Q2 2023 Masimo Corp Earnings Call
Yeah.
Good afternoon, ladies and gentlemen, and welcome to Masimo second quarter 2023 earnings Conference call. The company's press release is available at Www Dot <unk> Dot com.
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 Cameron Martinez, Vice President of business development and Investor Relations.
Thank you Hello, everyone.
Joining me today are chairman and CEO , Joe Kiani, and executive Vice President and Chief Financial Officer Micah Young this call will contain forward looking statements, which reflect management's current judgment, including certain of our expectations regarding fiscal year 2023 financial performance. However, they are subject to risks and uncertainties that could cause.
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.
Business. Therefore, the financial measures, we will be covering today will be primarily on a non-GAAP basis unless noted otherwise further we will also be referencing pro forma financial measures, which include historical results for sound United Prior to the acquisition date of April 11th 2022 in our presentation today.
We will want once again be referring to this business as our non healthcare segment rec.
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 website.
Investors should consider all of our statements today together with our reports filed with the SEC, including our most recent Form 10-K and 10-Q in order to make informed investment decisions. In addition to the earnings release issued today, we have posted a quarterly earnings presentation within the Investor Relations section of our website to supplement the content.
We will be covering this afternoon I'll now pass the call to Joe Kiani.
Thank you Eli good afternoon, and thank you for joining us for Massimo <unk> second quarter 2023 earnings call.
As we discussed four weeks ago, we are disappointed with the level of sales we achieved in the second quarter in both segments of our business and have reduced our revenue and earnings outlook for 2023.
Michael will provide a detailed review of the quarter and our updated guidance shortly.
And I want to share our view of prevailing trends in our key markets.
Massimo is doing in this environment and how we're responding to them.
In healthcare, we believe inpatient volumes. This year remained close to flat relative to 2019, while our original 2023 guidance contemplated a step up in inpatient volumes above those pre COVID-19 levels.
The time, we provided our guidance. We also had a large new product orders in the pipeline that we hope would help us exceed our guidance.
And if patient census growth was lower than expected. These large orders would offset the lower than expected growth.
Unfortunately, we did not see the inpatient census growth and those large orders have not come in yet.
The forecast for giving you today as soon as we will not get most of the large orders.
And inpatient census growth will not return in the second half of 2023.
The rebound in patient census growth does not return then we have reset our baseline this year and we will expect our normal growth to return in 2024, given our strong hospital wins over the last two years.
If in patient census growth does return then we could exceed our updated guidance this year.
Meantime, we're taking action to mitigate the impact of the shortfall in revenues.
Notably, we will reduce our expenses by over $100 million.
We're also we focused our field resources to speed up new customer conversions as customer scheduling and OEM equipment availability improves.
On the consumer side, we are refocusing the team on horrible Wearables stork and heals, while we continue to support the iconic Miranda denim Bowers, <unk> Wilkins and pulp brands and products.
This focus should help us grow the business despite the challenges in the consumer audio markets.
I'll provide you with updates on some of these new products, but now I will ask Micah to review our second quarter results in more detail and provide an update on our 2023 financial guidance.
Thank you Joe and good afternoon, everyone for the second quarter, we achieved consolidated revenue of 455 million and non-GAAP earnings per share of <unk> 62.
For our healthcare segment second quarter revenues were $281 million, reflecting a 21% decline.
Please recall that our second quarter of 2022 revenues benefited from the shift of approximately $25 million to $30 million of revenues from the first quarter of 2022.
The second quarter due to supply chain delays in the first quarter of 2022.
Making the year over year comparison, more even more difficult.
For the second quarter of 2023, we missed expectations by approximately $66 million of this amount approximately half of that related to lower than expected sensor orders roughly 40% of the shortfall is related to large orders that had been expected that have not closed yet.
The remainder was attributable to lower so a weaker demand for capital equipment from hospitals as well as slower than expected installations.
We shipped over 64000 drivers in the quarter, which is below our expected expectations for shipments of 75000.
