Okay, good afternoon, everyone. Welcome back from lunch. We're extremely excited to have Masimo with us today. They've been presenting at this conference that the company's undergone in that time period. They're really now in a position of very strong revenue growth, which I think is positioned to continue for the foreseeable future. There remains margin expansion. The new product pipeline is strong, and the balance sheet is about as clean and powerful as you can get for a company of this size. So, a lot of very impressive things going on. We're really fortunate to have Micah Young join us. Thank you for flying across the country to get here. He's the EVP and Chief Financial Officer, and Eli Kammerman's in the audience as well, who heads up Investor Relations. So, with that, I'll turn it over to Micah.
Hopefully, we'll have a little bit of time left for some Q&A, and if not, we'll adjourn downstairs for a breakout session.
Great. All right, thank you. Appreciate the opportunity to be here with you today. My name's Micah Young, CFO of Masimo. Just want to take you through a few things real quick, get some of the housekeeping items out of the way, but I'll be going through some forward-looking statements we'll be making and also referring to some non-GAAP financial measures, so please refer to masimo.com for more information. What I'm going to go through today is, to give you a little background of the story, just a brief overview of Masimo for those who are not familiar with the story. I want to talk about two new initiatives. We've been talking a lot about this over the last several months, hospital automation as well as opioid safety.
And then I want to get into how we performed our performance financially for 2018 and also talk about our 2019 financial outlook and what we're doing to drive shareholder value. If you look at Masimo today, we're guiding this year to $912 million of revenue. It's about 11% growth on a constant currency basis. We just came off a year where we grew 12%. And if you look at today, we're impacting over 100 million patients annually. We have a broad reach internationally. We're in over 140 countries. We're an innovator in non-invasive monitoring technologies and the leader in pulse oximetry, which is basically measuring blood oxygen levels. SpO2 is what we refer to.
If you look at our long-term plan, which we laid out a few years ago, originally we had the plan come in 10 years off of our IPO, and then we talked about our new long-term plan, which is about a seven-year plan, and we haven't changed in terms of our mission. We want to improve patient outcomes and reduce the cost of care, but we've also laid out some very strong long-term financial targets, revenue growth of 8%-10%, and as I just mentioned, we've been growing north of there the past couple of years. Gross margins of 70% and operating margins of 30%, with a cadence of about 100 basis points of improvement per year. Now, you're going to see in a minute where we are guiding to about 200 basis points of improvement for 2019.
We came off a year where, if you were to exclude the royalty revenue that we get that expired late last year, for more of an apples-to-apples comparison, we had about 340 basis points of operating margin improvement last year, so very strong performance over the last two years. If you look at where the company started, it was around Masimo SET, which is a signal extraction technology, and basically, we solved the unsolvable, which is measured through motion and low perfusion, and it revolutionized the pulse oximetry market. Up until that point, there was about 70%-90% of alarms were false alarms, which led to a lot of overload for clinicians having to respond to those alarms, but we've been able to take that false alarm rate to below 5% while at the same time improving the way pulse oximeters should alarm for more true alarm detection.
Also, late last year, we had a press release or announcement that we've also improved our accuracy once again, and we improved it by another 50%. So, we're continuing to innovate and separate ourselves from the competition. If you look at the evolution, I've talked a lot about this over the past year, and what's impressed me most is we're more than just pulse oximetry. When I was able to come on board, I've been a CFO for about 15 months now, and it's more and more impressive to see we have over 200 engineers, and they are focused on driving innovation in healthcare technology, and we've built out a very broad technology portfolio. Not only that, we're now moving in and evolving more into integrating systems and solutions.
So, if you think about what we can do to go into a hospital system and be able to integrate all the components within the hospital, I'll talk more about that here in a minute. So, one of our major initiatives, sorry, is hospital automation, and I'll talk about opioid safety here in a minute. If you look at what we're doing there, and if you look at really what the challenges are, today, clinicians are faced with a heavy physical workload in the hospital system. There's increasing demands for manual documentation, manual assessments, procedures, and there's a lack of effective care coordination systems. And there's all these different data sources that are disconnected: anesthesia machines, ventilators, infusion pumps, all these things, they don't connect and talk to the electronic medical records of a hospital.
