Masimo Corporation

Hello, everyone. Joining me today are CEO Katie Zyman and CFO Micah Young. Before we begin, I'd like to inform you that this call will contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in our periodic filings with the SEC. 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 or adjusted 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. It is important to note that the Sound United business is now being classified as held for sale and reported in discontinued operations. As a result, our non-GAAP financial measures have been updated to reflect the continuing operations of Massimo's healthcare business for both current and historical reporting periods. 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, earnings presentation, 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. I'll now pass the call to Katie Ziman.

Thank you, Eli, and good afternoon, everyone. For the second quarter, our core healthcare business delivered strong growth in earnings performance. Revenue was $370 million, and we achieved earnings per share of $1.33 with 600 basis points of operating margin expansion. This exceptional performance reflects the continuation of the effective cost structure actions taken last year and is the result of hard work and strong execution across the entire organization. I have spoken repeatedly about the incredible talent and innovation we have at Massimo. Building on that foundation, we've undertaken a thoughtful effort to expand our leadership team in key focus areas. First, we added the role of chief commercial officer with Greg Meehan. Greg brings over 25 years of experience building and optimizing commercial organizations in the medical technology industry where he delivered double digit growth and improved profit margins by building high performance teams. Second, we added a president of the Japan and Asia Pacific region, Dr. Cayman Wang. Cayman is an anesthesiologist and business development leader with over 30 years of experience overseeing growth-oriented sales and marketing organizations in the region. Next, we have a new Chief Marketing and Strategy Officer, Tim Benner. Tim has an impressive track record of overseeing the launch and commercialization of transformational therapies such as MitraClip, TAVR, and AI-based platforms for market-leading companies. Tim joined us from Minari Medical, where he led global sales, global marketing, and market access across the company's category-leading portfolio. We also added an Executive Vice President of Quality and Regulatory, Lynette Torres. Lynette brings over 20 years of deep expertise in shaping global quality and regulatory compliance strategies, and most recently led these efforts at Integra Life Sciences. Lastly, we have a new Chief Information Technology Officer, Giri Chaudhary. Hoda Virapu. Giri is an IT expert with a proven track record of driving large-scale digital transformations and developing tech-enabled products to support business growth and enhance enterprise cybersecurity. These hirings follow the earlier addition of our Chief Human Resource Officer, Lisa Hellman, who led Human Resources at Hologic, a leading women's medical technology company. All of these leaders share a deep commitment to the patient experience and each of them is highly qualified to help us drive our next chapter of growth and innovation. It's a testament to the exceptional talent we already have, as well as our leading industry position, that we have been able to attract such skills and dynamic additions to our team. With this new structure, we now have the key pillars in place to augment commercial and operating excellence to execute our growth strategy. The prior responsibilities of our Chief Operating Officer have been redistributed across other roles, including the elevation of our engineering operations team leaders to my executive staff. Omar Ahmed has been promoted to chief technology and innovation officer. Anand Sampath has been elevated to my staff as the executive vice president of operations. We do not anticipate further substantial additions to leadership aside from the eventual appointment of a permanent general counsel. Now let me turn to our strategic and financial goals and what we are doing to achieve them. As we have stated, we are focused on investing in our core healthcare business to achieve our goals and accelerate our long-term revenue growth. I'm excited about the opportunities we have to accomplish this goal, and we'd like to briefly recap our growth strategy. As I've mentioned before, we are focused on three waves of growth, elevating commercial excellence, accelerating intelligent monitoring, and innovating wearable technologies. First, I'd like to address our focus on elevating commercial excellence globally. As I mentioned, we've added key leaders to bring a strong focus on commercial execution, including our new chief commercial officer, our new leader in Japan and Asia Pacific, and our chief marketing and strategy officer. These leaders are dedicated to driving growth across our portfolio. As described on our last earnings call, we strategically aligned our U.S. sales force, moving from specialty teams centralized by product category to regionally led groups within our pulse oximetry infrastructure. We believe we have the best pulse oximetry sales force in