We believe that orders for replacement monitors from hospitals to our Oems have slowed as hospitals facing budget pressures delay purchases in our OEM partners manage their bat order backlog in inventories.
As of the end of the second quarter, we estimate that our installed base grew by 6% over our installed base at the end of the second quarter of 2022.
However, we would like to point you to our record breaking level of new hospital contracts as those will bring new sensor cells and are better predictors of our future growth.
Coming into this year, we felt good about our health care revenue outlook due to strong contracting with hospitals in the prior year in combination with some large new opportunities within patient monitoring and telehealth.
Further we expect to significantly reduce the equipment installation backlog associated with new hospital customer contracts at supply chain issues abated for Massimo and our OEM partners.
We also projected sensor volumes to improve substantially with inpatient volumes rising well above pre COVID-19 2019 levels.
In fact, we saw data showing sequential improvements in inpatient admissions exiting last year and we expect those trends to continue this year.
Based on data, we've seen and feedback from customers. We believe the inpatient admissions have remained roughly flat versus 2019 levels and inpatient surgeries are still down from 2019.
To be clear outpatient surgeries have increased versus 2019 levels, but even though we are in the vast majority of the ambulatory surgery centers, where.
Where the bulk of outpatient procedures occur they predominantly use reasonable sensors today.
The procedure shift from hospital to Afcs, therefore limits, our consumable revenue growth, even though those patients are still being serviced with Massimo technology we.
We do believe there are opportunities to move <unk> single patient use sensors over time as we educate them on all the benefits of a single patient use sensors.
Since our orders were lower than expected across most of our customers in the second quarter. We are also seeing extended lead times for equipment installations, which also affected sensor sales.
Therefore, we are re baseline of our healthcare revenue level for 2023, and still see our long term growth rate target is achievable, assuming the inpatient volumes grow annually at historical levels in the low single digits going forward.
For our non healthcare segment second quarter revenues were $174 million, representing a decline of 17% on a pro forma and constant currency basis.
This business is grappling with reduced discretionary spending on high end audio systems and a return of competitors, who had previously been hampered by supply chain interruptions now being aggressive with price cuts as they get back into the market.
Although we are unable to raise prices to the level, we had planned coming into this year, we did not reduce our prices and have put discipline in place to sell based on our features and advantages.
While non health care was hampered by the change in consumer behavior and competitive pressures a bright spot in this segment was a gerbil category, including headphones and year, but which we scaled up in the second half of 2022 with the introduction of the Bowers <unk> Wilkins Pis seven <unk>, seven and PX eight headphone models.
The steady growth we are realizing was boosted by the June launch of denim Carl ear buds with automatic customization of the sound spectrum for personalized listening experience.
<unk> revenues represented more than 7% of our non healthcare revenues this quarter compared to 3% last year.
Now moving down the P&L for the second quarter of 2023, we realized consolidated non-GAAP gross margin of 50%. This includes gross margins of 60% for the healthcare business and 34% for our non healthcare business.
Gross margins were negatively affected by the deleveraging impact of lower sales against our fixed overhead costs, a difficult pricing environment for consumer audio products as well as an unfavorable segment mix segment and product mix.
For our consolidated business, our non-GAAP operating profit was $59 million versus 107 million in the prior year due to the revenue shortfall and its deleveraging impact partially offset by a reduction in crude expenses for performance based compensation.
And our non-GAAP earnings were <unk> 62 per diluted share, which included the increase of $7 million in interest expense over the prior year period related to the debt incurred for the acquisition and share buyback in 2022.
Again, we are disappointed in our second quarter results, but encouraged by the strength in the underlying fundamentals of our business.
We see good potential for a rebound in our health care and consumer businesses buoyed by <unk> and the soon to be launched consumer health products with our consumer team.
We are committed to preserving profitability by implementing a variety of expense control measures that should provide benefits beginning with our third quarter earnings.
Our expense control measures include reductions in payroll costs, as we slowdown down our hiring activities as well as significant reductions in performance compensation and other measures further we have reduced marketing and promotional expenses within our consumer audio business to help offset the shortfall in those revenues.
