Q3 2024 Masimo Corp Earnings Call
Speaker Change: Ladies and gentlemen, good afternoon and welcome to Massimo's third quarter 2024 earnings conference call.
The company's press release is available at www.masamo.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. And I'm pleased to introduce Eli Kammerman, Massimo's Vice President of Business Development and Investor Relations.
Eli Kammerman: Hello everyone. Joining me today are Interim CEO Michelle Brennan, COO Bilal Moussin, and Executive Vice President and Chief Financial Officer Micah Young.
Eli Kammerman: 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.
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 investors 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 the 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 methods, structure, timing, and terms of any such potential separation are still under consideration and have not been determined, approved, or finalized.
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.
Eli Kammerman: 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.
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.
Eli Kammerman: 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.
Eli Kammerman: Reconciliation of these measures to the most directly comparable gap 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.
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 Michelle Brennan.
Michelle Brennan: Thanks Eli and hello everyone and thank you for joining us today. I'm pleased to be with you for my first earnings call as interim CEO of Massimo.
Eli Kammerman: I strongly believe in the company's long-term growth potential, and the board and management team are focused on executing our plan to achieve continued growth by capitalizing on the many opportunities we see ahead for this business.
Eli Kammerman: At the onset, I want to stress how impressed I have been by the team at Massimo. Over the past month,
Eli Kammerman: I have had many interactions with employees who are energized by our path forward.
by our purpose of saving patients' lives and by our innovation-focused culture.
Notably, we have not seen any critical talent departure since the annual meeting, and in fact, have seen attrition rates decline. With such a strong team, there is no limit to what we can accomplish today and in the future.
Eli Kammerman: We have a lot to cover today, so let's jump right in.
Eli Kammerman: I'm going to touch on a number of governance, strategic, and corporate updates, then Micah will dive into the financials and cover some near-term plans and areas of priority, specifically around our margin improvement initiatives.
Eli Kammerman: We will then turn to Q&A and Bilal will join us to answer your questions.
Eli Kammerman: With all the significant items currently being considered by the board, we ask that you limit your questions during this quarterly earnings call to those focused on business and financial performance during the quarter.
Eli Kammerman: First, let me provide an update on the strategic review of the consumer business.
Eli Kammerman: As we previously announced, the board has engaged Centerview Partners and Morgan Stanley as our financial advisors and Sullivan and Cromwell as a legal advisor to evaluate strategic alternatives for our consumer business.
Eli Kammerman: We will provide updates to the market when appropriate, but we want to assure you that this process is fully underway, and we are focused on delivering the best outcomes for our shareholders.
Eli Kammerman: Next, our review of the product portfolio and R&D projects is ongoing, but the headline is that we have excellent opportunities for growth and are laser focused on ensuring we allocate resources to those areas that will drive the greatest return.
Eli Kammerman: At a high level, we will be focusing on fewer projects and therefore concentrating on those big market opportunities addressing clear, unmet needs.
Eli Kammerman: As part of this effort of refocusing the organization, we have also found areas to reduce spending that are not contributing to our long-term growth objectives.
Eli Kammerman: However, let me be clear, as we refocus Massimo to capitalize on the long-term growth opportunities in front of us,
Eli Kammerman: Improved margins will be the output of our efforts not the input. We are not going to make short-term cuts at the expense of long-term growth.
Eli Kammerman: Finally, regarding leadership.
Eli Kammerman: In terms of the board, as you recently saw, we have expanded to eight directors.
Eli Kammerman: and added Tim Scannell and Wendy Lane. Tim's background leading highly successful commercial organizations in med tech and Wendy's vast experience overseeing corporate governance and changes and serving in board leadership roles will both be highly additive as we refocus the organization.
Eli Kammerman: Tim and Wendy have hit the ground running, and we are excited about what they bring to the boardroom.
Eli Kammerman: Let me also provide a brief update on the CEO succession process.
Eli Kammerman: As you know, Joe Kiani was not re-elected to the board at the annual meeting and is no longer CEO. Given the various related matters described in our 8Ks and 10Q, including litigation, we are not going to comment further on this matter.
Eli Kammerman: I've been very clear that my intention is to guide the company through this initial transition period until a permanent CEO is found, and then continue to focus on contributing as a member of the board for the long term.
Eli Kammerman: I'm not going to commit to the exact timing of the search process, but I can say that getting a permanent CEO in place is a top priority for the board. We have Korn Ferry assisting us, and the board is already meeting with excellent candidates.
