Masimo Corp

NASDAQ:MASI

Earnings Call Transcript 2021-Q1

[Operator]

Good afternoon, ladies and gentlemen and welcome to Masimo's First Quarter 2021 Earnings Conference Call. The company's press release is available at www.masimo.com. [Operator Instructions] I am pleased to introduce Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations.

[Eli Kammerman]

Thank you. Hello, everyone. Joining me today are Chairman and CEO, Joe Kiani; and Executive Vice President and Chief Financial Officer, Micah Young. This call will contain forward-looking statements which reflect Masimo's current judgment including certain of our expectations regarding fiscal year 2021 financial performance. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Risk factors that could cause our actual results to differ materially from our projections and forecasts are discussed in detail in our periodic filings with the SEC. You will find these in the Investor Relations section of our website. Also, this call will include a discussion of certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. We generally refer to these as non-GAAP financial measures. In addition to GAAP results, these non-GAAP financial measures are intended to provide additional information to enable investors to assess the company's operating results in the same way management assesses such results. Management uses non-GAAP measures to budget, evaluate and measure the company's performance and sees these results as an indicator of the company's ongoing business performance. The company believes that these non-GAAP financial measures increase transparency and better reflect the underlying financial performance of the business. Reconciliation of these measures to the most directly comparable GAAP financial measures are included within the earnings release and supplementary financial information on our website. Investors should consider all of our statements today, together with our reports filed with the SEC including our most recent Form 10-K and 10-Q in order to make informed investment decisions. In addition to the earnings release issued today, we have posted a quarterly earnings presentation within the Investor Relations section of our website to supplement the content we will be covering this afternoon. I'll now pass the call to Joe Kiani.

[Joe Kiani, Chairman and Chief Executive Officer]

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

[Micah Young]

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

[Joe Kiani, Chairman and Chief Executive Officer]

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

[Operator]

Thank you. [Operator Instructions] Your first question comes from the line of Lawrence Keusch from Raymond James. Your line is open.

[Lawrence Keusch, Raymond James]

Great. Thanks everyone. Wondering, Joe, if you can talk a little bit -- you provided some brief commentary in your prepared remarks about sensors and the number of bed monitors associated with them. You did give some color also I think on the fourth quarter call about, what you're getting from the field relative to the utilization of those new beds with those monitors. So, is there -- I just wonder if there's any update, if you can help us think about that utilization question that comes up quite often?

[Joe Kiani, Chairman and Chief Executive Officer]

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

[Lawrence Keusch, Raymond James]

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

[Joe Kiani, Chairman and Chief Executive Officer]

Yeah. Well, look, the pandemic, hope it’s once every 100-year event, maybe less, but no more. So, we went through obviously once in a 100-year event last year. And to our surprise, FDA moved at speed we'd never seen before. You remember how fast they approved Masimo SafetyNet for COVID patients. Unfortunately that big push of new technologies to help deal with COVID has delayed FDA. And that's what they keep telling us. They've been totally overwhelmed. And they've got everybody on staff trying to help clear the decks. But despite the incredible sad story of more people dying opiod overdose last year than ever before, I still don't -- unfortunately, no one we're going to get clear on and the FDA knows how good our product is. So, I don't think it's just -- they're getting to it. I don't know when, but what we're doing was we're basically saying you know what we have C and let's go to Europe. The problem of opioid is talked a lot about in the U.S., not talked a lot about outside the U.S., I think due to the cultural issues, but we think the problem is just as big. In a survey we did with the leading countries in Europe, Germany, France, U.K., Italy, Spain, Switzerland, I mean, the list goes on. The opioid problem is just as big there as it is here. And they seem to be eager to receive our products. So, we're gearing up our distribution channel for Europe and Canada, and we hope by middle of the year to be cranking. And if we're lucky by then we'll be in the U.S. as well. But we're going to get going with or without U.S.'s clearance.

[Lawrence Keusch, Raymond James]

Okay. Terrific. Thanks, Joe. Appreciate it.

[Joe Kiani, Chairman and Chief Executive Officer]

Thank you.

