Q2 2024 Masimo Corp Earnings Call

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 and 2025 financial performance. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Risk factors that could cause our actual results to differ materially from our projections and forecasts are discussed in detail in our periodic filings with the SEC.

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 2024, and 2025 financial performance.

However, they are subject to risks and uncertainties that could cause actual results to differ materially risk.

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.

Eli Kammerman: 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 such a 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 its consumer business, and the method, structure, timing, and terms of any such potential separation are still under consideration and have not been determined, approved, or finalized.

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.

The company is currently evaluating the structure of any potential separation of its consumer business.

And the method structure timing in terms of any such potential separation are still under consideration and have not been determined approved or finalized. Please.

Eli Kammerman: 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. Additionally, 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.

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.

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 that.

The company's operating results in the same way management assesses such results.

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. 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.

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.

Therefore, the financial measures, we will be covering today will be primarily on a non-GAAP basis unless noted otherwise.

Conciliation 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, in order to make informed investment decisions. In addition to the earnings release issued 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. Thanks, Eli.

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 and.

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.

Joseph Kiani: Good afternoon, and thank you for joining us for Masimo's second quarter 2024 earnings call. I'm happy to report that our health care revenues rose sequentially and grew 23% versus last year. Our health care business is seeing increasing momentum driven by excellent execution by our health care team and a robust hospital sense. We saw strong demand for Masimo sensors due to the combination of strong hospital conversions over the past few years, normalization of installations, and after a tumultuous post-COVID environment, rising hospital admissions.

Joe Kiani: Good afternoon, and thank you for joining us for Massimo <unk> second quarter 2024 earnings call.

Joe Kiani: I'm happy to report that our health care revenues grew sequentially and grew 23% versus last year.

Joe Kiani: Our health care business is seeing increasing momentum driven by excellent execution by our health care team.

Joe Kiani: Our robust hospital census.

Joe Kiani: We saw strong demand for Maximus sensors due to the combination of strong hospital conversions over the past few years.

Joe Kiani: Normalization of installations.

Joe Kiani: And after tumultuous post COVID-19 environment rising hospital admissions.

Joseph Kiani: Our sales team once again secured a record level of new hospital conversion contracts, amounting to $134 million in true incremental value for the quarter, representing a 28% increase versus last year. Not too long ago, we contracted $130 million of TI for the entire year. We believe our exceptional hospital conversion contracts point to a very bright multi-year future. Another standout item for the quarter was a substantial increase in gross margins.

Joe Kiani: Our sales team once again secured a record level of new hospital conversion contracts.

Joe Kiani: Amounting to $134 million in true incremental value for the quarter.

Joe Kiani: Representing a 28% increase versus last year.

Joe Kiani: Not too long ago with contracted $130 million of Ti in the entire year.

Joe Kiani: Okay.

Joe Kiani: We believe our exceptional hospital conversion contracts point to a very.

Joe Kiani: Right.

Joe Kiani: T year future.

Joe Kiani: Another standout item for the quarter was the substantial increase in gross margins.

Joseph Kiani: We committed to investors that this would be a key area of focus for us, and the team is delivering. Our healthcare business continues to benefit from initiatives to reduce product costs, including the recent relocation of most of our sensor manufacturing to Malaysia, which continues to be executed extremely well and ahead of schedule. In addition, we have an engineering team that focuses each year on product updates that reduce our cost of goods and increase margins.

Joe Kiani: We committed to investors at this would be a key area of focus for us and the team is delivering.

Joe Kiani: Our health care business continues to benefit from initiatives to reduce product costs, including the recent relocation of most of our sensor manufacturing to Malaysia, which continues to be executed extremely well and ahead of schedule.

Joe Kiani: In addition, we have an engineering team that focuses each year on product updates to reduce our cost of goods and increase margins.

Joseph Kiani: We have filled this team with some highly skilled talent, and the benefits are currently flowing through the P&L. The combination of strong conversions, new equipment installations, and increasing hospital census gives us the confidence to significantly increase our full-year guidance for health care revenues and earnings. I'm particularly proud of how well our global organization is performing. We remain committed to separating our consumer business. As previously announced on July 8, we received preliminary terms from a potential JV partner, and we have extended exclusivity until August 15 to accommodate their needs.

Joe Kiani: We have built this team with some highly skilled talent and the benefits are currently flowing through the P&L.

Joe Kiani: The combination of strong conversions, new equipment installations, and increasing hospital census gives us the confidence to significantly increase our full year guidance for health care revenues and earnings.

Joe Kiani: I'm, particularly proud of how well our global organization is performing.

Joe Kiani: We remain committed to separating our consumer business as previously announced on July eight we received preliminary terms from a potential JV partner and we have extended exclusivity until August 15 to accommodate their needs.

Joseph Kiani: We believe this option could offer shareholders the best outcome, but the completion of the transaction is not entirely in our control. In addition to the potential JV, we are considering all strategic options, including the sale of or spinoff of the audio business, either alone or together with a consumer health business. We will act decisively to execute on the option that best maximizes value for shareholders and puts us on the path to achieve our long-term goal of $8 earnings per share, which would effectively double our EPS in five years. With that, I'll pass it over to Micah to review our second quarter results in more detail and provide an update on our 2024 outlook. Thank you, Joe.

Joe Kiani: We believe this option could offer shareholders the best outcome, but the completion of the transaction is not entirely in our control.

Joe Kiani: In addition to the potential JV, we are considering all strategic options, including the sale of our spinoff of the audio business.

Joe Kiani: Either alone or together with a consumer health business.

Joe Kiani: We will act decisively to execute on the option.

Joe Kiani: Maximizes value for shareholders and puts us on a path to achieve our long term goal of $8 earnings per share, which would effectively double our EPS in five years.

Joe Kiani: With that I'll pass it over to Micah to review, our second quarter results in more detail and provide an update on our 2024 outlook. Thank you Joe and good afternoon, everyone for the second quarter, our healthcare revenues were $344 million, which were above the top end of our guidance range and represented 23% growth versus last year.

Micah Young: Thank you, Joe. Good afternoon, everyone.

Micah Young: For the second quarter, our health care revenues were $344 million, which was above the top end of our guidance range and represented 23% growth versus last year. Our consumable and service revenues grew 29%, partially offset by an expected decline of 9% in capital and other revenues. Within consumable and service revenues, our set pulse oximetry consumables grew 35%. Capnography consumables grew 35%, and brain monitoring consumables grew

Micah: Our consumable and service revenues grew 29%, partially offset by an expected decline of 9% and capital and other revenues.

Micah: Within consumable and service revenues, our set pulse oximetry consumables grew 35% Technography consumables grew 35% and brain monitoring consumables grew 19%.

Micah Young: Partially offsetting this growth, Rainbow consumable revenues declined 5% due to the timing of shipments outside the U.S. We expect rainbow consumable revenues to reach our double-digit growth target for the full year based on continued growth outside the U.S. and adoption of rainbow sensors in the U.S. following the FDA clearance of the Oxygen Reserve Index late last year. Our ongoing focus on expanding our footprint with existing customers and winning new customers has built a solid foundation for growth in the second half of 2024 and beyond.

Micah: Partially offsetting this growth Rainbow consumable revenues declined 5% due to the timing of shipments outside the U S. We.

