Q2 2022 Masimo Corp Earnings Call
Good afternoon, ladies and gentlemen, and welcome to your loss in the second quarter 2022 earnings Conference call.
The company's press release is available at Www Dot Masimo dotcom.
At this time all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
I'm pleased to introduce Eli cameraman Masimo as 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 2022 financial performance. However, they are subject to risks and uncertainties that could cause actual results to differ materially.
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.
Separate 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 <unk>.
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.
Thank you ally.
Good afternoon, and thank you for joining us for Massimo <unk> second quarter 2022 earnings call.
This is the first time, we are reporting results that include our recently acquired consumer business.
After we close the transaction in April .
The new business performed very well in the quarter with sales exceeding expectations.
We also achieved a solid rebound in the revenue growth rate for <unk>.
<unk> care business for the quarter with revenues rising 17% Chris.
As the prior year period.
<unk> the booths from shipping most of the delayed first quarter orders in the second quarter.
In addition, our installed base grew 7% over the past 12 months.
We are experiencing strong consistent demand for our innovative technologies.
Yes, we closed the consumer business transaction on April <unk>.
We've been moving at full speed to create many exciting new consumer health products with a collaborative R&D effort.
Raws expertise from both sides of our business we.
We now have combined teams of engineers, who are working diligently to develop very exciting new products.
The long term potential from Massimo has never been greater than it is today are.
A high level of conviction about the future success of our company is reflected in the 3 million shares we repurchased in the second quarter.
On a related note I am glad to report that our board has issued a new authorization to repurchase up to another 5 million shares.
Now I'll ask Micah to review, our second quarter results in more detail and provide you with an update on our 2022 financial guidance.
Thank you Joe and good afternoon, everyone before I get started I'd like to direct you to our earnings presentation on the Massimo website, which covers much of the detail that we will be discussing today.
The financial measures I will be covering today will be primarily on a non-GAAP basis unless noted otherwise.
Further I will also be referencing pro forma financial measures, which include historical results for sound United Prior to the acquisition date of April 11 2022.
In our presentation today, we will be referring to this business as our non health care segment.
Our second quarter results reflect the rebound, we expected and growth for our healthcare segment as we fulfill many of the delayed orders from the first quarter.
After effectively addressing the supply chain issues that limited our shipments in Q1.
The strong and persistent demand for a breakthrough technology that is visible in our driver shipments for the quarter, which reached over 77000 and exceeded our guidance of 75000 per quarter. This year.
This represents our fourth consecutive quarter of roughly 75000 units shipped.
We have now shipped nearly $2 4 million technology board and instruments over the last 10 years.
At the end of the second quarter, we estimate that our installed base has grown by 7% over our installed base at the end of second quarter of 2021.
For the second quarter of 2022, we reported consolidated revenue of $565 million, which exceeded the high end of our guidance range.
On a pro forma basis for the full quarter, our consolidated revenues would've been $572 million, representing 12% reported growth and 15% constant currency growth.
For our healthcare segment second quarter revenues were $357 million, representing 17% reported growth and 19% constant currency growth.
As Joe mentioned growth was helped by shipping most of the delayed orders from the first quarter that were related to supply chain issues earlier this year.
On a year to date basis, our healthcare revenues were $661 million, representing 9% reported growth and 11% constant currency growth year to date.
For our consumer non health care segment second quarter revenues were $208 million from April 11th 2022 through fiscal quarter end.
On a pro forma basis for the full quarter, our consumer non healthcare revenues would have been $215 million, representing 4% reported growth and 10% constant currency growth.
This business had solid growth across all regions and categories led by the premium brands of denim brands and Bowers <unk> Wilkins.
A combination of strong demand with effective management of supply chain challenges produced better than expected sales performance during the quarter.
Moving down the P&L for the second quarter of 2022, we reported consolidated non-GAAP gross margin of 54, 7% our margins were adversely affected by the impact of segment mix foreign currency headwinds and supply chain efficiency inefficiencies.
For our healthcare business second quarter non-GAAP gross margin increased 160 basis points to 66, 3% compared to 64, 7% in the prior year period.
The year over year improvement was the result of favorable product mix as we derived a higher proportion of our revenues from adhesive sensors versus capital equipment.
For our consumer non health care segment second quarter non-GAAP gross margin was 34, 8%.
