Q1 2024 Masimo Corp Earnings Call
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Operator: Good afternoon, ladies and gentlemen, and welcome to Masimo's first quarter 2024 earnings conference call. The company's press release is available at www.masimo.com. At this time, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. I'm pleased to introduce Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations.
Good afternoon, ladies and gentlemen, and welcome to Massimo its first quarter 2024 earnings conference call. The company's press release is available at Www Masimo Dot com 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.
Eli Kammerman: I'm pleased to introduce Eli cameraman Maximus, Vice President of business development and Investor Relations. Please go ahead.
Eli Kammerman: 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 that reflect management's current judgment, including certain of our expectations regarding fiscal year 2024 financial performance. However, they are subject to risks and uncertainties that could cause actual results to differ materially.
Eli Kammerman: Hello, everyone. Joining me today are chairman and CEO, Joe Kiani, and executive Vice President and Chief Financial Officer, Mike <unk>.
Eli Kammerman: 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. This call will also include a discussion of the potential separation of our consumer business and a preliminary estimate of the financial impact of a potential separation. However, the estimate is being provided solely for illustrative and informational purposes.
Eli Kammerman: This call will contain forward looking statements, which reflect management's current judgment, including certain of our expectations regarding fiscal year 2024 financial performance. However, they are subject to risks and uncertainties that could cause actual results to differ materially.
Eli Kammerman: 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.
Eli Kammerman: This call will also include a discussion of the potential separation of our consumer business and a preliminary estimate of the financial impact of a potential separation. However, the estimate is being provided solely for illustrative and informational purposes. The company is currently evaluating the structure of any potential separation of us consume.
Eli Kammerman: The company is currently evaluating the structure of any potential separation of its consumer business, and the methods, structure, timing, and terms of any such potential separation are still under consideration and have not been determined, approved, or finalized. Please refer to slides 2 and 3 of our earnings presentation for additional factors to consider in evaluating and reviewing the information relating to the potential separation of our consumer business. Also, this call will include a discussion of certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP.
Eli Kammerman: Business and the methods structure timing in terms of any such potential separation are still under consideration and have not been determined approved or finalized.
Eli Kammerman: Please refer to slides two and three of our earnings presentation for additional factors to consider in evaluating and reviewing the information relating to the potential separation of our consumer business.
Eli Kammerman: 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.
Eli Kammerman: 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.
Eli Kammerman: 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 Matt.
Eli Kammerman: 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.
Eli Kammerman: Therefore, the financial measures we will be covering today will be primarily on a non-GAAP basis unless noted otherwise. Reconciliation of these measures to the most directly comparable GAAP financial measures is 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.
Eli Kammerman: Therefore, the financial measures, we will be covering today will be primarily on a non-GAAP basis unless noted otherwise rec.
Eli Kammerman: 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.
Eli Kammerman: 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 and in order to make informed investment decisions.
Eli Kammerman: In addition to the earnings release issue today, we have posted a quarterly earnings presentation in 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.
Eli Kammerman: 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 so much your life.
Joseph E. Kiani: Thank you so much, Eli. Good afternoon, and thank you for joining us for Masimo's first quarter 2024 earnings call. For the quarter, we achieved results that show our businesses back on track after a period of robust growth during COVID and the wake of volatility that followed. It seems the market has stabilized, and we are once again able to forecast more accurately. Our health care revenues of $340 million were at the high end of our guidance range, driven by strong censor orders in the US and Europe.
Joseph E. Kiani: Good afternoon, and thank you for joining us for Massimo <unk> first quarter 2024 earnings call.
Joseph E. Kiani: For the quarter, we achieved results that show our business is back on track.
Joseph E. Kiani: After a period of robust growth during COVID-19 in the wake of volatility that followed.
Joseph E. Kiani: It seems the market has stabilized and we are once again able to forecast more accurately.
Joseph E. Kiani: Our healthcare revenues of $340 million or at the high end of our guidance range driven by strong sensor orders in the U S and Europe.
Joseph E. Kiani: We also had record contracting from hospital customers as, for the first time ever, we achieved over $100 million in true incremental contract value in the first quarter, demonstrating continued gains in our market share. Additionally, our success in moving the bulk of our manufacturing ahead of schedule to Malaysia from Mexico has yielded improved gross margins.
Joseph E. Kiani: We also had record contracting from hospital customers as for the first time ever we achieved over $100 million and true incremental contract value in the first quarter demonstrating continued gains in our market share.
Joseph E. Kiani: Our success in moving the bulk of our manufacturing ahead of schedule to Malaysia from Mexico has that improved gross margins.
Micah Young: Given that over two-thirds of our sensor production is now in Malaysia as of the end of the first quarter, we see great opportunities ahead for further increases in profitability. We are increasing our guidance today for health care revenues and non-GAAP EPS based on our first quarter results, in combination with a more positive outlook for hospital census in 2024. As we announced a month and a half ago, we're working to separate consumer health care from professional health care at the behest of most of our shareholders.
Joseph E. Kiani: Given that over two thirds of our sensor production is now in Malaysia as of the end of the first quarter, we see great opportunities ahead for further increases in profitability.
Micah Young: We are increasing our guidance today for health care revenues and non-GAAP EPS based on our first quarter results in combination with a more positive outlook for hospital census in 2024.
Micah Young: As we announced a month and a half ago, we were working to separate consumer health care.
Micah Young: Professional health care under test of most of our shareholders.
Micah Young: We have made significant progress on the proposed structures for separation, and Micah and I will share more details about this later in the call. With that, I'll pass it over to Micah to review our first quarter results in more detail and provide an added update on our 2024 guidance. Thank you, Joe, and good afternoon, everyone.
Micah Young: We have made significant progress under proposed structures for separation and Mike and I will share more details about this later in the call.
Micah Young: With that I'll pass it over to Michael to review, our first quarter results in more detail and provide an update on our 2024 guidance. Thank you Joe and good afternoon, everyone for the first quarter, our consolidated revenue was $493 million.
Micah Young: For the first quarter, our consolidated revenue was $493 million, and healthcare revenues were $340 million, which were at the upper end of our guidance range and represented a 2% decline versus last year. These results are encouraging given the business faced its most difficult year-over-year comparison this quarter. In the second quarter, we expect those comparisons to start to normalize on a year-to-date basis and throughout the rest of this year, which is implied in our full year guidance range of six to nine percent revenue growth.
Micah Young: Care revenues were $340 million, which were at the upper end of our guidance range and represented a 2% decline versus last year.
Micah Young: These results were encouraging given the business faced its most difficult year over year comparison this quarter.
Micah Young: In the second quarter, we expect those comparisons to start to normalize on a year to date basis and throughout the rest of this year, which is implied in our full year guidance range of 6% to 9% revenue growth.