[Operator]

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

[Rick Wise, Stifel]

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

[Joe Kiani, Chairman and Chief Executive Officer]

Rick, you're an excellent listener. You are not over listening. So, first of all, before this call, we were all reflecting on all the M&A we've done. In the last couple of years we've done a few, but for the last 10 years, I think we've done about nine and every one of them -- and eight out of nine of them have shown dramatic business results and have been successful. The other one is soon going to be showing us beautiful face. But we've been really happy with our acquisitions. We haven't picked up any bad acquisitions. I think our due diligence process is really good. And there's been a lot of acquisitions that have gone to the 11th hour and listen to our due diligence. And despite being in love with the team and the companies we pulled out when the data just did not add up to what we thought when we got in. So, to answer your questions, two things one, yes, we're still active in M&A. Although, I don't have anything on the near horizon that we're thinking of closing. We are open to any business that will help us continue expanding our businesses that we're in. And we're also open to new ideas. We're not going to pigeonhole ourselves. Our mission is improved patient outcomes and reduce cost of care and take a base monitor, do sites and applications. So, we're a business of that. So we're open to all of -- if I could do that. And then the second part of your question, as far as things that may have said, yes, we think we've got some really cool stuff that are going to finally see the light of day this year. And we're pretty excited about it. And hopefully, it'll dramatically increase our tab and our abilities to fulfill our mission.

[Rick Wise, Stifel]

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

[Joe Kiani, Chairman and Chief Executive Officer]

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

[Rick Wise, Stifel]

Yeah. Sounds exciting. And just as a second, we recently spoke to a number of hospital administrators, and certainly beyond the ICU, beyond the general ward, I left feeling like there were increasing opportunities post-COVID for Masimo in two other ways, one in sort of specialty areas of the hospital, like the cardiology suites or orthopedic areas. And I'd be curious to hear about that. But also one hospital was discharging patients directly from the emergency room, directly from the ER, directly home monitored by Masimo equipment. How do we think about these new opportunities or these nichey or -- no they could be meaningful going forward. Thank you.

[Joe Kiani, Chairman and Chief Executive Officer]

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

[Rick Wise, Stifel]

Thank you very much.

[Joe Kiani, Chairman and Chief Executive Officer]

Thank you, Rick.

[Operator]

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

[Matthew Taylor, UBS]

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

[Joe Kiani, Chairman and Chief Executive Officer]

Matt, yeah, you're absolutely right. We had not put softFlow business in the U.S in our guidance. We had not put SafetyNet for opioid in our guidance. And already we have a really good pipeline for softFlow in the U.S. so hopefully as it becomes real, it couldn't become a nice way for us to grow out of the number, the percentage points, maybe to just single digit growth that we are projecting. And, of course, SafetyNet for opiod could be big. It just depends how well we execute on the distribution, which is a new area for us. But then other areas that I think we have not baked in is the growth in things like hemoglobin SedLine, NomoLine, O3, things that are used in the ORi, and that could become hopefully as census is improving and people are feeling uncomfortable going into surgery, the talk that by mid June the U.S. could be out of the woods by having enough people vaccinated that will have herd immunity. So, I think all of those could be additive. I -- we have in the past several years have promised 8% to 10% revenue growth and double-digit earnings growth. We're comfortable with that. But it's like last year when things went better than that, we took advantage of it and we ran with it. So, we'll have to see how the year turns out.

[Matthew Taylor, UBS]

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

[Joe Kiani, Chairman and Chief Executive Officer]

Well, we buy just like you guys beyond when we think stock is under value. Also you have to remember, we've gone from generating $50 million, $60 million of cash flow to about $200 million of cash flow a year. So, the amount we bought wild, not small, it’s within our ability to buy. And we do think -- while we actually -- the stock prices, like beauty subject to the beholder, we find it beautiful too. You're not the only ones out there. So we thought it's a good idea to buy some shares. And then we did.

[Matthew Taylor, UBS]

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

[Joe Kiani, Chairman and Chief Executive Officer]

Thank you.