Micah: We expect Rainbow consumable revenues to reach our double digit growth target for the full year based on continued growth outside the U S. In adoption of Rainbow sensors in the U S. Following the FDA clearance of oxygen Reserve index late last year.

Micah: Our ongoing focus on expanding our footprint with existing customers and winning new customers has built a solid foundation for growth in the second half of 2024 and beyond.

Micah Young: As shown in our slides today, the incremental value of new contracts was $134 million this quarter, increasing 28% versus last year and rising 34% sequentially. This clearly demonstrates Masimo's strong market share gains through contracting with our hospital customers and has contributed to a 16% increase in unrecognized contract revenues, which have reached $1.6 billion as of the end of the second quarter. You'll be able to see the benefits of these new contracts and our revenue growth as the equipment is installed over the next six to nine months.

Micah: As shown in our slides today, the incremental value of new contracts was $134 million this quarter, increasing 28% versus last year and rising 34% sequentially.

Micah: This clearly demonstrates <unk> strong market share gains through contracting with our hospital customers and has contributed to a 16% increase in unrecognized contract revenues, which have reached $1 6 billion as of the end of the second quarter.

Micah: Youll be able to see the benefits from these new contracts in our revenue growth as the equipment is installed over the next six to nine months.

Micah Young: On a related note, driver shipments for the second quarter were $59,000 and were above our expectations. We believe that driver shipments will steadily rise over the remainder of the year and are being fueled by the excellent level of conversions that our team is achieving. Non-healthcare revenues were $152 million, which was at the low end of our guidance range and represented an 11% decline versus the prior year. This business continues to be affected by the weakening environment for luxury consumer purchases as well as slowness in the housing market, which affects product installations and upgrades.

Micah: On a related note driver shipments for the second quarter were 59000 and were above our expectations.

Micah: We believe that driver shipments will steadily rise over the remainder of the year and are being fueled by the excellent level of conversions that our team is achieving.

Micah: Non healthcare revenues were $152 million, which was at the low end of our guidance range and represented 11% decline versus the prior year.

Speaker Change: This business continues to be affected by the weakening environment for luxury consumer purchases as well as slowness in the housing market, which affects product installations and upgrades.

Micah Young: Moving down the P&L, for the second quarter, our consolidated non-GAP gross margin was 54%, which included gross margins of 62.5% for health care and 35% for non-health care. Healthcare gross margins improved 240 basis points year-over-year and rose 20 basis points sequentially, which is attributable to the relocation of sensor manufacturing to Malaysia, combined with increased operational efficiencies and a favorable mixed benefit from higher consumable sales. Our progress on this front gives us confidence in achieving our long-term goal of 30% operating margins for the healthcare business in five years.

Micah: Now moving down the P&L.

Micah: For the second quarter, our consolidated non-GAAP gross margin was 54%, which included gross margins of 62, 5% for healthcare and 35% for non health care.

Micah: Health care gross margins improved 240 basis points year over year, and rose 20 basis points sequentially, which is attributable to the relocation of sensor manufacturing to Malaysia, combined with increased operational efficiencies and a favorable mix benefit from higher consumable sales.

Micah: Our progress on this front gives us confidence in achieving our long term goal of 30% operating margins for the health care business in five years.

Micah Young: For our consolidated business, non-GAAP operating profit was $73 million. Our operating margin of 15% improved sequentially from the first quarter but declined modestly versus last year due to the return of performance-based compensation to normalized levels in 2024. Excluding the impact of performance-based compensation, our operating expenses decreased 4% versus the prior year period due to cost reduction initiatives.

Micah: For our consolidated business non-GAAP operating profit was $73 million, our operating margin of 15% improved sequentially from the first quarter, but declined modestly versus last year due to the return of performance based compensation to normalized levels in 2024.

Micah: Excluding the impact of performance based compensation, our operating expenses decreased 4% versus the prior year prior year period due to cost reduction initiatives.

Micah Young: Even with a return of performance-based compensation, we delivered 13% earnings growth to achieve non-GAAP earnings per share of 86 cents for the second quarter. Moving to cash flow, we generated operating cash flow of $75 million due to strong earnings and working capital improvement. As a result, we were able to pay down $93 million of debt in the second quarter, bringing our outstanding debt to $782 million.

Micah: Even with the return of performance based compensation, we delivered 13% earnings growth to achieve non-GAAP earnings per share of <unk> 86 for the second quarter.

Micah: Okay.

Micah: Moving to cash flow we.

Micah: We generated operating cash flow of $75 million due to strong earnings and working capital improvement.

Micah: As a result, we were able to pay down $93 million of debt in the second quarter, bringing our outstanding debt to $782 million.

Micah Young: Increasing cash flow and reducing debt are key priorities for the organization, and we're succeeding with both objectives. Now, I'd like to provide an update on our 2024 financial guidance. For the third quarter 2024, we are projecting consolidated revenue of $495 million to $515 million and non-GAAP earnings per share of $0.81 to $0.86, representing 8% to 15% earnings growth. For the healthcare segment, we are projecting revenue of $335 million to $345 million, representing 9% to 12% revenue growth.

Micah: Increasing cash flow and reducing debt are key priorities for the organization and we are succeeding with both objectives.

Micah: Okay.

Micah: Now I'd like to provide an update on our 2024 financial guidance.

Micah: For the third quarter 2024, we are projecting consolidated revenue of 495 million to $515 million.

Micah: And non-GAAP earnings per share of <unk> 81.

Micah: The 86, representing 8% to 15% earnings growth.

Micah: For the health care segment, we are projecting revenue of 335 million to $345 million, representing 9% to 12% revenue growth.

Micah Young: The robust hospital census, along with our record-breaking hospital conversions, new equipment installations, and strong sales order backlog increases our confidence in achieving a growth rate that exceeds the 9% revenue growth we saw in the first half of the year. For the non-healthcare segment, we are projecting revenues of $160 million to $170 million. Now turning to our full year 2024 financial guidance. We're now projecting a consolidated revenue range of $2,085,000,000 to $2,135,000,000. For our healthcare segment, we are now projecting revenues of $1,385,000,000 to $1,405,000,000, representing 9-10% revenue growth for the year and an increase of $25,000,000 at the midpoint versus the prior guidance range. With regard to driver shipments, we expect to see shipments increase to more than 60,000 in both the third and fourth quarters, representing a sequential step up from the first half level.

Speaker Change: Robust hospital census, along with our record breaking hospital conversions, new equipment installations, and strong sales order backlog increases our confidence in achieving a growth rate that exceeds the 9% revenue growth. We saw in the first half of the year.

Micah: For the non healthcare segment, we are projecting revenues of $160 million to $170 million.

Micah: Now turning to our full year 2024 financial guidance.

Micah: We're now projecting our consolidated revenue range of $2 $85 million to $2 billion $135 million.

Micah: For our healthcare segment, we are now projecting revenues of $1.385 billion to $1 billion and $405 million, representing 9% to 10% revenue growth for the year and an increase of $25 million at the midpoint versus the prior guidance range.

Micah: With regard to driver shipments, we expect to see shipments increased to more than 60000 in both the third and fourth quarters, representing a sequential step up from the first half levels.

