Masimo Corporation (MASI) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the 43rd Annual JPMorgan Healthcare Conference. My name is Grace Cho, and I'm an associate on the JPMorgan Healthcare Investment Banking team. Our next presenting company is Masimo, and speaking on behalf of the company, we're pleased to have CEO, Michelle Brennan. With that, I'll pass it on to Michelle.

Good morning and thank you for joining us on the last day of JPMorgan. So I really appreciate it. And I also want to take the time just to thank Grace and JPMorgan for inviting us to present today. As you heard, I am Michelle Brennan, and I am the interim CEO. And before I jump into the presentation, I just want to start by saying that I have been so impressed with the team at Masimo. As a Board member, I really got to know the management team. But as interim CEO, I've had the opportunity to get to know the team underneath the management team. And I've been very impressed with the strength that we have in talent and engineering and operations as well as sales. More important, though, is getting to know this team, I realized that they all knew that change had to happen for Masimo to continue to grow. And why that's important is because it gave us real buy-in as the Board and the management team started to make changes. So I want to jump into the business. As you can see on this slide, we are really building off of a very strong base as the global leaders in noninvasive patient monitoring. And for 2024, we expect our total health care revenue to come in at about $1.4 billion. You can see we have broad geographic reach. We have deep market penetration because of our very strong $2.6 million installed base of Masimo technology and Boards. We also are the primary provider of pulse oximetry for 10 out of 10 U.S. hospitals. And every single year, 200 million patients are monitored using Masimo SET technology. It really is our differentiated technology in a market that has high barriers to entry, coupled with our reoccurring revenue model that allows us to sustain and grow our market leadership position. I think it's important for us to talk about where Masimo has been and where we're going. So up until 2022, we were very focused on our professional healthcare market. And we were investing substantially in innovation to become that market leader. We consistently delivered double-digit growth and an EBIT margin around 25%. And then when we bought Sound United in 2022, and we expanded our R&D teams, the whole organization's focus on to consumer applications, you can see the company started to lose focus, growth stalled and margins deteriorated. So now what we're doing is we're really working to refocus the organization on our unique capability to innovate in the professional health care market to drive consistent growth and to improve our margin. And we expect to see this year growth in the single, or the high single-digit to low double-digit revenue growth, and we've set a goal for ourselves to achieve a best-in-class med tech margin profile. And we have made in 2024 great progress. So our -- as I've said before, our 2024 total health care revenue is coming in at about $1.4 billion. but that's 10% growth on a constant currency basis. We also see our consumables and our service revenue coming in around $1.25 billion. And our incremental value of new contracts is coming in to be greater than $410 million, which is another record year. Besides for focusing on innovation to drive growth, we've also been working really hard to improve our margins. And we have some different cost savings initiatives that we have started to work on such as rightsizing our organization and also really looking at some of our markets and products that we believe really are not going to deliver meaningful revenue growth, and we're discontinuing those. We also have some various other costs rationalization initiatives. So far, these initiatives have already given us significant operating leverage. And if you remember, in 2024 in November, we said that we believed our 2025 operating margin would be 26%. Well, today, we are increasing that and we expect our 2025 margin to be at least 26.5%. And why we're confident to do that is we really see more opportunity to improve our margin profile. We also have been looking at our organization and really wanting to create an organization that's more streamlined and effective. So we've really focused on pipeline prioritization, having fewer projects that are really focused on those big opportunities for growth in the market, so we drive the highest growth. But we also have been looking at enhancing some of the key processes around our products like our innovation project -- process and our launch excellence process, where we are able to really drive the highest returns by getting better at launching new products. And lastly, we are quickly working to find the right home for our Sound United business. If I move to the big picture, our priorities for 2025 and beyond are: one, to deliver best-in-class growth; two, to continue to drive innovation; three, really focusing on operational efficiency and margin improvement and then fourth, really strategically aligning the organization to drive long-term growth. And I'm going to take a moment and talk about each one of those. So we have a long track record of delivering sustainable high single-digit to low double-digit revenue growth. And that's exactly where we want to be in 2025 and beyond. Our consumable and service revenue growth, our model really helps us where we take our huge large and growing installed base, which we view as a tailwind and our reoccurring revenue model. And with that, we see that our consumable and service revenue provides 89% of our total health care revenue. We see that as a tailwind that justifies this cost or growth expectation that we're putting on the market. Another tailwind we see is our practice of long-term customer contracting, which