about this latest wave of COVID? And maybe, Micah, just -- and I'll just ask this now, can you help us think about the third quarter, fourth quarter cadence, the flow, as we think about the second half in terms of quarterly mix and numbers? Thank you..

Sure. Let me answer the first part and then Micah will answer the second. So what we're seeing so far with the Delta variant, it isn't hospitalizing vaccinated people. And in most of the markets, we are addressing, majority of people have been vaccinated.

So while the Delta is increasing, you've seen, for example, the case in Iceland, it's not hospitalizing those people. It's not killing those people. So based on what we're seeing today, we don't think that hospitals will get full of COVID patients and they'll have to cancel their elective surgery.

So we are anticipating that things are going to continue recovering..

Yes. And Rick, as part of the second question, I think you asked what are we assuming in our guidance and very consistent with last quarter, we're assuming that steady rebound back to pre-COVID levels by the end of the year. That's what's implied in the guidance. Plus, as you know, now we increased our driver shipments for the year to 270,000.

So that's an increase of 24,000 above our prior estimate. So you'll see an elevated number of installations and steady rebound in sensor volumes..

Thank you very much..

Sure..

Now we do think Q3 sensor volumes will probably be lower than Q2 because of the summer vacations that happens normally. But we do think that's just seasonal things that are finally getting normalized..

Yes. Yes, Rick, just one thing to add there. Historically, if you go back on kind of normal years, our revenue percentage in Q3 is about 24.3% of our full year revenues. So that's pretty consistent in -- outside of last year..

Perfect. Very helpful. Thank you, Micah..

You’re welcome..

Next question comes from the line of Matt Taylor from UBS. Your line is now open..

Hi guys. Thanks for taking my question. I just wanted to ask a follow-up to try to get more specificity on the gross margin dynamic. So obviously, it's good you're signing up all these new customers.

I guess if that remains at elevated levels, I guess, for the rest of this year, when do we start to see that cycle through? You mentioned in three to five years it's obviously better.

Do you start to see a pickup next year? Is it kind of gradual and asymptotes towards the 70? How do we think about modeling it phased out over the next couple of years?.

Yes, Matt. I think we would be happy to see continued gains with new customers that this is the right investment to make, and we expect to get returns out of this over the long-term. And as Joe mentioned before, if we did no new customer installations, you'd see a significant leverage in our gross margins over time.

If we continue to gain new customers at the pace we're gaining them, it will have some pressure, and it's already contemplated in our gross margin guidance. And then we should get kind of back on that steady increase in gross margins moving forward that we've laid out in our long-term plan..

Okay. And you called out some pretty positive trends in the sensor utilization and with the new products. And maybe you could just also give us a sense for -- you have a new -- a lot of new product flow coming up here in the second half of the year with LiDCO ramping, opioid SafetyNet, hospital automation expanding.

Could you just characterize how much those new things contributed in the quarter? And how much are you baking in your guidance for some of those other new products that could be material in the future?.

Yes. So Matt, we have negligible revenues from our US launch of T&I this year, and that's -- we're just now launching that as we announced last quarter, building the pipeline and starting to roll that out in the US. So we'll see how that contracting goes and over the course of the back half of the year and on into next year.

And if we gain some new accounts earlier, that could be upside to our guidance. Same thing with Lidco, is we're continuing to integrate that technology into our devices and then start to really launch that later in the year in the US, that could be also a source of upside later this year or even as we move into next year..

Okay. And then maybe just one last one. Any color on -- you mentioned some indicators that you're really seeing the broadening of monitoring throughout the hospital with the seasonality not dipping this year, and you talked about like replacements being really strong.

Could you give us any sense or any other guideposts that you're looking at feedback from customers pointing to that being durable and increasing in the future potentially?.

Yes. As I said earlier, when we've been talking to our customers, we're seeing that extra monitors that were bought last year being utilized. We once again interviewed our top 30 customers, and they're still utilizing them, not in the OR and ICU only, but outside the ICU.

So we are -- I mean, if you look at our adhesive sensor growth, we mentioned what -- between this year and last year.

But if you go back to 2019, when it was a normal period, not a COVID period, our sensor volumes were still up over 20% compared to Q2 2019 and we've been -- we know census isn't up that high compared to 2019, so it must be a combination of additional new customers we've attained and the continuous monitoring, proliferating through the hospital's noncritical care beds..

