Masimo Corporation (MASI) Earnings Call Transcript & Summary

Hello, and thank you for joining us. We appreciate you joining in for our second day of our virtual conference. Sorry that we're not in [ Snover dovetailing ] on the slope, so I thought I'd bring up the background here so we could all remember how beautiful it is there. But we are here today with Eli Kammerman from Masimo, and I am so pleased to be able to have some time with him to chat about what Masimo has been up to. I do want to note here that they do have a Q4 earnings call coming up pretty soon. So there may be some topics we can't discuss, and I'm sure Eli will tell me if I've stepped that around here. And just before we start the chat, I do want to urge investors to use the Q&A function on the webcast. If you have any questions you want to send to me, I will be sure to ask them.

But Eli, let's start right away by discussing the 2021 revenue guidance, $1.2 billion or so. That implies, by my math, at least about 5% year-over-year growth on a reported basis. Well, 3% or so after we think about Lidco and constant currency. So the question I've been getting is, after such a strong 2020 performance, what gives you confidence that Maximo can continue to grow the top line from here?

Okay. Sure. Thank you very much, Marie, for inviting Masimo to your conference this year. We're glad to participate in any way, shape or form. Even though we're not in the snow, just having a chance to participate in the forum is a very welcome occasion for us. Turning to the 2021 guidance, firstly, to put things in perspective, for 2020, Masimo's revenues grew by 22%. So there's no question we are facing a quite difficult comparison. The fact that we're guiding to growth this year, we see as a significant achievement. Our confidence to generate that growth is based on a number of items, including, firstly, a rebound in elective surgeries. As we move through the first half of the year, we believe that in the second half, we'll be back to a normal 100% volume elective surgery schedule. And this will have a positive impact on all of the different types of sensors that we sell for all the different parameters such as pulse oximetry, the rainbow sensor for total hemoglobin measurement during surgery, capnography, cerebral oximetry and, of course, brain function monitoring. In terms of outlook for shipments of our technology drivers to our OEM customers at a minimum for the first quarter because we get our confirmations in the first month of each quarter. And then we have continuing dialogue with our OEM customers, such as Philips, GE or Nihon Kohden getting insight into their forecast for the full year. We think we'll be back to that typical run rate of about 60,000 drivers per [Audio Gap] as hospitals refocus on an equipment replacement cycle this year rather than just expanding monitoring coverage last year due to COVID. We also see a ramp-up in sensor utilization in recently installed monitors. There's about a 6-month lag between the time that we ship a board to an OEM customer and the time that board gets out and starts consuming sensors. So the boards we shipped in the second half of 2020 [Audio Gap] first half of this year. Secondly, we're also looking forward to gaining traction once again for our hospital automation sales effort. Those system sales were put on pause due to the [Audio Gap] COVID. And now that we see COVID fading into the background, we think we'll have better hospital access to promote those enterprise-wide related suites to handle all of the information coming from all the devices around. Then finally, we urge investors to look at our 2-year stack rate up against the 2019 results. And if you calculate a CAGR out to the end of 2021, you'll see that it's 13% to 14% per year based on our guidance this year, which is pretty respectable.

That's great. That's great. And Eli, I hate to point this up, but it seems like we're getting a little bit of lag. I wonder if you could switch to phone audio, maybe have -- if you go over and click the microphone and hit switch to phone audio, and hit the call me button, you might get a little more smoothness. We're just dropping the last part of all of your sentences.

All right.

And we'll hold off just a second.

How is that coming through now?

That's a lot better. Is that -- how are you feeling? Does that sound, okay?

Yes. Coming through just fine.

Okay. All right, perfect. It's the new virtual world we're living in. So great. You pointed out a lot of the topics that I want to hit on through our discussion today. Maybe we'll take it one by one. The 60,000 ship boards and monitors, Masimo has been pointing to that as an expectation. You started to talk about why you thought that was the right number. It sounds like part of that comes from the insight you hear from our customers. Can you get into that in a little bit more detail for us, Eli?

Yes. What we see for board shipments is essentially a resumption of the replacement cycle. And that will provide positive comparisons in that specific type of activity. In 2020, we think the hospitals were more focused on getting more beds with monitors next to them. And they were putting that replacement cycle on hold. So we're looking at some mix comparisons as we move through the year. But based on our dialogue with the OEMs, we do have confidence that we'll be able to get back to trend line. Keep in mind that last year, our driver shipments for OEM customers and for Masimo brand monitors combined were 470,000. So just getting back to trend line is something that we see as a good achievement. And we're confident that the combination of equipment replacement as well as new hospital construction in developing areas, we'll get those driver shipments on track. Does that address the question?