the industry, and we want to leverage the strength of that team to pull through other categories and increase our market position across all categories long term. Looking at categories such as capnography, brain monitoring, hemodynamics, and automation, those markets are worth somewhere between $1 and $2 billion, and in aggregate are growing by high single digits. Today, our market share is less than 20% in each of those segments. The sales team alignment allows us to increase the sales representation in each U.S. region such that each region now has a dedicated representative for each of the specialties, which in turn should help us capture more pull-through because we ideally would have the same large market share in those areas as we do in pulse oximetry. In summary, we are leveraging our leadership position in pulse oximetry to broaden our impact on patients and to broaden our market presence across other advanced monitoring categories. Our goal is to achieve growth in those adjacent markets of 10 to 20%. Now let's turn to our second wave of growth, accelerating the adoption of intelligent monitoring. In this area, we are working to upgrade our sensors and create next-gen monitors featuring advanced AI-based algorithms. We expect this will help us to continue to grow our market share while creating greater value as customers pay for the innovation we deliver. In the past, our team developed incredibly advanced algorithms for the consumer market, and we are now redeploying those innovations into sensors for use in hospitals. One example is our ability to detect cardiac dysfunction such as atrial fibrillation using just a pulse oximetry sensor. This will enable the detection of patients who are in distress earlier and it will allow clinicians to take remedial action very quickly. Our third wave of growth will come from innovating wearables longer term. We continue to evaluate our significant opportunities to change the way patients are monitored around the world. We have a strong portfolio of wearable technology and telemonitoring solutions that we are piloting today. There are numerous unmet patient needs that we are well positioned to address, and we have strong capabilities and momentum behind us to do so through further innovation of our wearable technologies and solutions. This third wave of innovation will expand our long-term growth potential. In recent months, I've visited our employees and customers around the world. So far, I've visited customers, regional offices, and our major manufacturing locations across the United States, Saudi Arabia, Mexicali, Japan, Korea, and Malaysia. In fact, I don't know where I wasn't this last quarter. In total, I've met more than 90% of our incredible team. I've been impressed by their passion for Massimo and the patience we serve, as well as their creativity and commitment to innovation. This commitment is what will drive our continued growth, and I have great confidence in the team's ability to execute on our strategic growth priorities. Just a few words on tariffs. Our operations and finance teams have worked relentlessly to reduce our exposure to new tariffs by implementing highly effective mitigation measures. I'm very proud of our team and want to highlight that their efforts have played a big part in our ability to guide to a tariff impact that is more than 50% less than our original estimate. Michael will expand on this more and provide updated guidance, but I do want to highlight that our updated EPS guidance now exceeds our original projections provided at the beginning of the year, before the tariff situation had even started. Despite the impact of tariffs, We are projecting 24 to 30% EPS growth this year. I'd really like to thank our entire global team for delivering another excellent quarter. Our products and technologies continue to impact millions of patients around the world. I am honored to be a part of this team. With that, I'll turn it over to Micah.

Thank you, Katie, and good afternoon, everyone. I want to begin by expressing how proud I am of our global team for their outstanding efforts this quarter. They successfully managed the challenges of the cybersecurity event, implemented measures that reduced our tariff burden by more than 50%, and continued to deliver strong results, with revenue meeting expectations and EPS growing by 46%. For the second quarter, healthcare revenue was $370 million, up 7.4% on a constant currency basis. Our consumable and service revenue grew 8.4%, and our capital equipment and other revenue declined 2%. As I mentioned earlier this year, we're observing a transition from capital lease to operating lease accounting under ASC 842. This shift created more than a 1% point headwind for our total revenue growth and is the reason for the decrease in capital and other revenue. Notably, revenues are on track to reach our full year guidance as we are seeing more normal seasonality this year compared to last. We also shipped 63,100 technology boards and monitors this quarter, which is within our expected range. Moving down to P&L, our gross margin of 62.9% improved 40 basis points year-over-year, driven by 90 basis points of operational improvement, partially offset by 50 basis points of tariff impact. Tariffs increased cost of sales by 2 million this quarter, which is in line with our