Great. Thanks, Joe..

You’re welcome Matt..

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

Hey good afternoon. Thanks for taking the questions. Just to maybe come back with the -- sorry, another quick follow-up on the gross margin side.

Micah, if this was 160 bps of a greater headwind this quarter, what you were thinking, is the impact here just a surprise due to the pace of the installations being faster than what you anticipated? And then maybe, correct me if I'm misremembering, but I think your new contracting was real strong in the second half of last year.

So is this the first big impact from this contract and equipment being installed? Or was some of this weighing on past periods as well?.

No. Mike, just to clarify, when I said over 160 basis points of headwind, that's against our expectations for the quarter year-over-year. It was a larger headwind over 200 basis points of headwinds year-over-year or more than 200 basis points.

What's happening is and what we're seeing is -- last year was a record year in terms of winning over new customers to Masimo technology as well as renewing existing contracts, and we saw a record first half as well.

So we're seeing an elevated number of amount of equipment that we're installing under those contracts, and that's what's putting the pressure above and beyond what we expected coming into this quarter..

Yes. And maybe this is helpful. The reason we're not capable of give you better guidance than we're giving you right now because we've been through a period where there's changes. Last year, the changes were due to COVID rising and hospitals panicking and buying things to turn a lot of beds into monitoring beds.

And that's affected our margins, because we sold not by contract, we sold a lot of capital that have a lower margin compared to sensors, because sensor volumes were down because there weren't as many elective procedures.

So you have patients that would normally come in five days for elective procedures, not the patients coming in for maybe a month or two for COVID. So you didn't see the same rate of change with sensors. So that cost, as you know us not being able to predict the margins profitably last year.

The good problem we're having again this year is it's hard for us to predict, because last year was really an inflection point for many institutions that had been sitting with old competitive technology, they realized at the moment of truth, they needed us.

So that plus our ability to come up with innovative products to help them, I think, has won a lot of customers over. So we've ended up with a record -- not only a record shipment of capital and OEM boards that we sold, but a record set of new hospitals contracting with us, which is seeping into this year.

So it's really a problem of good fortune with the margins, but that's also why it's hard for us to predict better than we predicted, because we think we're still beneficiaries of that goodwill and of that moment of truth where you know what, when you really come down to it, we're the best for patient care.

We proved ourselves in the NICU in the pediatric and children area. But then when it came to adults, people used to say, well, we're not sure you make a difference. Dartmouth-Hitchcock came up with that 10-year study shows we made a difference. And last year, they saw that we made a difference with COVID patients.

So I think that's why we're ahead of schedule in things that we hadn't -- we couldn't have predicted fortunately. But that's also why we can't tell you for sure what's going to happen beyond this year.

And even then, things may go better than what Micah has baked in, in new hospitals converting to us, which could improve our drivers, improve our sensor volume, but because of ASC 842, reduce our margins temporarily..

Got it. Got it. That's helpful. It definitely seems like a high-class problem. Okay. So just for my follow-up here --.

High-five problem. I like that.

I wanted to ask on the board number you posted here, which was quite good. I appreciate all the color you're providing here on the installations. Just conceptually, as we think beyond this year, which I think this year also would have been higher, if not for some higher board inventories with OEMs to start the year.

But is the exit rate here in 2021, the right way to think about modeling forward board shipments? Or do we think about maybe a bonus level of growth on top of the run rate here that's now seems to be taking a little bit higher?.

Yes, Jason, if you look at our implied guidance, it's just over 65,000 a quarter, and I think that, that's kind of the way that we look at it right now until we give further estimate seeing how the rest of the year goes.

So, I think, that's probably the way to look at it going forward, and we'll update you as we continue to see success in contracting..

Okay, all right. Thanks Micah. I appreciate it that..

Next question comes from the line of Mike Polark from Baird. Your line is now open..

Good afternoon. I'm going to ask one more on this scintillating gross margin discussion..

You thought I was kidding?.

Yes. No, here.

So as you assess -- understanding it's imperfect, as you assess the surprise or the drivers of the surprise versus your prior expectation, what portion of it is replacing competitive boxes with your boxes? And what portion of it is putting boxes next to beds that didn't used to have boxes? Not year-over-year, but like what did you miss? What piece of that was better or is trending better than what you thought three to six months ago?.