Eli Kammerman: We will do everything we can on our end to keep our foot on the gas during this process. Well, of course, ensuring that the candidate we ultimately select is the absolute best choice for the organization.
Eli Kammerman: And now I'll turn the floor over to Micah to dive into the financials for the quarter. Thank you, Michelle, and good afternoon, everyone.
Micah Young: For the third quarter, our health care revenues were $343 million, which is near the top end of our guidance range, and represented 12% growth versus last year.
Eli Kammerman: We saw strong growth in our consumable and service revenues, partially offset by a decline in capital, equipment, and other related products.
Eli Kammerman: Driver shipments for the third quarter were approximately 61,000 and were in line with our expectations.
Eli Kammerman: Non-healthcare revenues were $161 million, which was near the low end of our guidance range and represented a 6% decline versus the prior year.
Eli Kammerman: 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.
Eli Kammerman: Now moving down the P&L.
Eli Kammerman: For the third quarter, our consolidated non-GAAP gross margin was 54%, which included gross margins of 62.9% for health care and 34.6% for non-health care.
Eli Kammerman: Healthcare gross margin improved 260 basis points year-over-year and rose 40 basis points sequentially as we continue to benefit from the relocation of our sensor manufacturing to Malaysia.
Eli Kammerman: In combination with increased operational efficiencies and a favorable impact related to a higher proportion of our cells coming from consumables.
Eli Kammerman: For a consolidated business, non-GAAP operating profit was $81 million, representing 23% growth versus last year.
Eli Kammerman: Our operating margin of 16% improved 230 basis points year-over-year and rose 130 basis points sequentially from the second quarter.
Eli Kammerman: This represents a very strong result, considering that we overcame 480 basis points of year-over-year expense headwinds due to the return of performance-based compensation to normal levels in 2024.
Eli Kammerman: We continue to make meaningful progress on our margin improvement initiatives, which I will discuss in more detail in a moment.
Eli Kammerman: Even with the return of performance-based compensation, we delivered 31% EPS growth to reach non-GAAP earnings per share of $0.98 for the third quarter, which was primarily driven by strong performance from our healthcare business and effective expense management across the organization.
Eli Kammerman: Now, I'd like to provide an update on our 2024 financial guidance.
Eli Kammerman: For the fourth quarter 2024, we are projecting consolidated revenue of $581 million to $611 million.
Eli Kammerman: and non-GAAP earnings per share of $1.35 to $1.50.
Eli Kammerman: For the health care segment, we are projecting revenue of $363 million to $373 million, representing 7 to 10 percent revenue growth.
Eli Kammerman: For driver shipments, we expect to ship 60,000 to 65,000 drivers in the fourth quarter.
Eli Kammerman: For the non-healthcare segment, we are projecting revenues of $218 million to $238 million.
Eli Kammerman: Now turning to our full year 2024 financial guidance.
Eli Kammerman: We are now projecting a consolidated revenue range of $2,075,000,000 to $2,105,000,000
Eli Kammerman: For our healthcare segment, we are now projecting revenues of $1,390,000,000.
Eli Kammerman: to $1,400,000,000, representing 9-10% revenue growth for the year.
Eli Kammerman: in line with our prior guidance midpoint.
Eli Kammerman: For the non-healthcare segment, we are now projecting revenues of $685 million to $705 million, which represents a decrease of $20 million at the midpoint versus the prior guidance range.
Eli Kammerman: For the full year, we are projecting a consolidated non-GAAP gross margin of 53%, which includes healthcare gross margins of 62.7%, and non-healthcare gross margins of 33.7%.
Eli Kammerman: Further, we are projecting a consolidated non-GAAP operating margin range of 15.7% to 16%, which represents an increase of 50 basis points at the midpoint versus the prior guidance range.
Eli Kammerman: Finally, we are now projecting a consolidated non-GAP EPS range of $3.95 to $4.10.
Eli Kammerman: which represents an increase of 13 cents at the midpoint versus the prior guidance range due to strong performance from our health care business and effective expense management across the organization.
Eli Kammerman: partially offset by the reduction in non-healthcare revenue.
Speaker Change: Now, I'd like to expand on some of the important initiatives that Michelle had mentioned earlier, which we fully expect will strengthen Massimo's revenue growth and earnings power in 2025 and beyond.
Speaker Change: We are enthusiastic about the opportunities we see to enhance revenue growth while continuing to expand margins.
Eli Kammerman: The management team, in partnership with the new Business Review Committee of the Board, is in the process of focusing our R&D resources on those projects that will enhance our long-term growth profile. And we are excited about the work we have done to date.