expectations. Our operating margin of 27.5% improved 600 basis points year over year, driven by 650 basis points of operational improvement, partially offset by 50 basis points of share of impact. The cost structure optimization measures implemented in 2024 are clearly delivering margin benefits. Our non-GAAP earnings per share was $1.33, representing 46% growth versus the prior year. In addition to our improved operating margin, we realized a lower tax rate in the quarter as we are seeing greater profits from outside of the US, which carry a lower tax rate. Operating cash flow for the healthcare business was 62 million, which allowed us to repay 38 million in debt and repurchase 14 million worth of common stock. Now moving to our updated fiscal 2025 financial guidance. We are projecting revenue of 1,505,000,000 to 1,535,000,000, which reflects 8% to 11% growth on a constant currency basis. Excluding the impact of new tariffs, our updated guidance implies operating margins of 28.3% to 28.7%, reflecting a year-over-year improvement of 460 to 500 basis points. Further, our updated guidance excluding tariffs implies earnings per share of $5.45, to $5.70, reflecting year-over-year growth of 30% to 36%. Including the impact of new tariffs, we are updating our guidance for operating margins to be in the range of 27% to 27.5%, representing an increase of 130 basis points at the midpoint versus prior guidance. This is being driven by 25 basis points of operational improvement and 105 basis points of tariff expense reduction versus our prior assumption. Further, we are updating our guidance for earnings per share, including tariffs to be in the range of $5.20 to $5.45, representing an increase of 35 cents at the midpoint versus prior guidance. This is driven by 12 cents of operational improvement and 23 cents of tariff expense reduction. Our updated guidance now incorporates 17 to 19 million of tariffs that have impact on new tariffs compared to our prior guidance of 33 to 37 million. This represents a 17 million reduction in tariffs at the midpoint versus prior guidance with over 60% of the reduction coming from our intensive efforts to mitigate the impact. Breaking down our updated guidance range assumptions for tariffs, Products manufactured in Mexico and not currently eligible for USMCA exemption now represent 2% of our total cost of sales, and we are assuming a 30% tariff rate. Products manufactured in Malaysia that are subject to US tariffs now represent 18% of our total cost of sales, and we are assuming a 19% tariff rate. Patient tables sourced in China represent 4% of our total cost of sales, and we are assuming a 59% tariff rate, which combines the new tariff rate of 34% with the pre-existing Section 301 tariff rate of 25%. And we are now including the potential impact of new tariffs on copper. Copper raw materials represent up to 4% of our total cost of sales, and we are assuming a tariff rate of 50%. Although this is still a very fluid situation with all the changes in tariff rates and assumptions, it's important to note that a majority of the improvements in tariff is being driven by our mitigation actions. These actions involve adjustments to our supply chain, as well as an intensive administrative effort to qualify our products for exemption, including those under USMCA. I'd like to take a moment to thank our operations and finance teams for their hard work implementing these mitigation plans. As shown in our earnings presentation material today, we've already executed a variety of actions that are contributing to more than a 50% reduction in the gross tariff impact we have estimated last quarter. We don't view our mitigation efforts as fully complete, and we have already identified additional medium-term mitigation measures to reduce the tariff burden even further over time. Moving on to the cybersecurity-related incident, reported last quarter, In the second quarter, we incurred net expenses of approximately $4.5 million to recover and fortify our systems with the help from a team of outside experts. These expenses are excluded from our non-GAAP results as they are non-recurring in nature and expected to be recovered through our insurance policy. Finally, the divestiture of Sound United announced last quarter remains on track to close by the end of the year. subject to obtaining necessary regulatory clearance. Regarding use of proceeds, we anticipate share purchase will be our priority, as we believe it will be more creative at our current share price. Looking ahead, capital deployment strategies might involve a mix of share buybacks, debt reduction, and tuck-in acquisition, the technologies that enhance our in-hospital monitoring capabilities. And as a reminder, Our 2025 financial guidance does not reflect any benefit from the use of proceeds from the sale of 79. In closing, our second quarter results clearly highlight the exceptional earnings power of our healthcare business. Notably, we have more than compensated for the impact of tariffs this year as our revised EPS guidance now exceeds our original projections coming into the year. Our global team has demonstrated consistent execution, successfully navigating challenges such as network outage and new tariffs while still delivering another outstanding quarter. With that, we'll open the call to questions. Operator.