Masimo Corporation

COO Bilal Mohsen 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 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. 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. 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 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. 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. At the onset, I want to stress how impressed I have been by the team at Massimo. Over the past month, 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. We have a lot to cover today, so let's jump right in. I'm going to touch on a number of governance, strategic, and corporate updates. Then Michael will dive into the financials and cover some near-term plans and areas of priority, specifically around our margin improvement initiatives. We will then turn to Q&A, and Bilal will join us to answer your questions. 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. First, let me provide an update on the strategic review of the consumer business. 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. 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. 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. At a high level, we will be focusing on fewer projects and therefore concentrating on those big market opportunities addressing clear unmet needs. 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. However, let me be clear, as we refocus Massimo to capitalize on the long-term growth opportunities in front of us, 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. Finally, regarding leadership, In terms of the board, as you recently saw, we have expanded to eight directors 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. Tim and Wendy have hit the ground running and we are excited about what they bring to the boardroom. Let me also provide a brief update on the CEO succession process. As you know, Joe Chiani was not reelected 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. 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. 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. 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. 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. For the third quarter, our healthcare revenues were $343 million, which is near the top end of our guidance range, and represented 12% growth versus last year. We saw strong growth in our consumable and service revenues, partially offset by a decline in capital, equipment, and other related products. Driver shipments for the third quarter were approximately 61,000 and were in line with our expectations. 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. 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. Now moving down the P&L. For the third quarter, our consolidated non-GAAP gross margin was 54%, which included gross margins of 62.9% for healthcare and 34.6% for non-healthcare. 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. in combination with increased operational efficiencies and a favorable impact related to a higher proportion of our sales coming from consumables. For our consolidated business, non-GAAP operating profit was $81 million, representing 23% growth versus last year. Our operating margin of 16% improved 230 basis points year over year and rose 130 basis points sequentially from the second quarter. 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. We continue to make meaningful progress on our margin improvement initiatives, which I will discuss in more detail in a moment. Even with the return of performance-based compensation, we delivered 31% EPS growth to reach non-GAAP earnings per share of 98 cents for the third quarter, which was primarily driven by strong performance from our healthcare business and effective expense management across the organization. Now I'd like to provide an update on our 2024 financial guidance. For the fourth quarter of 2024, we are projecting consolidated revenue of $581 million to $611 million in non-GAAP earnings per share of $1.35 to $1.50. For the healthcare segment, we are projecting revenue of $363 million to $373 million, representing 7% to 10% revenue growth. For driver shipments, we expect to ship 60,000 to 65,000 drivers in the fourth quarter. For the non-healthcare segment, we are projecting revenues of $218 million to $238 million. Now turning to our full year 2024 financial guidance. We're now projecting a consolidated revenue range of $2,075,000,000 to $2,105,000,000. For our healthcare segment, we are now projecting revenues of $1,390,000,000 to $1,400,000,000, representing 9% to 10% revenue growth for the year, in line with our prior guidance midpoints. 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. For the full year, we're projecting consolidated non-GAAP gross margin of 53%, which includes healthcare gross margins of 62.7% and non-healthcare gross margins of 33.7%. 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. Finally, we are now projecting a consolidated non-GAAP EPS range of $3.95 to $4.10, which represents an increase of 13 cents at the midpoint versus the prior guidance range due to strong performance from our healthcare business, and effective expense management across the organization, partially offset by the reduction in non-healthcare revenue. 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. We are enthusiastic about the opportunities we see to enhance revenue growth while continuing to expand margins. The management team, in partnership with a 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. While our foremost focus is on innovation-driven growth, we are also happy to see our margins expand as we right-size corporate overhead costs, 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. 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. For context, on our August Q2 earnings call, we detailed for investors a 24% EBIT margin profile for our healthcare business. As we look forward to 2025 and take into consideration the actions identified today, we expect this margin to be at least 26% 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. We will continue to update the market on the work of the management team in partnership with the Board's Business Review Committee. We expect to provide the next update in January 2025. With regard to our strategic review process, the Board has not made a final determination of the manner in which the consumer business will be separated. 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. 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. 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. 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. 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, which have reached $1.65 billion as of the end of the third quarter. I'm excited about the strength we are seeing in our core healthcare business, and when you combine that with our ongoing initiatives to separate the consumer business and improve operating margins, 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. With that, we'll open the call to questions. Operator?