For our consolidated business, our non-GAAP operating profit increased 49% to $107 million and represented 18, 9% of total revenue.
And our non-GAAP earnings per share increased 44% to reach $1 35 per diluted share in.
In the second quarter, we invested 401 million to repurchase 3 million shares of our common stock representing over a 5% reduction of our shares outstanding.
In summary.
We delivered strong performance in the second quarter with revenues operating margins and earnings per share exceeding the high end of our guidance range, our consumer not health care segment delivered 10% constant currency growth on a pro forma basis.
Our healthcare segment fulfilled most of the late orders and boosted our growth for the second quarter.
Further our health care revenues grew 11% on a constant currency basis for the first half of the year and we have now shipped approximately 75000 drivers for four consecutive quarters illustrating the strong and persistent strength in our health care business.
Im happy to say that our health care business is thriving and we are winning new customer accounts very consistently while keeping virtually all of our existing accounts around the globe for our set oximetry products.
At the end of the second quarter, our contract backlog was $1 2 billion, which represents a 30% increase over the prior year and provides a good window of the durability for our future growth.
We're seeing steady adoption of our connectivity technologies, such as our route ISO Rota hub and patient safety net across multiple hospital settings.
Notably the number of beds connected via Iris gateway and patient safety net grew 20% and our installed base increased over 30% over the prior year.
Further our service revenues associated with our connected beds and our hospital automation platform increased by more than 20% compared to last year.
Now I'd like to provide you with an update on our 2022 consolidated financial guidance, which includes our two segments.
Due to the acquisition and shifting macroeconomic conditions, we are providing consolidated guidance ranges for both the fourth.
Third quarter and the full year.
It is important to note that our guidance incorporates substantially increased foreign currency headwinds from the strengthening of the U S dollar against most major currencies.
Negative currency effects will essentially flow through our income statement to adversely affect our margins and operating income.
For the third quarter of 2022, we are projecting consolidated revenue of $515 million to $545 million.
For our healthcare segment, we are projecting third quarter revenues of $320 million to $330 million, which incorporates $10 million a year over year currency headwinds.
This reflects 9% constant currency growth at the midpoint of the range.
For our non healthcare segment, we are projecting third quarter revenues of $195 million to $215 million compared to pro forma revenues of $227 million for the third quarter of 2021.
On a pro forma basis, our guidance incorporates $23 million of year over year currency headwinds, implying flat constant currency growth at the midpoint of the range.
Notably this business is facing its toughest year over year comparison due to an exceptionally strong third quarter of 2021, which was above trend line due to new product stocking orders at a large retail customer in combination with the film fulfillment of back order products.
On a consolidated basis, we are projecting non-GAAP gross margins of approximately 53% operating profit ranging from $72 million to $80 million and earnings per share ranging from <unk> 85 to <unk> 97 for the third quarter.
Now moving on to our updated full year 2022 financial guidance.
For the full year, we are projecting consolidated revenues.
Of $1 billion $985 million to $2.045 billion.
Compared to our prior guidance provided back on May 3rd. This represents a net reduction of $15 million, which is comprised of $44 million of additional FX headwinds offset by an increase of $29 million due to strong sales performance.
On a pro forma basis, our guidance implies consolidated revenues of $2. Two 4 billion to $2 3 billion for the full fiscal year 2022, compared to 215 billion in fiscal year 2021.
Further our pro forma consolidated revenue guidance incorporates $100 million of year over year currency headwinds flying 9% to 12% constant currency growth.
For our healthcare segment, we are projecting revenues of one <unk>.
$1 billion $330 million to $1.345 billion.
Which now incorporates $30 million of year over year currency headwinds.
Compared to our prior guidance. This represents an additional $13 million increase in FX headwinds.
This represents.
This update reflects 10% to 11% constant currency growth over the prior year, which is in line with our prior guidance range.
We're also maintaining our projection for shipments of at least 300000 technology boards and instruments. This year.
For our consumer non healthcare segment, we are projecting a reported revenues of $655 million to $700 million from April 11th.
2022 through fiscal year end.
Compared to our prior guidance. This represents an increase of $26 million to $31 million due to strong sales performance offset by $31 million of additional FX headwinds.