Micah Young: On a constant currency basis, our consumable and service revenues grew 2%, partially offsetting a 21% reduction in capital equipment and other revenues versus the prior year period. The decline in capital is expected given the extra purchasing many hospitals did during COVID. Within consumables and service revenues, our set pulse oximetry consumables grew 2% due to a difficult comparison, but we expect growth to normalize throughout the remainder of this year. Our capnography disposables grew 27% and now comprise over half of the category.
Micah Young: On a constant currency basis, our consumable and service revenues grew 2%, partially offsetting a 21% reduction in capital equipment and other revenues versus the prior year period.
Micah Young: The decline in capital as expected given the extra purchasing many hospitals did during COVID-19.
Micah Young: Within consumables and service revenues, our set pulse oximetry and consumables grew 2% due to a difficult comparison, but.
Micah Young: But we expect growth to normalize throughout the remainder of this year.
Micah Young: Our cap Nagra fee disposables grew 27% and now comprise over half of the category.
Micah Young: Additionally, brain monitoring sensors grew 17% as our SED line and O3 products continued to gain market share. Offsetting this growth was an 11% decline in rainbow consumable revenues due to the timing of shipments outside the U.S.
Micah Young: Additional clean brain monitoring sensors grew 17% as our <unk> and <unk> products continued to gain market share.
Micah Young: Offsetting this growth was an 11% decline in Rainbow consumable revenues due to the timing of shipments outside the U S.
Micah Young: Most importantly, you can see evidence of our market share gains and our strong contracting with hospitals. As shown in our slides today, the value of incremental new contracts signed in the quarter has more than doubled over the past four years, yielding appreciable market share gains. This has contributed to 11% growth in our unrecognized contract revenues over the past 12 months. This consistent growth in our contracts demonstrates our decades-long experience and relationships with hospital systems and our success in continuing to win new customers from our competitors. And we expect these contracts to translate into a meaningful source of revenue growth this year and beyond. It is clear to us that, over any meaningful period of time, we have gained tremendous market share.
Micah Young: Most importantly, you can see evidence of our market share gains and our strong contracting with hospitals.
Micah Young: As shown in our slides today the value of incremental new contracts signed in the quarter has more than doubled over the past four years.
Micah Young: Yielding appreciable market share gains.
Micah Young: This has contributed to 11% growth in our unrecognized contract revenues over the past 12 months.
Micah Young: This consistent growth in our contracts demonstrates our decades long experience and relationships with hospital systems and our success in continuing to win new customers from our competitors.
Micah Young: And we expect these contracts to translate into meaningful a meaningful source of revenue growth this year and beyond.
Micah Young: It is clear to us that over any meaningful period of time, we have gained tremendous market share.
Micah Young: Non-healthcare revenues were $153 million, which was at the midpoint of our guidance range and represented a 29% decline on a constant currency basis versus the prior year. Like healthcare, this business also faced its most difficult year-over-year comparison this quarter. If you recall, our consumer business had a strong first quarter last year before macroeconomic conditions, including higher interest rates, began weighing heavily on consumer spending for luxury and premium products. While we expect comparisons to ease over the course of the year, market conditions remain challenging, as we expected.
Micah Young: Non healthcare revenues were $153 million.
Micah Young: Which was at the midpoint of our guidance range and represented a 29% decline on a constant currency basis versus the prior year.
Micah Young: Health care. This business also faced its most difficult year over year comparison this quarter.
Micah Young: You recall, our consumer business had a strong first quarter last year before macroeconomic conditions, including higher interest rates began weighing heavily on consumer spending for luxury and premium products.
Micah Young: While we expect comparisons to ease over the course of the year market conditions remained challenging as we expected.
Micah Young: Now moving down the P&L, for the first quarter of 2024, we reported a consolidated non-GAAP gross margin of 52%, which included 62% gross margins in health care and 29% in non-health care. Notably, healthcare gross margins improved by 110 basis points sequentially and were 50 basis points above the high end of our guidance range. The healthcare margin improvement is attributable to the benefits of moving our sensor manufacturing to Malaysia combined with increased operational efficiencies and a favorable mix of consumables and services.
Micah Young: Now moving down the P&L for the first quarter of 2024, we reported consolidated non-GAAP gross margin of 52%, which included 62% gross margins in health care, and 29% and non health care.
Micah Young: Notably healthcare gross margins improved by 110 basis points sequentially.
Micah Young: And were 50 basis points above the high end of our guidance range.
Micah Young: The healthcare margin improvement is attributable to the benefits of moving our sensor manufacturing to Malaysia, combined with increased operational efficiencies and a favorable mix for consumables and service.
Micah Young: For our consolidated business, non-gap operating profit was $68 million, and non-gap earnings per share was 77 cents for the first quarter. Moving to cash flow, we generated operating cash of $46 million in the first quarter, which helped to pay down $28 million of debt.
Micah Young: For our consolidated business non-GAAP operating profit was $68 million and non-GAAP earnings per share was <unk> 77 for the first quarter.
Micah Young: Moving to cash flow, we generated operating cash of $46 million in the first quarter, which helped to pay down $28 million of debt.
Micah Young: Strong cash flow generation continues to be a key area of focus, and results have improved significantly. With the first quarter behind us, we have moved past the difficult comparisons for the healthcare business, and our guidance implies 7-8% revenue growth for the first half of the year and 6-9% growth for the second half. Our continued strong hospital contracting and sizable increases in unrecognized contract revenue give us confidence in our outlook for revenue growth. Now, I'd like to provide an update on our full year 2024 guidance.
Micah Young: Strong cash flow generation continues to be a key area of focus and results have improved significantly.
Micah Young: With the first quarter behind US we have moved past the difficult comparisons for the health care business and our guidance implies 7% to 8% revenue growth for the first half of the year and 6% to 9% growth for the second half.
Micah Young: Our continued strong hospital contracting and sizable increases in unrecognized contract revenue give us confidence in our outlook for revenue growth.
Micah Young: Now I'd like to provide an update on our full year 2020 for guidance.
Micah Young: We are now projecting a consolidated revenue range of $2,055,000,000 to $2,165,000,000. For our healthcare segment, we are now projecting revenues of $1,355,000,000 to $1,385,000,000, which reflects an increase of $10 million for the low end of the ranch. Although hospital contracting is the most important indicator for market share gains and revenue growth, I'd like to address driver shipments for 2024. As I mentioned on last quarter's call... We think that the replacement cycles of existing equipment have slowed temporarily after the robust COVID demand and have hit a low point in the first quarter.
Micah Young: We are now projecting a consolidated revenue range of $2.055 billion to $2 billion $165 million.
Micah Young: For our healthcare segment, we are now projecting revenues of $1.355 billion to $1.385 billion, which reflects an increase.
Micah Young: Of $10 million for the low end of the range.
Micah Young: Although hospital contracting as the most important leading indicator for market share gains and revenue growth I'd like to address driver shipments for 2024.
Micah Young: As I mentioned on last quarter's call.
Micah Young: We think that the replacement cycles of existing equipment have slowed temporarily after the robust COVID-19 demand and have hit a low point in the first quarter.