Micah Young: For the non-healthcare segment, we are now projecting revenues of $700 million to $730 million, which represents a decrease of $25 million at the midpoint versus the prior guidance range. For the full year, we are now projecting a consolidated non-GAAP gross margin of 53%, which includes healthcare gross margins of 62.5% and non-healthcare gross margins of 34%. Finally, we are now projecting a non-GAP EPS range of $3.80 to $4 per share, which represents an increase of 28 cents at the midpoint versus the prior guidance range, demonstrating our year-to-date progress and our strong commitment to increasing operating leverage and driving sustainable earnings growth.

Micah: For the non healthcare segment, we are now projecting revenues of $700 million to $730 million, which represents a decrease of 25 million at the midpoint versus the prior guidance range.

Micah: For the full year, we are now projecting consolidated non-GAAP gross margin of 53%, which includes health care gross margins of 62, 5% and non health care gross margins of 34%.

Micah: Okay.

Micah: Finally, we are now projecting non-GAAP EPS range of.

Micah: $3 80 to $4 per share.

Speaker Change: Which represents an increase of 28 at the midpoint versus the prior guidance range.

Micah: Demonstrating our year to date progress and our strong commitment to increasing operating leverage and driving sustainable earnings growth.

Micah Young: In summary, our healthcare business is solidly back on its expected growth track, and we foresee the potential for even faster growth combined with expanding margins over the remainder of the year. Our hospital conversions have grown substantially over the past 12 months, and those contracts can drive higher sensor volumes for the next five years.

Micah: In summary, our health care business is solidly back on its expected growth track and we foresee the potential for even faster growth combined with expanding margins over the remainder of the year.

Micah: Our hospital conversions have grown substantially over the past 12 months and those contracts can drive higher sensor volumes for the next five years.

Micah Young: Now I'd like to provide you with an update on the progress we are making on the separation of our consumer business from our healthcare business. While we continue to see long-term potential for the consumer business, we believe that separating into two standalone businesses will maximize returns for Masimo's shareholders and ensure the market can recognize the full value of our thriving healthcare business. As Joe mentioned, while the JV offers a uniquely attractive solution for separating the consumer businesses while retaining some upside, the board is considering all options to separate the consumer audio business regardless of the outcome of the JV negotiation.

Micah: Now I'd like to provide you with an update on the progress we are making on the separation of our consumer business from our health care business.

Micah: While we continue to see long term potential for the consumer business, we believe that separating into two standalone businesses will maximize returns from mass most shareholders and ensure the market can recognize the full value of our thriving health care business.

Micah: As Joe mentioned, while the JV offers a uniquely attractive solution for separating the consumer businesses, while retaining some upside.

Speaker Change: The board is considering all options to separate the consumer audio business, regardless of the outcome of the JV negotiations, we are committed to executing on our full deconsolidation of the consumer audio business from our financial statements.

Micah Young: We are committed to executing on a full deconsolidation of the consumer audio business from our financial state. Our thriving healthcare business is being obscured by the weaker consumer market, which increases our desire to separate the two businesses. We are committed to this goal, whether it is through the JV, a sale, or a spinoff of audio alone or audio combined with consumer health. Our decisions on the structure of any separation will be predicated on providing maximum value to our shareholders.

Speaker Change: Our thriving health care business is being obscured by the weaker consumer market and increases our desire to separate the two businesses.

Micah: We are committed to this goal whether it is through the JV.

Micah: Well or a spinoff of audio alone or audio combined with consumer health our decisions on the structure that any separation will be predicated on providing maximum value to our shareholders.

Micah Young: To that end, we've provided a preliminary estimate of the financial impact of two different alternatives for a separation on slide nine of our earnings presentation. Notably, assuming an outright sale of just the consumer audio business is completed as outlined, we estimate that Masimo's non-gap operating margins would improve by 610 basis points to reach 21%. Alternatively, if the audio business is divested in combination with the consumer health business as contemplated in the proposed JV, we estimate that Masimo's non-GAAP operating margins would further improve by 260 basis points to reach 24%.

Micah: To that end, we provided a preliminary estimate the financial impact of two different alternatives for a separation on slide nine of our earnings presentation.

Micah: Notably assuming an outright sale or just the consumer audio business is completed as outlined we estimate that Massimo is non-GAAP operating margins would improve by 610 basis points to reach 21%.

Micah: Alternatively, if the audio business is divested in combination with the consumer health business as contemplated in the proposed JV. We estimate that Massimo was non-GAAP operating margins would further improve by 260 basis points.

Micah: To reach 24%.

Micah Young: This structure would result in significant progress towards achieving our long-term goal of 30% operating margins for the healthcare business. If a transaction results in cash proceeds to Masimo, we plan to use those proceeds to pay down debt and reduce interest expense, which currently amounts to $40 million in our guidance for this year. Either way, with our strong cash flow, we expect to retire our debt within three to four years. With that, I'll turn the call back to Joe.

Micah: This structure would result in significant progress towards achieving our long term goal of 30% operating margins for the health care business.

Micah: If a transaction results in cash proceeds to Massimo we plan to use those proceeds to pay down debt and reduce interest expense, which currently amounts to $40 million in our guidance this year.

Micah: Either way with our strong cash flow, we expect to retire our debt within three to four years with that I'll turn the call back to Joe. Thank you Mike.

Joseph Kiani: Before we go to Q&A, I want to thank our team for their unrelenting effort and consistent focus during a disruptive time that is unprecedented. Hola.

Joseph Kiani: Few quarters clearly demonstrate that the post-COVID disruptions are behind us, and we are back on track to meet or exceed expectations. Our main objective continues to be driving our revenue growth towards double digits by providing our customers with clinically relevant innovation and achieving or exceeding 30% operating margin. We see a clear pathway to reach that margin target within the next five years and expect the planned business separation to have an immediate positive impact on the profitability of our professional health care business once finalized.

Joseph Kiani: Our future is brighter than ever, as we execute our mission to improve lives, improve patient outcomes, and reduce costs of care by taking non-invasive monitoring to new sites and applications. With that, we'll open the call to questions. Operator? and...

Operator: And the floor is now open to your questions, so if you have just asked a question, please press star 1 on your telephone keyboard. We've got to pause for just a moment to compile the Q&A roster. Our first question comes from Jayson Bedford.

Joe Kiani: And the floor is now open for your questions. So if you ask a question. Please press star one on your telephone keypad.

Speaker Change: We've got a pause for just a moment to compile the Q&A roster.

Micah: Okay.

Micah: Yeah.

Speaker Change: Our first question.

Jason: And Jason.

Jason: Got it.

Jayson Bedford: Afternoon, everyone. Thanks for taking the questions. A nice quarter here. Joe or Mike, feel free to respond here.

Jason: Hey, good afternoon, everyone and thanks for taking the questions and nice quarter here.

Speaker Change: Joe or Mike you can feel free to respond here, but look the core business performance appears to improve quite a bit you were seeing in the driver numbers, we're seeing the productivity installed base.

Speaker Change: <unk> gross margin to health care franchise.

Speaker Change: Look there is understandably a little skepticism from investors out there regarding maybe a repeat of what we saw last year ahead of the shareholder vote. So really just hoping you could comment on maybe what's different this time around what kind of visibility are you going to offer to lend confidence to the investment community that the underlying improvements here are sustainable into the back half of the year.

