Masimo Corporation (MASI) Earnings Call Transcript

Hi, everyone. I'm Lilia Lozada. I'm on the med tech team here at JPMorgan, and I'm happy to have the Masimo management team with us here today. I'll pass things over to CFO, Micah Young, before we open things up for Q&A.

Thank you. Thank you, Lily. All right. I appreciate the opportunity to be here with you today. Thank you to the JPMorgan team for hosting us. Before I get started, I'm just going to go through some housekeeping here. This presentation will include forward-looking statements that involve risks and uncertainties as well as non-GAAP financial measures, which -- you can refer to those in our SEC filings as well as on our Investor Relations website. All right. So I'm going to start out with just a brief overview. For those who are not familiar with the Masimo story. We are a global leader -- global market leader in pulse oximetry as well as other highly differentiated medical technology solutions. We have -- we're guiding to about $2.3 billion to $2.4 billion of revenue in 2023. 61% of those revenues are from our healthcare business. 39% from the non-healthcare business, and I'll get into more of the breakdown of those businesses here shortly. We have over 8,000 employees worldwide, about 825 engineers behind the innovation power of this business. We are in nearly 200 countries worldwide. And we're going after markets that are collectively over $170 billion in total market cap. We really started out -- the company was founded back in 1989 by Joe Kiani and Mohamad Diab. And they set out to solve the unsolvable, with SET pulse oximetry, which is our signal extraction technology, and that's the leading pulse oximetry in the market today. We were able to get accuracy specifications -- the first accuracy specifications for those technologies back over 25 years ago with plus or minus 3%. We've continued to improve that over time and that's led us to be the industry leader. We've also came out with a lot of innovative technologies beyond pulse oximetry. Our core SET has about 5 different parameters. We've added another 7. You can get -- with 1 fingertip sensor now you can measure at least 12 parameters with some of the technology of rainbow that adds continuous hemoglobin measurements, which are really relevant in blood management programs for hospitals. We've also expanded beyond there. We've added our own monitoring devices, also service and solutions in the hospitals with advancing a pretty robust portfolio for hospital automation technologies, improving complex workflows in the hospital, trying to automate those workflows. We can now connect over 1,000 devices in the hospital from multiparameter monitors, infusion pumps, anesthesia machines, and that creates all the real-time data flow coming from those patients and from those sensors to where we can manage the status of those patients through the hospital, and move them and help our customers discharge them effectively into the home. We've also created by expanding off of our set capabilities, our pulse oximetry capabilities. That's been an expandable platform for us to where we can now take that and we put it in wearable form. We've gone to finger wireless -- wearable wireless fingertip sensors. We've also created our W1 watch, which is our first health watch, which we launched last year. That's mainly focused around telemonitoring. We will have a consumer version of that coming out. We're planning for the second half of this year. So I'm going to jump into -- if you look at our healthcare revenues, we're guiding -- we provided guidance for this year, and we're guiding to about 9% to 11% growth for health care for the next 5 years. Non-healthcare, we're guiding to mid-single-digit growth there. And that business is really going to help as we integrate the platforms between those 2 businesses, really help us to drive an acceleration into these new consumer health markets for us. We're well-positioned to create significant shareholder value over the next 5 to 10 years. It all starts with our innovation. We have a proven track record of innovation. We never stopped innovating at the company. We're always trying to find ways. We take a customer-driven approach. We look at the needs of our hospital customers where they need solutions in the hospital and how they need to improve patient outcomes, and we work our way back and engineer our products according to that. That's led to clinically-superior technologies with the highest degree of accuracy in the hospitals. And now we're moving that across the continuum of care in the hospital, but also moving that into the home. That's allowed us to provide a robust product portfolio and pipeline and professional health that addresses unmet needs of healthcare professionals and their patients. We're also scaling and integrating our integrated platform capabilities, we -- to capture the large consumer health markets that we're going into. And that was really enabled by the acquisition we completed last April in April of 2022 for the consumer technology business of Sound United. And last but not least, we built a very strong performance culture. We have a strong track record of execution financially, and we've set a foundation that should drive sustainable revenue and earnings growth over the long term. Now just kind of stepping back and looking at the reason we did the acquisition last year. We had been investing in consumer health technologies over the years. We've moved, like I said, move to more wearable platforms. We now have our first watch. We recently announced at the Investor Day just about a month ago that we are now coming out with a baby monitoring system, which I'll talk about here briefly, which we call STORK. And we're also moving more towards providing wearables such as fitness and sleep trackers and also a next-gen consumer version of the watch that will be able to measure blood oxygen saturation, pulse rate, respiration rate and some of those key health measurements. And now we have a breakthrough index of hydration. The reason we did this was we made a lot of the investments in the innovation. We had the products ready to go. But we saw a pretty heavy multiyear investment required to build out the consumer distribution channels. With the acquisition, we were -- we got immediate access to 20,000 points of retail distribution globally. We also brought on a team that had a direct-to-consumer marketing expertise, over 450 consumer and marketing -- sales and marketing staff globally, and that would have taken us years to build. We also have the ability to leverage over the brands for this new business, the Bowers & Wilkins, Marantz, Denon, Polk. These are premium brands -- premium luxury brands that are already moving into a big area, which is hearable as well, and we'll talk about that. It's a big market for us. That hearables market is about an $85 billion market. They've been growing that business pretty rapidly within -- but they're still very early -- but they've got some great products out there that have been recognized -- great reviews out in the consumer space. And that gives us the ability to leverage where we want to go into developing products in the hearable space, especially for hearing enhancement -- the bar has been lowered a bit to go over the counter with some of those hearing enhancement devices like hearing aids. And this gives us the form factor. It gives us the brand recognition -- we're going to -- we've got 2 great teams of