Now I'd like to provide an update on our 2023 financial guidance.
For the full year 2023, we are reducing our guidance range for consolidated revenue to $2 billion 100 million, the $2 billion $200 million down from our prior guidance range of $2 billion $415 million.
$2.460 billion.
This change includes reductions in expected revenues for our health care segment and are not health care segment for.
For our healthcare segment, we are maintaining the low end of our guidance range at $1 $3 billion. This year as stated in our press release last month, and introducing a new high end guidance range of $1.350 billion compared to our original 2023 guidance of $1 billion and $250 million.
A $1 billion $165 million.
The lower end of our guidance range assumes inpatient emission levels and capital sales trend seen in the second quarter continue through the remainder of the year.
For the higher end of our guidance, we are assuming that some of the large orders expected in the first half will be realized in the second half.
Further we are assuming the pace of equipment installations.
The pace of equipment installations from hospital conversion wins will steadily improve leading to increased sensor volumes from new customer conversions in the second half.
For the non healthcare segment, we are maintaining our previously stated revenue guidance from our July pre announcements of 800 million to $850 million down.
Down from our previous guidance range of $965 million to 900.
<unk> $95 million.
Our new guidance range reflects.
Continued weakness in the premium and luxury audio categories.
For the remainder of the year, partially offset by continued growth in the <unk> category driven by our new product introductions.
We are accordingly, lowering our guidance for 2023, non-GAAP operating profit to $296 million to $312 million compared to prior guidance of 400 million to $405 million.
As we experienced deleveraging of our business, partially offset by a variety of cost control measures.
At the midpoint, we are lowering our operating profit guidance by roughly $98 million. This is comprised of a $168 million impact from lower revenues of $32 million impact from lower gross margins and a $15 million impact from increased litigation costs.
We expect to partially offset these headwinds with $117 million and expense reductions, which is comprised of $46 million from expense control measures and $71 million from performance based compensation.
Lastly, we are now estimating 2023, non-GAAP EPS to be $3 35 to.
The $3 55.
Down from our prior guidance of $4 70.
$4 80.
Turning briefly to our third quarter outlook, we are projecting consolidated revenue of 475 million to $525 million with health care revenue of 305 million to $335 million.
And non health care revenue of $170 million to $190 million.
Further we are projecting non-GAAP operating profit of 50 million to $60 million and non-GAAP EPS of <unk> 50 to.
To 64.
Please reference the earnings presentation on our Investor website for further details.
In closing, although we are rebalancing our health care revenue. This year following the large expansion in our business since 2019, the fundamentals of our health care business remains strong.
Notably New hospital customers continued to switch to Massimo technology faster than ever increasing our share of the hospital market and we achieved record contracted in the first half of the year, which has contributed to a 12% growth in our unrecognized contract revenue versus the end of the second quarter of 2022.
I'll turn the call back to Joe Thank you Mike.
Massimo is an innovative mission, driven adaptive and resilient company and.
In addition to the short term actions to adapt to changing market conditions that we've already discussed.
Innovation to drive profitable growth from products that improve lives across all our businesses remain a key focus and source of vitality.
Our data informs us that our business remains very strong.
Starting with consumer health and wellness, we launched the first new Horribles.
Based on our adapted acoustic technology during the second quarter and it has been very well received in the marketplace.
These next generation Airbus are being marketed as the denim Pearl and Pearl probe to leverage Dennis Heritage a world class acoustics we've.
We've seen nearly 200 positive press reports on Pearl since the launch in June .
Initial demand from existing retailers for denim Pearl has been very strong as sales for the products are likely to be above our initial forecast formulated earlier in 2023.
In addition, we received many inbound requests by new retailers to carry pearls.
We are nearing the launch of our Stork baby monitor with some very large well recognized mass market retailers.
<unk> should be on the shelves soon.
The retailers that carry storage will be displaying the product and prominent locations. In addition, Stuart will be available from one of the largest online baby registry.
Our expectations for store card based upon its superior feature set and value to new patents.
As well as the high visibility the product will have and mark key stores and online stores.
