Q3 2022 Masimo Corp Earnings Call
Okay.
Good afternoon, ladies and gentlemen, and welcome to Massimo <unk> third quarter 2022 earnings Conference call.
The company's press release is available at Www Dot Massimo dotcom.
At this time all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
And now I am pleased to introduce Eli cameraman, Massimo 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 sub.
Jack 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. A reconciliation of these measures to the most directly.
Comparable GAAP financial measures are included within the earnings release and supplementary financial information on our websites 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. Thank.
Thank you very much good afternoon, and thank you for joining us for Massimo <unk> third quarter 2022 earnings call I'm happy to report that we achieved results above expectations for the quarter.
Former consolidated revenues increased 8% versus last year on a constant currency basis with 10% growth from our healthcare segment and 5% growth from our consumer segment. These figures reflect above market growth for both business segments.
Our health care business has been seeing solid growth as we are realizing a steady stream of new customer wins globally, and we are on track to see our installed base grew by 7% this year.
In our consumer business sales growth exceeded expectations as demand for premium auto audio products was strong.
Bowers <unk> Wilkins and Miranda are holding up well in the face of a challenging economic environment due to their reputation for exceptional quality and design.
Our consumer and health care teams are working independently and collaboratively on multiple projects to create exciting new consumer products and professional health care products as well as innovative consumer health products. These.
These products will incorporate technology and design from both teams that will be highly differentiated in their target markets and we expect it will be well received.
Now I'll ask Micah to review, our third 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 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 once again be referring to this business as our non health care segment.
We delivered strong results in the third quarter with revenues operating margins and earnings per share exceeding the high end of our guidance range.
Our consolidated revenue was $549 million, representing 3% reported growth and 8% constant currency growth on a pro forma basis.
During the quarter, the third quarter, our global sales and operations teams did an incredible job of navigating through a challenging macroeconomic environment.
Ongoing supply chain challenges.
Hospital staffing shortages and slowing hospital admissions for our healthcare segment third quarter revenues were $327 million, representing 6% reported growth and 10% constant currency growth our driver shipments for the third quarter reached over 76000 solidly on track for us to realize over one.
300000 driver shipments this year.
At the end of the third quarter, we estimate that our installed base has grown by 7% over our installed base at the end of the third quarter 2021.
For our consumer non health care segment.
Third quarter revenues were $222 million decreasing 2% on a pro forma reported basis, but increasing 5% on a pro forma constant currency basis.
As I mentioned on our last earnings call. This business faced its toughest year over year comparison due to an exceptionally strong third quarter of 2021, which was above trend line due to the fulfillment of backward products.
Despite the difficult year over year comparison, this business delivered solid growth due to strong performance by our premium Bowers <unk> Wilkins and <unk> brands.
Moving down the P&L.
For the third quarter of 2022, we reported consolidated non-GAAP gross margin of 52, 6%.
Our margins were adversely affected by the impact of segment mix foreign currency headwinds and persistent supply chain inefficiencies as I described last quarter.
For our health care business third quarter non-GAAP gross margin decreased 190 basis points to 64, 6% compared to 66, 5% in the prior year period.
The year over year decline was expected and resulted from the factors just mentioned.
For our consumer non healthcare segment third quarter non-GAAP gross margin was 35%, which represents a modest sequential improvement.
For our consolidated business, our non-GAAP operating profit increased 15% to 81 million and represented 14, 8% of total revenue.
And our non-GAAP earnings per share increased $1 per diluted share.
Now I'd like to provide you with an update on our 2022 consolidated financial guidance.
For the fourth quarter of 2022, we are projecting a consolidated revenue range of $581 million to $611 million.
On a pro forma basis, our guidance incorporates $45 million a year over year currency headwinds, implying a constant currency growth range of 6% to 11%.
If foreign currency rates hold at current levels, we are estimating approximately 70 million of additional currency headwinds in 2023.
These negative currency effects will flow through our income statement to negatively affect our margins and operating income.
For our healthcare segment, we are projecting fourth quarter revenues of $337 million to $352 million, our guidance incorporates $14 million a year over year currency headwinds, implying a constant currency growth.
The range of 7% to 11%.
We're also projecting shipments of at least 75000 technology boards and instruments for the fourth quarter.