That question may imply what we said we had record breaking new customers and renewals that you thought were aggregating it. No, we have record numbers of new customers and record number of renewals. And typically, with renewals, we don't place as much new equipment because they already have our equipment.

So it's really the vast majority of business for new customers..

Okay. Helpful. Lidco, I heard the comment from Micah on the US launch maybe later this year, perhaps next that seems to be a great opportunity for you. But in the meantime, I'd just be curious, is that the ex-US piece contributing as expected. I think we were modeling about one point of revenue contribution in the quarter.

Is that give or take where Lidco is?.

Yes, that's correct..

Yes. And Lidco is going great. It's in many ways, doing better than what we expected..

Okay. The -- I want to ask about Apple. I mean, I appreciate the carve-out of the new item, $5 million in the quarter. I guess bigger picture, this just seems like the third front in this….

Mike, real quick, just to be clear, $5 million for the year. The majority of that in the back half of the year..

Okay. Helpful. Zooming out on this, it seems to be the third front in this matter. And I'm just curious for a little more color, how do you underwrite this internally, the total expense you're willing to -- the total investment you're willing to make, the potential payoffs here, the timing of visibility, any -- I get a lot of questions on this.

And I know there's a lot of fluidity and not a lot of good info at the moment, but your latest and greatest thinking on this, I think, would be helpful..

Yes. Well, we've never done a ITC before. We're familiar with patent allegation. And as you know, with Medtronic and with Philips, that ended up costing between $15 million to $30 million each.

But ultimately, it was -- we not only were able to, in the Medtronic case, enjoin the infringing product, but it led to Medtronic -- nearly $1 billion in royalties and damages. And with Philips, $300 million in damages and a new partnership that I think has been really helpful to our company.

With Apple, with the trade secret and patent infringement that is not going to go to trial probably until end of 2022, and that will be the normal cost of a patent litigation give or take some. I mean, Apple has not been easy to do things with.

They do everything they can to take away your rights to discovery, and we've been fighting that and I think we're making some headway in the court on that. But -- and that eventually, if we went, that could be a significant damages and who knows what else. But on the ITC case, we don't get any damages.

That is purely -- we're seeking an conjunction, and that will take about 18 months probably, and will probably cost $1 million a month. And -- but we're seeking an injunction of the Watch 6, which has our patented technology in it. And so that's why -- that's summary I can give you on that..

Yes. No, that's really helpful color.

And then last on that for Micah, are all expenses related to these three work streams is going to be excluded now? Or is some of it in the adjusted numbers and some of it's out?.

Yes, Mike, as far as our traditional defense of our patents and the trademark case as well -- or trade secret, I'm sorry, trade secret as well as the patent case, those costs are already included in our non-GAAP numbers.

This is a very unique case in terms of the ITC, the complaint that we filed, which represents a pretty significant spend over a very pretty defined period of time. It's a very short duration of time, call it up to 18 months. So that's why we're excluding that and giving you visibility to the spend related to the ITC..

Excellent. Thank you for taking my questions..

Thank you..

Next question comes from Ravi Misra from Berenberg. Your line is now open..

Hey, Joe, Micah, Devin here for Ravi. Thanks for taking our questions. I wanted to talk a bit about hospital automation a little bit more. We discussed it kind of in detail and it was a big Q last year or last quarter for it. In regards to the kind of the expansion and utilization of hospital automation and monitoring.

How do you see the recovery and kind of the delta variant there impacting any adoption versus kind of any change from last quarter? And then I have a follow-up to that, please..

Well, hospital automation is going very well. People are seeing the value -- you saw the study maybe that we did a press release on that showed there's less nursing time at the bedside, which, of course, helps with dealing with any disease, especially an infectious disease like COVID, Delta variant.

And then as far as the business is going really well, our -- the way we kind of track this is -- there is a driver of shipment and then there's annual revenues. I know we had some really good quarters in terms of driver shipments and that has continued.

But I know from a annual revenue increase has been double-digit, maybe close to 30% growth this quarter compared to the same quarter a year ago..

Okay. Thanks. And then I just want to shift real quickly to Lidco and also NantHealth. With Lidco, I know you mentioned that, that could be meaningful kind of toward the end of the year.