We are not changing our 2023 sales guidance for our consumer health and wellness products at this time, but we have increased confidence in our ability to reach our target of adding one percentage point to healthcare segment revenues with these products.
We want our W. One watch and historic Baby monitor to have SBA cliffs, a five 10-K clearance for store will open the door for promotion of the product for healthcare.
A five 10-K clearance for W. One will allow us to execute on our hospital to home strategy in the U S, including pre operative and post operative monitoring at home as well as monitoring patients with chronic diseases, such as congestive heart failure and COPD.
Hello to our current efforts outside the U S.
In Q2, we received two long awaited an important FDA clearances for radius PSM wearable a vital signs monitor and opioid halo for detecting opioid overdose.
We have finally launched these products in the U S.
We're seeing great customer excitement for these new products.
Lastly, we recently secured a multimillion dollar contract for our central body position sensor with a large health care system that sees the high potential of centrally to help reduce the incidents of costly pressure ulcers with their patients.
To conclude while we regret disappointing our investors with a large revenue and earnings Miss in Q2, we are happy to report strong market share gains in our healthcare business and customer excitement around Pearl opioid halo radius DSM and W. One.
We will soon launch stork and begin to execute our consumer health business flat.
Massimo has faced challenges in the past and as always overcome them to evolve into a stronger company.
We are confident that we will move past the recent shortfall and achieve great results for patients clinicians and our shareholders alike. As we continue to pursue our mission to improve life.
With that we'll open the call to questions operator.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Yes.
We will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Matt Taylor with Jefferies. Please go ahead.
Hi, guys. Thanks for taking the question.
So I wanted to ask.
Kind of a two part questions related but basically wanted to understand from you how.
Transient.
As you are.
You referenced in your prepared comments the ability to get back to kind of a normalized growth rate in healthcare in 'twenty four.
Yes, I'm wondering if the comps are easy and some of the sales we're getting.
Do you think 2024 could actually be a stronger.
In a normal year or why would it just go back to a normalized growth rate.
Well 2024.
Yes, a strong year for us.
Longer than normal because of the availability of some of the new products and our push into telehealth and also the consumer health.
We see that as a very promising business.
On the sensors side, what we don't know whether to shift too.
Outpatient surgeries at ambulatory surgery centers.
Sure.
Due to shortages of nurses and the pressures hospitals have for inpatient care or is that loaded.
Surgeons and patients prefer.
If it fits an anomaly that would be another reason next year will be a better growth year than normal for us, but assuming it is not we believe this is our baseline.
At least.
If we get a normal couple percentages increase consensus beginning in 2024 compared to 2019.
Then we should do well and the final point I'll make is we have the bulk of.
Pulse oximetry monitoring and the ambulatory surgery centers, but use reusable sensors and reusable sensors.
Our unfortunately, even despite the best efforts to cleanup inbetween surgeries carry bacteria that are dangerous to patients.
So we plan to make a more concerted effort in educating the ambulatory surgery centers under advantages to patients and maybe their businesses by using single patient use sensors.
Okay. Thanks, Thanks, Jay can I ask maybe just one follow up.
Yes.
That's what they're scratching our heads a little bit because normally your business is very stable and you have a.
It's volatility here.
Could you help US you called out a number of factors that impacted the second quarter.
The downward revision on the guidance.
And maybe help us understand the bridge of the different components. If you can estimate how much was caused by sensors forces.
I am delays in orders just to give us a better picture of what's going on underneath the hood.
Sure sure we'll try I'll give you a high level, then maybe Michael can get more granular.
Came into 2023 with incredible momentum and all.
Over the normal new contracts that we had in 2022 and 2021.
And we expect that as we finish our installations of those we will push our normal business up by several percentage points. Some of those got delayed despite our best efforts those installations does not occur we're not going to even a higher gear, calling from all of our clinical specialists to <unk>.
Put the installation given at least at this point it looks like the hospitals are ready to dual finally, and the Oems can deliver the monitors. So some of the revenue shortfall was because of that but that's probably the biggest factor was lower purchase of sensor.