really gives us this stable floor and also great visibility. A third tailwind that we're seeing that will help us drive growth is we do see opportunity to expand into different care areas with new technology. And then lastly, we truly do have a technology and innovation edge in the marketplace. And you probably heard us talk about being leading innovators. And I think this next slide really brings that point home. We lead in pulse oximetry with our SET product, we also lead in hemodynamics with our Rainbow and LiDCO product line. What we expect to see is sustaining growth in these 2 categories with our NomoLine of capnography and gas monitoring, we really expect to see acceleration because we offer a complete product portfolio, and we have patented technologies that has allowed us to enhance the accuracy but also to extend that product life cycle. When you come down and look at our NomoLine our SedLine and O3 brain monitoring line, we also expect to see accelerated growth there. We have a complete brain solution on one platform that delivers best-in-class performance as well as enhanced accuracy. And this is an area we are continuing to innovate in with new parameters and new capabilities. When we look at hospital automation and telemonitoring, we see that as one of our biggest growth opportunities. We have a very cost-efficient offering and we have unmatched wearable capabilities. And when you put those together, it allows us to bring to market a one ecosystem platform where you can have connectivity, surveillance, visualization, and mobility all in the same place. So this is not where we're stopping. We're going to continue to innovate, and we see real significant opportunity to keep penetrating deeper in that high acuity care space where we played for such a long time with new parameters like DO2 on our hemodynamic platform. We've also been working to make sure that we can expand into the low acuity care area with our wearable and wireless technology such as products like Radius VSM. When it comes to that shift of from hospital to home, where we think our strength will be is to center our strategy on really being able to monitor patients that are being discharged and recovering at home, as well as the chronically ill patients that are being monitored at home. I want to take a moment and shift focus to now our margin improvement initiatives. And I want to start by just saying we really are a growth-focused company and margin is really our output, not our input to our efforts. We're going to continue to invest strongly in innovation so we can deliver that market-leading growth. However, we have seen significant opportunity to rationalize our facility footprint, to really streamline the office of the CEO and to position our corporate overhead more appropriately to our structure and our strategy. I mentioned this before, but we also are being very disciplined on our pipeline prioritization, as well as stopping marketing spend on products that just are not going to deliver meaningful revenue. In addition, we really see an opportunity to increase our operational leverage as well as improve our gross margin by focusing on COGS and by being very disciplined in discontinuing programs or projects that are not aligned to our core business. We will reinvest some of the benefit that we see through this effort, but we also will, at the same time, have a portion of flow through so that we continue to improve our EBIT margin. We look forward to being able to talk to you more in-depthly later this year on how these programs have really impacted. But we do feel very confident today based on the actions that we've been taking in fourth quarter to increase our operating margin to at least 26.5%. I'd like to summarize our top initiatives really for 2025. First, we're going to be highly disciplined on how we deploy our R&D resources so that our programs that they're working on really have real commercial viability. They're in very attractive markets, and they deliver the highest return. Second, we will go after reducing our COGS, and we're going to do this by expanding and optimizing our Malaysia facility by reducing our product costs and by leveraging our overhead expense. Third, we definitely will exit the consumer audio business. We're very pleased that process is well down the line. We have many companies or multiple parties that are interested in this business. And we're going to let this kind of play through, and we'll update you when that's at an appropriate point. We have, as I've mentioned, being very focused on pipeline prioritization, and we will continue to discontinue any product or program that is not squarely in that primary health care or that professional health care market. And then we have been expanding our Board with very highly capable individuals, and we're really pleased with the progress we're making on identifying the permanent CEO. I'd like to end by really sharing with you our 2024 preliminary financials in our 2025 guidance. So in 2024, a we see our total revenues coming in at approximately $2.1 billion. And as I've mentioned several times, we see total health care coming in at $1.4 billion. We also see that our non-GAAP earnings per share is coming in at the high end of our range at least for $4.10. As far as 2025 guidance goes, we expect our total health care revenue to be in the range of $1.5 billion to $1.53 , and that is an 8% to 11% growth on a constant currency basis. We also -- if we hit and when we hit at least 26.5% on we believe our non-GAAP operating profit will be in that range of $390 million to $406 million. And then we do see that our non-GAAP earnings per share for 2025 will come in a range of $4.90 to $5.10. So at Masimo, we're really excited about the opportunities we see in front of us to be able to accelerate top line growth and also to improve our operating margin. So I'm going to now join Bilal, our COO; and Micah, our CFO, to answer any of your questions.