[Operator]

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

[Jason Bednar, Piper Sandler]

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

[Joe Kiani, Chairman and Chief Executive Officer]

Well, we raised guidance by $5 million, even though we thought revenue wise, our revenues would increase by $10 million, because we have a $5 million headwind on the strengthening of the dollar versus most of the currencies we deal with. As far as the census improvement, we're seeing some hospitals right now, very well-known hospitals, destination hospitals having more than -- reaching 100% capacity, some even over that. So -- and yet we see children's hospital at about half capacity of what it used to be. So what we believe, we believe there's a lack of confidence in being able to get safe care in hospitals. And that's confidence, I think, is going to improve as we get to herd immunity and running against late procedures. And issues that people have they need to be fixed. So, logically we think it’s going to get better, but even surveying our customers is looks like it's getting better. The 3% improvement in sensor volume utilization from prior quarter, which even included a reduction of inventory of some of our major customers tells us it is getting better. So, I don't know if I answer the question, but we were using that to kind of feel good about the future. I don’t know, Micah, if you want to add some together.

[Micah Young]

Yeah. Jason, just to add there, as Joe mentioned earlier, we assume basically a stable or steady rebound over the course of the year, back to kind of pre-COVID levels. To Joe's point earlier, if we see higher patient confidence to come back into the hospital and the volume start to pick up, that's where -- that can be upside to the guidance that we provided. But we've assumed kind of a steady rebound, stable rebound.

[Jason Bednar, Piper Sandler]

Okay. That makes sense. Thanks for all that.

[Micah Young]

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

[Jason Bednar, Piper Sandler]

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

[Joe Kiani, Chairman and Chief Executive Officer]

Sure. So, we think the international market is roughly the same size of the U.S. market. And we think of the market in two segments, the prescription opioids post-surgery and also illicit use of opioids. And we -- the markets are very different in each country. Some countries, it's a lot of business over-the-counter in pharmacies and the pharmacists make the call of what to give to people. In some countries, it's by doctor's order, and in some countries, it's really both, but they still want to make sure doctors think is a good idea, even though if they can get it themselves without a prescription. So, we -- I think the second part of your question about execution in those markets, we are in incidents. I -- we are trying to hire people around us that have experienced around consumer marketing and distribution of products like this in pharmacies and other channels. So, it's something that we're gearing up, and we hope we can execute as well as we've done in the hospital business.

[Jason Bednar, Piper Sandler]

Thank you.

[Operator]

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

[Michael Polark, Baird]

Hey, good afternoon. Maybe a follow-up there as well on the Opioid SafetyNet in Europe. I'm just curious, what is the -- and acknowledging that it sounds like it's quite different from country to country the channels where patients may access the kit. What is the reimbursement landscape in pharmacies and physician offices or hospitals get paid for providing a solution today? Or is that something Masimo will be working on to establish with the local authorities?

[Joe Kiani, Chairman and Chief Executive Officer]

Yeah. We will be working with local authorities on reimbursement. But we are in the pleasant surprise is that when we surveyed customers in these countries, a lot of them -- vast majority of them at the price point were thinking of selling it said they would buy it. So, I think it's just a matter of a -- well, obviously proving that to be true, but also getting the message out. So people know it's there, making sure that the medical community trust it and recommended. But yeah, we think there's going to be a business we had without reimbursement, as well as with.

[Michael Polark, Baird]

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

[Joe Kiani, Chairman and Chief Executive Officer]

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

[Michael Polark, Baird]

Okay. Maybe the other one on hospital automation. I heard the revenue comment, three times in the period. My question is more on the sales pipeline, selling opportunity there, any quantification of that opportunity as you think about the rest of 2021? Is the pipeline up down sequentially year-on-year? If so, by how much, just eager to understand what the cadence of that business may be rest of this year and into next?