And if you look at how we're integrating our systems and solutions, it all really centers around connectivity or interoperability. And all that, at the heart of that for us, is what we call Root, and that's a connectivity platform. So, with Root, we can associate a patient with their data, and it can feed all the way into Root. And there's also what we call MOC-9 ports, and that enables newer technologies. So, other companies who are trying to innovate, it's more of an open platform to where they can plug and play into our system as well. And then you have Iris Ports, which connects all these different third-party devices that are disconnected today. As I mentioned, ventilators, infusion pumps, anesthesia machines, all those things can connect through our Root connectivity hub. Then you have Patient SafetyNet and the Iris Gateway.
Basically, what the Iris Gateway does is it translates all that data into HL7 language and feeds that into the electronic medical records of the hospital. Then we can also, through data management, we collect all this patient data, we can manage that data, and we can provide alarm notification. If you look at our Patient SafetyNet software, at a central viewing station, you can monitor up to 200 patients remotely through our software. Then we have other capabilities like UniView, where we can take, within an OR room, we can take all the different parameters, patient parameters, and measure those and put them up on a screen, and a clinician or a surgeon can customize the views within the operating room. It helps reduce that cognitive overload for the clinicians.
So, you could do sedation, monitor a patient's sedation status or oxygenation levels, and it gives you that kind of cockpit, is what I refer to a lot, just like it would a pilot with instruments. And then we also have what's called MyView, where a clinician can walk into a room, and through an association with a badge, they can see their own customized views when they walk into a patient's room. And then we launched, last year, we launched a new software program that works with smart tablets, smart devices, and phones called Replica. And it's an intelligent two-way communication system that can work among clinicians where they can collaborate. It'll escalate alarms. If a physician's off duty, it'll escalate to the next clinician so they can respond to that patient. And then finally is data analytics and scoring.
We have some, let's call it Halo Index, where basically it takes all the different parameters of a patient and also with early warning score. Both of those are some of our technologies that we use to really get out in front of a deteriorating patient status, so by all these parameters, they can help provide decision support to where we know that there's significant changes in a patient's status, and we can respond to that patient. Now on to opioid safety, so this is another new initiative we've been talking a lot about here lately. Within the U.S., 72,000 U.S. residents died from drug overdose in 2017, and out of that population, 49,000 of those deaths were involving opioids, such as heroin, morphine, fentanyl. So, there's people dying both in the hospital and outside the hospital, and really, opioids, what's causing that is opioid-induced respiratory depression.
So, what happens is during respiratory depression, you starve the organs and tissues of oxygen, and it creates a low oxygenation level. And that can be read in SpO2 values, which is where we play a big role. And I'll talk about that here in a minute. Rad-97, so last year in May, there was a Utah Senate resolution that came out where basically it was tied to a bill called Parker's Bill, and it's named after or in memory of a young gentleman, 21-year-old by the name of Parker Stewart. He was a newlywed. He just had a tonsillectomy procedure done, and he was prescribed opioids and was taking half the prescribed dose. And three days later, he passed away in his sleep.
And through that bill, they actually used our technologies to shape this bill because there was a doctor who was involved with shaping this legislation, and they used our technology, the Rad-97 device, which is used for home monitoring. So, that resolution linked opioids with respiratory depression, and it also really showed the value of why home monitoring is important and being able to get out in front of a change in patient status and get out in front of respiratory depression events. So, and here recently, we've talked a lot about the FDA opioid crisis challenge. And the FDA came out and issued the challenge. There's about 250 applicants that basically applied for this that had products to address the opioid crisis. And we were selected as one of eight companies for this challenge. And basically, over 90 days, we're going to be working with the FDA.
There'll be a collaboration period where we will help them understand our product even better, and then we'll also discuss the regulatory pathways moving forward. And then at the end, ultimately, all the eight companies will submit a formal application for those products. And we have a product that's in late-stage development right now, and we're going to talk a lot more about that, as I mentioned on the last call, conference call, as well as some of the last presentations we gave. We're going to be talking a lot more in May at our Investor Day to really talk about what that market looks like and how we're going to address this challenge in the U.S. Now moving on to our 2018 results. If you look at our revenues for 2018, we grew on a constant currency basis 12% to $830 million.