I'm curious how that plays in with the cardiac monitoring and the oximetry to any pricing can the subscription with bed algorithms and then also kind of rolling out that package together. Is it already integrated with the Masimo dashboard? If you could just get some color into that, that would be helpful..

Well, sounds like you've been talking to some of our customers. We have not only a better technology for cardiac output, minimally invasively done. That's one reason we bought Lidco, then the leading company in the space. But we also have a better -- better cost and cost of ownership proposition for our customers and it's gone really well.

Customers are happy to see Masimo backing Lidco, because even though in the past, Lidco always won clinically, they were such a small company, customers were afraid of taking a chance on them. So, like I said, in many ways -- revenue-wise, it is what it is, we said it's about a point.

But in many ways, it's been better than we expected as far as customer excitement and acceptance..

Guys, we have time for a couple more questions.

Mike Matson? Operator?.

Mike Matson, your line is now open..

Yes. Thanks. So I guess, I have one -- yet one more on gross margins. But putting aside this mix issue and the board issue, I wanted to see if you can just comment on any other kind of drivers of gross margin over the next few quarters.

I know the RD sensor, I think in the past, that was helping your gross margin? I don't know if that's run its course? And what about the other new products you've launched and things like inflation, et cetera? What are the kind of puts and takes that are for gross margins aside from this mix issue?.

Yes, Mike, if you kind of strip out the headwinds from the higher monitor installations for the balance of the year, we continue -- as we see rebounds in elective procedures and how our SpHb, O3, SedLine, those things are kind of connected more to those rebounding surgeries. That will give us a nice mix benefit.

And then, if you think about the RD, as we convert more to RD sensors, the higher quality sensor, but we have some better margins on that sensor and that should continue to drive improvements in gross margins. And that's why we have that long-term plan as we try to drive our gross margins to 70% over time.

Those are some of the key drivers to that improvement..

Okay. Thanks.

And then, as far as the Opioid SafetyNet launch in Europe goes, what's the initial plan for -- who's going to be paying for that? Is it just going to be an out-of-pocket purchase? Do you have any plans to seek reimbursement or have insurers pay for it?.

Yes. Initially, it's going to be out-of-pocket purchases, but we are working with reimbursement groups outside the U.S. to seek reimbursement for them as well..

Okay. Thank you..

Thank you. Okay. I think last question is from Marie Thibault..

Marie Thibault, your line is open..

All right. Thank you for squeezing me in this evening. I won't ask any more on gross margins, I think we've asked everything there is to ask there. But I did want to ask about sales guidance. You had a great quarter.

All the indicators looked good, shipments, sensor volumes, really a lot of positive commentary and you beat consensus by about $10 million or so. So why not take guidance up a bit higher on the sales front? Just would love to hear a little bit more of the thinking around that..

Yes. Marie, I'll comment first and then Joe can add. If you look at our guidance for the year, we're raising it by $11 million, and that's in excess of how we exceeded expectations in the second quarter, and it really reflects the additional level of driver shipments for the back half of the year.

And of course, as you know, we're being thoughtful and prudent about our guidance. We're still in the first half of the year and coming out of a pandemic from -- we're just being thoughtful and you could say, I'm somewhat conservative and provide high confidence guidance. So that's how you should think about it..

Sure, sure. Yes. And I agree with that assessment of yourself, Micah, very good. And then I guess, I'll ask one on international. We used to hear from time to time that there'd be some big tenders coming in. So I would love to just hear kind of your expansion on the international front.

Any new countries you've been able to get into, any new governments you've made relationships with that sort of issue? Like, we just haven't talked about international specifically in a while? Thanks..

Well, sure. We have not expanded much directly this year internationally, but we are making really good progress in the countries that we are direct in from major European countries to Asian countries. And we just recently got some really good reimbursement for our noninvasive hemoglobin in Korea, which we think is going to be good.

And so, yes, things are going really well.

I think this quarter, international was what, 34% of our total revenue? Was it some?.

Yes, it’s around 30%..

Yes, about 30%. Yes, 30% of our revenues. So we expect international to do more and more as we continue growing..

All right. I appreciate it so much. Thank you..

Thank you so much. Everyone have a wonderful afternoon and look forward to our Q3 earnings call, where we can talk about margins. Thanks. Bye..

This concludes today's conference call. Thank you all for your participation. You may now disconnect..