For our non healthcare segment, we are projecting fourth quarter revenues of $245 million to $260 million.
On a pro forma basis, our guidance incorporates $32 million of year over year currency headwinds, implying a constant currency growth range of 5% to 10%.
For our consolidated business, we are projecting non-GAAP gross margin of 51%, which assumes health care gross margins of 63% in consumer non health care gross margins of 34% to 35%.
We continue to experience persistent pressures related to supply chain challenges, which in turn create operational inefficiencies throughout our procurement manufacturing and fulfillment processes.
In addition, our gross margins are also being negatively impacted by.
Worsening currency headwinds.
Exchange rates hold at current levels, we believe that our depress gross margins of 51% in the fourth quarter will continue into next year with modest improvement in the second half of 2023.
On a consolidated basis.
We are projecting non-GAAP operating profit ranging from $91 million to $100 million and earnings per share ranging from $1 11.
So $1 22 for the fourth quarter.
Okay.
Now turning to the full year guidance for the full year. We are now projecting a consolidated revenue range of $2 billion to $2.030 billion.
On a pro forma basis, our guidance implies consolidated revenues of $2 billion and $258 million to $2 billion 288 million.
Representing 5% to 7% reported growth and 10% to 11% constant currency growth.
For our healthcare segment, we are projecting revenues of $1 $325 million.
So the $1.340 billion, which now incorporates $35 million a year over year currency headwinds.
Compared to our prior guidance. This represents an additional $5 million increase in currency headwinds.
This update reflects 10% to 11% constant currency growth over the prior year, which is in line with our prior guidance range.
Today, we are continuing to see lower than expected hospital census levels, particularly in community hospitals, our guidance contemplates a normal seasonal increase in patient admissions, noting that the flu season. This year is already running well above prior year levels and hospitals had surgery postponements in the third quarter.
That could be rescheduled into the fourth quarter.
However, due to the challenging healthcare environment with softer hospital census levels and ongoing supply chain challenges, we are not raising our guidance range.
Despite these challenges we are continuing to build a strong foundation for future growth with a large and growing installed base combined with new customer wins.
Im excited to report that for the first nine months of the year, we had record new contracting levels from hospitals converting to Massimo.
For our non healthcare segment, we are projecting reported revenues of $675 million to $690 million.
From April 11, 2022 through fiscal year end.
Compared to our prior guidance range. This represents an increase of $5 million at the midpoint of the range.
While this business achieved better than expected results in the third quarter by navigating a difficult supply chain environment.
We are being prudent in our fourth quarter outlook due to ongoing component shortages and a challenging economic conditions.
On a pro forma basis for the full year, our guidance implies consumer non healthcare revenues of $933 million to $948 million for fiscal year, 2022, representing 3% to 4% reported growth.
10% to 12% constant currency growth.
For our consolidated business, we are projecting non-GAAP gross margin of 55%, which assumes health care gross margins of 65% and consumer non health care gross margins of 35%.
We're also projecting consolidated non-GAAP operating profit ranging from $349 million to $357 million compared to prior guidance. This represents a decrease of $2 million at the midpoint of the range due to additional currency headwinds.
This update reflects consolidated non-GAAP operating margins ranging from 17, 4% to 17, 6% for our consolidated business.
Moving further down the P&L.
Consistent with our prior non-GAAP financial guidance, we are projecting non operating expense of $23 million a tax rate of 25, 7% and weighted average shares outstanding of $55 3 million.
Based on these assumptions, we are projecting non-GAAP EPS range of $4 38 to $4 49.
Compared to prior guidance. This represents a decrease of <unk> <unk> at the midpoint of the range due to additional currency headwinds.
Based on our year to date results, we are on pace to deliver a strong performance for 2022 on a pro forma basis, our consolidated revenue guidance implies 10% to $12, 10% to 11% constant currency growth with both segments projecting to have double digit growth for the full year.
For additional details on our 2022 financial guidance. Please refer to today's earnings presentation within the Investor Relations of our website at <unk> Dot com with that I'll turn the call back to Joe. Thank you, Mike Thanks very much.
As you just heard our third quarter results illustrate the durable strength of both business segments.
In the third quarter, our consumer business once again had strong quarterly performance with multiple new product launches.