Micah Young: However, we expect to see shipments increase to 55,000 or more in the second quarter and return to 60,000 or more in the third and fourth quarters of this year. For the non-healthcare segment, we are maintaining our projection for revenues of $700 million to $780 million. Based on our strong first quarter results and how inventory flows through the P&L, we expect to see gross margin further increase this year. Gross margin expansion is a critical focus area for us, as it is one of the most significant factors in generating earnings leverage. We're excited to announce that we have already transitioned a large portion of our sensor manufacturing to Malaysia and expect to realize increased efficiencies and lower production costs moving forward.
Micah Young: However, we expect to see shipments increased to 55000 or more in the second quarter and return to 60000 or more in the third and fourth quarters of this year.
Micah Young: For the help for the non healthcare segment, we are maintaining our projection for revenues of $700 million to $780 million.
Micah Young: Based on our strong first quarter results and how inventory flows through the P&L, we expect to see gross margin further increased this year gross margin expansion is a critical focus area for us as it is one of the most significant factors in generating earnings leverage.
Micah Young: We're excited to announce that we have already transitioned a large portion of our sensor manufacturing to Asia and expect to realize increased efficiencies and lower production costs moving forward.
Micah Young: As a result, we are increasing our healthcare gross margin guidance by approximately 60 basis points to reflect our progress on this important initiative. For fiscal 2024, we are projecting a consolidated non-gap gross margin of 52 percent, which now reflects a 62.4% margin for our healthcare segment and a 32% to 33% margin for our non-healthcare business. Due to our strong performance and improved outlook for health care revenues and gross margins, we are now projecting a consolidated non-GAAP operating profit of $309 million to $324 million.
Micah Young: As a result, we are increasing our health care gross margin guidance by approximately 60 basis points at the midpoint to reflect our progress on this important initiative.
Micah Young: For fiscal 2024, we are projecting consolidated non-GAAP gross margin of 52%.
Micah Young: Which now reflects a 62, 4% margin for our healthcare segment.
Micah Young: And a 32% to 33% margin for our non healthcare.
Micah Young: Due to our strong performance and improved outlook for health care revenues and gross margins. We are now projecting consolidated non-GAAP operating profit of 309 million to $324 million.
Micah Young: Based on these assumptions, we are now projecting a non-GAAP EPS range of $3.54 to $3.70, which represents an increase of $0.10 from prior guidance at both ends of the range, highlighting our strong commitment to operating leverage and earnings growth.
Micah Young: Based on these assumptions we are projecting we're now projecting a non-GAAP EPS range of $3 54.
Micah Young: The $3 70, which represents an increase of 10 from prior guidance at both ends of the range highlighting our.
Micah Young: Now turning to our outlook for the second quarter, we are projecting consolidated revenue of $480 million to $510 million, non-GAAP operating profit of $67 to $72 million, and non-GAAP earnings per share of $0.73 to $0.79. Please refer to the earnings presentation on our investor website for further details. In summary, the outlook for the healthcare business has improved, and we anticipate accelerating growth and expanding margins throughout the year. We have added many new customers to our large contract backlog, which should produce higher sensor volumes this year.
Micah Young: <unk> commitment to operating leverage and earnings growth.
Micah Young: Yes.
Micah Young: Yes.
Micah Young: Now turning to our outlook for the second quarter, we are projecting consolidated revenue of $480 million to $510 million non.
Micah Young: non-GAAP operating profit of $67 million to $72 million and non-GAAP earnings per share of <unk> 73 to 79.
Micah Young: Please reference the earnings presentation on our Investor website for further details.
Micah Young: In summary, the outlook for the health care business has improved and we anticipate accelerating growth and expanding margins throughout the year.
Micah Young: We have added many new customers to our large contract backlog, which should produce higher since our volumes this year.
Micah Young: Now, I'd like to provide you with an update on the ongoing evaluation of options to separate our consumer business. The Masimo executive team is working diligently to gather information and assess the advantages and disadvantages of potential pathways for a separation. The conclusions will then be presented to the board for its ultimate decision.
Micah Young: Okay.
Micah Young: Yes.
Micah Young: Now I'd like to provide you with an update on the ongoing evaluation of options to separate our consumer business.
Micah Young: Okay.
Micah Young: The Massimo executive team is working diligently to gather information and assess the advantages and disadvantages of potential pathways for a separation.
Joseph E. Kiani: The options being considered, among others, are a spinoff of the consumer business in the form of a new stock issued to existing shareholders as a dividend or the sale of at least a majority stake in the consumer business to a third party. A key objective is that any separation would result in a full deconsolidation of the two businesses in our financial statement. Another key objective for the proposed structure is to give both businesses the appropriate capital structures and resources to achieve long-term success and maximize shareholder value.
Micah Young: The conclusions will then be presented to the board for their ultimate decision.
Joseph E. Kiani: The options being considered among others are a spinoff of the consumer business in the form of a new stock issued to existing shareholders as a dividend or the sell of at least a majority stake in the consumer business to a third party.
Joseph E. Kiani: Our key objective is that any separation would result in a full deconsolidation of the two businesses in our financial statements.
Joseph E. Kiani: Another key objective for the proposed structure is to give both businesses the appropriate capital structures and resources to achieve long term success and maximize shareholder value.
Joseph E. Kiani: We provided a preliminary estimate of the financial impact of a separation on slide 7 of our earnings presentation. Notably, assuming a separation is completed as outlined, we estimate that healthcare non-gap operating margins would improve by 220 to 380 basis points to reach 23 to 25 percent. This would be a big step towards reaching our long-term goal of 30% operating margins for the healthcare business. Additionally, if a separation transaction results in cash proceeds to Masimo, we expect to use those proceeds to pay down debt and reduce interest expense, which currently amounts to $47 million in our guidance.
Joseph E. Kiani: We provided a preliminary preliminary estimate of the financial impact of a separation on slide seven of our earnings presentation.
Joseph E. Kiani: Notably assuming a separation is completed as outlined we estimate that healthcare non-GAAP operating margins would improve by 220 to 380 basis points to reach 23% to 25%.
Joseph E. Kiani: This would be a big step towards reaching our long term goal of 30% operating margins for the health care business.
Joseph E. Kiani: Further if a separation transaction results in cash proceeds to Massimo we expect to use those proceeds to pay down debt and reduce interest expense, which currently amounts to $47 million in our guidance.
Joseph E. Kiani: The timetables for these two types of transactions are quite different. A spend to shareholders is likely to be more time-consuming and could take 12 months to complete. The sale of at least a majority stake in the consumer business could take four to six months following board approval, depending on receipt of required regulatory clearance. We're advancing the evaluation quickly but rigorously, and expect to make significant progress over the next few months. We will provide investors with a more detailed update when the board makes a final decision. With that, I'll turn the call back to Joe.
Joseph E. Kiani: The timetables for these two types of transactions are quite different.
Joseph E. Kiani: Spin to shareholders is likely to be more time consuming could take 12 months to complete the sale of at least a majority stake in the consumer business could take four to six months falling board approval, depending on receipt of required regulatory clearances.