engineers. We now -- as you can see here, we have an engineering power of over 825 engineers now that are great at signal processing that we can cross leverage those capabilities with theirs and audio with the consumer team with their experience in audio as well as the health care team with the experience with optical spectroscopy and bringing those types of things together. We can create a lot of great new products in the consumer health space. The other thing is we see -- the vision for us is that we see that consumers and patients. We can follow the patient not only through the hospital but into the home, but also back into the hospital. If you think about it, we see a time down the road where health data is going to be important to have your baseline with you at any point in time, whether or not you're able to interface with your clinician at home or you come back in and think about connecting back into our devices in the hospital with one of our wearable devices like the watch and being able to download that baseline data and use that. A lot of times you go in the hospital and the clinicians don't know your baseline, and it's very difficult to be able to diagnose and be able to treat the patients until you learn that baseline. So we're trying to close that loop all the way through to the consumers and back into the hospital. We did this at a reasonable value, 1x revenue, 8x EBITDA for the company is immediately accretive to earnings, and it provided significant upside options for us as we start to roll out a pretty robust pipeline of consumer health products. The next slide shows that we -- this gives us the opportunity to really expand our addressable markets. We have a $9 billion market force in the traditional hospital market. We're now adding the home audio, the premium luxury. That's about $6 billion, but where we are focused is going after the hearables market. That's an $85 billion market when you combine the $55 billion headphone and earbud market with the $30 billion hearing enhancement market. And then also wearables. The wearable technology, that market is over $50 billion in telemonitoring. Where we're going in that space, we've sized that as a $20 billion market. So this acquisition helps us to accelerate our efforts in those areas and really try to capture market share in each of those spaces and also do it where we can accelerate our ability to get to a profitable consumer health business much faster. Now I'm going to turn -- and back at Investor Day last month, we took a deep dive, and I encourage you to go out and listen to the webcast that's out there that all the leadership of Masimo and Joe Kiani, our CEO and Founder, you'll hear them talk about -- each of them talk about kind of going deep in a lot of these areas. But I'm just going to touch high level. I'll start with professional healthcare. Our core in professional healthcare, as I mentioned before, is our SET pulse oximetry. It represents about 79% of our revenues there. And that's growing 3% to 4% in the market. It's about a $3 billion market when you start to include the general floor expansion opportunity there as well. And we -- our guidance and our long-range targets are to grow at 2x that growth rate, 6% to 8%. Rainbow is about 10% of our revenues, and that involves parameter measurements such as total hemoglobin, continuous hemoglobin and carbon monoxide measurements, things that are important for EMS professionals as well. That's about 10% of our revenues. We believe when you look at helping hospitals manage those blood management programs and looking at high blood loss surgeries. We've sized that market about $2 billion and we plan to grow that business about 10%. The other -- our other advanced parameters, brain monitoring, which is SedLine and O3 those products as well as NomoLine Capnography and gas monitoring. We also have hospital automation product line, and we're entering into telehealth and telemonitoring. Each of those areas we expect to contribute another point -- percentage point to our long-range growth rate. If you look at the foundation of Masimo, it all started with Masimo SET technology, as I mentioned. And today, we're monitoring over 200 million patients with that technology. It's a core pulse oximetry technology in the top 9 out of 10 hospitals in the U.S., according to U.S. News & World Report. And we have over 100 clinical studies out there that show the outperformance of SET. And that's where we've really taken that platform and that's been the expandable platform for us. And we've been able to take that not only throughout the hospital, even to the general floor areas of the hospital step-down units, but now we're getting more into the home with telemonitoring and ultimately, like I said, with some of the consumer health products. We've not only been a noninvasive kind of measurement company. We've also developed our own patient monitoring devices. And you can see some of those here with some of the route devices. We've expanded into NomoLine Capnography beyond SET, rainbow, SedLine, LiDCO is an acquisition we did for cardiac output. That combined with some of our rainbow measurements, we can now measure oxygen delivery as well. We came out with another breakthrough measurement, which is sepsis index. We're continuing to innovate to where if you look at some of the -- for example, the Halo Index, we've talked about that in the past where -- we have algorithms that we take from measuring all these parameters that are coming off patients, and we can bring those together and develop advanced algorithms for decision support and be able to provide the status of that patient. And one of those statuses is really around sepsis. And that's been one of the leading causes of death in hospitals is sepsis. So that's something we're excited about. We just announced that about a month ago at our Investor Day. And we're continuing to advance more and more with those different algorithms as we help clinicians with that decision support. All right. Moving into -- now going from hospital to home. If you look at our vision for telemonitoring, we're trying to create a cloud-based ecosystem to where we're working with partners. We've got implementation models. We're piloting right now with large entities outside the U.S. as well as large institutions in the U.S. to develop pilot programs, and they're going through those right now. Those will be some good -- something to keep close to as we hopefully announce some of those partnerships and the fruits of that labor coming up here soon. But we're taking medical clinical grade wearables. Devices that are -- same things that are measuring you in the hospital, but in wearable form and being able to combine that with customizable pathways, clinical pathways, working with hospitals on their protocols on how they manage patients through long-term chronic disease type programs -- management programs. And we feel that everything is moving in that direction. Even during COVID, CMS came out with remote patient monitoring, where they reduce the duration. I think it was from 18 days to 2 days, and it opened up more opportunity for hospitals to implement these programs because they were really tied almost you had to be -- manage a patient through a long-term chronic disease as opposed to a short-term acute illness. So that really opened things up there. And also through CMS, they've allowed hospitals to where -- if they can put together the right set of criteria within the hospital and