On a pro forma basis for the full year, our guidance implies consumer non healthcare revenues of $913 million to $958 million for fiscal year 2022, compared to $909 million in fiscal year 2021.
Further our guidance incorporates $70 million a year over year currency headwinds plying, 813% constant currency growth.
For our consolidated business, we are projecting non-GAAP gross margin of 55%, which assumes health care gross margins of 65, 5% and non consumer.
Consumer non health care gross margins ranging from 34% to 35%.
Compared to our prior guidance. This represents a reduction of 130 basis points, which is comprised of 70 basis points from additional foreign currency headwinds 35 basis points from supply chain inefficiencies and 25 basis points from segment mix.
For our consolidated business, we are projecting non-GAAP operating profit ranging from 346.
The $364 million compared to our prior guidance. This represents a net reduction of 19% to $22 million.
This is comprised of $25 million of additional FX headwinds offset by three to 6 million of improved operational performance.
As a result, we're now projecting consolidated non-GAAP operating margins ranging from $17 four to 17, 8% for our consolidated business.
Compared to our prior guidance. This represents a 90 basis point reduction due entirely to incremental FX headwinds.
Without the currency headwinds our operating margins would have been projected in the range of $18 three to 18, 7%.
Moving further down the P&L, our non-GAAP non operating expense for the consolidated business is expected to be approximately $23 million in 2022. This.
This is primarily comprised of interest expense associated with the new credit facility.
We're also projecting non-GAAP tax rate of 25, 7% and weighted average shares outstanding of $55 3 million.
Based on all these assumptions, we are projecting non-GAAP EPS in the range of $4 34.
The $4 57.
Compared to our prior guidance. This represents a net reduction of 12% to 16.
Which is comprised of roughly 35 cents of additional FX headwinds offset by an increase of 19% to 23.
From improved operational performance combined with share repurchases.
Without the additional FX headwinds, our non-GAAP EPS would have been projected in a range of $4 69 to $4 92.
To summarize we delivered strong performance for the first half of 2022 that exceeded expectations.
Excluding the additional currency headwinds, we are raising our full year revenue operating margin and EPS guidance due to our strong underlying operational performance.
Our full year 2022 revenue guidance implies 9% to 12% constant currency growth on a pro forma basis.
For additional details on our 2022 financial guidance. Please refer to today's earnings presentation within the Investor Relations section of the website at Massimo Dot com with that I'll turn back the call to Joe. Thank you Michael.
We have moved expeditiously forward with our plans to become a prominent company into consumer health and wellness space.
<unk> sensing watch is now in limited market release.
We've been moving.
And receiving excellent feedback.
Back to full market launch of the <unk> one to occur this quarter.
Our bio sensing smartwatch, which we referred to as freedom will fall of next year and that watch will have a much larger feature set than the Delta you won including Android watch features.
Our strategy to be a leader.
And the deployment of clinically relevant monitoring devices within the hospitals and home settings is now taking shape as we initiate the development of new products that integrate our healthcare technologies with her consumer non health care technologies.
These innovative products are intended for home health and wellness Hughes as well as hospital and health care.
Our mission is dedicated to improving lives, taking noninvasive monitoring to new sites and applications, while improving patient outcomes and reducing the cost of care.
With that we'll open the call to questions operator.
Thank you.
If you'd like to ask a question. Please press Star then one on your telephone keypad.
Our first question today is from Mike Matson with Needham <unk> Company. Your line is open.
Yeah. Thanks for taking my question.
I guess.
Where can I start with the consumer strategy and the smartwatch, maybe you could talk about what you think it is about.
Youre smartwatch the W want or this upcoming three on watch, it's really going to kind of help.
Help differentiate you in the market versus some of the peer companies out there like Apple or Samsung.
Okay.
Well done.
During the Olympic marketed release space I'll tell you what our customers are telling us they have never had a product that allows them to do the things they've been wanting to do so for example, the continuous and accurate.
Information of oxygen saturation and pulse rate.
<unk> not been there.
And whether it's used for sending patients.
Oh from hospitals.
Patients that are at risk that want that need to be monitored remotely or.
Even athletes that use some of that information for better training and better preparing for competition.
They are telling us.
It is different it's unique and it's compelling.
In addition, we have some unique new parameters that have never been released in the commercial.
Watch for four four.