Joseph Kiani: But look, the core business performance appears to have improved quite a bit. We're seeing the driver numbers, we're seeing the productivity and installation base, and we're seeing the gross margin in the healthcare franchise. So look, there's understandably a little skepticism from investors out there regarding maybe a repeat of what we saw last year ahead of the shareholder vote. So really just hoping you could comment on maybe what's different this time around? What kind of visibility are you going to offer to lend confidence to the investment community that the underlying improvements here are sustainable into the back half of the year and that there wasn't any pull-forward of revenue or margin contribution?

Speaker Change: And that there wasn't any pull forward of a revenue or margin contribution.

Joseph Kiani: Well, maybe I'll start off on a high note, Jayson. First of all, as you've seen from some of the public hospitals that have reported, the census is very strong. I think HCA and Tenet reported a 5% increase. And our business is driven a lot by consumables, which is driven by hospital admissions and hospital discharges. So that's one. The second, to address directly what you're saying, we have not had. At this level of backlog for many, many quarters, the backlog going into Q3 is extremely strong.

Jason: Well, maybe I'll start off high level Jason.

Speaker Change: First of all.

Speaker Change: As you've seen from some of the public hospitals that have reported the census is very strong.

Speaker Change: Think HCA and Tennant reported 5% increase.

Speaker Change: And our business is driven a lot by the consumables, which is driven by hospital admissions and hospital admissions.

Joseph Kiani: And that's one of the reasons, besides the censors and the successful conversions of hospitals to Massimo at a really rapid rate, that made us feel comfortable in updating our guidance and giving such a strong guidance for the rest of the year.

Joseph Kiani: All right, very helpful. I just wanted to want to double check because I know there's already questions that are on the surface since the pre-announcement, but no, that's super helpful, Joe. And then I wanted to come back to some of the comments you made and just maybe help us with the JV situation, the JV partner situation. You referenced the August 15th exclusivity period. They extended it to this partner. I think that was in the 8K that you provided a month ago. But you also mentioned that things are outside your control.

Joseph Kiani: I'm not sure if you're suggesting that it's in the control of the JV partner or if the agreement that you have is interrelated with the upcoming shareholder vote. I'm curious if other players may have entered the discussion with that original JV partner or if you've received other definitive inbound interest beyond what was originally outlined. So, really, just trying to get a sense of where things stand. If you can give us an update and whether or not we should expect anything ahead of BAGM or after BAGM.

Joseph Kiani: Well, first of all, given some of the innuendos and comments that were thrown out, we made it clear that we would not do any JV unless the activist board member agreed to it. Secondly, when we mention it's not under our control, it's because, unlike a sale or a spin, this requires a JV partner to also do what they say they're going to do, and as you know, they had We reported this before, they wanted to get one or two other more partners in the JV.

Speaker Change: The activist Board member agreed.

Speaker Change: Agreed to it.

Speaker Change: Secondly, when.

Speaker Change: When we mentioned it's out of our control because unlike a sale or a spin.

Speaker Change: It just requires a JV partner to Austin.

Speaker Change: What they say, they're going to do and that's you know they had.

Speaker Change: Reported this before if they wanted to get one or two other more partners.

Speaker Change: In the JV. So that's I think one of the reasons. They asked us to give them to August 15, that's what they're currently working on and we should know.

Joseph Kiani: So, that's, I think, one of the reasons they asked us to give them until August 15th. That's what they're currently working on. We should know soon what they're going to do, and we will report to you what they're going to do. But I think Micah and I wanted to reiterate, regardless of what the JV partner does or doesn't do, we still think the JV proposal was the best proposal compared to the other options.

Mike: Soon what theyre going to do and we will report to what Theyre going to do but I think Mike and I wanted to reiterate regardless of what the JV partner does because it doesn't do it.

Speaker Change: We still think that JV.

Speaker Change: Proposal was the best proposal compared to the other options, but if those if that option doesn't come true we still will do a separation.

Joseph Kiani: But if that option doesn't come true, we still will do a separation, and nothing's off the table, whether it's just separating the audio business or separating the audio and the consumer health business. We'll do whatever we believe is best for shareholders.

Speaker Change: And nothing's off the table, whether it's just separating the audio business or separated the audio and the consumer health business. We will do whatever we believe is best for shareholders.

Joseph Kiani: Okay, and maybe just a quick follow-up, Joe: should we expect something like a, I guess, a more definitive path forward then after we hear what, you know, what that JD partner decides as of August 15? Or do we need to sit tight until after the shareholder vote to maybe have better clarity on what that looks like?

Speaker Change: Okay.

Joseph Kiani: As soon as we have something that we can do, we will take it to the board, assuming we have that. If the board approves it unanimously, then we can get it done. I don't think it needs to wait for the shareholder meeting, but clearly, it has to be a unanimous vote by the board, which, hopefully, should mean everyone's happy with it. But if we don't get a unanimous vote, then we're not going to do it, regardless of whether it's before or after the shareholder vote.

Joseph Kiani: All right. Very helpful. Thanks so much. Nice quarter.

Operator: Thank you. Thanks, Jayson.

Marie Thibault: Our next question comes from Marie Thibault.

Marie Thibault: Hi Joe. Hi Micah.

Micah Young: Thanks for taking the questions this evening. I wanted to ask a straightforward one here on the Q3 guide. If I think back to Masimo Healthcare pre-COVID, I'm very used to Q2 and Q3 revenue being very similar, healthcare revenue being very similar, and often quite flat sequentially between Q2 and Q3. Just curious if there's anything to think about when we look at the Q3 guide, the midpoints, just 5 million or so below what you achieved in Q2, and how to think about maybe the puts and takes on that guide.

Micah Young: Yeah, thanks, Marie. So the way we're thinking about that is we are seeing, of course, strong contracting, but installation seems to have started to normalize now.

Speaker Change: We're seeing of course strong contracting installations seem to start to normalize now we're not seeing the length of the delays that we've seen in the past passed so that's helping us to more to the positive as we look into Q3, and Q4 and that strength should come through revenues.

Micah Young: We're not seeing the length of the delays we've seen in the past. So that's helping us to be more positive as we look into Q3 and Q4, and that strength should come through revenues. You know, we are also being mindful, though, of the census. We saw a very strong census in Q2. I think it was reported out by some of the large public companies, as Joe mentioned, 5% inpatient growth in Q2.

Speaker Change: We are also being mindful, though of of census, we saw a very strong census in Q2 I think it was.

Speaker Change: A report out by some of the large public companies as Joe mentioned, 5% inpatient growth in Q2, I think that was <unk>.

Micah Young: I think that was following 4% growth in Q1. So we're also being cautious there in terms of how we think about that. And I think a lot of those public hospitals are also guiding to a full-year growth of around 3% to 4%. So they're being cautiously, I guess, cautiously optimistic in the back half of the year as well.

Joe Kiani: Following 4% growth in Q1, so we're also being cautious there in terms of the how.

Speaker Change: How do we think about that so.

Speaker Change: And I think a lot of the those public hospitals are also guiding to full year growth of around 3% to 4%. So.

Speaker Change: Theyre being cautiously I guess cautiously optimistic in the back half of the year as well so.

Speaker Change: Strength from contracting installations.

Speaker Change: And if you really look at the business historically.