their programs that they can get full reimbursement under DRG code. So there's a lot of things moving in this direction of going more outside the hospital and continuing to follow the patients and provide better care management in the home. And we're well positioned. Like I said, we've got the wearable wireless sensor, Radius PPG that we can monitor those patients. It's a great protocol for patients who are post-surgical discharge. We have the watch -- the health watch now that could help with those patients who are on long-term chronic disease patients. So introducing the Masimo W1. We rolled this out last year. We're working through, like I said, pilot programs, but it's the first continuous accurate health monitoring, wearable device that can monitor pulse rate, blood oxygen, respiration rate and a new breakthrough as parameter as our hydration index. Hydration is not only important for athletes or fitness enthusiasts. It's also important for hospitals and how they manage patients. If you look at major calls for readmissions. It's hydration. People will get dizzy and come back into the hospital, especially if you look at ileostomy type procedures. So that's an important breakthrough index for us, and that's going to be continuous real-time directional feedback on hydration. We see a clear consumer need here. 1/3 of every American has at least 1 chronic disease or illness. And this is addressing a very large market even beyond just telemonitoring with the consumer health. This is a $50 billion -- over $50 billion market for wearables. So I think we're uniquely positioned there. And as I mentioned before, we're also planning to launch our Freedom Watch, which will be in the second half of next year or second half of this year, sorry. If you look going -- switching over to consumer health and audio, if you look at what we're doing here is we're trying to leverage, and I mentioned this before, is we're leveraging the shared platforms of the businesses. We now have over 800 engineers combined as a company, with the addition of nearly 400 from the Sound United acquisition, leveraging over 1,700 patents between the companies. And we -- most importantly, is we're getting ready to launch a lot of these new products. We're leveraging integrated framework around global brand and marketing framework that's going to allow us to accelerate the launches of some of these products. Of course, a lot of these products are going to be pending FDA 510(k) approval. But this positions us very well for when those products are ready to launch. We also are focused around continuing to build out connected software ecosystem in the homes. Beyond just Masimo SafetyNet where you can connect it through your phone. We're trying to create that connected ecosystem in the home environment. With the acquisition, we have now 3.4 million devices in the homes and we plan to turn on those devices later this year. That would be capable -- backing as health hubs. And this is an opportunity to really build an installed base there where we can start to go after and hopefully deploy some of our consumer health products into as well as telemonitoring. And the last one is the omnichannel go-to-market. We've acquired about 20,000 points of retail distribution partnerships in place that we can really deploy through each of those channels. One thing that was opening for us, and we didn't have the expertise in consumer health or even any area of consumer before we did the acquisition. We were starting to build that out, that expertise. We acquired that through the acquisition, and the team has done a great job of really segmenting the consumers here that we're going after, and we're trying to deploy a lot of these consumer health products into. And areas they're focused on is the vulnerable. So you'll see one of our upcoming launches will be the STORK baby monitoring system, which I'll talk about in a little bit. We're also focused on the aging population, the elderly, recovery, health and wellness and athletes. And they've really come in and segmented those and profile those customers to where we've got a great, very thorough marketing plans as we roll out each of these products. The first product is STORK. It's a baby monitoring system, leverages our highly accurate, clinically superior technology in the hospital, which is our SET pulse oximetry technology. It allows us to provide alarms and alerts, give parents a peace of mind, and it's a natural movement for us from the hospital to the home. If you look at what we've done with babies in the NICU, for example, or infants, we've not only improved screening of CCHD. We've also reduced retinopathy of prematurity in infants, which leads to blindness. And our technologies are -- it's an incredible expanding platform that enables us to go into a marketplace that we feel like there's an opportunity to really raise the standard. And this is an existing market today. And we think the potential for that market is about $1.5 billion market, growing double digits. And with 130 million babies born per year, this could be a big opportunity for us. The next one is the wearables market. And with wearables, we're looking to launch, as I mentioned before, the Freedom, the new smartwatch with all of our parameters and measurements, including hydration. That will be out in the second half of this year to be more consumer focused. It will have more connectivity, natural operating systems within a smart watch. And it can be used for telehealth, telemonitoring, but really going after the larger consumer market that we've sized here. We're also going to be launching some sleep and fitness bands as well that track a lot of those core parameters in the second half of this year. The last piece is really the premium and luxury home audio and hearables. We are working -- bringing the teams together to really advance and develop new hearable devices. We have advanced acoustic technology, which can personalize sound, customize it to your hearing profiles for playback and listening to music. What we want to do is continue to evolve and bring the teams together to develop the next generation of hearing enhancement devices. So that will be something that will roll out over the next couple of years. We are going to launch, though into the -- to more of the audio space with hearables with earbuds later this year with -- and branded under the Denon name, but it will leverage the Masimo adaptive acoustic technology. So that will launch sometime in the second half of this year. And then just turning and wrapping it up is our -- we've had a strong track record of top line and bottom line growth over the years, delivered over the last -- since we set out our last long-range plan in 2017, we've delivered 14% revenue growth, 23% earnings growth and about 520 basis points of operating margin expansion. And we've laid out a new long-range plan. It's on a much higher base of revenue, much higher base of earnings. But we're planning to grow our top line, 7% to 9% and leveraged earnings of 10% to 12% growth. And we have a lot of shots on goal for upside as we've only -- we haven't included a lot of those new technologies into those long-range plans yet. We've included some level of the STORK revenues as well as W1 for telemonitoring but a lot of those new consumer health products, which are going to be subject to 510(k) approval as well. Those would be upside shots on goal for the business. All right. With that, I'll turn it over to any questions.