Both health care and consumer wellness, which we're hoping to release with the launch of there'll be one.
And then as far as freedom.
I want to just.
I'll tell you the things I've said before and no more because of the competitive nature of this business.
But we.
Believe we have a compelling.
Design, we believe with the addition of the Android features and some unique features that again have never been made available before.
We think we have a great product.
No.
And we think we have a product that should command a 100% market share which is what you want.
What you want for your team to feel so the question is do we have now the right distribution channel and the right.
Salesforce to hopefully make the most out of it and.
Time will tell but.
We've never been better prepared and we.
I can tell you the whole United Massimo team.
Excited for all.
Grateful for the efforts that they have within date book.
We're going to we're going to have a lot of work ahead of us and I think it's revitalizing.
Our team.
Okay, great. Thanks, and then the guidance for the third quarter, particularly for EPS is theres, a pretty big differential there versus.
Where we were modeling things.
Is that just maybe a function of sort of the seasonality with the new consumer business kind of in the mix or something.
Just I understand what happened with the overall.
Guidance and whatnot your currency, but it just seems like there's a kind of a bigger delta there in the third quarter guidance versus consensus.
Well Q3, even for our health care business has historically been the.
Our lightest quarter.
Our businesses typically.
<unk>.
Aided by people, having procedures, which they have less of them elective procedures in the summertime, but also the flu season.
Which comes in Q4, and Q1 timeframe and I think on the consumer side.
A lot of business gets done.
The holiday season in Q4, and so I think they are kind of the same book. So we don't there's nothing that we're alarmed about.
The way, we see the whole year.
Mike just to add to that to Joe's point, there are strongest quarter for the consumer are now non health care segment.
Of course, the fourth quarter and Theres a lot of investment that goes into the business throughout the year preparing for that fourth quarter. So that's that's having some impact on a year over year Harrison.
The other thing is.
FX headwinds there are very significant so if you look at it versus our prior guidance.
Just for the <unk>.
Third quarter alone about 170 basis points.
FX headwinds on our operating margin well, so something to keep in mind.
Okay got it thank you.
Oh, and one more thing Mike their businesses when.
When you look geography.
Geographically.
Our business is 30% of our revenues are outside the U S.
The sound United United Business is about 60, probably about two thirds of their business is outside the U S.
Only a heavier.
FX headwind coming from that business.
Okay got it thank you.
Okay.
The next question is from Jason Bednar with Piper Sandler Your line is open.
Okay.
Hey, good afternoon, thanks for taking the questions.
Joe I wanted to start with the recent announcement to part ways with Kevin Duffy the prior CEO Sandy United.
I can't help but ask you indicated when you announced the transaction six months ago that retaining sound leadership and talent was a top priority and is what you saw as the biggest risk to a successful integration of outcome from the acquisition.
Could you help us understand what changed.
Three months post deal that Rick.
Required.
Leadership transition in.
And maybe help us feel comfortable that the risk level here hasn't risen in fill us in on what you have planned in terms of backfill and that leadership position.
Oh sure sure.
As you go through this journey and Youre working side by side.
Sometimes it feels like it's a good fit and sometimes it doesn't feel like it's a good fit in it.
It wasn't a good try there Kevin or us.
We left an amicable terms and he has been wonderful and exit process and has committed to helping us post.
This last date, which was August 5th.
The good news is.
We have a very strong team.
Below Kevin.
That has really been running the business the way that business is run.
There are five.
Basically president and there is a.
Brand presidents.
We're responsible for borrowers are Wilkins one of them one of them Miranda one of them denim one of them.
Hum.
Definitive technologies and other one Polk and these.
Overall, we're very happy with that team.
We also.
Wonderful head of engineering, there is chief operating officer that those brand leaves reported to us.
An incredible supply chain and operations leader.
No.
And underneath them, a very strong bench, we have had a chance to meet a lot of them. So yeah, we still feel great about the team.
We obviously.
We're going to do our best to keep.
Keep everyone that we really think we need for the journey and.
Well underway.
These things will happen when they happen.
We certainly did not anticipate it to be honest with you I did not believe would be parting ways with Kevin but.
It is it is what ended up happening and.
We're gonna be we're gonna be good I'm really excited about the future we're gonna be naming a new leader to lead that team from the sound United team.
And we're just going through the process right now and we.