Joseph E. Kiani: We are advancing the evaluation quickly, but rigorously and expect to make significant progress over the next few months months.
Joseph E. Kiani: We will make we will provide investors with a more detailed update when the board makes a final decision with that I'll turn the call back to Joe. Thank you Michael.
Joseph E. Kiani: as our Good Results and Improved Outlooks for the year show. Masimo is back on track.
Joseph E. Kiani: Those are good results and improved outlook for the year show.
Joseph E. Kiani: But before we take your questions, I want to share a few additional thoughts on the separation of our consumer business. Before we announced our plans to evaluate a separation of our consumer business, we engaged with and listened carefully to our shareholders' perspectives. While we believe that consumer health and professional health care have greater potential together, the Board of Management is confident we have come up with a way to enact our shareholders' wishes without materially sacrificing the vision we have for making lives better and building greater shareholder value.
Joseph E. Kiani: Massimo is back on track.
Joseph E. Kiani: But before we take your questions I want to share a few additional thoughts on the separation of our consumer business.
Joseph E. Kiani: Before we announced our plans to evaluate a separation of the consumer business, we engage with and listen carefully to our shareholders' perspectives.
Joseph E. Kiani: While we believe the consumer health and professional healthcare have greater potential together.
Joseph E. Kiani: The board of management are confident we have come up with a way to enact our shareholders' wishes without materially sacrificing division, we have for making lives better and building greater shareholder value.
Joseph E. Kiani: With the proposed separation, the consumer business will consist of consumer health products such as Freedom and consumer audio products, including Hearable. Powered by Masimo technology and some Masimo team members, the consumer business will be appropriately resourced to continue to innovate and pursue this fast-growing and developing market. Professional health care will retain everything else, including our telehealth and remote patient monitoring products, where we continue to see significant interest from hospitals and health care providers in reducing costs and improving outcomes with our transformative technologies and hospital-at-home models.
Joseph E. Kiani: With the proposed separation the consumer business will consist of consumer health products, such as freedom and consumer audio products, including <unk>.
Joseph E. Kiani: Powered by Massimo technology on some Massimo team members the consumer business will be appropriately resource to continue to innovate and pursue this fast growing and developing market.
Joseph E. Kiani: Professional healthcare will retain everything else, including our telehealth and remote patient monitoring products, while we continue to see significant interest from hospitals, and health care providers, and reducing costs and improving outcomes with our transformative technologies and hospital it.
Joseph E. Kiani: As Micah shared earlier, we expect the conceived separation will have an immediate positive impact on the profitability of our professional health care business. I'm incredibly excited about the future for both Masimo businesses and look toward sharing more details about the separation as we make further progress. With that, we'll open the call to questions. Operator? Thank you.
Speaker Change: Home models.
Joseph E. Kiani: As Mike shared earlier, we expect the concede separation will have an immediate positive impact on the profitability.
Joseph E. Kiani: Our professional health care business.
Joseph E. Kiani: Incredibly.
Joseph E. Kiani: Incredibly excited about the future for both Massimo businesses and look toward sharing more details about our separation as we make further progress with that we'll open the call to questions operator.
Operator: We will now begin our question and answer session. At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. We will pause for just a moment to compile the Q&A list. Thank you. The first question comes from the line of Frederick Wise from Stiefel. Please go ahead.
Frederick Allen Wise: Thank you Bill.
Operator: We will now begin our question and answer session. At this time, if you'd like to ask a question. Each breasts are followed by the number one on your telephone keypad.
Operator: I would like to withdraw your question simply press Star one again, we will pause for just a moment to compile the Q&A roster. Thank you.
Operator: Okay.
Frederick Allen Wise: Good afternoon, everybody. Let me start with drivers, if I could. I'm already getting a bunch of questions there.
Frederick Allen Wise: The first question comes from the line of Freak Weiss from Stifel. Please go ahead.
Speaker Change: Hi, good afternoon everybody.
Frederick Allen Wise: Let me start with.
Frederick Allen Wise: Drivers, if I could I'm already getting.
Frederick Allen Wise: Bunch of questions there.
Frederick Allen Wise: <unk>.
Frederick Allen Wise: Mike I heard your comments.
Frederick Allen Wise: <unk>.
Frederick Allen Wise: You've talked about it before this issue.
Micah Young: Micah, I heard your comments, and you've talked about it before, this issue of COVID-driven demand and buildup of installed-based But several things. One, I don't think any of us expected a 50,000 unit number. I'm not looking at the approximate number in the first quarter. Help us understand what happened there and help us more concretely understand why the step up in subsequent quarters is, you know, you believe it, and we should believe it as well.
Frederick Allen Wise: The COVID-19 driven demand and buildup installed base.
Micah Young: But several things one.
Micah Young: I don't think any of us expected.
Micah Young: Unit number.
Micah Young: Looking at the approximate number.
Micah Young: In the first quarter.
Micah Young: Help us understand what happened there.
Micah Young: And.
Micah Young: It helped us more concretely understand why the step up in subsequent quarters.
Micah Young: Absolutely. Thanks, Rick. Yeah, so as you mentioned, we hit a low point of 50,000 this quarter. If you recall back on the fourth quarter call, I mentioned that we expected to see a low point in drivers before climbing, you know, before recovering back in the first quarter. Right now, we're expecting that number to step up to 55,000 or more, as I mentioned in my prepared remarks, and then 60,000 or more in the second half of the year.
Micah Young: Is.
Micah Young: As you believe it and we should believe it as well.
Rick: Absolutely. Thanks.
Speaker Change: Thanks, Rick.
Micah Young: Yes, so as you mentioned, we hit a low point 50000. This quarter. If you recall back on the fourth quarter call I mentioned that we expected to see a low point in drivers before climbing before recovering back in the first quarter.
Micah Young: Right now we're expecting that those will step up to 55000 or more as I mentioned in my prepared remarks, and then 60000 or more in the back half of the year.
Micah Young: What we believe has happened is that, you know, there's been a slower replacement cycle for existing equipment out there. We saw a slowdown of orders, you know, coming from our OEM partners. Last year, we expected that it would be soft as we entered the year but then start to recover based on what we're seeing from our internal forecasts from our OEM team, as well as our direct team, in terms of the Masimo branded equipment.
Micah Young: What we believe is happened is is that there's been a slower replacement cycle for existing equipment out there.
Micah Young: We saw.
Micah Young: Slowdown of orders.
Micah Young: Coming from our OEM partners last year.
Micah Young: We expected that it would be soft as we entered the year, but then starting to recover back based on on what we're seeing from our internal forecast from our from our OEM team as well as our direct team in terms of the Massimo branded equipment. The Massimo branded equipment as demand has still been very strong.
Micah Young: The Masimo branded equipment, demand has still been very strong, and I think that's heading the right direction as well, but the biggest pullback in drivers is really on the OEM side, and like I said, we're seeing good forecasts internally. That's why we're including expectations for the remaining quarters of the year, and we think it'll start to normalize back to above the 60,000 level, which is kind of where we were back pre-COVID.