By our customers that we anticipated we not only anticipated a return to normal growth off of 2019 due to the pent up surgeries, but we also thought.
Youre not going to over to Les.
Not only returning to the increase.
Increased demand because of the pent up procedures, because they push those pent up procedures to outpatient setting, but they order less from us census in inpatient went down.
So we could have anticipated that and I think one of the things that I.
We had hoped.
But when you're doing these projections are always wondering especially in a dynamic situation will come out of Covid.
Or what do you have as a backup plan in case some of your assumptions don't turn out as for a backup plan yes.
Several large.
Business.
That we anticipate at least one of them was close.
And.
And that you are expecting much higher than expected and patient volumes are stepping up we'll have a pre COVID-19 levels. So we had some some assumptions that were incorrect, but also you know it's it's difficult to separate the census from from how customers are ordering we don't have good visibility into the inventory levels.
Rules, how they're managing those inventory levels and it's hard to break out the impacts separately and those buckets, but not one thing I just want to emphasize that cause I've I've been around software company, sometimes software companies have great contracting, but their revenues that they can account for that quarter doesn't hit quite.
Right, obviously, that's not our situation, but what was kind of similar for me is here, we had again another record quarter and contracted with new hospitals, and and lack of any any loss to our competitor. So here we are growing again unfortunately on revenues decline.
Unfortunately, it was a perfect storm and I know, that's probably an overused terminology, but it really was three or four factors came together and unfortunately blew out our revenue target, but the business strong because we are gaining over the competition by lush larger.
Slope unusual can I just have one thing Joe the <unk> <unk>.
We are looking at monitoring closely ordering patterns of customers.
Over the first four weeks, we are seeing that improve and you know that gives us more confidence in the new guidance range, we have we'd like to see them improve even further but give us confidence in that that guidance range, but we just put out today.
Great. Thank you guys.
Thank you.
Alright. Your next question comes from Mary Peter with B T. I G. Please go ahead.
Hi, good evening, Thanks for taking my questions I'm Gonna continue along the yeah. The guidance pack here and see if I can try to understand a little bit more about you know your margin expectations and also the cadence throughout the year for.
Revenue. It does look like we're expecting a bit of a bit of a step I. Thank you for for both sales as well as operating margins and I'm, assuming most of the opex cuts will be coming in queue for it but if he can help US you know kind of figure out that cadence a little bit more of that would be helpful.
Yeah <unk>.
Yeah, Yeah, Marie So I mentioned I walk through kind of how we're thinking about the the guidance range and you know that lowering the guidance, we're assuming the inpatient admissions in the capital of cells trends Kenneth seen in the second quarter continues to the year with a with a modest improvement there and then.
On the high end of the range, we're assuming that some of the large orders that were expect that we expected are gonna be realized in the second half. We've got you know a large a large portion of this order is more in queue for on the mixer. So if you look at the kind of the the forecast for Q3 and Q4 the law.
Orders are contributing probably about 1% in that upper end of the range and those are assumed further in Q4.
Okay, and I think I was also asking about the expectation for those opex cuts to 100 million an expense reductions and how we should think about <unk>.
Yes, so you'll see some of those come through and the third quarter were already taking action on those and then you'll see a bigger impact as we move in the queue for you know.
With all the productions were making also some of the marketing and promotional investments that are tied to the consumer audio business. Some of those are are heavier than two four as well. So those have been pulled out to offset the lower revenues. So.
We've giving you guidance on the third quarter and then you had the four year. So you should be able to tomato right into the <unk>, what we're expecting for the fourth quarter.
Yeah, Yeah, Okay, understood and and those cuts that the expense reductions will stay in place even if if revenues rebound better than your assuming at this point.
Not all of them a big portion of the cats is were taken away the bonuses for the executives in many of our people and our Hugh Grant all that kind of stuff. So if for some reason, we we deliver what we projected at the beginning of the year those will come back, but but assuming we don't they will.
<unk> yeah.
And the answer that question too Marie is you know we've taken some cuts to really sides are expense profiled with our with our revenue profile of this year as well so.