Speaker Change: Our healthcare revenues have had years, where they've they've ticked down in Q Q2 to Q3 and that if you go back pre COVID-19 and kind of look at the three years.

Micah Young: And if you really look at the business historically, our healthcare revenues have had years where they've kicked down in Q2 to Q3. And if you go back pre-COVID and kind of look at the three years leading up to 2019, we averaged, you know, a step down from Q1 or Q2 to Q3, a slight step down there. So that's why we put at the midpoint 345 million dollars of revenue, or sorry, 340 million dollars of revenue, and the high end is 345, which would keep it flat to Q2.

Speaker Change: Leading up to 2019, we averaged.

Marie Thibault: Okay, that's really helpful Micah, thank you. And then maybe my follow-up, I heard a quick mention of it, the Oxygen Reserve Index, that's one of the newer products in healthcare that, you know, should come with a revenue uplift, and I know it's a standard of care in some countries where it's been available for a few years. So can you tell us how that's doing in the U.S., what the early feedback is on that, and are you indeed seeing any revenue tailwind from that?

Joseph Kiani: Thanks, Marie. Yes, that's gone really well.

Joseph Kiani: We are seeing an uptick in the U.S. with the adoption of Rainbow. I think the combination of the Oxygen Reserve Index and now offering the cardiac output with Rainbow gives us a measurement of oxygen delivery. I think it's helping our Rainbow business tremendously. We should see great results in the second half, and that's why I believe Micah mentioned we expect for the year to grow double digits in Rainbow, not just based on all U.S. but U.S. conversions.

Marie Thibault: Very good. All right. I appreciate it. Thanks so much.

Joseph Kiani: Thank you. Thank you.

Operator: Our next question comes from Brickwise.

Frederick Wise: Good afternoon, everybody. Hi Rick. Hi Joe. I was hoping, maybe first, you could talk a little bit more about the implied rest of your consumer outlook. Obviously, you're going through the separation, but just help me better understand. You know, obviously, yesterday, there was a lot of concern about a softening or more softening of the economic environment. I think if I'm doing it correctly, guidance is implying sequential consumer sales improvement in the second half. Help us understand your thoughts or your optimism or your confidence that consumer sales will, in fact, increase sequentially as the year unfolds.

Joseph Kiani: Sure, Rick. The growth this year should come from our hearables. These are the over-the-ear headphones and inner ear earbuds, like the Bowers & Wilkins headphones and earbuds and the Denon Pearls. So we, as you remember, last year grew about 100% compared to the year before that business. We expect to see strong growth this year as well, but those products are typically shipped in Q4. It's a kind of holiday gift or Christmas thing.

Speaker Change: Wearables. These are the over the ear headphones and inner ear ear buds are like the borrowers on wilkens AR headphones on Airbus under Dennis Pearls.

Speaker Change: So we if you remember last year grew by 100 per cent compared to year before that business, we expect to see strong growth this year as well, but those products are typically shipped in Q4, it's a kind of a holiday gift Christmas thing so.

Joseph Kiani: So we expect a very strong Q4. Even though we think the high-end audio, both the speakers and the AVRs, may be continuing to be muted because of the economic pressures, we think the earbuds and headphone business will grow. And that's why we're optimistic about the second half of the year.

Speaker Change: We expect a very strong Q4, and even though we think the high end audio.

Speaker Change: Both the speakers in the a b ours and may be continued to be muted because of the economic pressures, we think the ear buds and headphone business will grow and that's why we're optimistic about the second half of the year.

Frederick Wise: Gotcha. And Micah, maybe you could, or Joe, could expand on your comments about two things related to gross margins and, therefore, operating margins. You said that Malaysia is ahead of schedule and going well. And if I'm remembering correctly, last quarter, you said it was two-thirds of the way through that sensor manufacturing transition. In those three months, where does it stand today, when is it going to be done, how are you thinking, what are you baking into the guidance, and maybe, just separately but related, what are you talking about some of the cost reduction initiatives? Maybe you can help us better understand what those are and again, your confidence in the second half outlook based on the programs that are clearly helping out so far. Thank you. Absolutely. Thank you, Rick.

Speaker Change: Gotcha.

Speaker Change: And Mike maybe you could expand on your comments about.

Mike: Two things related to gross.

Mike: Gross margins.

Mike: Uh huh.

Mike: Therefore, our operating margin.

Speaker Change: You said that Malaysia is ahead of schedule.

Speaker Change: Going well.

Speaker Change: If I remember correctly last quarter, you said it was two thirds of the way.

Speaker Change: Through that.

Micah Young: Thank you, Rick. Well, just to kind of step back and provide some context, we came into the year, and I believe our guidance for health care was 61.9% gross margin. We took that up about 60 basis points, 50 to 60 basis points last guide where we're taking up another 10 basis points for the year to get to 62.5% for the year. So we're seeing good traction so far. Last quarter, we were about two-thirds of the way there with Malaysian Manufacturing. But keep in mind that a lot of that early on was more the high-volume runners that were getting up and running first with sensors.

Micah Young: The next phase that we're working through now between now and the end of the year is going to be some of the lower-volume parts and more complex parts. So it'll take a little time, but we plan to be there by the fourth quarter as we exit this year. We're already seeing good efficiencies coming out of Malaysia and that workforce. They're doing an incredible job so far.

Micah Young: That's starting to roll through the P&L. We should start to see an uptick in gross margins in Q4. We're expecting gross margins to be relatively flat in Q3 from the first half, but then stepping up closer to 63% in the fourth quarter. So progressing well there. We also have a team that's dedicated to cost reductions, to your second point of your question. The engineers continuously look to take costs out each and every year.

Micah Young: It's where we've historically gained good margin expansion and are trying to fight the offset of the inflationary costs that we've seen over the years. But I think we're seeing that progress very well. We're not taking costs out of anything from our technology boards, or our cables that bring the attachment to the sensors. Also, we're seeing mixed benefits from some of the prior cost reduction efforts that they did to reduce the cost of sensors from moving from Lynx to RD.

Micah Young: And I think we're probably over 50% now with the lower cost sensor now with its higher margins. So that's progressing well, and we're continuously trying to take costs out of our Massimo-branded equipment as well as some of the advanced parameter lines, like NOMA lines.

Speaker Change: With its higher margins, so so that's progressing well and.

Speaker Change: We're continuously trying to take costs out of our our Massimo branded equipment as well and some of the advanced parameter lines like no Milan.

Frederick Wise: Great. And if I could ask a quick follow-up, I apologize. You expressed a lot of confidence in your 30% operating margin goal. Just in the simplest of terms, Micah, is this sales-driven, mix-driven, you know, what are the reasons why are you confident that that's the right goal and that you have the tools in hand to make it happen?

Speaker Change: Great.

Speaker Change: If I can ask a quick follow up I apologize.

Speaker Change: <unk> spent a lot of confidence in your 30% operating margin goal.

Speaker Change: Simple is confirmed.

Speaker Change: Okay.

Speaker Change: Is this.

Speaker Change: <unk> driven mixed driven.

Speaker Change: What what are the.

Speaker Change: Why are you confident that that's the right goal that you have the tools in hand to make it happen.