Micah Young: And I think Thats thats heading the right direction as well, but the.
Micah Young: The biggest.
Micah Young: Pullback and drivers is really on the OEM side and like I said, we're seeing good forecast internally.
Micah Young: That's why we're we're including expectations for the remaining quarters of the year and we think it will start to normalize back to above.
Micah Young: The 60000 level, which is kind of where we were back pre COVID-19. One other thing to add is when I look at consumable revenue we are seeing good utilization.
Micah Young: One other thing to add is, when I look at consumable revenue, we're seeing good utilization on our, in terms of revenue per driver. As you know, we shipped about two times the amount of drivers back in 2020 during COVID. We shipped an extra $240,000. That's about 10% added to our install base above normal. And the great thing is that we're still seeing our consumable revenue per driver today higher than what it was pre-COVID. It's a tick higher, which tells us that we're still seeing very good utilization across the install base, and we expect to see consumable revenue per driver increase as we move forward.
Micah Young: On our in terms of revenue per driver.
Micah Young: As you know we shifted about two times the amount of drivers back in 2020 during COVID-19.
Micah Young: We shipped an extra 240000, thats about 10% added to our installed base above normal and the great thing is is that we're still seeing our consumable revenue per driver today is higher than what it was pre COVID-19, it's a tick higher.
Micah Young: Which tells us that we're still seeing very good utilization across the installed base and we expect to see.
Frederick Allen Wise: Yeah, that's a great perspective, Micah. I guess I'll turn to two other questions if I can. One, I'm hoping you'll talk a little bit about the second quarter guide, you know, solid but maybe a little softer than I might have expected, especially the business stabilizing. It sounds like you're optimistic on the driver front. We're seeing new products launch, and inpatient admission growth is at the higher end of the zero to one percent, you know, actually above, it seems, the zero to one percent you've guided for the year. Why aren't we seeing a stronger second quarter guidance, Micah? And then I have one more, if I might.
Micah Young: Consumable revenue per driver increase as we move forward.
Frederick Allen Wise: Yes.
Speaker Change: Great perspective, Mike.
Frederick Allen Wise: I guess I'll turn it to other questions if I could.
Frederick Allen Wise: One I'm, hoping you'll talk a little bit about the second quarter guide.
Frederick Allen Wise: Solid.
Frederick Allen Wise: But maybe a little softer than I might have expected, especially.
Frederick Allen Wise: The business stabilizing it sounds like you're optimistic on the driver front.
Frederick Allen Wise: We're seeing.
Frederick Allen Wise: New products launching and inpatient admission growth is at the higher end of the zero to 1%.
Frederick Allen Wise: Actually above it seems the zero to 1% you've guided for the year why aren't we seeing a stronger second quarter guide.
Micah Young: Yeah, good question Rick. We believe both businesses this year are back to kind of where we see them historically in terms of back to, you know, 2019 and prior. When I look at the health care business, revenues for health care typically have been about 24.7%, 24.8% of full year, somewhere in that range. And Q2 has always stepped down, about 24.4% historically, and Q3 as well.
Frederick Allen Wise: Mike.
Speaker Change: And then I have one more if I if I might.
Micah Young: Yes.
Speaker Change: Good question Rick.
Micah Young: We believe both businesses. This year are back to kind of where we see them historically in terms of kind of back to 2019 and prior when I look at the healthcare business.
Micah Young: Revenues for health care typically have been about 2024, 7% 2024, 8% of full year.
Micah Young: Somewhere in that range.
Micah Young: Q2 is always stepped down about 24, 4% historically and <unk>.
Frederick Allen Wise: Right now, the guidance is really aligned with that seasonality for the year, and we feel good about kind of where we're setting in terms of the guidance for the full year. What gives us much more confidence is what we've seen in contracting. We've seen, like I mentioned, strong contracting in the quarter, an increase in the contract backlog, but it's still early in the year, and we don't want to get ahead of ourselves.
Frederick Allen Wise: In Q3 as well.
Frederick Allen Wise: Right now the guidance is really aligned with that seasonality for the year.
Frederick Allen Wise: And we feel good about kind of where we are setting in terms of the guide for the full year.
Frederick Allen Wise: What gives us much more confidence as what we've seen in contracting we've seen like I mentioned strong contracted in the quarter.
Frederick Allen Wise: An increase in the contract backlog, but it's still early in the year.
Frederick Allen Wise: We want to be thoughtful and prudent about our guidance, and that's why we're holding back the back three quarters. But we're feeling very good about where we are today in terms of the strength of the business.
Frederick Allen Wise: We don't want to get ahead of ourselves, we want to be thoughtful and prudent about our guidance.
Frederick Allen Wise: And that's why we're that's why we're we're holding still the back three quarters, but we're we're feeling very good about where we are today in terms of the strength of the business.
Micah Young: And just, again, if I could be selfish and ask one more question on Malaysia. I mean, one clear standout positive, obviously, is the progress you're making in transferring production to Malaysia. Two-thirds, I mean, this is well ahead of what I might have expected. Talk about that volume and, as that ramps up, the implications for the rest of the year as we start to think about gross margin and beyond. It seems like over the next few years, you really, I mean, I feel like your past comments, Micah, suggested that this could add, you know, literally hundreds of basis points back to the P&L. Where are we? How quickly does that happen?
Micah Young: And just again, if I could be selfish ask one more on Malaysia, I mean, one clear.
Micah Young: Standout positive obviously is the progress youre, making in transferring production to Malaysia.
Frederick Allen Wise: And especially this year. Thanks a lot. Yeah, absolutely.
Micah Young: Two thirds I think this is well ahead of what I might have expected.
Frederick Allen Wise: Talk about.
Frederick Allen Wise: About that volume and as that ramps the implications for the rest of the year as we start to think about gross margin and beyond it seems like over the next few years, you really I mean I.
Frederick Allen Wise: I feel like your past comments, Mike I suggested this could add.
Frederick Allen Wise: Hundreds of basis points back to the P&L.
Micah Young: Well, if you look at our guidance, we're increasing it by about 60 basis points at our midpoint. And we beat the first quarter. We came in better. We're seeing that transition to Malaysia taking hold faster than we expected. I think we were estimating 50% as we passed the mid-year point, and we're already at 2 thirds. So I think we expect that the ramp, it's implied in our guidance for the year.
Micah Young: Yeah, absolutely. Thank you, Rick.
Frederick Allen Wise: Where are we how quickly does that happen and especially this year. Thanks a lot.
Speaker Change: Yeah, absolutely. Thank you Rick well, if you look at our guidance, we're increasing it.
Micah Young: Bye.
Micah Young: By about 60 basis points at our midpoint and we beat.
Micah Young: The first quarter.
Micah Young: We came in better we're seeing.
Micah Young: That transition to Malaysia.
Micah Young: Hold faster than we expected I think we were estimating 50% by as we passed the mid year point and we're already at two thirds.