Eli Kammerman: while our foremost focus is on innovation-driven growth.
Eli Kammerman: drive improved gross margin, reduce marketing expenses associated with products that do not show promise of generating meaningful revenue, and take other reasonable cost actions on items unrelated to our top-line growth, such as selling the corporate jet, among other things.
Eli Kammerman: It is still early and our work is ongoing, but as we look forward to 2025, we believe actions identified to date will deliver at least 200 basis points of additional operating margin while we continue to deliver on our long-term revenue growth expectations.
Eli Kammerman: For those of you trying to estimate our earnings potential, please note that we currently have $38 million per year in net interest expense, an approximately 26% effective tax rate, and roughly 55 million diluted shares outstanding.
Eli Kammerman: We will continue to update the market on the work of the management team in partnership with the Board's Business Review Committee.
Eli Kammerman: We expect to provide the next update in January 2025.
Eli Kammerman: With regard to our strategic review process,
Eli Kammerman: The board has not made a final determination of the manner in which the consumer business will be separated.
Eli Kammerman: If, among other things, the Board decides to no longer pursue a spinoff of this business into a publicly traded company, we anticipate treating the consumer business as a discontinued operation upon those decisions being finalized.
Eli Kammerman: Further, we would exclude the results for this segment from our non-GAAP earnings and no longer provide guidance for this segment if it still remains with the company into the first quarter of 2025.
Eli Kammerman: In closing, our ongoing focus on expanding our footprint with existing customers and winning new customers has built a solid foundation for growth in 2025.
Eli Kammerman: As shown in our slides today, the incremental value of new contracts this year now totals $318 million through the third quarter and is continuing to track ahead of last year, which itself was a record for the company.
Eli Kammerman: This clearly demonstrates Massimo's strong market share gains through contracting with our hospital customers and has contributed to a 15% increase in our unrecognized contract revenues.
Eli Kammerman: which have reached $1.65 billion as of the end of the third quarter.
Eli Kammerman: I'm excited about the strength we are seeing in our core health care business and when you combine that with our ongoing initiatives to separate the consumer business and improve operating margins.
Eli Kammerman: We have tremendous opportunity in front of us to achieve our goal of more than doubling our earnings per share within five years, and most importantly, increasing shareholder value.
Eli Kammerman: With that, we'll open the call to questions. Operator?
Speaker Change: Thank you and we will now begin the question and answer session. If you have dialed in and would like to ask a question please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question simply press star 1 a second time.
Eli Kammerman: If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Eli Kammerman: To be able to take as many questions as possible, we ask that you please limit yourself to one question and one follow-up.
Eli Kammerman: Again, it is star 1 if you would like to join the queue.
Speaker Change: And your first question comes from the line of Jason Bednar with Piper Sandler. Your line is open.
Jason Bednar: Good afternoon. Congrats on a nice quarter and great to hear about the stability in the business here.
Jason Bednar: Michelle, I wanted to start with some of your comments and Micah, feel free to weigh in as well.
Eli Kammerman: and the press release regarding the actions that have already been taken to focus spending on just fewer projects and focus on those with the greatest return. Really appreciate the insight you also gave on 25 operating margin for healthcare. But just to clarify, you know, that 26% floor that it seems like we now have in place,
Eli Kammerman: Does that reflect spending reductions that have taken place up to today, or does it contemplate additional actions?
Eli Kammerman: that you still plan to take between now and over the next few months or whenever. And then one other point on this, just can you clarify out of that 200 basis points that we're seeing, is that mostly R&D and SG&A or do we have some gross margin lift in there as well? Because I believe that was part of the original plan.
Speaker Change: Jason, thank you very much for your question. You know the 26% contemplates the actions we're going to take between now and year-end, but I'm going to turn it over to Micah to answer the rest of your question.
Micah Young: Yeah, Jason, thanks for the question.
Micah Young: Yeah, the actions we've taken to date and we're going to be working through the end of the year through some of these cost initiatives as well as operating margin improvement initiatives
Micah Young: Those we expect that's going to drive our health care margins for 25 to 26 at least 26 percent and
Eli Kammerman: You know, that's just based on some of the actions we've taken to date.
Micah Young: You know, we're working through a lot of things to really refocus resources in the organization, reallocate those resources to drive our top-line growth, and really focus on the projects that are going to deliver the best return.
Micah Young: We feel good about the actions we've taken so far, and we think that those actions will have minimal impact on the top line. And I mentioned a lot of the things that are really contributing to that, in terms of corporate overhead costs and rightsizing those.
