Earnings Call: Q3 2016

Nov 2, 2016

Good afternoon, ladies and gentlemen, and welcome to Masimo's Third Quarter 2016 Earnings Conference Call. The company's press release is available at www dotmasimo.com. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I'm pleased to introduce Eli Kemmerman, Masimo's Vice President of Business Development and Investor Relations. Hello, everyone. Joining me today are Chairman and CEO, Joe Kiani and Executive Vice President of Finance and CFO, Mark Dorad. This call will contain forward looking statements, which reflect Masimo's current judgment, including certain of our expectations regarding fiscal 2016 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 SEC filings, including our most recent Form 10 ks and Form 10 Q. You will find these in the Investors section of our website. I'll now pass the call to Joe Kiani. Thank you, Eli. Good afternoon and thank you for joining us for Masimo's 3rd quarter 2016 earnings call. We are happy to once again be reporting results that surpassed our projections. Similar to the Q2, we realized strong U. S. Adhesive sensor growth due, we believe, our growing customer installed base as evidenced by shipment of 45,800 set and rainbow set oximeters in Q3 and increase in hospital census. Our projected worldwide installed base, excluding handheld and finger pulse oximeters is now poised to exceed 1,500,000 units by end of this year. Here are some other highlights from our Q3. We once again achieved double digit growth for product sales, which rose by nearly 11%. Our Q3, 2006 GAAP earnings per share was $0.52 a share, including a $0.05 per share gain related to the new accounting rules for gains realized on stock option exercises and some other near zero sum items that Mark will address later. In the clinical arena, at the recent annual ASA meeting in Chicago, new SVHB and PBI study results were presented that showed 30% 25% mortality reduction at 30 days 90 days after surgery, respectively, for the group that had SPHB and PVI monitoring. Over 18,000 patients were in this French study. These are remarkable results and if they can be repeated at other institutions, it should create a standard of care argument for SBHB and PVI. We also received 3 important new product clearances in the EU, which I will discuss later. We signed a new agreement with Medtronic that will not only assure our royalties through the 1st part of October 2018, but minimize the chances for further litigation with Medtronic. We're well positioned to enter 2017 and successfully complete our 10 year plan. Our product portfolio and our customer reach all over the world is continuing to expand, which will help more patients gain better outcomes and more hospitals reduce their cost of care. With Q3 results exceeding our expectations, we are happy to be able to once again increase our financial guidance for the remainder of 2016. Next, Mark will review our Q3 financial results in more detail and also provide you with our updated 2016 financial guidance. I will then discuss some additional Q3 business, product and clinical highlights. Mark? Thank you, Joe, and good afternoon, everybody. Our Q3 product revenues of $160,300,000 rose by 10.8% or 10.3% on a constant currency basis versus the Q3 of 2015. As Joe noted, our Q3 product revenues were above our expectations due primarily to our ability to continue to expand our customer base as our superior technologies and innovative products are resonating with both hospitals and clinicians. Our 3rd quarter total revenues, which include royalty revenues, were $167,600,000 up 9.9 percent from $152,600,000 in the prior year period. Rainbow product revenues for Q3 totaled $18,000,000 up by 5% from $17,100,000 in the prior year period. Rainbow sales were strong in the U. S, but because of a difficult comparison for OUS Rainbow sales related to a large Saudi Arabia order in the year ago period that did not repeat due to their unexpected financial crisis, the overall worldwide growth rate was adversely affected. Still year to date, rainbow revenues totaled $49,800,000 which is up 16.5% from the same prior year year to date period, and we are maintaining our forecast for total 2016 Rainbow revenue growth of approximately 10%. Our Q3 SBHB revenues were $5,800,000 up by 24% from $4,700,000 in the prior period. In fact, SVHB sales are now up 36% year to date and on track to reach nearly $20,000,000 this year. Our worldwide end user or direct business, which includes sales through just in time distributors, grew 14.3% in the Q3 to $137,400,000 versus $120,200,000 in the year ago period. Our direct business represented approximately 86% of total product revenue in the quarter versus 83% in the prior year period. OEM sales comprising the remaining 14% were down by approximately 6% due to lower year over year sales to an OUS customer. By geography, total U. S. Product revenue increased 12.9 percent to 114.6 $1,000,000 compared to $101,500,000 in the same quarter of 2015. Our Q3 OUS product revenues of 45 point $7,000,000 rose by 6% versus $43,100,000 in the same prior year period and were up 4.3% on a constant currency basis. Excluding our business in Saudi Arabia, our OUS business grew 11% compared to the same prior year period, as total OUS revenues