Micah Young: Yeah, I think, you know, what's given me a lot of confidence is that we do believe that we can get back up. I mean, we're assuming just to get to 30% that gross margins get back to 66%. We were as high as 67% and maybe even 68% before a lot of the inflationary costs that sprung from COVID, the COVID years. You know, over the past four or five years, we've had a lot of inflationary costs, increases in labor costs down in Mexico.

Speaker Change: Yes, I think.

Speaker Change: Give me a lot of confidence as we do believe that we can get back up.

Speaker Change: Sure.

Speaker Change: We're assuming just to get to 30%.

Speaker Change: Gross margins get to get back to 66%, we've been as high as 67% and maybe even 68% before a lot of the inflationary costs.

Speaker Change: That sprung from Covid, the COVID-19 years with over the past four or five years, we've had a lot of inflationary cost increases in labor costs down in Mexico.

Micah Young: And now that we're moving that manufacturing to Malaysia, that's going to give us good benefits not only in the labor cost reduction but also in improving efficiencies as we're seeing a much more stable workforce and lower turnover. We've had a lot of currency headwinds with the peso, although it's heading the right direction again, finally. But, you know, a much more stable currency situation there with Malaysia as well.

Speaker Change: And now that we're moving that manufacturing to Malaysia, that's going to give us good benefits not only on the labor cost reduction, but also improving efficiencies as we are seeing a much more stable workforce.

Micah Young: So that's giving us more confidence on top of all the cost reduction initiatives we've laid out. And the team is aggressively pursuing those product cost reductions that I just mentioned. The other thing to your question on revenue, revenue leverage is very important. I mean, to grow, let's say seven to 10% is what we're really going after to deliver, you know, that $8 EPS and double EPS in the next five years. Revenue leverage is important, and the innovation of this company is critical to drive and continue to drive revenue growth.

Micah Young: And we also, you know, are set up well with the contracting we're doing over the next several years. So, I think that's going to give us the leverage to leverage those fixed costs and gross margin, leverage our installed base, and then also leverage a lot of our fixed SG&A costs for the company as well as R&D. So, when we look out five years at 30 percent, our performance this year, seeing the growth on the top line and where the strength of the business is, we're getting a lot more confident towards achieving that 30% margin goal and $8 earnings per share. Thanks for the thorough answer.

Operator: Our next question comes from Michael Polark.

Michael Polark: Hey, good afternoon. Thank you so much.

Michael Polark: The health care driver base in the deck, I'm seeing the installed base is up 2% year on year. I'm also hearing about record contracting and a tick up in installation activity. Is it fair to say that as new accounts get onboarded, and you expect that 2% growth rate to reaccelerate here over the next year?

Micah Young: Yeah, I think we're gonna see a continued step up in driver shipments throughout the rest of this year, especially as we exit going into next year. I'd expect next year to be a strong year for driver shipments as we step up on the exit. The other thing is, you know, we only need.

Micah Young: We're replacing a lot of the existing drivers in our install base today. We've got about 2.6 million drivers that are out there. A lot of the shipments we're doing, half of those are replacing existing drivers because we've gotten to a significant market share already within pulse oximetry. So we really only need 50% of that kind of 60,000 plus run rate to be new drivers going out in the field, and that's what we're seeing.

Michael Polark: That's why we're starting to see it step back up because of the contracting we're doing. But our consumable revenue per driver is going to continue to expand. We're seeing this year, on a year-to-date basis, consumable revenue per driver is up 11%, 11% to 12%. And our installed base is up 2%. We're delivering about 14% growth in consumable revenue in the first half of the year. So that's coming off strong contracting, installations, and just the momentum that we're seeing in the business.

Micah Young: If I can ask a follow-up question, let's say your goal for core health care is to grow 10% round numbers at this level of scale and kind of market share. What would you hope is the mix between the kind of growth in the driver base versus growth in revenue per driver to get to 10%, say next year or beyond?

Michael Polark: Yeah, I think it's probably somewhere around four to five percent maybe on driver or install based growth, and the other four, you know, call it three to five percent coming from our consumable revenue per driver.

Michael Polark: Yep, okay. If I can ask then the last one on Apple, can we just get an update on the Apple litigation, where it stands, and what milestones might be upcoming? Thank you so much. Certainly. Yeah, we have.

Joseph Kiani: Probably two or three trials left. There's a litigation we brought against them in the federal court for patent theft and trade secret theft, and those two, we were hoping to have them be in one, but it might get broken into two pieces. Right now, we're looking at a schedule in November to have the trade secret trial and then later the patent trial. I'm still hoping they'll get combined, but we'll see.

Speaker Change: Two or three trials are left.

Speaker Change: There is a.

Speaker Change: Litigation, we brought against them and the federal Court for patent theft, and trade secret theft and does too.

Speaker Change: We were hoping to have them being one but it might get broken in two pieces right. Now we're looking at are scheduled in November to have the trade secret trial and then later the patent trial Im still hoping they'll get combined we'll.

Speaker Change: We'll see.

Joseph Kiani: Then Apple brought litigation against us in Delaware, and the first part of it should go to trial in late October, and then our part, where we brought patent and antitrust cases against them. That should go to trial, hopefully, next year. If we win a trade secret and patent case that's remaining even in federal court here in California, we should be able to broaden our injunction, not just limited to SPO2, but to photoplethysmography, which will include pulse rate and other related parameters to photoplethysmography, as well as, hopefully, with the trade secret lawsuit, broaden the injunction beyond the U.S.

Speaker Change: Then Apple brought in litigation against Us in Delaware and that first part of it should go to trial late October.

Speaker Change: And then our part where we brought patent and antitrust.

Speaker Change: Against that should go to trial hopefully next year.

Speaker Change: If we win a trade secret and patent case, that's remaining even in federal court here in California, who should be able to broaden our injunction.

Speaker Change: Not just limited to <unk>, but to follow up with <unk>, which will include pulse freight and other related parameters to photo such as maga fee as well as hopefully with the trade secret lawsuit broadened injunction beyond the U S.

Joseph Kiani: So that's where we are. There is some activity at Customs and Border where Apple has gone back to try to basically get around the ITC's injunction. We should hear back soon on that. We're hoping Customs and Border will not give them what they're asking for. But if they do, we'll have to go back to the ITC to make it clear what the injunction was supposed to be about. So that's where we are. I think we probably have another two to three years left, and we should be done.

Speaker Change: So that's where we're at there is some activity at customs and border, where Apple has gone back to try to.

Operator: Our next question comes from Mike Matson.

Speaker Change: Basically get around to Itc's injunction.

Speaker Change: We should hear back soon on that one.

Speaker Change: Hoping customs and border will not.

Michael Matson: First, just on the guidance, given what you did in the second quarter and where you're guiding for the third quarter, you can kind of back into what it means for the fourth quarter for revenue and EPS growth. And, you know, it seems like that's really where the raise is effectively falling, both for revenue and for EPS, at least relative to where the consensus was for the third quarter. So, you know, the fourth quarter looks kind of aggressive to me and, you know, assuming the third quarter comes in in line with the guidance.

Michael Matson: So I don't know if you had any comments there. I know Micah, you did say something about gross margins maybe being, expecting them to be, higher in the fourth quarter, so maybe that explains part of it.

Micah Young: Yeah, absolutely. So a couple things there.