[Joe Kiani, Chairman and Chief Executive Officer]

Well, I'm not going to promise two times growth. I will say that there is strong interest in every corner of the world, literally from Eastern United States, Western, Southern to all over the world. I believe we have really the most complete and most well thought out solution, as the pioneers of hospital automation. And what I mean hospital automation, I'm not talking about connecting things, so that data can go to the EMR. I'm saying to connect those things, and then you make that data actionable. You make that data useful wherever the clinician might be, including the room or outside the room the clinician is about to enter into. Another -- I think besides that demand of that healthy pipeline, another indication that I believe is out there is we had a variable buff Patient SafetyNet installation. And typically once hospitals implement that, they get interested in the other solutions around it, like Halo ION, like UniView 60 and UniView and Replica. So, I think even those hospitals, which we had a nice, healthy uptick, not only in Q1, but the prior quarter are going to be great customers of ours to expand into our vision of hospital automation.

[Operator]

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

[Ravi Misra, Berenberg]

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

[Joe Kiani, Chairman and Chief Executive Officer]

Good. How are you doing?

[Micah Young]

Hi, Ravi.

[Ravi Misra, Berenberg]

Good. Thanks. Thanks for taking the question. So just got a question on the commentary on sensor volumes and kind of the margin profile of the business. If I take out 1Q 2020, because of the obvious sensor pull through that you guys got there and compare you more to 2019 similar quarter, it looks like your gross margin has definitely stepped up since that period. So, just curious, you've had this larger install base, you have more opportunities, more shots than gold sell [ph] sensors. Would it be fair to say that your kind of mix is moving more towards kind of the rainbow and O3, Capnography sensors. How do we think about that when it comes to all these new beds, so to speak you've onboarded in the last year or so? And kind of related to that, what are the parameters that are being used now on the general floor? I mean kind of what's the opportunity here that we should be thinking of when it comes to the longer term mix benefit perhaps that could come from it.

[Joe Kiani, Chairman and Chief Executive Officer]

Sure. Let me hit that. And maybe Micah, you can add some detail to it. So, high level, what's happened is that we have a bigger installed base to sell sensors into. And one of the things we were worried about is that 250,000 plus drivers that came last year on top of our normal volume, we were afraid they might not be utilized, and not to say that maybe a year from now they'll stop being utilized. But so far they're being utilized for the most part, if not all of it. So, what that should mean we should see, especially in a year that we don't think our drivers will be abnormally high, the capital and drivers should be same level as before, that kind of 2019 numbers, we think that should bode well as a higher sensor to capital ratio. And given that our sensors are a higher margin, it should lead to a higher gross margin for our company. As far as the other parameters, those other parameters have similar margins sensors. So, they're being used now more of the electric surgery coming back, drivers at one been used before in the ORi. There's a lot of activity in the hospital, but it wasn't in the ORi. It was in the ICUs and beds that turn into ICU beds to take care of COVID patients. But now that the ORis are using sedation monitoring, brain oxygen saturation monitoring, and Capnography for airway casts exchange analysis and monitoring. We're going to see again higher utilization. We expect to see that. And then I think the last part of your question was related to kind of how we see the general floor, and what's going to happen. What's effective? Look, a lot of -- maybe one day general floors have become like the ICU where every parameter in the ICU will follow patients in the general floor. But so far it looks like the common denominator that they need to protect them, just like they needed to be protected at home for COVID there's the pulse oximeters. And not just any pulse oximeters, if I may say, but the SET pulse oximeters would work through Motion and Low Perfusion. It doesn't give the false alarms and it does what it's supposed to. No other technology has been proven in that environment. In fact, when other technologies were taken into that environment and putting other pulse oximeters, they bull around, they came right back out because of excessive false alarms. Dartmouth-Hitchcock completed a 10-year study that not only showed no more dead in bed where patients being monitored without technology, but they reduced the cost by $7 million a year because ICU and rapid response team activation reduction in the neighborhood of 50% and the nurses loved the product. They -- some of the comments were great in the early publication. You can only get it out of my cold -- dead cold fingers where before the nurses were the first to say, get this crap out of here because it was driving them insane. Once they adapt general with our competitive pulse oximeter, this is years ago, but they had a false alarm every four minutes. So, anyway, I hope I answer your question. Micah, anything else you want to add to that?