represented approximately 29% of total Q3 product revenues. Our Q3 2016 GAAP product gross profit margin was 64.1%. However, included in this was a $2,000,000 adjustment related to a new customer contract in which due to language required by the customer, we were required to immediately expense the upfront monitoring equipment over the life of the agreement versus over the life of the agreement as we normally do. Without this $2,000,000 adjustment, our product gross margin would have been 65.3%. Also, as you will recall, at the start of the year, we discontinued the consolidation of CIRCUCore. Had we not consolidated CIRCUCore in fiscal 2015, our prior year product gross margin would have been 64%. Therefore, on a true apples to apples comparison, our year over year gross profit margins have actually increased from 64% to 65.3% or by 130 bps. This very strong improvement is due to a favorable product mix tied to higher single patient use adhesive sensor sales, the aggregate benefits from our value engineering efforts as well as the benefit from favorable FX movements in the value of the Mexican peso versus the U. S. Dollar. And in fact, because of this true apples to apples growth profit margin strength, we are actually increasing our own internal Q4 product gross profit margin forecast. Reported Q3 2016 total expenses were $73,500,000 a decline of $600,000 versus the prior year period as we realized a $3,000,000 benefit from an insurance recovery related to legal defense costs from a prior period. In addition, our current year total operating expenses no longer include Circuit Core operating expenses, which totaled approximately $3,000,000 in the prior year period. So adjusting for the impact of these items, our total adjusted operating expenses would have been up by approximately 7.6%. This increase was primarily due to higher employee related costs as well as additional marketing and engineering project related costs, including new staffing related to our continued commitment to reinvest the savings from the 2 year suspension of the medical device tax. 3rd quarter 2016 operating income was $36,600,000 compared to $28,100,000 in the prior year period. Our reported operating income margin was 21.8%. However, adjusting for both the $3,000,000 insurance recovery and the 2,000,000 contract expense, our adjusted operating margin would have been 21.2%. Non operating income in Q3 2016 was $500,000 compared to non operating expense of $1,100,000 in the prior year period. The $500,000 in Q3 20.60 non operating income includes approximately $900,000 in net interest expense related to borrowings under our line of credit, offset by slightly favorable FX benefits related to the translation of our foreign entities' financial statements. Our Q3 2016 effective tax rate fell to 23%, down from the 33 point 8% in the same period last year and was well below our expected rate of approximately 30%. This lower effective tax rate was due entirely to a 2,600,000 benefit we recognized in the quarter related to our early adoption of ASU 20 sixteen-nine, the new accounting guidance regarding the reporting of tax benefits resulting from the exercise of stock options. Without this discrete item, our adjusted Q3 effective tax rate would have been 30.3% near our 30% forecast. As a result of this new accounting rule, our Q3 2016 fully diluted EPS was increased by $0.05 per diluted share. Our average shares outstanding for Q3 was 53,600,000 essentially leveled with the 53,700,000 shares in the year ago period, but up from the 52,700,000 in Q2 2016. The sequential increase in our Q3 weighted share count was due to the exercise of stock options and the dilutive impact that a higher stock price has on the dilutive value of stock options outstanding. 3rd quarter GAAP net income increased by 44.4 percent to 27,800,000 including the $0.05 per diluted share benefit related to the discrete Q3 accounting change or charge. The Q3 insurance recovery added $0.04 to our Q3 earnings per share, although that was largely offset by a $0.03 charge related to the new customer contract equipment charge off that I alluded to before. Adjusting for these items, our EPS would have been approximately 0.46 dollars a 28% increase compared to EPS of 0.36 dollars for Q3, 2015. As of October 1, 2016, our day sales outstanding was 54 compared to 47 as of July 2, 2016 and compared to 46 as of January 2, 2016. Our Q3 day sales outstanding is typically the high point for the year due to the latter selling later selling activity in Europe. In addition, our Q3 day sales outstanding also increased slightly due to the aging of a receivable from our Saudi customer. Inventory turns were 3.4 compared to the April 2, 2016 level of 3.74.2 as of January 2, 2016. Total cash and cash equivalents as of March 1, 2016 were 126 $1,000,000 compared to $132,300,000 as of January 2, 2016. During the 1st 9 months of this year, we have generated approximately $88,000,000 in cash from operations and $26,100,000 from the exercise of stock options. These funds have been used to repurchase 1,500,000 shares at a total cost of approximately 63,400,000 to repay $32,500,000 in our line of credit borrowings and to fund our operations. During the Q3, we repaid $22,500,000 on our line of credit, lowering the