Maybe I can start. I can kick things off with a few questions. So yesterday, it was announced that Apple was found to infringe on one of your pulse oximetry patents. So can you talk about what that means for you moving forward, both strategically and if there are any financial benefits to that win?

Yes. Let me give you some background of the ITC. So the ITC, the first state it's in really 3 phases. The first one is, yesterday, you heard the administrative law judge made an initial determination that they -- that Apple infringed on one of our patents and violated U.S. trade laws by selling product that infringed on that patent. That's a good initial step for us, of course, and it's positive. The next step would be is the commission. The International Trade Commission would -- will have time to review that. And I think the deadline -- or they've set an initial date of, I think it's May 10 is when the ITC, the commission would review as well, and they would make a decision on whether or not to exclude the Apple watches that are violating these U.S. trade laws from being able to be sold in the U.S. And then the third phase would be is if it's supported by the commission and they uphold that, it would move to the President for signature. So that's about a 60-day period. So that's where we're at there. But this is -- keep in mind, this is a 3 -- this kind of has 3 legs to it. It's not just the importation on the watch for the ITC, but it's also -- we are going through a trade secret case. The trade secret case -- the trial will be in late March with probably a verdict -- I'm guessing probably around early April is when we'd hear that. The patent infringement case is being stayed right now, and it's pending -- we've had to go through about 21 IPRs that were filed from Apple on our patents. We've had to work through those. We're in the state of appeals on those patents. And that process will take a lot longer. So that will probably be at least 2 to 3 years, if not longer, to settle or to get through that patent case.