[Micah Young]

Ravi, you mentioned -- I did hear you mentioning -- comparing back to gross margins about two years ago. So looking at Q1 2019 and you mentioned, we're up from there, we are about 65.4% gross margins in 2019, in the first quarter. And we're now up to 66.1% and continue to rebound as mix improves. Some of the things that we are seeing is we're continuing to get more revenue per drivers. We're leveraging that installed base. I think Joe hit on that there. We've also done a lot of great things in terms of our engineering and our manufacturing teams to improve and reduce costs of our products over time. So that's some of the things that are really showing that improvement when you look back a couple of years to some of those normalized gross margins. Keep in mind that we are guiding this year to 67%. So, if you look at that, that assumes or implies about a 50 to 60 basis points sequential stepped up improvement each quarter to get into those numbers. So, we're expecting to kind of get back to those pre-COVID gross margin, the 68%, as we exit the year.

[Ravi Misra, Berenberg]

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

[Joe Kiani, Chairman and Chief Executive Officer]

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

[Operator]

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

[Marie Thibault, BTIG]

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

[Joe Kiani, Chairman and Chief Executive Officer]

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

[Marie Thibault, BTIG]

Yeah. Yeah. I know 66. Yeah.

[Joe Kiani, Chairman and Chief Executive Officer]

No, 66.

[Micah Young]

Yeah. 66,000 for the first quarter.

[Marie Thibault, BTIG]

I am saying 66,000. Yeah.

[Joe Kiani, Chairman and Chief Executive Officer]

It's hard to hear through the …

[Micah Young]

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

[Marie Thibault, BTIG]

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

[Micah Young]

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

[Marie Thibault, BTIG]

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

[Joe Kiani, Chairman and Chief Executive Officer]

That's correct. Since the last couple of quarters, even from the beginning, there's definitely looks unchange. They're very engaged with us. They're very interested in helping us. Remember, this is a product that they chose as not only breakthrough technology, but one of eight products out of over 250 that could potentially impact the opioid epidemic. So, this has -- I think it has still the attention of the management and FDA as well. So, no, nothing's changed. It's just -- they've been incredibly busy with COVID related things. And I think that's just spread them very thin.

[Marie Thibault, BTIG]

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

[Joe Kiani, Chairman and Chief Executive Officer]

Thank you.

[Operator]

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

[Michael Matson, Needham & Co.]

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

[Joe Kiani, Chairman and Chief Executive Officer]

Well, our relationship with Philips is strong. They're one of those resilient customers besides the end users I discussed at the beginning. They're doing really well. And no one -- this in the capital business for patient Masimo probably last year, that was a great year for demand for patient monitors around the world, as well as ventilators. But I believe from everything we are seeing, they're kind of going along their 2020, 2019 kind of level. We are becoming increasing a bigger part of their business both in pulse oximetry shipments as well as new parameters like SedLine, NomoLine and O3. And we're still partners and linked together in the power rainbow, and we're -- we believe that is a game changer for predictive algorithms, which not only Masimo's interested in, but so is Philips. So, yeah, things are going great. We're -- we continue to increase our footprint within Philips.

[Michael Matson, Needham & Co.]

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

[Joe Kiani, Chairman and Chief Executive Officer]

Certainly. Malaria project has progressed very well since we discussed the project and we're planning to do large scale clinical trials in effected countries at their peak times when they get affected by malaria this year. And if everything goes well there, we will be commercializing that product. However, there was some really good to use on the malaria front that there might be a very effective vaccine dealing with malaria -- apparently had about 75% of efficacy. So that could really change the demand potentially for this product, which we wouldn't be upset about. That would be great. So many children and adults die of malaria around the world. And we've picked up this project as a means to help more than anything. On the partial pressure of oxygen, we're -- unfortunately the clinical trials for that technology got suspended or pause because of COVID. But now that COVID is receiving and the countries that do the trials will be picking that up again. And hopefully, we'll have some information about its efficacy and whether we're going to be able to successfully launch it or not probably towards the end of this year.

[Michael Matson, Needham & Co.]

Okay. Great. Thank you.

[Joe Kiani, Chairman and Chief Executive Officer]

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

[Operator]

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