We have a lot of good candidates to choose from.
Alright Thats helpful. Thanks for that and then maybe a follow up on on Mike's question.
And just to maybe digging a little bit deeper because this is the first time, you've talked a little more openly about the more the mass market consumer watch the so and any details that you are willing to give us on freedom.
Beyond what you disclosed there I'm not sure if you're willing to.
To move forward with our price point, yet on that product.
Also just any like go to market activities you have planned how how you're how you're going to go about that what kind of investment spend we.
We should be prepared for as you enter full market release of <unk>, one and the launch of freedom.
And then maybe Mike just curious how you'd have to start thinking about modeling and contributions from something like W. One and freedom are you willing to throw out any year, one or two targets.
Something like 10 million or $20 million in revenue reasonable.
Yeah, we.
We would love to share with you all the things that we're excited about freedom.
But I think for the benefit of all of our shareholders. Its better that we don't what I can tell you. This freedom will have the same bio sensing technology is W. One.
At minimum the feature set that.
Come with the Android watches that are out there and some other cool stuff.
As far as what have you been doing to prepare as you know our strategy has always been to provide any of our customers are clinically relevant products.
It becomes even more important for people that are further away from clinical oversight.
So.
The purpose of W. One is to prove it under clinical oversight.
And hospital to home environment, and it's a very clinical selling.
Selling.
Process, which we have nearly 1000 salespeople that we'll be doing that for us and then as we get to.
To freedom, that's the product that we are going to need the help from the sound United team that we've invested quite a bit to acquire and to hopefully motivate and keep going.
It's.
Phenomenal.
The number of.
People that have spent some of them decades doing gas, but before them the very best.
I can't say the word anymore, but the previous team before them 50 to 100 years of time have built this incredible distribution channel. That's 20000 distribution points strong and of course, we're planning to do additional things as well I think all of these are have been modeled we look forward to sharing as much of it as we can with you.
At the Investor Day meeting in December Michael do you want to add anything to that yeah, Jason I think.
As you know, we're always thoughtful and prudent with our guidance.
We're still learning a lot about how we're going to commercialize some of these new consumer health products.
You know sizing the market's in and also the target.
Consumers for those products so we.
We don't want to get ahead of ourselves. There are the good thing is is we don't have to I mean, the business is growing double digits.
And we've got a very strong business today. So we're gonna be thoughtful before we start to bring that into our guidance as we move forward into next year.
So sorry, I know, it's going to be small, but just.
Is it safe to assume that whatever you are assuming for W. One is baked into this year's guidance with respect to the full market release.
Well just just from a practice perspective, we've learned the hard way not to put anything in our guidance until the product is released so so far the guidance. We've given you does not have that there'll be one revenues that hopefully will come except for whatever we have received.
A limited market release.
Period.
Okay understood. Thank you.
Thank you the next question.
The next question is from Jason Bedford with Raymond James Your line is open.
Good afternoon can you hear me okay.
Yes, yes.
So maybe just to follow along the last line of questions and then.
Question for Mike.
The full market release of there'll be one what does that entail meaning is this a global launch.
And I assume the sale will start in the hospital setting and if so how will the logistics and the economics of this work.
Yes, it is going to be a global launch.
We're direct in about 40 countries and we have distribution in another.
<unk> 90.
Plus countries. So it will be a global launch.
As far as.
There is two paths with Bellevue one.
We are submitting our F D a.
Five 10-K for that product that will be for a hospital and clinical use as well as so we're going to be targeting pro Sumer as these are.
Actually these are.
People, who want to be fit fees, maybe people that are concerned about their health. They may have COPD. They may have heart conditions that they just want to monitor themselves.
So those will be our targets and we plan to.
Augment our sales.
Salesforce with.
E Commerce.
From Massimo as well as potential partners that will join and we are looking at partnering with some organizations that have a.
Health care focus to consumers.
That we May I'm joined forces together to further the availability of <unk> or as many people that want to take advantage of it.
Okay. Thanks, Joe.
Cool.
Just on.
The health care business in <unk>, but recall <unk> was about $25 million short.
Because of the supply issues is that how we should view the <unk> overage I'm, just trying to get out of an underlying growth rate and if theres any comments between.
Drivers and consumer.