I can get started here. How will the company be different under the new Board and management?

So I think the biggest difference is that we are very focused that our core capability is the professional health care space and that we do not have any business being in the consumer channel at all. I think the other thing that you'll see is as a Board, we do see all the opportunity to grow this company, and we're going to continue to invest in innovation, but we're going to be disciplined about it. And we're also going to put capabilities around that -- those new launches so that we get returns quickly. I don't think beyond that, the Board will be very different because Masimo is a great company. And we didn't come in seeing a turnaround. We came in seeing, let's put some disciplined focus and let's drive from the foundation that Masimo had.

And what will be the main sources of growth for the next 3 to 5 years?

I think we alluded to some of them in the presentation. On the short term, we definitely see an expansion into the general care floor with our Radius VSM product that we're looking to launch towards the second half of the year as well as deeper penetration into the peri-op space with launches in our hemodynamics platform. And then a focus on that hospital to home segment. And that segment, like we said, is going to be really focused on patients postoperatively exiting to the home that need monitoring or chronic care management in the home. Looking beyond that, our focus at Masimo has always been on the consumable space, and we'll continue to expand our portfolio related to what we call wireless and wearable sensing technology. We see that as the future of monitoring and we're going to be really heavily focused on that. On the other end of the spectrum, we're going to be focused on decision support and AI, and we believe we can be delivering decision support to hospitals with a service model that competes with what we do on the disposable model that we have today in our recurring revenue. So that will be our focus in the future, and we see those growths in the future being beyond hopefully, what we have today.

And do you see business development fitting into that picture?

Yes. So looking at business development, I mean, it's going to be something as far as the capital allocation area focus for us in the future. Right now, we're trying to optimize what we've done in 2024, leading into 2025 in terms of really optimizing the business driving the improved margins, continue to deliver that top line growth. And we want to make sure we stay focused on our core business and doing that. Once we work through optimizing, getting rid of some of the -- exiting some of these businesses that are not performing or delivering the right return on investment, we will start to turn and look at bring -- having a combination of organic and inorganic growth be part of the story moving forward. We don't need to do acquisitions. We expect that our core business is going to continue to deliver that high single-digit, low double-digit growth. But we wanted to become a part of the story by tucking in technologies and there will be more tuck-in nature. So we want to tuck those technologies into where we may have gaps in the portfolio or opportunities in the portfolio, whether it be in co-oximetry and hemodynamics, maybe filling out some technologies there. It could be filling out technologies within our hospital automation and our telemonitoring. So really just working with the teams here, the Board and leadership teams to try to figure out where we can augment that growth and what the right tuck-ins are. But we're not looking to do anything large at a large scale. It's not something that we need to do going forward.

Great. And I think you just touched upon this a little bit, but with greater interest in telemonitoring, both in hospital and at home, will there be focused on expanding into ECG as well?

Yes. I think we have already introduced some wearable products with our W1 product that does have ECG capability into it. and we plan to expand also with our VSM product on the general care floor and eventually at home with some ECG products. Our -- we do have a differentiator here. We're not going after the legacy ECG monitoring. We are going after some wearable devices that will reduce the burden on nursing, yet have the same capability as the high-end devices in the future.

And is there potential for additional margin expansion beyond what's expected in 2025?

Yes. So if we look at -- let me step back and talk a little bit about how we've set up the year. So we've done, as Michelle mentioned, a lot of really rightsizing of corporate infrastructure, consolidating facilities, really getting after G&A costs and corporate overhead back-office costs and optimizing that structure, and that's the work that we've done in 2024, leading into how we're guiding 2025. As Michelle mentioned, we also have rightsized some of the spending around marketing spend on projects or product lines that are not generating meaningful revenue. We have gone through a lot of work around R&D project and portfolio rationalization, and there's still some ongoing work there. But all these things have really set us up to give us confidence coming into the year because we're also seeing, as you saw, we expect at least to be at the high end of our guidance range on earnings per share for the year. A lot of that is really -- we're seeing the fruits of that effort to where now we're starting to see that come into the fourth quarter, setting us up well for this year in 2025, and giving us the confidence to come out with guidance as early to say at least 26.5%. The other thing it does, too, is it gives us the opportunity to navigate. We believe that this new administration is going to be overall business friendly, but there may be things like tariffs or things that come up that we may have to navigate, and it gives us ability to really navigate those things in a more confident way. Not only are we in Malaysia now and we're moving more manufacturing there, and that seems to be a little bit more out of the spotlight in terms of tariffs. And thank goodness, we moved our manufacturing there. So it gives us flexibility to navigate any potential tariff in the future. And also just all the initiatives that we're doing today is laying that groundwork to help us navigate even further. As we look beyond the kind of the really the optimization, rightsizing efforts that we're doing and look out into future years. This is a -- with the recurring model that we have, the razor, razor blade model. We've made a lot of investments in the countries that we want to go direct in -- those are investments of the past that we're able to leverage moving forward. This business model has a great ability to scale going forward. So we expect that margin progression and that margin story, we've always kind of said that 10 basis points of margin expansion. We still believe we have that capability to continue to expand beyond what we're optimizing today.

We'd also bank on growth. So we're looking to say that we're going to continue to drive that market-leading growth rate, and that will also help improve our margin profile.