Micah Young: driving improved gross margins, reducing marketing expenses associated with
Eli Kammerman: products that just aren't driving meaningful revenue and meaningful returns and then we have other cost actions that we mentioned as well, so
Micah Young: Those things are well contained and we're being very deliberate and intentional about where we where we target those And just making sure that we preserve the top-line growth and set us up for profitable growth moving forward
Speaker Change: Really helpful. Thanks for that.
Speaker Change: Maybe I'll just ask one here on on the CEO search process. Understand we're not necessarily talking about timing, but maybe help us out what, you know, what's being looked for at the board level for that next CEO. Are we talking, you know, a med tech industry veteran, a growth focused individual or operations focused individual? So just would love to hear what you're prioritizing in the search. This is understandably a very attractive seat and also an important one for the board to fill.
Speaker Change: So we are, first of all, looking at both internal and external candidates. We are looking for a medtech background. We would like to have a balance of operational as well as technical or experience in refreshing pipelines.
Speaker Change: We want to make sure that the FIT is really good with the culture that is here at Massimo because we have a very strong culture of innovation focused
Micah Young: and a family type of atmosphere so we want to make sure that the new CEO will come in and hit the ground running and really is the right person for the long term.
Speaker Change: Okay. Thanks, Michelle.
Michelle Brennan: You're welcome.
Speaker Change: And your next question comes from the line of Marie Thibault with BTIG. Your line is open.
Marie Thibault: Hi. Good evening. Thanks for taking the questions. A nice quarter. Michelle, glad to be working with you.
Marie Thibault: and Bilal Azalkut to talk to you. I wanted to ask a question here on Malaysia and growth margin, just sort of a status update on where we are in realizing some of those benefits. I know a lot of the volume has already flowed to the Malaysia facility. What portion of the growth margin uplift would you say we've seen and sort of the timing of how we might continue to see some of that benefit rollout?
Speaker Change: Thank you.
Speaker Change: Yeah, thank you, Marie. So right now we're seeing very good improvement this year. I mean, if you look at coming into this year, I think our margins last year for health care were 60.9 percent.
Speaker Change: We've now ratcheted that up and stepped that up over, I think, two or three guidance raises.
Speaker Change: We're now up to 62.7% is what we're guiding to this year.
Speaker Change: and I think we came into the year, you know, we're up about 70 to 80 basis points at least from where we came in guiding of the year. So we're seeing good traction in Malaysia. We are, of course, as you know, moving our high volume manufacturing for sensors over to Malaysia and out of Mexico.
Speaker Change: that's giving us great
Speaker Change: Savings in terms of the comparison of cost structure between those two locations
Speaker Change: We are seeing very good manufacturing efficiencies that are starting to flow through inventory and into our margins. In fact, our Q4 margins are, you know, implied around 63%. So, you know, we delivered 62.9 this quarter.
Speaker Change: and we're tracking very very well as we as we move into 2025 and we expect those margins to continue to expand as we become more efficient with that workforce and continue to move some more production over into Malaysia.
Speaker Change: Okay that's really helpful Micah. My follow-up here then just sort of a headline overview of
Speaker Change: The health care environment in general, you know, in the past you've given us some color on hospital census, OEM activity, ordering activity, maybe any early thoughts on flu season as well as we think about Q4, Q1. Thank you.
Micah Young: Yeah, so in terms of census, you know, I think we've talked about implied in our guidance last quarter was kind of that, you know, somewhere between two and a half to four percent.
Speaker Change: in terms of census contribution, in terms of growth.
Speaker Change: You know, that's, we're still seeing it very stable, and it's, since it has been stable, we're probably
Speaker Change: now with what we saw the result in Q3 and what we're expecting for the year, we're still in that zone. So, you know, it's been very stable, very strong.
Speaker Change: ordering patterns are much better than they had been in the past, and the business is back to kind of where we can predict it much better than in the past few years. So, you know, we're happy with where things are and it's giving us confidence in our guidance for the fourth quarter and as we move into next year.
Speaker Change: And then, Marie, this is Bilal. One thing to add related to flu season, it's probably too early to predict that at this point, but like Micah said, everything we've anticipated so far has held steady for us.
Speaker Change: Okay, very good. Thank you.
Speaker Change: And your next question comes from the line of Michael Pollark with Wolf Research. Your line is open.
Michael Pollark: Hey, good afternoon. Thank you. I'm wondering if you might be willing to share a product or two or three that the organization is de-emphasizing here, just to put a little more meat on the bone around how you're perceiving these opportunities as you review the broader portfolio and look to drive efficiencies?
