Masimo Corporation

Hello, everyone. Joining me today are Chairman and CEO Joe Chiani 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 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. 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 methods, structure, timing, and terms of any such potential separation are still under consideration and have not been determined, approved, or finalized. Please refer to slides 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 the company's operating results in the same way management assesses such results. Management uses non-GAAP measures to budget, evaluate, and measure the company's performance and sees these results as an indicator of the company's ongoing business performance. The company believes that these non-GAAP financial measures increase transparency and better reflect the underlying financial performance of the business. 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 are included within the earnings release and supplementary financial information on our website. Investors should consider all of our statements today, together with our reports filed with the SEC, including our most recent form 10-K and 10-Q, in order to make informed investment decisions. In addition to the earnings release issued today, we have posted a quarterly earnings presentation within the investor relations section of our website to supplement the content we will be covering this afternoon. I'll now pass the call to Joe Keon.

Thank you so much, Eli. Good afternoon and thank you for joining us for Massimo's first quarter 2024 earnings call. For the quarter, we achieved results that show our businesses back on track. After a period of robust growth during COVID and the wake of volatility that followed, it seems the market has stabilized and we're once again able to forecast more accurately. Our healthcare revenues of $340 million were at the high end of our guidance range, driven by strong sensor orders in the US and Europe. We also had record contracting from hospital customers as for the first time ever, we achieved over $100 million in true incremental contract value in the first quarter, demonstrating continued gains in our market share. Our success in moving the bulk of our manufacturing ahead of schedule to Malaysia from Mexico has yielded improved gross margins. Given that over two-thirds of our sensor production is now in Malaysia as of the end of the first quarter, we see great opportunities ahead for further increases in profitability. We are increasing our guidance today for healthcare revenues and non-GAAP EPS based on our first quarter results, in combination with a more positive outlook for hospital census in 2024. As we announced a month and a half ago, we're working to separate consumer health care from professional health care on the behest of most of our shareholders. We have made significant progress on the proposed structures for separation, and Micah and I will share more details about this later in the call. With that, I'll pass it over to Micah to review our first quarter results in more detail and provide an update on our 2024 guidance.