Yes, it absolutely does. And I would say, I typically hear more sort of how do you get back to the 60,000 as opposed to as 60,000 too low, given how much -- how many systems sort of went into the field last year. So it's good to hear some of that insight into where that 60,000 comes from kind of getting back to that replacement cycle. As we think about 2021, and I know nobody has a precise answer here, but how is Masimo thinking about the cadence growth recovery throughout 2021? I guess asked another way, what's built into the $1.2 billion in terms of that guidance and the cadence that comes with it?

Yes. Sure. Firstly, from a macro perspective, we see elective surgery volumes standing at 90% to 95% of normal in the first half and then getting back to 100% in the second half. So that's one aspect of it. Then going into more detail, the comparisons for overall revenue growth vary by quarter. Generally speaking, they're somewhat tough when you compare the growth last year to our trend line growth of 9% to 11%. And the reason these comparisons are important is because their mix with regard to the contribution from hardware versus sensors. And so as the hardware comp flips to negative, we expect the soft -- the sensor comp to switch to positive. So there'll be an offset there. In the first quarter, overall growth was 17%, and there were similar growth for sensors, whereas equipment was essentially in line with trend line, meaning that 9% to 11% level. In the second quarter, overall growth was 30%, strongly boosted by hardware sales, meaning Masimo monitors and boards, but there was actually a year-over-year decline in sensor sales. So that's a very easy comparison for sensors in the second quarter. The third quarter overall growth was 20%, once again, strongly boosted by hardware, and there was a rebound for modest sensor growth in the third quarter. For the second and third quarter, the hardware growth was really, honestly, off the charts, at about 175% and 150% year-over-year. So there's no question we're going to see declines related to that. But as I mentioned, with sensors being the bulk of our business, and getting back to trend line or better, we think that, that will help to offset the hardware comparison. And then finally, in the fourth quarter, as we just put out in our pre-announcement, overall sales growth was 19%, again boosted by hardware with sensor growth essentially in line with the third quarter. So a relatively easier comp for sensor growth. So our take is that the tough comps are for equipment, but they're pretty easy for sensors. We think the recovery means a return to trend line growth for boards. And overall, we're confident in generating mid-single-digit growth for this year.

Okay. Yes, that makes a lot of sense. That's a lot of great color on sensors and sort of the growth we should expect there. But how should we think about utilization, given how much the installed base expanded? I guess asked another way, is there a way to kind of characterize what portion of the installed base is likely to keep being utilized?

Well, we expect the entire installed base to be utilized over the long term, and that's because when hospitals get new monitors, they keep them next to the beds that they were intended for. Now there is a difference in utilization between the critical care setting, which is our core market and the general floor setting, where we believe a lot of these extra monitors will wind up after hospitals reserving them for COVID patients this year, this past year. So as COVID fades into the distance, we expect the installed base to be fully utilized within the low acuity general floor setting mainly due to the strong evidence that supports continuous monitoring for post surgery opioid recipients. So those monitors will remain in place. They won't be put into storage closets or sold office surplus equipment. They'll be there on a contingency basis, if there is a patient who's getting IV morphine or IV [ sentinel ] or even oral opioids, those patients should be monitored. We've got great data supporting both the life-saving benefit of that as well as a cost saving benefit. And the sensor utilization will really depend on the protocols that hospitals adopt in terms of standardized procedures. We think about 60% of the 25 million surgeries per year are highly invasive, resulting in significant postoperative pain, and that yields an addressable patient population of [ $15 million ] for continuous monitoring that's really significant. And now that those monitors are out in the field, they should be put back into availability for the general populus in the hospital. And we think that the utilization will gradually ramp up with that availability.

Okay. You actually predicted my next question was going to be. I know Masimo has long talked about expanding into the general floor and some of these lower acuity areas of the hospital. Where do you think now -- and I know it's hard, it's a moving target, but where are we in that kind of journey or progress toward that?

Well, for the general floor, we started 2020 with about 10% monitoring coverage of the beds from all companies and all brands. We think that, that coverage has gone up very significantly with these significant purchases of monitors throughout last year and that we ended 2020 with a potential for 20% to 30% of beds to be covered by monitors. Now that raises the potential for the perception of a tipping point because it becomes much more obvious that some beds have monitors and others don't, which creates the perception of inequity in the health care that's available for patients. So consequently, we think that the coverage now has a much higher chance of becoming universal versus that potential at the beginning of last year. That 20% to 30% coverage is based on our assumption that the driver sales and the Masimo monitor sales we achieved last year were predominantly put into the field for contingency planning for an anticipated surge in COVID patients. Now that the reserve nature of those monitors is no longer necessary, they become available, and they all go to the general floor because there was already 100% coverage in the critical care area. Monitoring of the oxygen saturation and critical care, ICUs and ORs is a standard practice across all hospitals. So the monitors were there for that setting. And then obviously, they flow to the general floor setting where they have value for the types of patients I just mentioned.