Of the IPRs [ coming ] invalidated or what's the [indiscernible] of the IP.

Eli, do you have the number right now?

Yes. So in the neighborhood of about 18 to 19 out of the 21 working about it? Yes. And those are now going to be appealed through the court channel. So that's why [indiscernible] pathways extended.

You come on up.

So can you provide a little bit more color on the benefits of the Sound United acquisition from a strategic and financial perspective? And how did it compare to standing up the Consumer Health business on your own?

Yes. I mean we looked at a lot of different options. I mean, we looked at partnerships. We've evaluated partnerships. We evaluated a lot of companies in terms of acquisitions. We also evaluated building it out on our own. And we want to control our own destiny. We felt like this is too important of an initiative, and we have a lot higher goals and expectations than even we've provided in that long-range plan. And so that was important to us. One, to control our own destiny. That's where we felt that it was right to look at some potential company that we could acquire. We looked at a lot of companies. Some were just -- the financials didn't make sense. There's other areas that just wasn't a strategic fit for us. We like how a lot of those boxes check down the line for Sound United. And again, we weren't focused on audio. We were focused on what we could do together to deliver the best product in consumer health as well as they happen to be a great fit for hearables as well, and that's a big market that we're going after. And it would have been heavy multiyear investment, highly dilutive to earnings, and we didn't want to do that. And it just happened to be a company that had pretty good financial metrics, and they were immediately accretive to earnings. And it gave us a very scalable platform and something that we can drive a lot of synergies on over the next 5 to 10 years.

Great. So which upcoming new product launches are you most excited about? And how is Masimo positioning these products versus existing competitors in this market like Apple, Garmin, [ Outlet ], et cetera?

Yes. You want to go ahead?