Our non-GAAP operating margins on product, when you exclude our royalty revenue and other non-recurring revenue, improved 340 basis points to 22%, and then our non-GAAP product earnings per share increased from $1.73 to $2.65, and that was a 53% increase year- over- year, and again, this is excluding the royalty and nonrecurring. And we're trying to really transition because the royalty revenue expired October of last year, so we're trying to give more of an apples-to-apples comparison of what the core business looks like. In 2018, one of the greatest achievements we had was really driving strong cash flow. We generated $222 million of Free Cash Flow last year. It was about 26% conversion rate on our revenue, and during the year, we made significant improvements in our working capital. Overall, we improved our cash conversion cycle by about 27 days.
10 days' improvement came from our reduction in DSO, and then we improved through inventory management our days on hand for inventory, and that improved by 10 days. And that drove around $40 million-$45 million of additional cash flow during the year. And if you strip that out, you would expect about 18%-20% conversion of our revenue into cash. For our guidance for 2019, we're guiding to $912 million in revenue, about 11% constant currency growth, and 200 basis points improvement in our operating margins going from 22%-24%. And then our EPS, we're estimating $3.08, which is a 16% increase in our product earnings per share versus 2018. And finally, our revenue growth opportunities, our SET business, and we've laid out the long-term plan of 8%-10% growth.
If you really break that down, our set business, which is our pulse oximetry, we have that growing in our long-term plan 6%-8%. We saw that grow faster than that last year, which is why we're above the high end of that range. There's a lot of opportunity still out there. I mean, if you look at, there's still a lot of market share available to us, but there's also the opportunity to expand onto the general floor. Today, if you look at the acute care setting that we're in and look at critical care beds, there's about 125,000 critical care beds in the U.S. The general floor has about 425,000 beds. There's an opportunity as we continue to expand on the general floor. There's a sizable opportunity out there to continue to grow.
And then Rainbow, we've improved the accuracy of Rainbow over the years. We've also built a lot more clinical data around Rainbow. And Rainbow is basically, with one fingertip sensor, you can measure up to 12 parameters. Our core SET technology measures SpO2 and about four other parameters like respiratory rate, pulse rate, perfusion index, and pleth variability index, which is basically fluid responsiveness. With Rainbow, you get another seven parameters. So, you have a total of 12 parameters on your fingertip sensor. And then you can also, with an acoustic sensor, you get a 13th parameter on the neck, which is acoustic measurement. With Rainbow, not only the clinical data we have has improved, but also we've improved our accuracy, but we have a partnership with a large OEM that we expect is going to benefit us for many years to come.
Today, we have very low share in terms of business with that OEM and their customers, and this is going to be a significant opportunity for us. And we've seen that already in the amount of boards and monitors we've been putting out there with that OEM this past year. There's several new markets that we've been getting into over the last several years, but we have very low share in, which is NomoLine capnography, SedLine brain function monitoring, and O3 regional oximetry. And those combined represent about a market opportunity of about $700 million-$800 million, and they're growing double digits. And we have roughly about a 5% share of those markets today. So, that's going to be another opportunity for growth.
And if you look at Rainbow growing 10% in our long-term plan, and then those newer product categories growing 20%, that's what gets you into that 8%-10% growth rate long-term. And then you have hospital automation opioid safety, which I just mentioned, and those are going to be some other opportunities to further drive growth for us in the future, and we'll talk a lot more about that at our May Investor Day. Just to wrap it up, how we're driving shareholder value, as I mentioned before, targeting revenue growth of 8%-10% long-term. Our margins, our goal is to expand those to 30% over the long-term. And then tax rate improvement. We've put a lot of investment in our operational structure outside the U.S., and as we become more profitable, that's going to give us the opportunity to leverage and improve our tax rate over time.
And then we're targeting double-digit EPS growth, and as you've seen us demonstrate, we're generating strong Free Cash Flows, and we plan to do that in 2019 and going forward. So, thank you for your time, and we'll go to Q&A.
Yeah, we have a couple of minutes for Q&A. Micah, I wanted to start maybe working backwards a little bit. So, the balance sheet is very, very strong. Can you just remind us again what the priorities are for the cash on that balance sheet as it continues to build up here?