Yeah, Great question. So the way I'd look at it internally here is I look at it year to date, our year to date, we're growing 11% on a constant currency basis.
And that really takes into account the timing of all those shipments, it's really hard to parse it out and see what each quarter would've grown.
But if you look at year to date, we grew 11% constant currency, that's how we're viewing the strength of the business right now.
Okay. Thank you.
Welcome. Thank you thanks for joining.
The next question is from Rick Wise with Stifel. Your line is open.
Good afternoon, Hi, Joe Hey, Micah.
I'll start with the health care business.
Theres been a great deal of just broad based concern not just the specific <unk> about the capital environment Hospital financial health.
And gosh. It seems like you had an excellent quarter and backlog strong et cetera et cetera.
Or are you concerned at all about the capital environment are you concerned about the pace of new spending or the timing of spending.
Just just at a high level I'm wondering if you're seeing anything that we should be sensitive to.
Well, our health care business has never been a capital intensive business, it's really been.
Technology as a service model as well and we've purposely purposefully have done that.
Doesn't mean, we don't have capital revenue, we do have small amount of capital revenue self.
So of course, any reduction and that will reduce that but that's that's a minority of our revenue. So we're not.
<unk> greatly concerned about that but obviously at the same time, we're all in the same boat and where you'd like to see.
Our OEM.
Customers drive and with their capital sales and.
So.
All in all we're good but.
And we hope to see things improve for them.
Nothing unusual good.
And turning to gross margins.
Mike.
Maybe you could expand on your comments there you spell that very clearly.
Pressure is that FX at supply chain are having.
I guess two questions one.
What's next.
What steps, you're taking to try to it particularly can't do much about currency, but what can you do about supply chain and sourcing and is that going to get.
What's your expectation things get stay.
It stayed the same or gradually get better and in a separate but.
Related on the sound United gross margins.
How do we think about this going forward do we is.
Do we need to get the watch launch to get margins up.
I'm sure you're not satisfied with margins in the current range, how do we think about the second half and the outlook for next year and beyond Thank you.
Yeah, Rick Great question, So as I mentioned earlier in prepared remarks.
We've got we're facing about 130 basis points of total headwinds half of that being FX or more than half.
You look at our underlying operational margins.
No down 60 basis points on our from prior guidance about half of that as segment mix.
The other half as some of these supply chain inefficiencies I mean every company right now is facing supply chain challenges I think some of them.
Still believe there's a lot of that these challenges are transitory and I think you know we're gonna be facing them for the back half of this year, maybe the first part of next year, but a lot of it has to do with just you know there's not a consistent you.
You know when you look at vendors and everything there's not a consistent flow of of components and raw materials, which creates a lot of inefficiencies in our production process, because we're not only having to.
Expedite the freight on those components coming in.
But then it creates inefficiencies in our manufacturing lines, because we're waiting on those components and then once we get them through the manufacturing line, we had to expedite them to our customers to make sure. We are you know meeting.
Meeting, our customers' needs and that's the most important thing for us. So it's it's a challenging environment.
I can't predict when it's going to get better, but I would think that we're probably seeing the worst and from here.
Hopefully it doesn't get better as we start to move into next year.
That's gonna give us great opportunities to drive more improvements in our gross margins back over time.
But we just got to navigate through this and as the teams done a great job.
We validated multiple vendors now I think.
You know, it's it's wolk, our woken up a lot of companies out there to who are focused on just pure efficiency going to you know trying to get as much volume with one vendor and it's helped us to really you know distribute some of that debt.
Production in some of our vendor base and we're in a better spot plus where we're building inventory safety stock.
You are seeing that investment coming through our financials, but.
We're gonna be in a better spot moving forward make sure that we are meeting those needs of the customers and putting them first.
Well a couple of things on the hospital side.
Hospitals are having a tough time, they're having to bring in travel.
Traveling nurses paying them $175 an hour.
They're seeing a lot of companies raise their prices.
So we have taken the approach of not doing that we have not.
Put in on the healthcare side.
Extra cost inflation that we're all facing.
I'm, hoping that it will be temporary and that we can help our customers at a time, where they need help.
On the on the but if it continues and if it sticks then we'll have to adjust our prices, which we have held back for two years now.
On the consumer side.
I don't believe we should be.