Thank you, Joe, and good afternoon, everyone. For the first quarter, our consolidated revenue was $493 million. Healthcare revenues were $340 million, which were at the upper end of our guidance range and represented a 2% decline versus last year. These results were encouraging given the business faced its most difficult year-over-year comparison this quarter. In the second quarter, we expect those comparisons to start to normalize on a year-to-date basis and throughout the rest of this year, which is implied in our full-year guidance range of 6% to 9% revenue growth. On a constant currency basis, our consumable and service revenues grew 2%, partially offsetting a 21% reduction in capital equipment and other revenues versus the prior year period. The decline in capital is expected given the extra purchasing many hospitals did during COVID. Within consumables and service revenues, our set pulse oximetry consumables grew 2% due to a difficult comparison, but we expect growth to normalize throughout the remainder of this year. Our capnography disposables grew 27% and now comprise over half of the category. Additionally, brain monitoring sensors grew 17% as our SEDLINE and O3 products continued to gain market share. Offsetting this growth was an 11% decline in rainbow consumable revenues due to the timing of shipments outside the US. Most importantly, you can see evidence of our market share gains in our strong contracting with hospitals. As shown in our slides today, the value of incremental new contracts signed in the quarter has more than doubled over the past four years, yielding appreciable market share gains. This has contributed to 11% growth in our unrecognized contract revenues over the past 12 months. This consistent growth in our contracts demonstrates our decades-long experience and relationships with hospital systems and our success in continuing to win new customers from our competitors. And we expect these contracts to translate into a meaningful source of revenue growth this year and beyond. It is clear to us that over any meaningful period of time, we have gained tremendous market share. Non-healthcare revenues were $153 million, which was at the midpoint of our guidance range and represented a 29% decline on a constant currency basis versus the prior year. Like healthcare, this business also faced its most difficult year-over-year comparison this quarter. If you recall, our consumer business had a strong first quarter last year before macroeconomic conditions, including higher interest rates, began weighing heavily on consumer spending for luxury and premium products. While we expect comparisons to ease over the course of the year, market conditions remain challenging as we expected. Now moving down the P&L, for the first quarter of 2024, we reported consolidated non-GAAP gross margin of 52%, which included 62% gross margins in healthcare and 29% in non-healthcare. Notably, healthcare gross margins improved by 110 basis points sequentially and were 50 basis points above the high end of our guidance range. The healthcare margin improvement is attributable to the benefits of moving our sensor manufacturing to Malaysia combined with increased operational efficiencies and a favorable mix from consumables and service. For our consolidated business, non-GAAP operating profit was $68 million, and non-GAAP earnings per share was $0.77 to the first quarter. Moving to cash flow, we generated operating cash of $46 million in the first quarter, which helped to pay down $28 million of debt. Strong cash flow generation continues to be a key area of focus, and results have improved significantly. With the first quarter behind us, we have moved past the difficult comparisons for the healthcare business, and our guidance implies 7% to 8% revenue growth for the first half of the year, and 6% to 9% growth for the second half. Our continued strong hospital contracting and sizable increases in unrecognized contract revenue give us confidence in our outlook for revenue growth. Now I'd like to provide an update on our full year 2024 guidance. We are now projecting a consolidated revenue range of $2,055,000,000 to $2,165,000,000. For our healthcare segment, we are now projecting revenues of $1,355,000,000 to $1,385,000,000, which reflects an increase of $10 million for the low end of the range. Although hospital contracting is the most important leading indicator for market share gains and revenue growth, I'd like to address driver shipments for 2024. As I mentioned on last quarter's call, we think that the replacement cycles of existing equipment have slowed temporarily after the robust COVID demand and have hit a low point in the first quarter. However, we expect to see shipments increase to 55,000 or more in the second quarter, and returned to $60,000 or more in the third and fourth quarters of this year. For the non-healthcare segment, we are maintaining our projection for revenues of $700 million to $780 million. Based on our strong first quarter results and how inventory flows through the P&L, we expect to see gross margin further increase this year. Gross margin expansion is a critical focus area for us, as it is one of the most significant factors in generating earnings leverage. We're excited to announce that we have already transitioned a large portion of our sensor manufacturing to Malaysia and expect to realize increased efficiencies and lower production costs moving forward. As a result, we are increasing our healthcare gross margin guidance by approximately 60 basis points at the midpoint to reflect our progress on this important initiative. For fiscal 2024, we are projecting consolidated non-GAAP gross margin of 52%, which now reflects a 62.4% margin for our healthcare segment and a 32 to 33% margin for our non-healthcare segment. Due to our strong performance and improved outlook for healthcare revenues and gross margins, we are now projecting consolidated non-GAAP operating profit of $309 million to $324 million. Based on these assumptions, we are now projecting a non-GAAP EPS range of $3.54 to $3.70, which represents an increase of 10 cents from prior guidance at both ends of the range, highlighting our strong commitment to operating leverage and earnings growth. Now turning to our outlook for the second quarter, we are projecting consolidated revenue of 480 to 510 million, non-GAAP operating profit of 67 to 72 million, and non-GAAP earnings per share of 73 cents to 79 cents. Please reference the earnings presentation on our investor website for further details. In summary, the outlook for the healthcare business has improved, and we anticipate accelerating growth and expanding margins throughout the year. We have added many new customers to our large contract backlog, which should produce higher sensor volumes this year. Now I'd like to provide you with an update on the ongoing evaluation of options to separate our consumer business. The Massimo executive team is working diligently to gather information and assess the advantages and disadvantages of potential pathways for a separation. The conclusions will then be presented to the board for their ultimate decision. The options being considered among others are a spinoff of the consumer business in the form of a new stock issued to existing shareholders as a dividend or the sell of at least a majority stake in the consumer business to a third party. A key objective is that any separation would result in a full deconsolidation of the two businesses in our financial statements. Another key objective for the proposed structure is to give both businesses the appropriate capital structures and resources to achieve long-term success and maximize shareholder value. We provided a preliminary estimate of the financial impact of a separation on slide seven of our earnings presentation. Notably, Assuming a separation is completed as outlined, we estimate that healthcare non-GAAP operating margins would improve by 220 to 380 basis points to reach 23 to 25%. This would be a big step towards reaching our long-term goal of 30% operating margins for the healthcare business. Further, if a separation transaction results in cash proceeds to Massimo, we expect to use those proceeds to pay down debt and reduce interest expense. which currently amounts to $47 million in our guidance. The timetables for these two types of transactions are quite different. A spend to shareholders is likely to be more time-consuming and could take 12 months to complete. The sell of at least a majority stake in the consumer business could take four to six months following board approval, depending on receipt of required regulatory clearances. We're advancing the evaluation quickly but rigorously and expect to make significant progress over the next few months. We will provide investors with a more detailed update when the board makes a final decision. With that, I'll turn the call back to Joe.