Wilkins launched the 760 <unk> series three speakers and expanded its headphone line with two award winning products. The Pxs seven S too and the PX eight over ear headphones.
Then and unveiled a new line of 8-K receivers that <unk> introduced the new cinema series.
Award winning performance and design.
And our health care business I'm happy to report that we recently secured important new customers, including Denver health and nationwide children's one of the top 10 children's hospitals in the U S.
This has been the strongest nine months, we have ever had and attaining new customers.
A milestone for us in the third quarter was the launch of our W. One watch in August the.
W. One has.
Parallel accuracy for a wrist worn wearables and is the only watch available that provides continuous.
Clinical grade monitoring of critical vital signs such as oxygen saturation pulse rate and respiration rate.
We also launched novel measurement Hydration index under limited market release at the time of the launch of WT one.
Hydration index, our hei as we like to call it should be very useful for athletes and exercise enthusiasts, who need to calibrate their fluid intake for achieving peak performance as well as for patient who is fluid levels need to be properly titrated.
Not ventilated, where PV ISS has helped with hydration titration for 15 years.
Also.
We see even greater potential for W. One to be adopted by large hospital systems as a tool to effectively manage patients with chronic disease, such as CHF and COPD.
There are multiple pilot programs underway with the W. One to assess such potential both in the U S and in the Middle East.
We're looking forward to finishing the year with another quarter of solid performance, which will set the stage for next year.
2023 will be an important year for our consumer healthcare business and the year, we expect our recently acquired consumer business to help us with our hospital to home strategy.
We look forward to seeing you at our Investor Day on December 13 to give you a glimpse of what's ahead.
We hope youll be able to join us with that we'll open the call to questions.
<unk>.
Thank you.
If you would like to ask a question simply press the star key followed by the number one with Cowen. Thank you Kat.
You would like to withdraw your question Press Star one once again.
We will pause for just a moment to compile the Q&A roster.
Yes.
And we will take our first question from Matt Taylor with Jefferies. Your line is open.
Hi, Thanks for taking the question can you hear me okay.
Yes, Thank you, Matt Hi, Matt.
Great, Hey, Joe Hey, Micah.
So I wanted to ask you just given the continued good performance of the sound portfolio could you talk about whether you think you can still grow that high single digits into next year in a recession do you have any visibility into that maybe just talk about any updated thoughts on the outlook for that.
Sure sure while we intend to continue growing it in high single digit given.
Economic.
At least inflation, if not recession and all that stuff that has come forward.
Hard at this point to give.
<unk> you.
Assurances that we will.
But what we've noticed is.
<unk> Wilkins brands and even denim.
They seem to be products that are purchased by people who are not.
Not as impacted as maybe most people are.
Economic downturn.
So.
As we've talked of probably as iconic of brands and as.
Solid as you can get in any consumer industry. So, we're hoping but I can't tell you for sure yes.
Yeah, Matt just to add to that too.
At our December 13th Investor Day, we're working through.
Building the plans for next year, hopefully be able to give you an update on kind of our outlook as we go into next year. We just want to get ahead of ourselves at this point until we work through those plans but.
To Joe's point, we're seeing good durability with the more premium brands.
We've talked about this before but there has been softness in some of the more mass consumer products like sound bars, and those types of products.
But over the past couple of quarters, even while we've seen that we've seen good strength in those premium brands that have driven solid growth in performance. So.
We'll provide you more of an update and hopefully be able to join us.
Your next month.
Great. Thanks, I wanted to ask one on the healthcare side.
I was hoping you know you gave some anecdotes on the call about the momentum and some new customers.
I think a lot of people like to hear about some of the sub segments. I didn't know if you could provide any color on things like hospital automation or some of the higher value parameters to help us understand how momentum in those different areas has been.
Sure sure as you know we've had a few incredible years on top of very solid years before that in terms of our driver shipments and new customer.
Coming to Massimo.
I'm, just really happy to see this incredible momentum that I think was caused by people understanding how important it is to have measurements are accurate and reliable during COVID-19.
And how we came through with innovation at the beginning Covid debt.
Save many hospitals from.
Turning away patients or putting their clinicians in danger.
As for your second part of your question about some of the New technologies Hospital automation has been growing exceptionally well our rainbow has been growing exceptionally well.
Our cap geography business, our sideline or three have all been growing plus 20%. So we're really expecting after 15 years off.