Speaker Change: Thank you very much.
Speaker Change: Yeah, so there are a few products that we've de-emphasized. One of them is Opioid Halo.
Speaker Change: If you guys remember, we made a push for monitoring patients on opioids.
Speaker Change: at home.
Speaker Change: as well as Bridge, which was a therapeutic device for patients or people on opioids that wanted to reduce the pain of removing opioids, basically, or coming off opioids. So both of those products are examples that we've reduced from our current portfolio.
Speaker Change: You know, Michael, I would also add is we had some feasibility studies that were being done on non-invasive monitoring of cancer, bilirubin, and diabetes, and we really have
Speaker Change: felt like we had not made the progress we would expect to bring those products to market, so we have also discontinued those.
Michael Pollark: Okay, thank you.
Speaker Change: And Mike, can I just add to that too, you know, in terms of opioid, I want to be clear though, opioid halo, we are still, you know, we still have products that we're using in that area that are going to be focused in the hospital.
Speaker Change: So I want to make sure that's clear that
Speaker Change: Those products will still be very, very important for the business as we're in the hospital. It's just, as we think about the remote monitoring, especially of illicit users, those types of things.
Speaker Change: That's where we think it's a much more challenging pathway. It's a road to reimbursement. Some of those things that we really want to get more efficient on and not focus on in terms of the long term right now. The direct to consumer market. Yes.
Speaker Change: Thank you.
Speaker Change: Thank you. As a follow-up topic, I want to ask on Apple, my understanding is this trade secrets trial is starting here again, or the retrial is this week, I believe. Maybe for Michelle, just curious, kind of the...
Speaker Change: How does the board view this investment, this pursuit? Any comments on what you've learned about this opportunity as the team has dug in? Thank you.
Speaker Change: You're welcome. Well, you know, as an innovation leader, we are going to definitely defend our patents. And I don't think that's new news to anyone. What I would like to do is turn it over to Bilal, who is very active with this litigation, to really comment on where we are.
Bilal: Thanks, Michelle. Yeah, the California trial for theft of trade secret did start. It actually started today. It's a bench trial, so we're not going to be able to predict the timing of it. And we don't have any further updates at this time.
Speaker Change: Thank you.
Speaker Change: And your next question comes from the line of Rick Wise with Stiefel. Your line is open.
Rick Wise: Thank you. Good afternoon, everybody.
Rick Wise: I guess I've observed that it's been four or five quarters now of better than expected healthcare sales performance driver shipments.
Rick Wise: backlog growth. The business does seem in strong shape, you know, as we move toward 25. You gave us a couple of hints about, or thoughts, early thoughts, Micah, about
Speaker Change: the potential for further operating margin expansion. Help us.
Speaker Change: reflect on the sales outlook and some of the key drivers.
Speaker Change: Some of the things that you're feeling positive about, maybe if there's something you're concerned about, so that we can see the, you know, we can start to anticipate, you know, just early on as we build our models.
Speaker Change: how we should start to be thinking about the 25-year from a revenue point of view.
Speaker Change: I think if you really frame up revenue, the way I look at it is...
Speaker Change: Number one, all of our product platforms, we're very confident in.
Speaker Change: you know, starting with Set. And we've kind of given a long-term plan range of 7% to 10% growth. We've broadened it a little bit more, just because we are growing off a much larger base, so high single-digit, you know, to 10% growth.
Speaker Change: But if you look at SET, you know, we expect SET to kind of perform, you know, continue to perform in that range of, you know, long term that kind of that six to eight percent rainbow double digit growth.
Speaker Change: So those are the key categories we've laid out, but some of the things that I'm really excited about, and I know Bilal is as well, and even, you know, as we talk with the board, I mean, we're...
Speaker Change: We're very excited about the opportunity with Rainbow and Hemodynamics, combining the capabilities of total hemoglobin, continuous hemoglobin measurements with cardiac output that we acquired from Lidco, or when we acquired Lidco. You know, bringing that platform together. That's another new product platform that we're very excited about, that we're rolling out.
Speaker Change: The last one, or another one, another example is ORI, as we start to launch that as well in the in the US market now that we have 510k clearance.
Speaker Change: and we've always had that outside the U.S. but now we're really...
Speaker Change: Now that we have the de novo clearance, we're able to really launch that in the U.S.
Speaker Change: Anything else you want to add, Bilal? Yeah, I mean, we're going to continue to expand our platform. One of them that's exciting is also the RADIUS VSM.