We are still trying to make the investments we need to grow this business and balance that but we.
We're making the right taking the right actions to to offset the lower revenues.
Okay. That's what I understood. One last question, if I could just sort of high level now that we have the shareholders behind us what can we expect on on sort of next steps for corporate strategy. You know what might be next in terms of expanding the appointment to seven numbers any clarity you can give us on on on what's next Sir Thank you.
Yeah, the chairman of a nominating committee is working on that unfortunately due to the loss of her prior chairman abdominal familiar with what kind of starting a little bit from scratch, but yes, we are eager to expand the board and hopefully get more thoughtful people around the table.
Alright, Thank you both.
Thank you Marie.
Alright. Our next question comes from Rick Weiss with Stifle. Please go ahead.
Good afternoon, Joe have Micah Uhm, if I could start off Joe maybe you could.
Just expand on your <unk> comments, <unk>, obviously bright policies sounding exciting product as we all know maybe just talk about.
The kind of incremental revenue potential, especially as we move to the fourth quarter, what you're swimming and you know.
Maybe just reminds of serious thinking about the opportunity.
Even looking ahead to 24 and beyond what store could do if it if it all in full since you as you hope.
Oh sure well I think there are probably over.
10 million birds in developed countries annually.
And many people feel uncomfortable take your baby home given the risk of Sids and other issues store not only can measure oxygen saturation and detect.
With a breathing problem, but it's got a thermometer real time monitoring continuously measures the baby's temperature for fever spikes and has an amazing camera technology with lots of cool features they're gonna keep being added to it so.
Haven't shown that at one of the major baby conventions, many retailers and online retailers <unk> and in fact, some of them have moved mountains to get them on the shelves.
Immediately.
Normally what would take a year and a half is happening no matter two to three months one of our major retailers or a bad cough. There were gonna bring on his target target will be caring storch. So we are feeling that store could become a business. It should be a couple of hundred million dollars.
Yeah, I know the potential might be a billion, but yeah, let's.
Let's see let's see if.
Once we get the $12 million, we can thanks for the for the rest so the demand has been strong Edward.
Hoping once it gets in the hands of consumers.
Pearl has gone into the hands of consumers and have generated a lot of positive feedback from consumers as well as people who report on it if those things have a historic I think I think it will happen, but a huge element to for how we want our marketed in the U S. Because some of the things I just said to you I can say.
And the U S is getting the F D. A clearance right now in the U S. We can help parents this can help to Texas.
Because of oxygen monitoring we have to be careful.
<unk>, we can't be open about almost capability.
But once we get the F D. A clearance we can really.
Go to.
<unk> [laughter] I really take the covers off.
Great <unk> you you talked about implementing expense control starting the third <unk> and you talked about some of the factors, but it could you give me some more in depth perspective, there quantify a little bit you know what some of the big.
Just actions are and.
You know.
How quickly we're gonna see it in the second half how significantly.
And maybe the implications of some of these actions.
As a setup for 24 and beyond for gross margin and operating margins.
Yeah right so.
Some things I've I've mentioned were to keep in mind or performance comp was about 71 million out of 117 million for for the reductions for this year.
Some <unk> that's all tied into this year's performance comp. So as we perform that was some of that would come back if we perform better and improve.
And the other expense reductions of 46 million is is true cash expense reductions. So those should carry into next year <unk>. The majority of that is you know reduction in payroll costs.
That's about 28 million and then there's about 18 million associated with the marketing in and promotional spend for the consumer running a business.
Mmm.
Mmk and just sticking my last one if I could just maybe any update on the litigation with Apple and Uhm, just in any new perspectives or timelines you Wanna share.
At this point thank you.
Yes of course, we have three cases really what is the I T C, which we should hopefully have.
Results.
As you remember we were supposed to get a commission to give US a decision on July 17th they pushed it up for October 10th we think hopefully that will stick.
And assuming they go with the a O J 's 300, plus page decision, who should get an injunction borrowing president <unk> ability to start with what she has 60 days to do so they did not stop a light Coors injunction. So we don't expect them to stop.