total borrowings outstanding from 175,000,000 to 152,500,000. Now I'd like to take just a moment to update our fiscal 2016 financial guidance, which is based on the best information we have available to us. We are now projecting our total fiscal 2016 GAAP revenues to be approximately $692,000,000 including $661,000,000 in product revenues, which was up from the prior estimate of $658,000,000 and with no change in our estimated $31,000,000 in royalty revenues. We expect our annual GAAP 2016 product gross profit margins to be approximately 65%, which is consistent with our prior guidance. We now expect our fiscal 2016 operating expenses to be approximately $310,000,000 which is down from our prior guidance of approximately $314,000,000 due primarily to the $3,000,000 Q3 insurance recovery. We continue to expect our tax rate for the remaining 3 months of fiscal 2016 to be approximately 30%. And we're now projecting that our average quarterly weighted shares outstanding for the and 54,100,000. Dollars As a result of these changes, we are now expecting our 2016 GAAP EPS to be approximately $2.13 up from our prior estimate of $2.01 per share. And with that, I'll turn the call back to Joe. Thank you, Mark. Our Q3 results reflect the great clinical and financial value of our SET technology and the success of our new products such as Rainbow and Root, as well as our improved productivity. Our outlook for the remainder of the year is encouraging as illustrated by our ability to once again boost our financial projections for 2016. We are realizing higher sales of pulse oximeters and pulse co oximeters as well as solid growth for newer products such as SedLine, Brain Function Monitors, NOMALINE capnograph and O3 Regional Oximeters. We are also realizing higher revenues per driver across our installed base as utilization rises and even greater numbers of customers incorporate the use of our new rainbow sensors. We're especially happy to be able to say that another premier hospital organization in the country has now become a Masimo customer. Stanford Healthcare, including Lucille Packard Children's Hospital together with the hospital of the Stanford University School of Medicine has standardized on our rainbow set technology. I believe the clinicians at Stanford are equally happy as they get to use our breakthrough technologies to help them better care for their patients. 2016 has so far been a great year to get some of the most sought after conversions for Masimo, as we also reached partnership agreements with Cedars Sinai Hospital in Los Angeles and Walter Reed Army Hospital in Washington DC. We are very happy to welcome these and many other prestigious institutions as new customers. We should be able to maintain our steady growth with increases in our customer base, rapidly rising sales of our NOMALINE, O3 and SedLine products and a solid stream of planned new product launches. During Q3, we received 3 noteworthy product clearances in the EU. First, we received the CE mark for our new RAD97 pulse co oximeter. The RAD97 has a smaller form factor than our standard RADICAL 7, but a similar high resolution touchscreen user interface. It will be value priced to increase our penetration of accounts in developing countries and the home market. The second new product to receive the CE Mark in Q3 is a pediatric version of our 3 regional oximeter. This new sensor will enable us to move more fully address the market opportunity for cerebro and regional oximetry with the 3 module that plugs into our route communications hub. Lastly, we received a CE mark for our new RAS 45 sensor for rainbow acoustic monitoring of respiration rates. The new RAS 45 sensor is a trimmed down, more user and patient friendly version of our original RAM respiration rate sensor, another device which can plug into Root or into our Radius 7 tetherless wearable monitor. On the clinical front, the recent American Society of Anesthesiologists meeting in Chicago included multiple abstracts and presentations on Masimo Technologies. As I mentioned in my opening remarks, in a study presented by researchers at Hospital de Petruun, part of the University Hospital Center of Limoges, France, the clinical utility of SPHB and PVI were assessed at the scale of a whole hospital to measure any improvements in mortality and transfusion needs. In this prospective observational study, Professor Natalie Nathan and colleagues reviewed 2 sets of patients over 2 11 month periods before and after implementation of a clinical algorithm to guide transfusion and fluid administration. Masimo radical 7 pulse co oximeters were installed in all operating rooms, recovery rooms and intensive care units. In addition, the Radical 7s were connected to Simo Patient Safety Net for trend data collection. The study included 18,867 patients of whom 3,450 underwent SPHB and PVI monitoring via a RADICAL 7. The researchers compared the percentage of patients in the monitored group who received transfusions within the first post operative 48 hours as a percentage in a non monitored group. They also compared mortality rates for each group at 30 90 days following surgery. These researchers found that the patients in the group monitored with SPHB and PVI had a 30% reduction in mortality at 30 days and a 