Speaker Change: That's our new wearable vital signs monitor designed for the general care floor. And this product, including the Litco product that Micah mentioned, our hemodynamics platform, we're just starting the phases of launch throughout this year and next year, so it should be exciting for us.
Speaker Change: That's great, and just as a follow-up, Micah, you've been kind enough in many calls past to talk about
Speaker Change: what might push numbers toward the lower or the higher end of the various ranges you've contemplated.
Speaker Change: maybe talk specifically about
Speaker Change: for example, of drivers, it seems like a wide range for the fourth quarter. Is there something...
Speaker Change: that would get you unique, that would get you more toward that 65,000 range, or...
Speaker Change: and, again, just talk us through the near-term outlook.
Speaker Change: some of the various moving pieces. Thank you for the responses.
Speaker Change: Yeah, thank you. Thank you, Rick. You know, what we can control, Rick, is more the direct placement of our drivers in terms of Massimo-branded drivers, and that's, you know, that represents...
Speaker Change: 20, 25% of our total drivers that we ship around that zone.
Speaker Change: The rest is OEMs, so it's all really dependent on OEM ordering. But we feel good about that range for Q4, and we think that that's going to be kind of a steady quarterly range as we move into next year.
Speaker Change: and hopefully that will continue to climb. But we don't want to get ahead of ourselves there. We want to be thoughtful, just because we don't control the other portion of that. And a lot of that is dependent on...
Speaker Change: You know, how OEMs are managing their own inventory levels, those types of things. We've seen that as a challenge in the past and we want to be thoughtful of that.
Speaker Change: as we move forward, but we feel very good.
Speaker Change: about getting the new drivers we need to deliver the growth, which is really coming from all the record contracting we've seen over the past few years.
Speaker Change: And this year, as I mentioned in my prepared remarks, is
Speaker Change: You know, we're already tracking at $318 million for this year, and we're hoping to be north of that $400 million watermark, which is...
Speaker Change: an important level for us to really drive that growth year in, year out. So I think feeling very good about that, our unrecognized contract revenues are up 15% due to that strong contracting. We're set up very well as we move into 2025.
Speaker Change: Thanks so much. You're welcome.
Speaker Change: And your next question comes from the line of Matt Taylor with Jeffries. Your line is open.
Matt Taylor: Thank you for taking the question. I guess my first question on the margin progression, I know you talked about the 26% from the actions you've taken,
Matt Taylor: and in the LRP update that we had earlier this year, you talked about getting back to a cadence of about 100 basis points a year kind of over that plan. So I guess beyond the 26, is that the right cadence to think about or do you think you could do better than that?
Speaker Change: I think as you look at the 26% for next year and then move past that, I think we would expect, you know, to at least do 100 basis points.
Matt Taylor: If not better. So, you know, getting back into that type of cadence, but, you know, we're really taking a hard look at everything and making sure that we can optimize
Speaker Change: everywhere we can to not only you know this is not about just margin improvement but it's really refocusing the organization to deliver the growth over the long term and really focusing on those most important projects and I think we'll continue to see benefits
Speaker Change: play out as we move forward that could put us above that cadence.
Speaker Change: Yeah, I think it's important.
Speaker Change: I'm sorry, I just want to add, Matt, that I think it's important that we are making sure that going after those big opportunities sitting in our pipeline, fully resourcing those opportunities so we drive really strong growth, is just as important for our margin improvement as are some of the cost structure or cost initiatives we've talked about.
Speaker Change: Thank you. And just a follow-up on the components of revenue, thinking about the go-forward here. You had a really nice improvement in the revenue per driver this year. The install base was up a few percent, but that really stands out, the 13 percent growth in utilization. How would you think about those two pieces going forward?
Speaker Change: Yeah, I think, you know, we see revenue per driver and if you really dig deeper it's really revenue per bed and per patient and, you know, that's something I know Belal is laser focused on is really driving that, you know, in terms of how we think about the future and, you know, if you look at it, we're continuously, you know, not only up charging to
Speaker Change: you know, more differentiated technologies that carry, you know, higher premiums, but we're also
Speaker Change: continue to build out our connectivity platform and the way that we can monetize some advanced algorithms for decision support and those types of things as well as service revenue. So as we look forward into the future
Speaker Change: That revenue per driver is going to be more meaningful than just an install-based growth. And I think, you know, that's going to be something that we'll talk more and more about as we move forward. Bilal, do you want to add anything there? No, just like Micah said, the additional technologies we provide now, it's not just pulse oximetry, but you guys know it expands across our different platforms. So we're really looking at that closely to see.