Yeah. So, we've talked a lot about, so when you look at the priorities, M&A has been at the top of our list in terms of evaluating companies and assets that can augment some of our capabilities, whether it's hospital automation or this new opioid safety initiative. But areas where we can leverage our signal processing capability, our manufacturing capabilities, and our clinical footprint. We have a large footprint of clinical sales reps throughout the U.S., and we want to be able to leverage that globally. But in terms of capital deployment, M&A is something that we continuously evaluate companies. A lot of the companies that are coming across that we're vetting through are smaller-type acquisitions that can bolt on and just augment our business. The other thing is, as we continue to build cash, we're opportunistic about share purchases and share buybacks.
So, as we moved throughout 2018, we were hoping to do some more of that throughout the year, but we saw our share price increase pretty significantly throughout the year. And also, the yields that we were getting on our cash rose by about 70 basis points-80 basis points. So, when you look at that, there's not a big net EPS benefit to doing share buybacks at the moment, even though we believe that we can get a good return on investment from doing those share buybacks. So, we're trying to stay flexible. We believe that the right return on invested capital will be some smaller M&A, but again, we're just trying to be opportunistic.
Okay, terrific. Are there any questions from the audience?
Right here. A couple of times in the past, you've done special dividends. Is that in your work at all?
I think we've had some significant settlements. Yeah, we have done those in the past, but I don't look at Masimo as a dividend company. There may be times where we may do some larger dividends back, but for the most part, I mean, if we were going to give cash back to shareholders, we'll do that through more of just going and repurchasing shares. So, but we want to use our cash in a way that we can drive the highest return on invested capital, and we think that that's going to be through M&A.
Perfect.
There's one here.
To expand onto a general hospital floor, do you need to innovate the product? Do you need to take time down? What's the barrier to achieving that?
Yeah, so hospital automation is going to be a big enabler for us because you're looking at the value of being able to connect everything within the hospital. And we also think that opioid safety is going to be important because if you look at a lot of challenges within the hospital, it is tied to the use of opioids, and there are patients that are losing their lives because of respiratory depression. And that is happening both inside and outside the hospital. So, we think that that's very important to have continuous monitoring on the general floor. And there's been studies out there, Dartmouth-Hitchcock study that showed the value of continuous monitoring on the general floor and broadly throughout the hospital, where it drove savings of millions of dollars. So, I think it's just trying to really drive the need, demonstrate the need for it.
I think that with opioid safety and hospital automation, those are going to be key enablers for us moving forward.
I just want one other question here. Just on the hospital automation, thinking about that, so many of the things that you showed on the slide are already approved and commercial. So, just trying to understand, are you selling that as a solution today, or is there something that needs to happen so that you can package it and get out there and begin to sell it?
Yeah, good question. So, a couple of years ago, we launched Root, and Root is that connectivity hub. It's the heart of everything. We've also assembled all these technologies that we've come out with over the past year and a half, Replica, UniView, and all the software capabilities. And then we have Patient SafetyNet and Iris Gateway that gets that connection all the way through the electronic medical record. So, we've created the ecosystem exists. Now it's just a matter of now commercializing. So, we're packaging this up in a different way than we have in the past, and it's something that we're continuing to evolve that we've wanted to start talking about and just making investors aware that this is an opportunity for us.
Over the course of the next several months, we're continuing to refine what that model is going to look like, and that's something we're excited to communicate at Investor Day.
But there's not some big missing piece to this that you need?
No, no, no, no big missing pieces at all.
Okay. And then last one, just on the opioid safety. I know that you want to reserve comments for the May analyst meeting, but just at a high level, is it right to think of this as a standalone separate product that would be initially hospital-based? Or can you help us just think at a high level where this gets positioned?
Yeah, it's going to be more positioned with a home. So, it'll be more of a consumer-type product, more cost-effective than even our Rad-97. So, if you think of our Rad-97, it's telehealth for home monitoring, which is more cost-effective for home use than Root is in the hospital. But then if you think about this one, this one's going to be more of a consumer-type product that is going to be the quality for consumers, and it's going to have lower costs, which allows us to lower that price down for the consumer. So, that's where we think that this is going to be the right package, and we're packaging it up with technology that can alert the caregiver, the family member, that the individual's reacting to opioids or has a respiratory depression event.
There's a combination of our pulse oximetry plus software that's going to be packaged up for this thing.
Perfect. Okay, we'll join there. Management will be available for a breakout in [omron day one]
All right.
Thank you.
Thank you.