Micah Young: We expect it to continue to ramp up in Q2, and then especially as we exit into Q4, that's going to give us that 60 basis point increase in the guidance was really driven by the transition with Malaysia faster than we expected. And then if you look further out, I mean, we've laid out in our earnings presentation a slide that shows where we think we can take gross margins. If you look at it, it's about 350 basis points of improvement as we drive towards our long-term goal of 30% margins.
Micah Young: So I think we expect that to ramp.
Micah Young: Implied in our gross and our guidance for the year, we expect it to continue to ramp up in Q2 and then.
Micah Young: Especially as we exit into Q4.
Micah Young: That's going to give us that 60 basis points.
Micah Young: And the guidance was really driven by.
Micah Young: The transition with Malaysia faster than we expected.
Micah Young: And then if you look further out I mean, we've laid out in our earnings presentation, a slide that shows where we think we can take gross margins.
Micah Young: If you look at it.
Micah Young: Today, we're sitting at 62 and 12, so that would imply that we get up to 66% to reach that 30% margin goal. And we're not giving up. We're going to continue to focus on moving it even higher than 66, but right now, we're comfortable with putting out there a 66% gross margin and 30% operating margin long-term goal. And I think as we look at the initiatives, the three key initiatives are continuing to have our engineering teams work on initiatives to reduce product costs and manufacturing initiatives becoming more efficient as we transition to Malaysia.
Micah Young: It's about 350 basis points of improvement as we drive towards our long term goal of 30% margins today, we're sitting at 62 and a half so that would imply that we get up to 66% to reach that 30% op margin goal.
Micah Young: And we're not giving up we're going to we'll still continue to focus on moving it even higher than 66, but right now we're comfortable with putting out there a 66% gross margin and 30% operating margin long term goal and I think.
Micah Young: As we look at the initiatives the three key initiatives are continuing to.
Micah Young: Have our engineering teams work on initiatives to reduce product costs manufacturing initiatives, becoming more efficient as we transitioned to Malaysia, not only are we going to see lower labor costs, but we're also going to see we expect to see increased efficiency.
Micah Young: Not only are we going to see lower labor costs, but we're also going to see, and we expect to see, increased efficiency. And then third, really just leveraging the installation base that we're putting out there and the equipment. Thank you again.
Micah Young: And then third is really just leveraging the installed base that we're putting out there and the equipment.
Joseph E. Kiani: You know, one point I just want to make sure the group gets. I'm sure Rick knows this, but the majority of our drivers come from OEMs. And during COVID, the OEMs ordered a lot. And post-COVID, it's kind of come back down. I think they're suffering mostly from a dearth of capital dollars. We're not tied to that, that's why you're seeing our true incremental hit a record hundred million because we are converting more and more hospitals.
Speaker Change: Thank you again.
Joseph E. Kiani: One point I, just want to make sure.
Joseph E. Kiani: Group get I'm sure Rick knows this but.
Joseph E. Kiani: The majority of our drivers come from Oems.
Joseph E. Kiani: And during Covid, the Oems ordered a lot.
Joseph E. Kiani: And post Covid, it's kind of come back down.
Joseph E. Kiani: They are suffering mostly from dearth of capital dollars.
Joseph E. Kiani: We're not tied to that and Thats why youre seeing are truly incremental hit a record $100 million, because we are converting more and more hospitals and a lot of that.
Joseph E. Kiani: And a lot of that is driving up the number of drivers that we're getting, not what they're normally doing. So if we weren't doing TIs the way we've been doing TIs for a couple of years, you'd see even fewer drivers because a lot of the OEMs are not doing that well.
Joseph E. Kiani: It's driving up the drivers that we're getting not what they are normally doing so if we werent doing ti as the way we've been doing <unk> for a couple of years you'd see even less driver as well.
Joseph E. Kiani: A lot of the Oems are not doing that well.
Operator: The next question comes from the line of Marie Thibault from BPIG. Please go ahead.
Speaker Change: Thank you Tim.
Operator: Welcome.
Marie Yoko Thibault: Hi, thanks for taking the questions this afternoon, and congrats on a very nice Q1. It's nice to see that guide moving higher for the year. I wanted to ask about the operating margin that you laid out here in the slides for RemainCo Healthcare. The 23.2% to 24.8% was a bit higher than we expected. We were right there with you from that 600 bps of uplift from the consumer audio separation, but I don't think I was factoring in another 220 to 380 bps for additional separation adjustments.
Operator: Yeah.
Operator: Okay.
Marie Yoko Thibault: The next question comes from the line of married people from BP.
Speaker Change: Please go ahead.
Speaker Change: Hi, Thanks for taking the questions. This afternoon and congrats on a very nice Q1, nice to see that guide moving higher for the year.
Marie Yoko Thibault: I wanted to ask you about the <unk>.
Marie Yoko Thibault: The operating margin that you laid out here in the slides for the remain co remain co health care.
Marie Yoko Thibault: The 23, 2% to 24, 8% that was a bit higher than we expected. We were right. There with you from that 600 depth of uplift from the consumer audio separation, but I don't think I was factoring in and another 220 to 380 bps for additional separation adjustments can you help me understand what some of those adjustments.
Marie Yoko Thibault: Can you help me understand what some of those adjustments are on sort of a practical level and help us understand how you're able to get that leverage despite gross margins? Not at where they were pre-COVID, even though they are improving, not at where they were pre-COVID. So we'd love to understand that additional uplift.
Marie Yoko Thibault: Sure.
Marie Yoko Thibault: Sort of a practical level and.
Marie Yoko Thibault: No.
Marie Yoko Thibault: Help us understand how you're able to get that leverage despite gross margins.
Micah Young: Yeah, thank you, Marie. When you look at our healthcare business, you know, and kind of break that down, you mentioned consumer audio. I'll start there with consumer audio. Consumer audio, we're basically backing off 740 million of revenue and 29 million of operating profit in our guidance for the year, about 4% operating profit margin. And then the 220 to 380 basis points is really the improvement from there, taking our healthcare segment operating margins of 21% and moving those up to 23.2% to 24.8%.
Marie Yoko Thibault: Not at where they were pre COVID-19, even though they are improving not at where they were pre COVID-19. So would love to understand that the additional uplift.
Speaker Change: Yes, Thank you Murray.
Micah Young: When you look at our healthcare business.
Micah Young: And kind of break that down you mentioned the consumer audio.
Micah Young: I'll start with consumer auto consumer audio we are basically backing off 740 million of revenue and $29 million of operating profit and our guidance for the year about 4% operating profit margin and then the 220 to 380 basis points is really the improvement from there taking our.
Micah Young: Our healthcare segment margins operating margins of 21% and moving those up to 23, 2% to 24, 8% range.