Showing people the value of Rainbow, a 2023 and beyond will be kind of the five to 10 years for rainbow to take off and and the others to follow it so.
But yes, we're excited about the future and as long as hospitals continue growing and thriving and getting back their patients we should do really well.
Great. Thanks, Joe Thanks for the color.
Acute.
And we will take our next question from Jason <unk> with loop capital. Your line is open.
Hi, Thanks for taking the questions just first off in terms of your ability to raise prices in the.
Pace of inflation for healthcare and for sound United.
Has that have you begun to implement that and do you have any indication of how well it's sticky.
We have as you know in the last couple of years, we've resisted raising prices because we.
We're unsure if the inflation was going to be permanent.
But given that it looks like at least certain parts of inflation, our permanent such as.
Labor rates, and we have begun raising our prices and.
Maybe Mike I can give you more color if it's appropriate yes, absolutely and I think Jason.
If you look at on the consumer or the consumer side, the consumer audio side of the business.
We've also been navigating through a lot of these inflationary challenges by raising prices on that end as well so.
Yeah.
If we start to see some of the.
Headwinds ease up that we should see some nice improvement moving forward.
But we're trying to be thoughtful and prudent about how we reflect that in our guidance at this point. Okay. That's very helpful and if I could ask I don't know if you have any commentary about the recent announcement on Medtronic.
They're overlapping business spinning out has that had any impact on the marketplace. At this point or is it just too early.
See anything.
Well I think the announcement came kind of towards the end.
I guess this month October excuse me.
We're already seeing customers.
Take notice of that.
Nobody spins off a winning team so similar.
Look people are finally, seeing what we've been seeing for a while.
Okay, and then maybe just one final and I'll jump back in queue.
I've personally some questions about there was a philips settlement.
Do you have a can you give us indication of kind of when that expires and what kind of impact that might have when it does expire if any.
Well as part of the settlement I think we entered into.
Eight or 10 year agreement I think we've got two or three more years left on that agreement.
<unk>.
So.
We expect we will enter into a new agreement.
But because I think both companies are benefiting from this relationship.
And so our mutual customers.
Yes.
Great I'll jump back in queue.
Okay.
We will take our next question from Jason Bednar with Piper Sandler Your line is open.
Okay.
Hey, good afternoon, guys. Thanks for taking our questions.
I wanted to start off here with the fourth quarter guide.
Yes.
It looks maybe a little lighter than.
And the street at the top and bottom lines.
Maybe unpack a few things here for us the revenue Delta, maybe it's timing related the sound.
Maybe just wondering achieved if there's if that's how you're thinking about it as well or if there's something you're contemplating with respect to some of the consumer challenges spending challenges that are out there given the macro environment.
And then can you discuss what's pressuring EPS here more in the fourth quarter I mean, Mike It sounds like inflationary pressures are pushing costs higher that's probably extending into the first half of 'twenty three but can you talk is there any any early investment spend that you are making ahead of the consumer launches that you are planning for next year.
Yes, so that's.
There's a lot of points that question, but let me just try to take it one step at a time. So if you look at the fourth quarter.
We had a strong result, with our consumer audio business in Q3.
We are basic.
Basically only raising the midpoint of the range by $5 million.
The reason for that is we're also just being thoughtful and it's more around supply chain challenges.
They did a great job of navigating Q3, but that continues to be something thats been persistent as far as making sure. We've got product availability. So we're just trying to navigate through that we still if you look at Q4 for both businesses.
The fourth quarter implies very strong growth at the midpoint of the range, our health care business, we're implying 9% growth on a constant currency basis than our non health care, we're about 7% to seven 5% growth. So we're still.
Contemplating good growth in the fourth quarter.
Just being cautious about some of those challenges we're facing on the supply chain side.
And procurement.
As far as the earnings it's definitely being continued to be negatively impacted by currency.
Currency and the and.
In the fourth quarter, we believe that the headwind is gotten worse by about 60 basis points from our implied prior guidance.
We also think as.
That drops down through the income statement, we got about 6% of this incremental headwind.
Our EPS due to currency is what we're estimating so so that's really putting some pressure.