Speaker Change: from each bed, how many of the platforms can apply on a per patient basis as we expand or after we land in terms of expanding within our install base.
Speaker Change: Thank you so much.
Speaker Change: You're welcome.
Speaker Change: And your next question comes from the line of Vic Chopra with Wells Fargo. Your line is open.
Vic Chopra: Hey, good afternoon and thanks for taking the questions. I'm bouncing around, so I apologize that this has already been asked. But maybe just on your updated guidance, you know, just talk about what gives you confidence in this new guidance range and what gets you to the top end versus the bottom end of your guidance, and I had a follow-up to this.
Speaker Change: Thank you.
Speaker Change: Yeah, thanks Vic.
Speaker Change: Yeah, I'd say right now, I mean, we're...
Speaker Change: You know, we have a lot of opportunities in front of us in terms of the health care business, you know We expect to see very good strength in
Speaker Change: for example, Rainbow, Platform, and Q4.
Speaker Change: and also in brain monitoring. We're expecting some good growth there. In terms of what puts us at the high or low end, I think it's all really just gonna be dependent on census at this point.
Speaker Change: You know, we feel good about the, of course, the range and the midpoint of the range is really reflective of
Speaker Change: the historical seasonality of the business, which, you know, puts about 26.5% of revenues in the fourth quarter, and that's kind of where our...
Speaker Change: and a guide is at the midpoint. So, it's really gonna be dependent on the census, you know, how that moves in Q4, if it's a strong flu season, some of those things can contribute to the higher end of that range. But we're excited about finishing the year strong. We think that
Speaker Change: By the end of the year, we're going to see very strong performance across all platforms that are in line with our growth targets, and that's going to set us up very well moving into next year.
Speaker Change: In terms of non-healthcare business, you know, that's...
Speaker Change: You know, consumer is a very difficult business to predict, but we we have lowered the range at the midpoint. And now that range really reflects the, you know, the historical seasonality.
Speaker Change: We've, you know, de-risked some of the the headphone growth we had in there and some of the core growth
Speaker Change: And as we take a look at that, I mean, I think the midpoint of that guidance range is right there at 33%, which is our kind of the historical seasonality of that business. And if you look, I mean, that.
Speaker Change: the decline in that business that started last year has been moderating throughout this year and You know, we expect to see growth in the fourth quarter there
Speaker Change: Got it. Thank you for that comprehensive answer. And just, you know, as we look at our models for next year, maybe just talk about how you're thinking about the outlook for your end markets in 2025 and any potential headwinds or tailwinds for next year. Thank you.
Speaker Change: Yeah, thank you Vic. I'd say in the end markets, I mean, you know, we have a very, as you know, a very
Speaker Change: a strong business that's really...
Speaker Change: predicated around the install base, the large install base we have, but also our ability to generate revenue per driver and
Speaker Change: A large amount of our revenue is being contracted this year that's setting us up very well for growth in the next year.
Speaker Change: So, you know, with the strength we're seeing in contracting, we're feeling very good heading next year into that in-market for health care.
Speaker Change: And again, it's going to be dependent on how that fluctuates based on census. But but, you know, everything is pointing to a strong year moving into 2025.
Speaker Change: In terms of the consumer market, there's a lot going on there with elections and kind of how things will play out moving forward.
Speaker Change: a little bit more difficult to predict, but I think that business seems to be stabilizing more. And we do have a lot of new product introductions that are gonna be coming out in Q4 and Q1 that hopefully will return that business to growth.
Speaker Change: And your next question comes from the line of Mike Mattson with Needham. Your line is open.
Mike Mattson: Yeah, thanks. So just want to ask one on the Malaysian sensor production. So, you know, as we
Mike Mattson: get through the end of the year here, you know, how much of that is completed and to what degree that can continue to be a benefit to margins in 2025.
Mike Mattson: Thank you.
Speaker Change: Yeah, yeah, thank you for that question, Mike. If you look at kind of where we are, especially as we exit this year, majority of our high volume sensors will be manufactured in Malaysia as we exit. You know, we've made a lot of progress this year that's going to carry in some
Speaker Change: margin expansion in the next year.
Speaker Change: You know, if we look at
Speaker Change: All those things are going to give us good momentum in the next year.
Speaker Change: You know, it's still early. We have a lot of work to do to finalize the plans, but I would say, you know, if you look at our long-term plan, as we were trying to march towards 66 percent,
Speaker Change: We've already raised up towards 62.7% this year for the full year, and that implied previously about 350 basis points of margin expansion over the course of five years, so if you average that out, you're looking at about 70 basis points per year, and I think we're feeling very good about the 70, and hopefully we can maybe even improve that, but that's where we feel good about right now.