25% reduction in mortality at 90 days. The proportion of patients receiving transfusions did not change significantly between the two groups nor did the number of blood units transfused within 48 hours. However, in non cardiac surgery, patients were transfused sooner in the operating or recovery room. The researchers concluded that monitoring SPHB and PVI integrated in a vascular filling algorithm allowed earlier transfusion and reduces mortality at a scale of a whole hospital with different clinical practices and unselected patients. They further stated access to continuous monitoring of hemoglobin levels and fluid responsiveness has changed the way we address blood and fluid management. We strongly believe that surgeries of intermediate severity such as hip or knee replacement procedures as well as severe surgery will benefit from this technology. Because it is easy to use, quick to administer, provides continuous data and does not harm the patient in any way, it is more applicable to common clinical practice. Continuing on the clinical front, I want to update you on our NACCHO trial of SPHB. NACCHO is an acronym for non invasive and continuous hemoglobin monitoring for surgical blood management, a trial which began in 2012 and should reach its targeted enrollment of 4 70 patients sometimes around mid-twenty 17. The trial includes patients at 8 centers around the world and we are hopeful for an outcome that shows the value of SPHB for decreasing unneeded blood transfusion. We have also begun a new sick center study that incorporates continuous SBHB and PVI monitoring to help clinicians optimize intraoperative transfusion volume and assess the impact on postoperative complications. The defined outcome measures include any reduction in overall blood transfusion intraoperatively and postoperatively. 2, any reduction in excessive blood transfusion. 3, any reduction in the percentage of patients with incidence of the above mentioned excessive transfusion and 4, we will measure the ability to optimize or minimize infusion of IV fluids, reduction in hospital length of stay and reduction in post operative complications. The timeframe for this new study is targeted completion by Q2 2018 based on recruitment of approximately 2,000 300 patients within 6 centers. Results should be published thereafter. We have 3 clear objectives: make Rainbow the standard of care in developed countries, help automate hospitals cost effectively with Root and expand the penetration of SET. For the past 20 years, we have focused largely on the needs of those who are fortunate enough to live in more heavily resourced parts of the world where approximately 2,000,000,000 people live. While not abandoning our roots, we are adding our attention to the world's other 5,000,000,000 people in order to demarketize set pulse oximetry and with it, hopefully achieving vastly improved healthcare in these settings. Given the enormity of the task at hand, we're especially proud to be partnering with a number of public and private organizations in a groundbreaking alliance dedicated to increasing access to healthcare, oxygen supplies and pulse oximetry. Our partners in this fight include the Bill and Melinda Gates Foundation, the United Nations, PATH, Philips, GE, the Pneumonia Innovation Team, Save the Children, UNICEF and USAID among others. The Gates Foundation recently granted Massimo $5,000,000 towards this effort on a project we have named RAD G. We hope this work will allow us to sustainably help save nearly a 1000000 lives, mostly children annually. We will provide you more detail on this at our next earnings call and a planned Analyst Day in Irvine early next year. In closing, our Q3 financial results have once again exceeded our projections and have enabled us to increase our guidance going into the last quarter of the year. We're well positioned to complete the final year of our 10 year post IPO plan next year in a way that will continue to illustrate the financial strength and earning leverage in our business model. We also intend to lead the industry in new innovative technologies, products and direction, all while we remain faithful to our promises and responsibilities and our mission to improve patient outcomes and reduce the cost of care with our breakthrough non invasive monitoring technologies. With that, we'll open the call to questions. Operator? Thank Our first question is from Larry Keusch of Raymond James. Your line is open. Thanks. Good afternoon, everyone. Hi, Larry. So a couple of quick questions. I think you were pretty clear on most of it. But I was wondering if you could expand either Joe or Mark on the OEM sales decline and the customer that you indicated delayed or deferred an order in Europe? Sure. Well, it was actually tied primarily to a customer who had made a rather large order from us in the same quarter a year ago that for various reasons did not basically replace that order this year. So that's essentially all it was. Okay. So a comp issue? Yes, year over year. Yes. Okay. And then a couple of other smaller ones. Could you break out, Elyse, I don't think I heard it, the FX impact in the gross margin and then the U. S. SVHB growth, which you indicated was quite robust? Well, the overall FX impact in the margin was approximately