Micah Young: What that is, if you recall, when we did the acquisition, we put in about a point of investment for selling and marketing expenses, but this also includes another carve-out of expenses for R&D expenses for the team that's really focused on wearable products for consumer health. So when we look at the range, we're estimating a range of $28 million to $51 million that would get carved out. Again, we're going with a broad range because we still have a lot to work through internally before we can present to the board what the parameters look like, but that's the range we expect, and that would land us at 23.2%, like I said, to 24.8% and set us very well on that path to the 30% margin goal long-term.
Micah Young: What that is is if you recall when we did the acquisition.
Micah Young: We put in about a point of investment.
Micah Young: Selling and marketing expenses.
Micah Young: But this also includes.
Micah Young: Another carve out of expenses for R&D expenses for the team that's really focused on.
Micah Young: The wearable products for consumer health.
Micah Young: So when we look at the range, we are estimating a range of 28 million to $51 million that would get carved out again, we're going with a broad range because we still have a lot to work through internally before we can present to the board what that.
Micah Young: What the parameters look like but that's the range we expect.
Micah Young: And that would land us at $23, two like I said to $24 eight.
Marie Yoko Thibault: Okay, that's really helpful to understand. And then I heard the commentary about cash flow from operations, you know, generating some of that cash flow this quarter and being able to pay down some debt. Before the Sound United acquisition, one of the key strengths of Massimo was the free cash flow generation. Any way for us to think about, you know, with this preliminary estimate, what we could eventually see some of that free cash flow generation return to? Are there levels that we should think about or ways to back into some of those numbers? Micah, thanks for the help.
Micah Young: And set us very well on that path to the 30% margin goal long term.
Marie Yoko Thibault: Okay. That's really helpful to understand and then I heard the commentary about cash flow from operations generating some of that cash flow this quarter and being able to pay down some debt free.
Marie Yoko Thibault: On the acquisition one of the key strengths of Massimo is the free cash flow generation any way for us to think about.
Marie Yoko Thibault: Preliminary estimate what we could eventually see some of that free cash flow generation returned to are there levels that we should think about our ways to back into some of those numbers Michael Thanks, Sir.
Micah Young: Yeah, absolutely. You know, if you look at the carve-out costs, we laid those out in the... In the slide, not only do you have on a non-gap basis $28 to $51 million, but we're also assuming, for now, and we've still got to work through a lot of this, but we're assuming 50% of the Apple litigation expenses get split, so that's another, call it $19 million for the year, or $38 million in total, but $19 million that would get carved out under that
Micah Young: Yes, absolutely.
Micah Young: If you look at the carve out costs and we laid those out in the in the.
Micah Young: In the slide not only do you have on a non-GAAP basis and $28 to $51 million, but we're also assuming for now and we still got to work through a lot of this but we're assuming 50% of the Apple litigation expenses split so thats another call at $919 million for the year.
Micah Young: What's been weighing on cash flow has been the litigation expense and also just some of the expenses during the proxy season. And also, last year, what's been weighing on it is that we saw some increases in networking capital, and now we're starting to move that in the right direction with our accounts receivable and inventory management. So I think, you know, we would expect to get, you know, our cash flow back on track for that long-term goal.
Micah Young: 38 million in total, but 19 million that would get carved out under that assumption.
Micah Young: So what's.
Micah Young: What's been weighing on cash flow.
Micah Young: Has been the litigation expense.
Micah Young: And also just some of the expenses during the proxy season.
Micah Young: And also just last year, what's been weighing on it is just we saw some increases in networking capital and now we're starting to move that in the right direction with with our accounts receivable and inventory management.
Micah Young: Our long-term goal is to get that back up over time to 300 million plus, and it'll take a little time to get back there. But I think, you know, long term, that's where we expect to see that cash flow generation from the core health care business. Very helpful.
Micah Young: So I think.
Micah Young: We would expect to get.
Micah Young: Our cash flow back on track for that long term goal. Our long term goal is to get that back up over time to 300 million plus.
Micah Young: And it will take a little time to get back there but.
Marie Yoko Thibault: Very helpful. Thank you.
Micah Young: I think long term, that's where we expect to see that cash flow.
Operator: The next question comes from the line of Vik Chopra from Wells Fargo; please go ahead.
Marie Yoko Thibault: Generation from the core health care business.
Vikramjeet Singh Chopra: Very helpful. Thank you.
Vikramjeet Singh Chopra: Hey, good afternoon, and thanks so much for taking the questions. I have two, so I'll start with the first one. Really helpful that you put that slide out about the potential impact of the separation. But I was just wondering when you expect to present the board with a list of strategic options, is there anything you would share about timelines? And then, please.
Vikramjeet Singh Chopra: The next question comes from the line of Big Toe Prep from Wells Fargo. Please go ahead.
Speaker Change: Hey, good afternoon. Thanks, so much for taking the question two for me so I'll start with the first one.
Vikramjeet Singh Chopra: Helpful that you put that slide out about the potential impact from the.
Vikramjeet Singh Chopra: Separation, but I was just wondering.
Vikramjeet Singh Chopra: When you expect to present the board.
Vikramjeet Singh Chopra: Vic, it was very hard for me to understand that. Was that on the timeline? Oh, I'm sorry, uh...
Vikramjeet Singh Chopra: Akshay anything you can share about timeline and then a follow up.
Vikramjeet Singh Chopra: Oh, I'm sorry. I apologize. I was just wondering if you could share anything on the timeline about when you can present the board with a list of options.
Vikramjeet Singh Chopra: Please.
Vikramjeet Singh Chopra: Yeah.
Speaker Change: Victor was very hard to understand that.
Vikramjeet Singh Chopra: Was that on the timelines.
Vikramjeet Singh Chopra: Im sorry, I apologize I was just wondering if you could share anything on the timeline about when you can present the board with the list of options.
Micah Young: You know, we've got some work to do internally. We're pacing as far as right now. We're working as fast as we can to follow the process. We've got some things we're working through on both the various options we've laid out in the prepared remarks. And we can't give a definitive timeline at this point, but we expect to make a lot of progress over the next 30 to 45 days.
Micah Young: Yeah.
Micah Young: We've got <unk>.
Micah Young: Got some work to do internally.
Micah Young: We're we're pacing as far as right now we're working as fast as we can to.
Micah Young: Followed the process.
Micah Young: We've got some things we're working through them both on the various options we have laid out in the.
Micah Young: In the prepared remarks and <unk>.
Micah Young: We can't give a definitive timeline at this point, but.
Vikramjeet Singh Chopra: Okay, very helpful. Thank you. And apologies if you've already mentioned this before, I was jumping around on calls, but I think you initially assumed in your guidance 0 to 1% inpatient growth. I'm just wondering if you have an update to that and what impact the higher inpatient volumes are that you're seeing in the field out there have on your guidance. Thank you. Yeah, yeah, the strength of our quarter.
Vikramjeet Singh Chopra: We expect to make a lot of progress over the next.
Vikramjeet Singh Chopra: 30% to 45 days.
Speaker Change: Okay very helpful. Thank you.
Speaker Change: Apologies if you already.
Vikramjeet Singh Chopra: Before I was jumping around on calls, but I think you initially assumed in your guidance to 1% in patient growth.