Speaker Change: Okay.
Speaker Change: Got it, and then just
Speaker Change: For next year, you're talking about the 200 basis points of operating margin improvement, and that it sounds like it's coming from these cost initiatives, but does that also include this kind of underlying improvement that you'd have in a normal year, just from leverage and other.
Speaker Change: and other efforts. So in other words, that 100 basis points a year you're talking about in kind of a normal year, is it included in that 200, or would that be on top of that 200?
Speaker Change: Yes, it's included. So we've incorporated the, you know, the gross margin expansion as well as some of the the cost improvement initiatives we've put in place and that's all incorporated into how we're thinking about the getting to at least 26% next year.
Speaker Change: Okay, got it. And then finally, just on the consumer...
Speaker Change: potential divestiture or separation? I know you had put some estimates out there previously. Are those still valid? And, you know, putting aside the interest expense, because that's always going to depend on how much you get for the business, sorry, interest expense savings, you know, would the divestiture be accretive or dilutive to Massimo's EPS?
Speaker Change: Yeah, I think, Mike, the reason we're kind of putting that out there is so you can really kind of model the healthcare business.
Speaker Change: because
Speaker Change: You know
Speaker Change: depending on what the the board finalized in terms of the decision
Speaker Change: We, as I mentioned in prepared remarks, we would most likely move that into discontinued operations. So I'd say, you know, really think about the 26% margins for the healthcare business. You know, model in the interest expense there and as well as the tax rate and also the share count. It'll give you a good estimate of what we're, kind of how we're thinking about 2025.
Speaker Change: Okay, got it. Thank you.
Speaker Change: And your next question comes from the line of Jason Bedford with Raymond James. Your line is open.
Jason Bedford: Thank you.
Jason Bedford: Thanks, and congrats on the progress here. I just have a few kind of follow-ups, a little random here, but just on the capital side, selling capital, it still seems a bit heavy from a growth perspective. Are you seeing any changes in the environment, and can I assume that most of this is still on the OEM side?
Speaker Change: Bye.
Speaker Change: Yeah, I believe most of that is on the OEM side, but when we're looking at our own capital, we're still seeing slowness in terms of capital purchases and hospitals, and we hope that starts to turn around for us next year.
Speaker Change: Yeah, Jason, we think that's been a headwind for us all this year, but we think it's stabilizing.
Speaker Change: were, you know, past the point of where we saw kind of a pullback in drivers that we were shipping to OEMs earlier this year, and that's been climbing sequentially as we move throughout this year, and it's going to set us up very well as we move into next year, so.
Speaker Change: What do you think the issue is? Meaning, hospitals seem flush with cash. I'm just kind of curious as to, and I assume it's not competitive.
Speaker Change: No, we don't believe it's competitive. We believe they've gone through a cycle.
Speaker Change: with the way they manage capital. And as they come out of that right now, I think they're being very selective in terms of where they're using their capital. They probably put on hold a few of the larger projects, think imaging and everything around that.
Speaker Change: So, I think they're prioritizing those before they come back and replenish or update their monitoring solutions. We should see that start coming back next year, but I think it's a prioritization based on where they were and where they are today.
Speaker Change: That's helpful. Thank you. On revenue per driver, I think one of the components after utilization is price. And so if you could talk about just price, have you been able to take price over the last year?
Speaker Change: Yeah, I'd say Jason price is stable to positive so you know we
Speaker Change: continue to, we have CPI clauses that are tied to the...
Speaker Change: the Medical or the Health Care Equipment Index and...
Speaker Change: and those are part of our contracts. We do increase for that each year.
Speaker Change: and you do get some modest price out of that, of course.
Speaker Change: You know, we're also subject to where a lot of customers are under GPO, the GPO contracting.
Speaker Change: So that gives you somewhat of a ceiling there over time, but we do see some prices stable to modest improvement each year.
Speaker Change: Okay, okay, and then just last for me, I feel like I have to ask it. Is there anything assumed in the fourth quarter guidance for disruption from hurricanes or IV solutions?
Speaker Change: Thank you.
Speaker Change: No, nothing's, you know, we're not, we don't have anything in there in terms of, we don't see any disruption in terms of with our business and revenue for the fourth quarter.
Speaker Change: Fair enough, thank you.
Speaker Change: Thank you.
Speaker Change: And ladies and gentlemen, this concludes today's conference call, and we thank you for your participation. You may now disconnect.