between $0.01 and $0.02 Larry in the quarter because we received a little bit of benefit on the revenue line. And then as I noted in our prepared remarks, we also benefited from the movement in the Mexican peso during the quarter, at least relative to the prior year period. So in total, in the range of about $0.01 to $0.02 Okay. And then the U. S. SPHB Growth? In terms of the reasons why? No, just the growth rate for SPHB, I just missed it. I think it was 48%. And we said SVHB was up by 24% year over year. Okay. And then just lastly for Joe. I'm just obviously, I recognize that you're not providing 2017 guidance, but I was wondering if there's any sort of high level thoughts that you might provide as sort of how the environment feels as you head into next year? We're feeling pretty good about next year. We've had multiple meetings reviewing both headwinds and tailwinds for the year coming. And we think all included, it's going to be another great year. Thank you. Our next question is from Chris Lewis of ROTH Capital Partners. Your line is open. Hey, guys. Good afternoon. I guess first, the 2nd consecutive quarter now, if you just look at the core set sales growth, excluding Rainbow, nearly 12% back to back quarters. Can you just spend a minute or 2 to elaborate just on what continues to drive that core postdocs growth profile higher? And kind of as we look forward, how should we think about that core business growth rate? Sure. I think first of all, we're seeing increased demand for our technology. We're seeing it in our direct business as well as our OEM business where a greater percentage of our OEM sales are with our technology. Secondly, we're seeing an increase in sensor utilization, which we believe is due to the increase in census in hospitals, both inpatient and outpatient. So except for some small pockets in the market like UK and France and Saudi Arabia, it's been generally very positive census wise and financial purse wise. Okay, great. And maybe just kind of going off of that. We've heard some kind of varying commentary from some of the other reports out there in terms of utilization, hospital utilization, maybe some softness over the summer months. It sounds like it's picked back up. But can you just elaborate on obviously, it sounds like your utilization kind of pull through numbers are trending positively. So can you just elaborate on what you're seeing in terms of utilization during the Q3 and what you're seeing so far into the Q4? Yes, sure. We've seen obviously summertime is softer than Q1 and Q2 and Q4. But from a year over year perspective, we saw the similar growth in our summer quarter to the same quarter a year ago as we've seen in Q1, Q2 compared to the same quarter a year ago. So, we did not see that softness. We and we're continuing to see the same pattern. As you know, our sensors are single patient use in the U. S. And some parts of the world. So, we think that gives us a good view of hospital census. So while I cannot predict the future, I can just tell you the last several quarters have been very positive census wise. Great. And then, Mark, maybe a question for you. I think it's been about a year since you announced the new Red Diamond Sensor. Where are you in terms of rolling that out across your installed base? What impact is that having on gross margins? And how should we think about that layering into the gross margin expansion story over the next 12 months? Thanks. Sure. Well, the good news is that the product is actually rolling out both in the U. S. And OUS. It's not yet as we look towards the end of this year, probably not in substantial enough volume to have a dramatic impact on this year's numbers. However, as you know, we've talked pretty openly about the fact that we expect over the next 2, 3 years, as we are able to migrate both new customers and hopefully a large percentage of our existing customers to the new RD sensors that we expect that transition to actually result in or cause one of the reasons why we're very optimistic about our ability to see overall product gross margins continue to rise similar to what they've done over the last couple of years for some slightly different reasons. Of course, as you know, the last couple of years, the value engineering efforts related to primarily boards and some of our other products have yielded the kind of margin improvement that we've enjoyed. Looking forward to the next couple of years, there are a number of other cost initiatives that are underway, but the Red Diamond conversion is going to be a key element of why we're confident about the ability to continue to see increases in overall year over year product gross margins. And do you feel that I think in the past you've pointed to kind of a 50 basis point goal in terms of product gross margin expansion year over year. Is that still kind of the appropriate range or target to think about? Yes. Okay. Thanks guys. Thank you, Brett. Thank you. Our next question is from Brian Weinstein of William Blair. Your line is open. Hi, good afternoon. Hey, this is Matt Larew on for Brian this afternoon. Just first wanted to ask about a couple of the product growth drivers. First, if you could just update on where Root stands at this point and if you think you're going to hit the number