In any business that has that little bit of margin I think when you make incredibly valuable products like Bowers <unk> Wilkins Miranda.
These brands do I think they should be getting a premium.
Deb.
That will improve the margins now they have been raising their.
Prices to.
To adjust for the increased costs that they've been seeing both in Cogs and <unk>.
<unk>.
Shipments but.
Our plan is to work with them to improve their margin greatly but.
You said, it's Rick we did not buy sound United.
Only because you know they made great audio products, we bought them because what we thought we could do with them with freedom.
Other.
Consumer health care products that will model a lot after our health care business, which will be technology as a service. So that we anticipate not only good margins on the capital in that world, but.
We anticipate recurring revenues from a service model that we think will be a <unk>.
<unk> or for our customers.
That's very helpful. If I could just follow up on that just briefly.
Joe when the deal was announced that I had the sense that.
You and the team were going to.
I don't know whether I have an analyst day here at some point, we get a deeper.
Okay.
Perspective on your long term thinking we're getting some bits and pieces Tonight for sure.
When do you think we might hear from you about your longer term vision, yes, I'm sure that's part of the freedom.
That'd be one launch but.
When do you when should we expect to hear from you are in that more fulsome manner. Thank you.
Sure Rick out we.
We would love nothing more than to get you inside our head because I think you'll find it.
Hopefully.
Interesting.
But exciting.
But we have to be cautious not to let.
Competitors get inside our head as well so long story short I think you're going to get a good healthy dose of what were thinking this December .
Investor Day have we do have a date yet number 13 December 13th.
Drag you out of anywhere, it's raining or snowing and bring you to California.
Hopefully you will come and then I think when we launch freedom, obviously, we'll share more and then there's a couple of really.
What I think will be a breakthrough products and when they are out I think then you'll see what we had in mind.
But the full story might take a couple of years before it comes out, but we'll try to share with you as much as we can.
December 13th.
Thank you Jeff.
Yeah.
The next question is from Marie Thibault with <unk>. Your line is open.
Hi, good afternoon, thanks for taking the questions Joe Micah.
I wanted to follow up here on some comments Joe that you just made about the consumer side of the business and end of premium priced products. We certainly heard from some other consumer tech companies this quarter that with consumer confidence at a low there is concern about that discretionary spending we'd love to get your thoughts maybe what youre hearing from your brand.
<unk> in terms of customer appetite for these great Sunday night products.
Yeah well.
We first of all believe most of the songs United products are here.
Geared towards very affluent and wealthy people.
Which are.
For better or worse are usually more shielded from.
Some of the.
Weakness in.
Economies when they occur.
In addition, we've met with them they had a really productive meeting where we looked at.
What if you know what if things do slow down a lot more because certainly you're seeing given the low end products.
And the.
Consumer product lines that are out there from Tvs to sound bars and things like that.
And.
Still there.
<unk>.
Forecast that we've given you.
Is in line with the worst case of what they could.
Good.
Project, So I well I don't have historical data like I do for the health care business I've been running here for over 30 years to give me the confidence.
Everything that has to do with the sound United.
I feel that.
Theoretically.
They are in the high end world. So that part makes sense to me and my belief in the team and the way they thought about it it seemed like a good critical thinking and.
Lot of conservative.
<unk>.
Our modeling.
So yeah, we've we think we should be okay.
Okay. That's very helpful. Thanks for that and then on the Investor Day I realize it's been pushed out a couple of months from what we'd hope in September .
What was sort of the thinking behind that what is it that are I guess I'm led to some of that delay.
And what do we expect to hear more on the hearing aid product as well in December just any updates on that product category.
Yeah, we've pushed it out of one <unk>.
You can imagine.
The effort that has taken.
For Mike and his team to consolidate the financials with a company that was not public.
And it wasn't really being run to go public.
No.
I think we didn't want to we don't want to break the horse that was giving us the right [laughter].
But then secondly, we know you guys want more and we feel like by December hopefully, we'll be able to share more.
And yes, we definitely will share with you.
<unk> about <unk>.
Okay perfect looking forward to it thanks for taking my question.
Thanks Marie.
Again, Thats star one to ask a question. The next question is from Michael Polar <unk> with Wolfe Research. Your line is open.
Good afternoon. Thank you for taking the questions.
Maybe I'll start on just.