Micah Young: So if you look at kind of our guidance now versus our prior guidance, you know, top line, we're increasing $25 million for health care at the midpoint. And it's really distributed that increase pretty evenly between Q3 and Q4 in terms of percentage increase. If you look at Q3, the midpoint is around just a little over 10% for Q3 growth, and we're about 9% growth in Q4. And so I don't view it as more risky in that Q4 guide.

Micah Young: I feel like we've put a reasonable range around that for the fourth quarter. If you look at our earnings per share, we're up about 20 cents at the midpoint. And we do have a little bit more coming from the fourth quarter. Some of that is because we're seeing a better tax rate in the fourth quarter and full year as well. So that's driving some of the earnings there. But gross margin improvement from last year was up about 110 basis points in Q3 and Q4 for the consolidated business.

Micah Young: Q4 is 90 basis points. So, I think we're, you know, when I look at the guidance, you can see an increase pretty consistently between Q3 and Q4. The only difference there would be more the tax rate benefit that we're seeing and expecting for the fourth quarter.

Michael Matson: Okay, got it. And then, you know, just looking at it next year, and I know you're not getting guidance, but one of the things I think that has helped your growth margin this year, in addition to Malaysia, is this mixed shift where you've had more, you know, sensor growth, and your boards and capital have been, boards and capital have been down. So I would imagine that that kind of reverses next year. So could that be sort of a material headwind to growth margin in 25 if that does play out that way?

Micah Young: Yeah, Mike, I don't expect that to be a big headwind. I think we do believe that the capital environment is going to stabilize rather than being down double digits like it was this year, especially with our, you know, drivers starting to pick up, and they're stepping back up from the low point we saw in Q1. But we still expect very strong growth and consumable revenue. So, any of the headwinds that would be on mix, we're trying to offset that with cost reduction projects that we're working on with taking costs out of products as well as the full year benefit of the Malaysia transition.

Micah Young: So there's going to be some put and takes in there, but we still feel very good that we'll be on track to that cadence of margin expansion going into next year. We also don't have the year over year headwinds of performance-based comp like we did this year. This year, if you look at our operating margins, we are actually flat year over year. We're at 15.3 percent guidance this year versus last year.

Micah Young: We landed at 15.3 percent operating margin despite about 400 basis points of headwinds and performance-based comp. So that headwind will no longer be there, and we should get back onto a good margin expansion cadence going into 2025. Okay, got it. Thank you.

Operator: Our next question comes from Jayson Bedford.

Jayson Bedford: Good afternoon. Thanks for taking the questions. Maybe just a couple. Micah, maybe just to an earlier line of questioning on drivers, and I may have misheard it, but of the 59,000 drivers you sold this quarter, are you implying that half of them were new, meaning not replacing legacy drivers?

Micah Young: Yeah, so to grow our top line, half of those drivers are our new incremental drivers, and that's what's required to grow that top line. Somewhere between 25 to 30,000 drivers is what we need to deliver the top line growth that we're seeing this year. So that's The rest of it is literally replacing our existing installed base due to the size we are in the market today.

Jayson Bedford: Okay. Have you seen any on the capital side, any changes in ordering patterns from OEMs? I know that's been a little sluggish.

Micah Young: The question was ordering patterns from OEMs. Correct

Micah Young: Yeah, so the OEMs last year, as we talked about before, they had excess inventory. And they've, we feel like they burnt through a lot of that down in Q1, which was a trough of our driver shipments. There Q2 is stepping up, and we believe that we'll be back up above the 60,000 a quarter in the back half of the year, and we think that we should see that back in the normal ordering pattern, either by Q4 or early or Q1 of next year.

Speaker Change: Okay, and just last one for me just in terms of the potential separation and just disclosure around that August 15 date.

Jayson Bedford: And just last one for me, just in terms of the potential separation and just disclosure around that August 15 date, should we expect a public announcement either way around that August 15 date? Well, um...

Speaker Change: We expect the public announcement, either way in and around that August 15th.

Speaker Change: Okay.

Speaker Change: Well.

Joseph Kiani: The August 15th is the time we've given them exclusivity; whether or not they will have something final that the board can approve or not, it could come before or after. So, there's really no magic date about August 15th except that... you would think, if they want to do something, it would come before then, or they would ask for another extension. So, I don't know if we'll have an announcement or not. We'll have to see.

Speaker Change: The August 15th.

Speaker Change: Time, we've given them the exclusivity whether or not they will have something final the board can approve or not could come before or after.

Speaker Change: So there's really no magic date about August 15 to accept that.

Speaker Change: You would think if they want to do something it would comes before then or they would ask for another extension so.

Speaker Change: I don't know if we'll have an announcement or not we'll have to see.

Speaker Change: Okay. Thank you.

Speaker Change: Thank you.

Operator: Our next question comes from Vik Chopra. Alright, thank you for taking my question. You previously noted that your guidance assumes 0 to 1% inpatient growth. I know you mentioned a couple comments that some public hospitals have made. What are you now expecting in terms of

Nick Chopper: Our next question comes from Nick Chopper.

Nick Chopper: Alright. Thank you for taking my question you.

Nick Chopper: You previously noted that your guidance assumes zero and 1% inpatient growth I know you mentioned a couple of comments that some public hospitals.

Nick Chopper: What are you now expecting in your guidance for 2024.

Vikramjeet Chopra: Yeah, great question. So right now, we're somewhere around two and a half to 4% implied in the guidance for the year. And, you know, that's pretty consistent with what we're hearing out there in the market. With what we're seeing, you know, with reported admission growth and expectations that are laid out for the year. And, and that's implied in the back in Q3 and Q4 as well.

Speaker Change: Yeah, Great question, So right now we're somewhere around 2.5% to 4% is implied in the guidance for the year and.

Nick Chopper: That's pretty consistent with what we're hearing out there in the market.

Nick Chopper: With what we're seeing with reported admission growth and expectations that are laid out for the year and.

Nick Chopper: And thats implied in the back in Q3 and Q4 as well.

Nick Chopper: Yeah.

Speaker Change: Got it alright, thanks, guys.

Micah Young: I don't know. I think I've forgotten. I'm sorry.

Speaker Change: DIY is unpredictable.

Vikramjeet Chopra: Unpredictability. Just a follow-up from me. On the guidance, what gets you to the low versus the high end of your needs? Well, a lot of it is really driven by census. We've already kind of modeled in the, you know, new hospital conversions. We're layering those in also with the timing of installations through the rest of the year.

Speaker Change: Just a follow up from me.

Speaker Change: On the guidance what gets you to the low versus the high end.

Nick Chopper: Yeah.

Nick Chopper: Yeah.

Speaker Change: So a lot of it is really driven by by Sensus, we've already kind of modeled in the new.

Nick Chopper: Spittle conversions, we're layering those in.

Nick Chopper: Also with the timing of installations through the rest of the year.

Micah Young: So a lot of it is really dependent on the inpatient census growth and inpatient surgeries. We've seen positive trends in inpatient surgeries. I think those were up about three percent, which is what one of the large public hospitals quoted this past quarter, whereas actually outpatient was down, I think, a couple of points. So, I think trends are going in our favor. But I'd say it's really around the inpatient, the spread on our expectations for the inpatient census capital.

Nick Chopper: So a lot of it is really dependent around the inpatient census growth in patient surgeries.