On the the margins as well as our EPS, but underlying growth and you can see it in the business operationally, we're performing very well and we've got very strong guidance implied for Q4 in terms of the investments, we're making we've already incorporated those investments in earlier.
Earlier this year.
As we are starting to work through.
Collaboration among our our teams to co develop products and start working on co commercialization work. So that's already been in the guidance.
What what I will though you mentioned the gross margins, that's really what's putting a lot of pressure in Q4, because we've got significant headwinds there due to FX and supply chain.
The FX headwinds are roughly about 120 basis points.
When you look at it year over year.
So that's putting pressure as well as the supply chain challenges.
What I mentioned in my prepared remarks is we believe that where we are.
Nearing the bottom there with 51% margins and we are hopeful that even though those will continue in the first half of next year. We will start that will start to turn the corner and improve in the back half of 2023.
Okay, alright, thanks for all that I know there are a lot of questions in there maybe just a.
A couple of follow ups here on building up some of that commentary there Mike.
I know you mentioned things in the prepared remarks around hospital census hospital staffing issues, maybe weighing a bit on the outlook the outlook still pretty good in spite of those elements.
The supply chain challenges in the on the consumer side I guess for each of those are you able to quantify what the overhang is from those those elements.
Said another way how good might the guide would be if not for these issues that are holding.
Holding back.
Our young and Atkins overhangs on the business right now thank you.
Yeah, Jason I don't want to get into the Quant.
Quantifying those those numbers for you, but we feel good about the guidance for Q4 in terms of where we're guiding to very.
Strong growth.
In both businesses.
Okay, maybe I'll sneak one other one and then is there.
Anything contemplated in the guide or can you talk about what youre seeing with respect to hospital Capex budget I mean, the board numbers.
Still look pretty good you sound confident on 75000 plus going forward.
But maybe comment on that just given the mixed feedback we've heard from others in the hospital Capex landscape. Thank you.
Yes, I think.
Just overall, we're still feeling good about the foundation of our business in terms of the driver shipments.
We believe we're going to be above 75000 again next quarter.
Continue to see 7% growth in our installed base with the challenges we've seen though are some of our OEM partners has have had some some challenges as well and it's impacting our.
Our ability to.
To install.
New equipment and recognize some of that revenue on that equipment as well as we are.
On our installations as well as theirs so so.
So as we think about installations those have been challenging this year, just because of the availability of product from Oems and as you keep in mind as we're able to do those installs we recognize revenue.
Massimo branded equipment, so that that's been challenged a little bit this year and we've contemplated some of those challenges in the guidance.
Thank you.
Okay.
We will take our next question from Marie with BP <unk>. Your line is open.
Hi, Thank you so much for taking the questions and congrats on a strong quarter.
Wanted to ask a question here on W. One in the watch.
To hear a little bit more about the full launch what retail channels that was being sold through any learnings so far and if we could hear maybe an update on the FTE.
10-K process there would be helpful. Thank you.
Sure sure.
We have not launched <unk> in the retail channel.
We intend to do that with a product that will be called freedom next year. So Adobe one really is built for what I would call.
Our health care industry from hospital as a whole and prosumer as these are professional athletes and those who really are looking for this type of data.
And as far as five 10-K, we submitted to FDA to FDA. The <unk> application, we have not heard anything yet.
So hopefully by December 13, we will have more news on that for you.
Okay very good and we'll look forward to that Investor day, maybe I can ask a question here from Mike I appreciate that we should wait for Investor day to get too much on 2023 guidance, but.
Some of your comments here about investments that have been tuck in for the consumer health care products should we expect or would you like to sort of rightsize our expectation for spend next year on those sorts of products that just just want to be wary of if theres any step up or anything like that that might be expected. Thank you for taking the questions.
Yes, Thanks Marie.
I'll definitely address more of that at Investor Day, I think a few things data points I can give you is whenever we completed the acquisition and announced that we were adding some co investment.
For marketing and development, we said that was going to be roughly 1% of about 1% on revenue.
For that for the business so that that investment is likely to carry on an annualize out next year.
So I think thats something to contemplate.
And another thing I mentioned in my prepared remarks was.
Just as you think about your models for next year.
Keep in mind that a lot of currency headwinds.
<unk> rates hold at current levels.
We're contemplating are estimating about $70 million of FX headwinds again next year from from the strengthening of the dollar so.