On the trade secret and Pat in case in California. The as you remember the trade secret case, we unfortunately had a.
Hum jewelry, and we just met with the charge it looks like we will not go to trial till next year on that again, hopefully February March timeframe, and then the Delaware case, the Apple brought against US. They brought a patent case against US I think 10 patents and then we will.
Liquids patent case against them I say 10 patterns, but we also add an antitrust complaint and an unfair competition false advertising claim and dash, it's going a lot faster than we expected. The judge has been incredible and has.
Been really holding all of our feet.
Fire and that might go to trial next year, which will be unheard of it so that that's where we're at.
Thank you so much.
Thank you Rick.
Okay. Our next question comes from Jason Bedford with Raymond James. Please go ahead.
Good afternoon, maybe just a couple just getting back to the the lower sensor sales.
<unk> <unk> <unk> <unk>, you kind of alluded to it in answering your question, but I didn't hear much in that and are prepared remarks, <unk> inventory dynamics can you just talk through.
What you've learned maybe in the last month around inventory levels.
Customer level and be implemented any kind of bitter processes here to gauge inventory levels going forward.
Yeah, So Jason what I've mentioned, a little bit earlier touched on it but you know it's difficult to identify inventory levels with our customers just because we don't have that visibility, but what we are watching very closely is this customer order patterns.
The first four weeks so call up July those those those ordered patterns have improved substantially from Q2, so they're they're having the right direction or not where we wanted to be completely yet, but they do support that new guidance range that I've just that we just put out today. So.
That's how we're monitoring it closely were you know continue to put some try to get more and more information as we can but but that's that's the focus right. Now is just continue to monitor this.
Patterns.
Okay, maybe just on a semi related.
Topic price I think last month, you mentioned discounting can you just talk about uhm.
Uhm why the the discounting started and then kind of where we are from a pricing standpoint.
Well.
Discounting Y started we're still trying to understand but what I can tell you is.
These are not discounting at the time of contract.
These were just starting post contract and we once once I became aware of it.
<unk> and the reason I stopped it is because the sensor revenue is.
Ah Rachel blood is part of the <unk> strategy and while we are given a lot of.
A lot of freedom to the sales force, who discount R capital, even give away our capital I never intended them to reduce our sensor pricing. So we need to be disciplined on that so.
Asked us to be stop I've asked from here on if anyone ever wanted to start our sensors. They have to get my approval. So this hopefully won't ever happen again, but.
It wasn't you know it wasn't being done for a long time. It was done for a short time. They thought they were free to do it because they had been allowed to discount capital and you can sometimes cables and so anyway. That's that's what happened then.
What I think positive is that going forward.
It should help our gross margin because we're not offering these discounts anymore.
Okay.
Okay. That's helpful. Maybe just last one here.
Has your view of the.
Market opportunity changed in any way here, meaning upon reflection. After two Q you know is there a sense that hey, maybe the market's more penetrating we thought or does the opportunities still exist that you outlined back in December .
No no like I said, it's really <unk>.
<unk> I think I put in there.
Tailored to reality, one reality is our market penetration is increasing our market share is increasing I think there's a slide and your telephone physician is put up in time for their earnings call that shows that but unfortunately the revenues decreased.
Well I'll tell you if there's one thing. It made me believe is we had the right strategy and getting into telehealth teller monitoring and consumer health because has unbelievably reliable as are set censor business has been over the past couple.
With decades [laughter] this quarter it wasn't and the patterns change went from inpatient and outpatient.
And I know when we first put up all three announcements people kind of disputed that no competitor disputed that but it's showing that we were right outpatient census did increase sandwich said that but <unk>.
Reduced down decrease in that first so no I I think the.
What we thought about the overall market and the overall future <unk> is in tact.
I apologize I regret that we missed our numbers in queue to but it is not indicator of the health of our business.
Thank you.
Thank you.
Okay. Your next question comes from Mike Nancy with Needham and company. Please go ahead.