Capital deployment and cash flow question I mean, the balance sheet has been materially altered in just six months here post sound, United and now a hefty buyback I'm I'm doing math 750 million net cash.
Entering the year now just about $700 million of net debt.
I guess I'm curious for updated thoughts on you know.
Your comfort level here with this kind of.
The different profile number one.
Any kind of target leverage metrics you.
You might want to toss out about where this is comfortable on the high end or where you want it to go over over the midterm.
And then.
Just the related as you know.
A lot of moving pieces with sandy United coming in and I'm curious, where you think.
Kind of durable.
Free cash flow is for the for the enterprise over the next year or two.
Yeah, Mike This is Mike So if you look at I'll just.
Go through those questions I'll step through those.
So on the in terms of our leverage are ive always been comfortable with you know <unk>.
Three times or less in that zone.
Our net leverage is under one and a half we generate strong cash flow as a company are so so it's under wanted to have a we're getting a very good interest rate on the debt. We're in a good position there to service that debt with our with our cash flow and then even invest back even more in the business.
And so that's that's number one.
You know as we look at capital deployment.
You know the reason we have a lot of confidence in our long term growth of this business and that's why we're reinvesting in our shares for Massimo So.
That's something that.
We looked at it in and we think that reinvesting back into the company and in our shares is was a great capital deployment for us and.
And it's in terms of cash flow you know the softness we're seeing in cash flow is number one we've had some acquisition related costs that are transaction related. So we had to pay those in the first half that suppressed our free cash flow.
But if you pull that out we still are seeing good strong cash flow.
That we expect for this year. The other thing is as were investing in inventory. If you saw what happened in Q1, it's something we don't want to repeat so we're trying to make sure we get sufficient safety stock levels and I think that's very prudent for the company to do and make sure that we're putting our customers first as I mentioned before so hopefully that answered some of them.
Questions an IDE.
Opened for any follow ups you have on that.
My follow up topic was just.
Timeline and upcoming milestones for.
The legal proceedings with Apple any major.
Events, you expect over the next three months to six months before year end that we should be monitoring.
Yes, we had our.
ITC case against Apple and we anticipate a ruling by judge.
Judge by September 15th.
And then.
By January the commission will make their decision.
And assuming they both will go forward with enjoining the infringing.
Apple watch.
We should have and if.
Something in place by March April next year are subject to a presidential review and then our patent case, Oh kidney. Our patent case has been stayed in the federal court, but our trade secret case will happen in March.
And there'll be a jury case.
The judge sell now and so we expect some time in April we'll have a decision there.
I was in the ITC case for about half of it for about half of it I was asked to leave because of.
Apple confidential documents that we're gonna be the schools. The portion I was in I felt very good about our case and.
What I understand.
The documents that I couldn't see were not favorable to Apple. So you never know what's going to happen, but we feel good about it and hopefully we'll have some news September 15th.
I appreciate that if it if I could sneak one more topic.
Is there an update on opioid safety net I feel like we were talking about it every quarter. There is a pathway in Europe commercially there was a regulatory pathway here in the U S and I haven't heard it.
An update there.
For at least a couple of quarters. So if there's any any additional color on where that effort stands that you can provide I'd appreciate it thanks for taking the questions.
Absolutely yeah, we're pushing hard.
Around the world with.
<unk> safety net.
Mainly made for opioid that's been going well.
In the U S. We're waiting waiting for FDA clearance.
I believe we've given FDA everything gets requested.
So.
Or again, if you remember this is a product that the F. T E chose as one of eight products.
Out of over 250 companies that could help the opioid epidemic and gave it a breakthrough status as well. So I know the FDA is also eager to released a product hopefully hopefully soon.
We did report on it because I think we're getting tired of waiting to [laughter], but we were looking forward to the launch and.
If anything over the last two three years to problem has gotten worse.
Last 12 months 100000 people in the U S.
Were killed due to overdose, 20%.
Of those we believe were due to prescription opioids.
We believe we have the right solution, we believe they will save.
With this deployed it'll you can save tens of thousands of lives.
Year.
So.
We'll let you know as soon as we get our clearance.
I think that's our last question.
Thank you all for joining us I hope you all enjoy the rest of your summer and we look forward to our next quarterly call and seeing you on December 13th.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
Please wait the conference will begin shortly.
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