you had talked about for 2016? And then obviously a nice SPHB quarter and just wondering if there are other measurements in particular that you're really seeing nice traction on that's helped driving that rainbow total? Yes, we do believe we're going to hit our numbers for Roots for 2016 as well as for rainbow and SPHB in particular. And obviously, we think what's driving Root is the appeal that product has in terms of not only providing a great way of monitoring and trending the measurements that we have, but also creating a hub in the room for everything to connect into and display the information through the cockpit or and send it to electronic medical record. As for rainbow and hemoglobin, we just think not only is the evidence piling up on the outcomes, there's now 3 studies in 3 different continents, U. S, Europe and U. S, Middle East and Asia and Japan that have shown dramatic blood transfusion on patients with hemoglobin. And now this new study from France that shows mortality reduction. So I think that plus customers' own experiences is driving further adoption. We had a we're getting really great traction with consumables with hemoglobin and rainbow and we see that trend increasing as Philips has now launched rainbow in not just the low end, but the high end And Philips has been helping get the word out on Rainbow. So we expect that will continue to move up. Years ago, we talked about the technology adoption curve for any new technologies that does look like an S shape. I think we're beginning to go up to the steep parts of that curve. So I hope we're right. Okay. Thanks for that, Joe. And then, Mark, just one for you. Obviously, while the top line has been taking off pretty nicely here, the expenses have been controlled really well. And just thinking about moving forward, I know you talked today about a new initiative to move more broadly OUS. But in terms of the organization here in the U. S. Or the Santander developed countries, do you feel good about the size of the organization to be able to sustain this really nice uptick on the top line that you've seen? Sure, Matt. The quick answer is yes. We've spent the last 7, 8, 9 years building the infrastructure of the company to essentially put us in the position that we've enjoyed for the last couple of years and that is one of leverage. We will selectively continue to make investments all over the world, some of which Joe was alluding to before. But it will all be done within the overall guidance relative to our ultimate goal, which is that are far in excess of the growth rate of our product revenues. And obviously to do that, we're going to continue to need to see total operating expenses as a percent of revenue continue to decline over the next couple of years, despite making the appropriate selective investments that we need to make all over the world to continue to see the overall aggregate product revenues get to the levels that we think they ought to be able to achieve over the next 3, 4, 5 years. Okay. Thank you for taking my questions. Okay, Matt. Thank you. Thank you. Our next question is from Bill Quirk of Piper Jaffray. Your line is open. Thanks. This is Laura Sand on for Bill Quirk. Hi Laura. Can you talk about the transition for the new light weight sensor? Do you have any programs in place to help accelerate the process within existing customers? You're referring to the RD sensors? That's correct. Yes. Well, yes, it's an important part of our sales force and clinical specialists to transition our customers to RD. The good news is that the sensor offers so much value to the customer, both from its low profile, lightness and in the U. S, we can't talk about it, but it's actually more accurate. So in Europe, we do get to talk about that. So the customer's experience is fantastic. And for that reason, it has not been difficult to get them to want to transition to it. So we believe that transition is going to happen and it will be, as Mark said, a good reason for us to expect improvements in our margin as well next year. Okay, great. And can you give us an update on the integration with the dedicated hemoglobin sales force? Are you seeing any early traction here? And what are you expecting on timing? Well, yes, I think it has worked well. We are seeing a better, more productive group that's not just selling hemoglobin and PBI into the OR and critical care, but also the new products that have recently been introduced like 3 regional oximeter, SEDLINE brain function monitor. So yes, so overall, it's been a good move. We're happy we've done it and we'll continue to move on that path. All right. And then last one for me. Any update on the Phillips litigation? Yes. We've had really good results recently. Judge Stark from Delaware recently ruled on multiple motions, summary judgment motions that were intended to define what's going to happen at trial coming this January. We were very happy with the results. We believe we're we're set for a great trial in January. I think that was our last question. We appreciate you all joining us and look forward to our next call in the beginning of the year and hopefully seeing you all in person at our Analyst Day here in Irvine, California. Thank you so much. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.