Vikramjeet Singh Chopra: Wondering if you have an update to that and what impact the higher origination volume.
Micah Young: Yeah, the strength of our quarter really came from sensor growth, you know, sensor volumes that are both in the U.S. and Europe. And also, based on what we're hearing out there in the market, some have reported out early. Some have shown a census as high as 3% right now, and we're still waiting to see others report out, but that's definitely helping our growth, and if that continues, that could be an upside for the year for us.
Speaker Change: Are you seeing in the field out there and what impact that has your guidance. Thank you.
Micah Young: Yes, yes, the strength of our quarter really came from sensor growth.
Micah Young: Since our volumes that are both in the U S and Europe.
Micah Young: That that also based on what we're hearing out there in the market as some have reported out early some have shown census, as high as 3% right now.
Micah Young: And we're still waiting to see others report out, but that's definitely helping our growth and if that continue.
Operator: The next question comes from the line of Mike Polark from Wolf Research. Please go ahead.
Micah Young: <unk> continues that could be upside for the year for us.
Michael K. Polark: Good afternoon. I have a question for Micah.
Michael K. Polark: The next question comes from the line Mike Pollard from research. Please go ahead.
Michael K. Polark: Good afternoon.
Michael K. Polark: Question for Mike.
Michael K. Polark: I'm wondering if you can provide this disclosure, the installed base or the driver base year-on-year in the first quarter, what was the growth rate?
Michael K. Polark: If you can provide this disclosure the installed base or the driver base year on year in the first quarter, what was the growth rate.
Micah Young: I don't have the driver installation base right in front of me. I apologize, Jayson. Again, we're really laser focused right now on the true incremental and how we're viewing the contracting and how that's playing into our forecast.
Micah Young: Okay.
Micah Young: I don't have the driver installed base right in front of me.
Speaker Change: I apologize Jason.
Michael K. Polark: Okay, can I maybe ask then, like the 50,000 driver shipments, would you, at a high level, I don't need the precise number, but... What is the mix of replacements versus Met New?
Micah Young: Again, we're really laser focused right now on the on the true incremental and how we're viewing the contracting and how that's playing into our forecast.
Jayson: Okay can I, maybe ask then like the 50000 driver shipments would you at a high level I don't need the precision number but.
Micah Young: on replacements versus net new. Yeah, we typically don't. Well, maybe I could go ahead and check. So I think the best way to think about it, Mike, is that whatever our market share is today, that's probably replacement, and the rest is new. We're not here to tell you what that market share is, but what we can tell you is that we think today the minority of the drivers are New Shipments, and a lot of the shipments that we look forward to increasing our business in the future come from what we do at True Incremental when we sign up new hospitals to switch from our competitor to Masimo.
Jayson: What is the mix of replacements.
Micah Young: Replacements versus net new in that figure.
Micah Young: On the replacement versus net new.
Micah Young: Yes.
Speaker Change: Well go.
Jeff: Go ahead, Jeff.
Micah Young: <unk>.
Micah Young: So I think the best way to think about it it's.
Micah Young: Instead, what overall market share is today.
Micah Young: That's probably replacement and the rest is new we're not.
Micah Young: Tell you what that market share is but what we can tell you is that we think.
Micah Young: Today.
Micah Young: The minority of the drivers are.
Micah Young: New shipments and.
Micah Young: A lot of the shipments that we look towards and increasing our business in the future come from what we do is too incremental when we sign up new hospitals to switch from a competitor to Massimo.
Michael K. Polark: Thank you for that, Joe. For my second topic, I want to just ask for a follow-up on Malaysia and the gross margin update. I'm curious, when this is fully transitioned, I heard the comment about the change to 24, 60 BIPs, but it's obviously phasing in throughout the year and ramping throughout the year, and then 350 BIPs on the longer term margin bridge from gross margin. I'm just curious, the mechanical shift of Mexico to Malaysia, kind of from, say, last year to when you think it's optimized, how much in total is that And thanks for taking the question. Yeah, yeah, Mike, if you look at
Michael K. Polark: Thank you for that Joe for my second topic I wanted to just ask a follow up on Malaysia, and the gross margin update.
Michael K. Polark: I'm curious what.
Michael K. Polark: This is fully transitioned I heard the comments about the change to $24 60 bps, but it's obviously phasing and phasing in throughout the year and ramping throughout the year.
Michael K. Polark: And then 350 bps on the on the longer term margin bridge from gross margin I'm just curious.
Michael K. Polark: Mechanical shift to Mexico to Malaysia kind of from say last year too. When you think it's optimized how much in total is that impact.
Micah Young: initial impact. And we're reflecting some of that in, as you can see in our guidance as we raise it by 60 basis points. So this year, or for. For the early start of the transition, the benefit's gonna be more in terms of the direct labor benefit, and that should be, we're estimating that to be about 60 basis points of improvement per year. And, you know, from that point,
Speaker Change: Thanks for taking the questions.
Micah Young: Yeah, Mike if you look at the.
Micah Young: Initial impact and we're reflecting some of that and as you can see in our guidance as we raise it by 60 basis points.
Micah Young: So this year.
Micah Young: Sure.
Micah Young: For the early early startup.
Micah Young: Transition.
Micah Young: The benefit is going to be more in terms of the direct labor and benefit and that should be we're estimating that to be about 60 basis points of improvement per year.
Micah Young: We expect to drive increased efficiencies in our manufacturing there as we have improved rates of attrition and turnover in the workforce. We expect it to be a much more stable workforce for us and a more efficient workforce based on what we're seeing so far. So that can definitely get us well above that 60 basis point that we're seeing. And we'll see how that plays out. But I would expect that we're probably going to be over 100 basis points of improvement just from that once we start to see all the efficiencies.
Micah Young: And.
Micah Young: From that point.
Micah Young: We expect to drive increased efficiencies in our manufacturing there as we have.
Micah Young: Improved rates of attrition turnover in the workforce, we expect it to be.
Micah Young: A much more stable workforce for us and and more efficient workforce based on what we're seeing so far so.
Micah Young: And that can definitely get us well above that 60 basis points that we're seeing.
Micah Young: Okay.
Micah Young: We will see how that plays out but.
Micah Young: I would expect that we're going to be.
Micah Young: Probably over 100 basis points of improvement just from that once we start to see all of the efficiencies.
Joseph E. Kiani: Thank you so much, everyone, for joining us for our Q1 earnings call. We look forward to presenting our Q2 results with you very soon. Have a wonderful rest of your spring and summer. Thank you.
Joseph E. Kiani: Okay.
Joseph E. Kiani: Okay.
Speaker Change: Thank you so much for.
Joseph E. Kiani: Joining us for.
Joseph E. Kiani: Our Q1 earnings call, we look forward to.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.
Joseph E. Kiani: Presenting our Q2 with you.
Speaker Change: Very soon.
Operator: Have a wonderful rest of your spring and summer. Thank you.
Operator: Okay.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.