Thanks, So I just wanted to go back to the kind of quarterly sequencing applied by the guidance I think if you take care of the mid point of the third quarter U P. S range in the mid point of the annual cats range, it's implying something like $1.39 O E P.
Yes in the fourth quarter, which is a pretty big sequential step up as well.
You know year over year versus last year. So you know the third quarter number seems believable, but that seems like a pretty you know toss number which I guess, so I don't know maybe you can explain like how you're gonna <unk> <unk>.
Make that ramp.
Yeah. So my if you look at the <unk> you know cost actions were taking.
It's gonna be more of a step up in the fourth quarter, plus we're expecting a stronger revenues in queue for based on how we planned out the year and rebaseline or poor cat. So.
The combination of this the strength and revenues we expect in queue for some large you know some of those large orders coming in and out and that guidance range as well as the <unk> productions, taking hold and having a full quarter of expense reductions is how we how we expect to get to that guidance.
Okay, Alright, and then you know just.
Just wondering if there's any kind of second thoughts on the 70. Neither deal here just given what's happened look I understand the consumer health strategy Uhm.
But the way you're talking about Stark for example, it sounds like there's a tremendous amount of retailer interest there I'm not really convinced that you need you know billion dollar speaker company to get that product and it is just one of the shelves at these retailers. For example, you know of your competitor all that you know I know best buy solve their products.
They don't want a billion dollar Speaker company. So you know just wondering if you consider maybe exiting that business and focusing back on the health care business.
Oh look reasonable minds disagree in maximize a lot of parents and I I understand people have different views on things when we bought some United We said Hey give us three years. If we haven't proven. This thing you can really do what we say it is will get out of it.
That that thought has it changed everything today. It tells US it was the right move.
And secondly, you know we have a thriving healthcare business that I did not Wanna take our eyes off of I wanted to make sure. The current management team Ronstadt optimally.
So we needed a new T. Two optimally run the consumer health and <unk> team has done a great job. All these all these contracts we have now for Stewart for parole, that's all done by them.
Yeah, well, maybe my team could have done that but it may have distracted him from the health care business and and lastly, the.
The fact that we got in and we focused some United on the Hearables, which is about a 50 to 85 billion dollar business, depending how far you go into it whether you're just doing streaming music and voice calls or you want to improve hearing.
For people that have lost hearing and a low level tomorrow level.
That is a huge opportunity and already it's working.
So so no I'm sorry, you still feel like I should get rid of it but but we don't we still think it was the right decision and we're gonna do our best to to prove it but we're not gonna we're not gonna be foolish about it that you were wrong will back up but we're not done yet.
Okay I understand thank you.
Thank you we have time for one more question.
Alright, I'll sign up question for today comes from <unk> Chopra with Wells Fargo. Please go ahead.
Good afternoon, and thanks for squeezing me in just to question to me. So I guess on W. One in store can you talk about the regulatory pathway for approval.
And then I had to follow up please.
Yes of course W. One is <unk> E C G and is going through the normal channels with these products go through Storch is pulse ox based product that's going through the normal channels with the F. D. A.
Look at oxygen desaturation like opioid halo or our pulse oximetry helped your side. We believe they are all under the five 10-K mm procedure and and we believe.
We're having great communication with F T about it and.
Hopefully in the next 60 to 90 days both of them will get <unk>, but we've been <unk>.
We work with the F. D. A successful you over now three decades, and sometimes some project. It cleared in 30 days and some project cleared and a decade. So [laughter]. So let's hope for those who are not go in that direction.
Thank you for the color and then on my follow up question I heard your comments earlier about expanding the board from five to seven but can you put a finer point around that sort of you know when do you expect to get the two the two additional board members. He ended it by end of the year or potentially earlier or later, thanks for taking my questions.
Sure sure, we're gonna try to get them and as soon as possible.
Thank you so much everyone again I hope from here on we don't have to have the bad ordered to report and that the fundamentals of the business match. The revenues from a business. We appreciate your time, we'll talk to you hopefully in a corner. Thank you.
Thank you, ladies and gentlemen that concludes today's calm I. Appreciate you answering you may now disconnect.
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