Just a few things to model in there.
Ahead of the Investor day.
Okay, well understood Michael Thank you.
We will take our next question from Jason Bedford with Raymond James Your line is open.
Okay.
Good afternoon.
On adjacent in the queue.
So just a few question.
In in <unk>.
Was there any material contribution in sales for <unk>.
No no for third quarter, there was no material.
Contribution from revenue from <unk>.
As Joe mentioned.
There's a few things there is 500 K is going to be important for us.
As this is going to be a device that we think is going to do very well and.
As we move from hospital to home and.
And of course, we're making it available to consumers, but that's.
That's where this one is going to be focused and then.
Hopefully you'll hear.
You hear more about our.
Our next phase of consumer.
As we move forward.
Okay and.
It was mentioned earlier about pilot programs with W. One maybe Joe just wondering if you can kind of walk us through.
Logistics economics, and how it's being used in these pilot programs.
Yes.
We are working with several.
Really strong brand institutions in the U S.
Subject to the pilot is going well and FDA clearance we expect.
Really strong uptick and.
And what theyre doing to sending patients home.
They're monitoring them remotely with that there'll be one with also care pathways that they will follow.
And the same goes in the middle East or Middle East, we're not waiting for FDA clearance, we're working with some really large groups ministers of health.
<unk> as a group were.
Several hundred patients are being monitored at home so far the feedback we're getting from all the pilots are very positive and the first one to likely to pop will be in the middle East because we're not waiting for FDA clearance and if it does it'll go from several hundred.
<unk> tens of thousands of patients are monitored.
Annually.
It could be a significant revenue to us even before the consumer business begins with the launch of freedom.
Okay.
And just so I understand the revenue model, it's a sale into the hospital and then a monthly service stream of revenue post at dusk.
That's correct. So there's a hardware sale, there's also a monthly service.
And it depends on the amount of monitoring they need to some patients we offer more than Dolby one.
For example, if they're a diabetic will offer in glucose meters and scales.
For others blood pressure and thermometers or radius T. So it really depends on the individual but with the service model.
That we have with.
The service is kind of like the recurring revenue of our pulse oximetry and Rainbow pulse co oximetry business, what we will become a significant part of our revenue.
Okay. Thank you Mike had just a couple quick ones for you.
23 gross margin commentary is the first half pressure all FX related or is there something else in there.
No it's a combination of FX.
And also just some of the supply chain challenges so.
I would say probably what we're seeing in the fourth quarter is probably the best way to look at it.
If you look at our fourth quarter, we've got about 300 basis points of year over year pressure.
And that 51% gross margin number.
And I'm focused more on the healthcare side here and it's actually looking at their 63, 63% margins for health care.
So when you look at it year over year, it's about 300 basis points of total <unk>.
<unk> about 120, we are estimating our from FX and about 180 are operational and the majority and the majority of those operational headwinds are tied to those supply chain inefficiencies like higher freight costs.
And some some components of labor increased labor costs.
Okay. Okay.
That's helpful I'll jump back in queue.
Thank you Jason.
As a reminder, just star one if you would like to ask a question. Our next question comes from Michael Palmer with Wolfe Research. Your line is open.
Hey, good evening, Thank you for taking the questions.
This was asked a different way I'll I'll take another stab at.
A lot of irons in the fire, especially as you're integrating.
Consumer.
New product in the works likely to launch.
Next year.
You know philosophically.
What and I understand 2023 is kind of artificially small short term box, but.
There's a lot to chew on on this call and I guess philosophically.
How do you balance kind of the supporting these these launches with.
We're managing the business and kind of short term operating profit and EPS.
Is it is the guiding light to still grow earnings next year or is there a scenario where you know these these new products are potentially so compelling over the long haul that yet you had really kind of invest to support them next year such that.
Enterprise, EBIT and EPS might might not be up all that much I guess any I'm not asking for guidance, but philosophically.
Kind of where you stand on this I'd appreciate an update.
Absolutely and Mike will definitely get more to that next month, but just as we think about it just at a high level.
We one thing we don't want to do is under invest on being able to successfully launch what we believe are products that are going to be very successful in some very large markets.
And we're going after some some bigger markets and expanding into new large and growing market, that's going to really drive growth into the future and the future years. So we don't want to Underinvest. There. We are balanced trying to take a balanced approach we do want to deliver.
When you think about just exclude the FX headwinds for a moment.
Because those were going to have significant pressures on our reported growth.
But if you look at it more on an operational underlying growth excluding FX.
We still believe we can demonstrate good growth in the next year on a constant currency basis on both the top and bottom lines. So that's how we're looking at it and Thats, what Youll hear more about next month.
And then the follow up is specifically on.
The core sound United portfolio.
Kind of bracing for.
In recessionary impacts.
And your <unk>.
Six or seven months of owning the business kind of what what levers do you have to pull.
To protect.
The profit contribution of that business in the event of kind of revenue.
Softness I guess, how much how much.
Yes, how much.
Kind of fixed cost deleverage as their variable cost to manage as kind of the revenue picture.
Evolves.
Yes.
We've got a pretty good track record of being able to manage through some very challenging environments.
And I think that this would be no different.
I don't want to get ahead of ourselves.
We're still working through the plans for next year and beyond but.
<unk>.
We're still excited about the outlook for the.
The consumer audio business as far as for next year.
I think the way I look at it is they're doing a great job of outperforming the broader market.
And we're seeing that both businesses, both the health care side as well as the consumer audio side, so relative to the market, we feel very good about our outlook.
But we'll get into more of that discussion next month.
Okay.
And we will take our next question from Mike Matson with Needham <unk> Company. Your line is open.
Yes. Thanks.
I think there was.
And ITC hearing or something at the end of October I don't know, if you're able to share with us anything from that but maybe you can just also give us an update on when we will actually hear something from the ITC.
Yes, I think you know we were first anticipating rolling in September and then I've got pushed till end of October .
And then recently right before that to date, we were informed by our judge that Nash is going to rule.
Number 20th I think we're somewhere around that date 19. So we're hoping that date, we'll stick, but more importantly, we hope that we're going to win.
We just have to be patient.
So is that the data.
There was something publicly or do we have to wait till the latter D, which does because sometime early spring or something.
I think we should know something publicly but there's two other steps assuming we win the next stage as it goes to the condition.
To see whether they believe the product should be enjoined debt.
That we have gone after which is a pulse oximetry side of the watch that Apple sells and the third at some point it goes to president of the United States to whether he wants to.
But that happened or not so those stages will probably take three to six months post the December ruling.
Okay got it.
And then keeping them.
Our trade secret case against Apple is slated for end of March 2023.
Okay.
Yes.
A lot of.
I can't hear you I'm, sorry, Mike can you speak into the Mic sorry, maybe Alex every my microphone up on my phone there.
I hear you're making a lot of comments about inflation and the impact on your margins and whatnot.
Wanted to ask about your ability to raise prices to offset some of that both in the medical and the consumer side.
Are you have you raised prices or are you able to do so.
If you have how is that being received by the customers.
Yes, Mike.
That was asked a little earlier in the call.
One of the things that Joe mentioned was on the health care side, we've been reluctant over the past couple of years.
We didn't know how transitory some of those could be and now it looks like they are they are definitely here to stay.
As you look at labor costs.
We are looking to pass through with some higher prices on where we can on the on the healthcare side and then on the consumer audio side, where we are.
<unk> probably be in a bit more aggressive to offset some of those those challenges so.
If if things if the environment starts to improve or stabilize those will we'll we should see some continued.
Some improvement from here, but.
Trying to be thoughtful about that with our guidance right now.
Okay. Thanks, and then the $70 million revenue impact that you're expecting next year from currency.
Are you willing to put that in terms of EPS like how much of an EPS headwind you are expecting that to translate into.
Well I think one thing I can point back to if you look back at and we still got to work through the math on this but if you look at last quarters investor presentation I put out there.
There's about a 57% drop through to operating profit close to.
Maybe close to 60% drop through on operating profit.
And you could probably just model that in off those $70 million of of topline revenue headwinds.
Okay got it thank you.
Okay.
And there are no further questions at this time I will turn the call back to our presenters for any closing remarks.
Well.
Really appreciate everyone joining us today hope you all can join us on December 13th.
And we get a chance to meet face to face after a few years of.
Covid keeping us all away. So thank you all for joining and see you soon.
Maybe some gentlemen. This concludes today's conference call. We thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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