Speaker Change: We've seen positive trends on inpatient surgeries I think those were up about 3% is what one of the large public hospitals quoted this past quarter, whereas actually outpatient was down I think a couple of points. So so I think trends are going in our favor.

Nick Chopper: But I'd say, it's really around the <unk> and pes the spread on the our expectations on inpatient census.

Micah Young: We've pretty much, you know, we've seen a drop in capital year over year. I think it's down. Down close to, on the full year, we're expecting it down close to 15% with consumables up around 14-15%. So that's kind of where what's implied in the guidance range is.

Nick Chopper: Capital, we've pretty much we've seen a drop in capital year over year I think it's down.

Nick Chopper: Down close to on the full year, we're expecting you're down close to 15% with consumables up around 14%, 15%. So.

Nick Chopper: So that's kind of where what's implied in the guidance range.

Nick Chopper: Okay.

Nick Chopper: Okay.

Nick Chopper: Okay.

Operator: I think we have time for one more question.

Speaker Change: I think we have time for one more question.

Operator: Great. Next question, please. Yes.

Speaker Change: Operator next question please.

Operator: Yes, and the next question comes from Matt Taylor.

Nick Chopper: Yes, and the next question comes from Matt Taylor.

Matthew Taylor: Hi guys, thanks for taking the question. I did want to ask you about the estimates of the separation that you put in this presentation versus the prior one, so really, two clarification questions. Firstly, the difference in profitability with and without consumer health, is that really just spending on some of the projects in consumer health in the new presentation? And then Micah, I was hoping you could provide any other comments to help us bridge from the prior representation to the new one. If there were any other assumptions that were different, or obviously, some of the core assumptions have changed, but just wanted to get your take on that.

Speaker Change: Yeah.

Matt Taylor: Hey, guys. Thanks for taking my question.

Matt Taylor: I did want to ask you about the estimates of the separation that you put in this presentation.

Speaker Change: First as the prior ones that really two clarification questions.

Speaker Change: Firstly is the difference between the profitability with and without consumer health is that really just spending on some of the projects in consumer health in the new presentation, and then Mike I was hoping you could provide any other comments to help us bridge from the prior representation.

Speaker Change: The new one.

Mike: If there are any other assumptions that were different or obviously some of the core assumptions have changed but just wanted to get your take on that.

Micah Young: Yeah, it's pretty consistent with what we showed. I mean, we're focused more around the midpoint. I think that's where we're kind of dialing in. Previously, we were putting some ranges around it, but our best estimate we wanted to show to simplify the reconciliation between the two scenarios.

Mike: Yes, it's pretty consistent with what we showed I mean, we're focused more around the midpoint I think thats where were kind of dialing in previously where we're putting some ranges around it but our best estimate we wanted to show to simplify the.

Speaker Change: The reconciliation between the two scenarios, we wanted to simplify that so we're expecting about $37 million of adjustments. If you were to separate out the consumer health. In addition to the audio business, that's about 260 basis points improvement to get us to about 24% at the midpoint.

Matthew Taylor: So we're expecting about 37 million in adjustments if you were to separate out consumer health in addition to the audio business. That's about 260 base points of improvement to get us to about 24% at the midpoint for professional healthcare, which is kind of where we expect to land. And that's where we've been showing a lot of the when we showed our long-range plan, we were jumping off of that midpoint. So everything's pretty much in line there.

Speaker Change: For professional health care, which is kind of where we expect to land and that's why we have been showing a lot of the.

Mike: When we showed our long range plan, we were jumping off of that midpoint. So everything is pretty much in line. There if you're looking at $37 million, we have reduced some costs for consumer health spend this year.

Matthew Taylor: If you look at the 37 million, we have reduced some costs for consumer health spend this year to drive some margin improvement there. But that assumes the cost of goods sold or R&D expenses, selling and marketing expenses, and certain other corporate overhead expenses into that number of the 37 million that we carve out as an operating loss. So that's pretty consistent with prior, what we showed previously, just a few tweaks there on the operating expenses for the year, but it's still getting us to the right endpoint of 24% margins for professional healthcare.

Mike: Two to drive some margin improvement there but.

Speaker Change: That assumes.

Mike: Cost of goods sold our R&D expenses, selling and marketing expenses and certain other corporate overhead expenses into that number.

Speaker Change: Of the 37 million that we had.

Mike: Carve out is as an operating loss so.

Mike: So thats pretty consistent with prior what we showed previously.

Mike: Just a few tweaks there on the operating expenses for the year, but it's still getting us to the right endpoint of 24% margins for professional health care.

Micah Young: Okay, is there any change in tax or below the line to get to these new numbers, or is that all consistent?

Mike: Okay, and just sorry.

Speaker Change: Is there any change in tax are below the line to get to these new numbers or does that all consistent.

Mike: No.

Speaker Change: Nothing really.

Speaker Change: Below the line other than the guidance range in there.

Speaker Change: Raise the other thing would be as we're seeing closer to a 25% tax rate as opposed to 26% and.

Mike: I think that we have an opportunity to continue to see a tax rate there going forward for the professional health care business before we were showing about 26%.

Mike: So that would give us an upside or more confidence to achieve that $8 per share.

Mike: In five years.

Matthew Taylor: And maybe I could just ask, you seem very keen on this plan with the JV versus just separating the consumer, sorry, separating the audio business. Could you articulate more about why you like that plan so much better, seemingly?

Mike: Right.

Speaker Change: Maybe I could just ask you seem very keen on.

Mike: This plan with the JV versus just separating consumer.

Speaker Change: Sorry, separating the Io business.

Speaker Change: Could you articulate more about why you like that playing so much better seemingly.

Speaker Change: What do you think that does for you strategically or financially, but you wouldn't get with just.

Speaker Change: Separating audio.

Joseph Kiani: Well, I think we, one, would get a lot more cash than we probably could get for the audit business alone. But also, two, we would get an upside into the future that we had envisioned. While we understand that, in the short term, the consumer health business is hurting our EPS, boosted by the investment we're making in it, we believe long term, it

Speaker Change: Well I think.

Speaker Change: One would get a lot more cash than we probably could get for the audio business alone.

Speaker Change: But also too we would get an upside into the future that we had envisioned while we understand the short term the.

Mike: The consumer health business.

Mike: It's hurting our EPS due to the investment we're making in it we believe long term.

Mike: It has the potential of becoming really successful that's why to us.

Mike: We acquired southern United because we thought we needed that consumer group to sell the freedom watch to sell our hearing aid and <unk>.

Speaker Change: <unk>.

Speaker Change: If we don't have that team.

Speaker Change: Going to be very tough to really make a success out of the wearables and the <unk> from a health care company in and Ken Unfortunately add risk to the health care business because it focuses the team that's delivering on the health care business to also try to do something for the consumer health business.

Matthew Taylor: Got it. Okay. Thank you, guys.

Speaker Change: Got it okay. Thank you guys.

Speaker Change: Thank you so much everyone. We appreciate you joining us today, we look forward to reporting our Q3 numbers.

Speaker Change: And wish you.

Speaker Change: Great and then your summer thank you.

Speaker Change: Okay.

Speaker Change: Meetings now concluded you may now disconnect.

Speaker Change: Okay.

Speaker Change: