Excellent. Well, look, we're thrilled to have Joe, you here, and Micah here from Masimo. By way of background, Bennett Blau, Managing Director with Goldman Sachs. So maybe we can just dive right on in, Joe and Micah, as you guys kind of step back and think about performance of the core healthcare business today going forward. Can you maybe give us a sense of where that is today, how things are feeling, just to help level set for the audience?
Yeah, absolutely. Young , what do you think?
Either way. Go ahead.
Yeah. So I think, you know, the healthcare business, we've been picking up market share from the first day we launched. COVID accelerated that, and we've been picking up market share at 2-3 times our normal rate. We used to do about $130-$150 million of TI. TI is our definition of true incremental. So if you look at the contracts we signed with hospitals, which average 5 years, we were doing about $130-$150 a year. And we would subtract any hospitals we would lose to come up with a true incremental. Well, the last 3-4 years, we've been doing about $400 million. And after last year, which was a record at $400, Q1, we did $100 million. So we feel really good about our market share gains.
I really believe that's because of not just our measure of motion technology is still the best, and no one's caught up with it. We're the only company with Rainbow. We have 12 parameters now. We can measure with a sensor on your finger, including hemoglobin, and recently cleared ORI. We also have the only tetherless sensor, Radius PPG, and now the W1. Hospitals are all just realizing we make a huge difference in the lives of their patients. Things were going well. Now, post-COVID, we had the huge bump where we had one year, 400,000 drivers. Normally, we do about 200,000, 240,000. After that, we thought maybe next year it's going to go to zero or very close to that. It didn't. We still are doing about 240,000 drivers a year. That's going to continue.
We feel good about the future, the H2. The drivers are coming back to our normal rate. So then we hit the census problem, which seems to be over. And post-COVID, there wasn't enough nursing to have all the patients in the hospital. Also, some of the major insurance companies changed how they paid for people that were there two days or less. They turned them all into outpatient. So that pushed a lot of surgeries into the Ambulatory Surgery Centers. But that's all settled down. And we came into 2024 projecting only 0% census increase at our low number, 1% at our high number. And in Q1, a couple of the private public hospitals reported 3% census increase. And we've seen it. We see our census volume be a lot healthier than it has been for a long time, except middle of COVID.
So yeah, we think the healthcare business is doing great. We're excited about it. And especially with this separation, it's going to allow us to really increase our earnings power. We're targeting now 30% operating margin within five years. We're also, hopefully, hopefully, a couple of new exciting products are going to be rolled out before the end of the year. So yeah, I've never been more comfortable and more resolute to getting back to the days we used to meet, meet, and raise.
Well, it sounds like it's a true inflection point for the company right now, coming out of COVID, coming out of some of the noise. And certainly, the indicators that you talked about are trending in a way where it's kind of getting back to kind of that market position, leadership, and consistent performance. One topic that certainly we hear about across MedTech, a large swath of MedTech, is what's going on with inventory levels, and especially on the heels of COVID, and how customers, hospitals, health systems are thinking about inventory levels. What are you seeing kind of from your dialogue with a customer, trends that you're seeing in the business as it relates to inventories? And can you talk a little bit about where that fits into the overall kind of inflection point and positive trending that you're talking about, Joe?
Sure. Yeah, sure.
You're good?
Yeah.
All good? I'll hit that. So kind of where we're at is last year, as you know, we saw some destocking of inventory levels at hospitals. That's coming out of the years over the last 3 years, 3 or 4 years, where ever since COVID started, ordering patterns were very difficult to understand. You would see a week in our, as we tried to look at within a quarter, you'd see one week we would have a big order. Next week, there would be hardly anything. And it was very choppy between customers. So it was very hard to understand inventory levels, especially when you're going across 6,000 customers or however many customers that are out there that are doing, that are ordering at those kind of patterns. But if you look at kind of where we were last year, we've gotten through that. We're past the excess inventory levels.
We think that there's nothing material out there that's in front of us that we're concerned about. We'll manage it. We're managing it very tightly in terms of how we're reviewing ordering patterns today. Things have smoothed out. I would say we're back to kind of where pre-COVID, back in what I saw before in 2017 through 2019, when I first came on board at Masimo, you have very steady weekly patterns throughout the quarter. We're finally back there. That's important because now we can much better forecast. We can predict kind of where things are in terms of the inventory. We feel that that's behind us. Now, one thing that we did see, and I mentioned on the fourth quarter call, was there were some OEMs that had built some inventories of our boards, technology boards.
Our boards go into their multi-parameter monitors, and they ship them to the customer. It's not like our Masimo branded equipment where we ship it and we record it once we send it to the customer. It actually goes into the OEM inventory. So it was difficult to get full line of sight there. But we knew that it was going to trough in Q1. So we saw that trough, about 50,000 drivers in Q1. We're feeling very good about the guidance we gave last quarter, which is kind of stepping back up to 55+, and then getting back up to that normal level again, 60,000 a quarter going forward. But the most important thing is our install base has gone up from 1.8 million drivers back in 2019 to today, it's about 2.6 million. So you've got almost a 50% increase in your install base.
But our revenue per driver is at the same level as it was back in 2019. So that's showing good utilization, and even despite all the extra drivers that Joe mentioned that were shipped back in 2020 and the following years.
That's fantastic, really helpful context. And are the patterns that you're describing, Micah, pretty when you think about kind of the customer base, is that pretty consistent, you'd say, across the base? Or are there any patterns that you're seeing thematically in terms of differences from that perspective?
Yeah, I mean, just consistent across our customer base. So you're going to have some ebbs and flows with customers with orders. But if you look across, and we look at, I mean, I'm looking at this thing every, it feels like daily or every hour now versus last year. But we're seeing very steady patterns that show, as you kind of go out through, and we have about 13 weeks per quarter based on our closing each quarter. So it's a steady pattern that we've seen historically. So the trends are in line and much more predictable than they were.
Super interesting, very helpful context. Maybe for a second, pivoting to the consumer topic, obviously, in thinking about kind of the core business, getting back to the core, any updates on consumer, the separation, whether it's pathways or timing that you'd want to share?
Yeah, sure. Well, first of all, I just want to say we're two years into acquiring Sound United and our plans to get it in a big way into the hearables and the wearables. And it's gone very well. We saw them launch Freedom. This is the prototype I'm wearing right now. Once we do, I think we'll see the rest of that start happening. But the vision we had that a lot of care is going to happen at home is real. And I also believe a third of the people who buy smartwatches have chronic illnesses, and they're looking for a serious product. In fact, an interesting note, we, as you know, got an injunction against Apple at the beginning of January. And we just saw their Q1 numbers. Their sales of their watches is down 20%.
So it just tells you how important pulse oximetry is to the buyers. So I say that because I still believe keeping it all together is the right thing long term for Masimo. But also, I understand that the majority owners of Masimo, which is no longer me, they don't want to be solving for 10 years from now. They want to be solving for 2-3 years from now. And I heard them. Micah and I went and met with as many of our investors as we could meet physically, a couple of rounds. And after sitting down with them, we decided to go forward and separate not just the audio company, which came with the sales force, came with the audio engineers, which we need. And there's products in the pipeline you're not aware of that will make a lot of sense why we bought that company.
But regardless, I think we came up with a plan to separate, a plan that allows that team with the wearables and the hearables to really fulfill the vision of the future that's coming, and yet let Masimo shareholders have the healthcare company they like. And I don't blame them. I don't know if we're the best healthcare company, but we're one of the best healthcare companies in the world. And that's something to never lose sight of and build. So as far as where are we, we announced the spin. That's something that's fully in our control that we plan to do. At the same time, a company came forward and offered to do a JV. Right now, the JV looks more like an acquisition because they'll be ending up with about 85% of it, and we'll end up with 15%.
But the numbers they put in front of us are really attractive. They're probably about 2-3 times what some people thought. If we get there, the debt will pretty much go away. So that hopefully, they'll add $0.60 a share to our earnings, and people will like that. If that deal materializes, we should know by end of June, we will announce it at least as something that we could accept. Now, we're probably not going to do it till the AGM is over because I don't want people to think we're trying to put something together quickly because we're worried about something. We're not worried about anything. We'll be patient. Hopefully, they'll stick around. But we will be able to hopefully announce by end of the month what the terms are.
And I think once we do that, then I want to meet with our shareholders and find out what do they prefer. Do they prefer the JV? Or do they prefer to spin? And there's other news coming maybe before it's all over that they may prefer to keep it together. But I am committed to do whatever they want. I've done this for 35 years, and I'm not going to get caught up in that. But what I really want to see through is not only the healthcare business delivering on its mission, but I want the consumer health business to deliver on its mission. And the way we're doing the separation, both are intact. So I'm happy.
Super, super interesting updates, and I appreciate all of that. It sounds like the way that you're approaching it is kind of one of significant flexibility as you think about dialogue with shareholders, as you think about some of the input after you kind of receive and announce what the potential terms are. And so it sounds like that'll be kind of toward the end of this month as you think about expectations around timing.
Correct. Correct. And the disposal will be able to know the terms of the JV, if any. We think it's there. We think it's going to happen as an option for us. And then probably, I'd say middle of August, if we decide to go the JV route, where we could hopefully get something done. And if we decide to do the spin, and we being the majority shareholders, well, that'll probably happen next year.
Wonderful. Very helpful. Maybe once some of this plays out and kind of as you think about kind of to the Masimo's post-separation again on the healthcare side rather than the consumer side, when the dust settles, can you talk a little bit about what the biggest value drivers looking forward for Masimo will be as you think about kind of that core business? And what are you really excited about from that perspective?
Well, I think really what's unique about Masimo is that we have been serial innovators. We come up with disruptive innovation at least every several years. SET pulse oximetry was the foundation of Masimo. We're now the number one company in the world in pulse oximetry. And that growth is going to continue. I think we're doing about $1 billion and about a $2-$3 billion space. Then the second wave for us is Rainbow. We're the only company in the world with Rainbow technology, which is this 12-wavelength technology that allows us to measure not just pulse oximetry, but hemoglobin, carbon monoxide, ORI. And we're about $200 million of revenue with that. And that's about 10% of where it will be. Then the third piece is hospital automation.
This is taking both AI, which we developed, we launched in 2010 called Halo, where it helps clinicians know the status of the patient and where the patient's going, whether they're likely to have opioid-induced respiratory depression, whether they're likely to have sepsis, whether they're likely to have heart conditions and other things. But we have this connectivity that connects everything in every room, sends it to the EMR, brings data back to the EMR for Halo. We're just a few percentage into what could be a several billion-dollar TAM. That's the third wave. The fourth is the telemonitoring, telehealth, which really began to become concrete in the middle of COVID. If you remember, at the very beginning of COVID, we came up with safety nets for COVID. FDA cleared it within a week. We rolled it out in a month. Hundreds of hospitals deployed it.
The studies showed that mortality dropped by 70%, saved $11,000 a patient. Well, guess what? Every one of those hospitals who did that with us are now doing hospital at home with us. They're transferring patients home with either Radius PPG on our safety net or W1. We just got a big order in Spain, 1,000 W1s to do that with. NHS just got an award for their program with W1 and others to do telemonitoring. Saudi Arabia, we just won the tender. Hopefully, in a couple of weeks, we'll get the PO. We'll get that rolling. US, I mean, a lot of good stuff. That's really the fourth wave. So I think overall, what I'm excited about, we have for the next 10, if not 20 years, a growth where we can grow hopefully double digit and grow our earnings even beyond that.
If we're not investing in all the new technologies for home, for the wearables, for the hearables, the R&D will be less. We'll get to really take advantage of our SG&A footprint. We have 1,000 salespeople in the field now. So we have a lot of growth to do with not a lot of investment. That's why we think 30% operating margin within five years is achievable. And we have our sights on 40. Whether we ever get to 40, I don't know, but that's the ultimate vision.
Very helpful. It sounds like combining that kind of growth outlook with a pretty disciplined and improving OpEx line from that perspective. Can you talk a little bit about kind of how M&A, if at all, plays into that growth strategy as well as you think about those four different waves? Is M&A a part of that? Are there technologies or capabilities that you would want to think about as you kind of execute on each of those waves in the coming months and years?
Well, we see the 10-20 years ahead of us without needing to acquire anything. But we can't just put our head in the sand. We have to always keep looking. So if something interesting comes along, we'll try to do a better job of communicating to the street before we do it next time. But I can see a lot of tuck-ins. We've done like 10 acquisitions over the past several years, all small things that have been really helpful to the overall plan. So yeah.
Absolutely. I think it'll be a key part of our capital allocation strategy going forward is tuck-ins. Nothing large, but things that can really augment those categories that Joe mentioned, whether it's in automation, telemonitoring, and just add to the portfolio. So I think that's a big part. I think it's great to get back to really that cash flow focus as well, not just the margin expansion story. The earnings power and the earnings story is back for the core healthcare business in terms of we can really start to show that power over the next five years. And it's not just from the revenue growth, the margin expansion, but it's also we're paying down debt. So as we pay down the debt, that's another nice tailwind below the line that's going to drive earnings growth.
And then last is important to us is free cash flow and just continuing to drive that as well and getting that up to some pretty high targets over the next five years. Absolutely. That's very helpful. And just, Micah, on the capital allocation point, as you think about debt paydown and that being kind of a clear opportunity to drive some of that tailwind, would you say that kind of with the M&A framework you talked about, those two things are your top priority? Have there been other discussions around thinking around capital allocation, shareholder return, things like that?
Yeah. I would say number one is debt paydown. I think Joe and I have talked through this. Debt paydown is number one. I think definitely Tuck and M&A is right there at probably number two. And then, of course, if we're not finding some of those things that we can bring in that will be opportunistic about share buybacks, that'll be another third leg of that capital allocation.
Makes total sense. I think maybe pivoting to another topic, is there anything else on the innovation or R&D roadmap that you'd like to share?
Well, yeah, like I said, we were excited about a couple of major products we want to roll out by the end of the year. We might start giving you some hints. We've already said it's a next generation Root, but it's going to be phenomenal. I really feel like there are things we can do to help patients and help hospitals. And I think second generation, which we call Root Square, could hopefully deliver on that. So we're excited. The other thing we're seeking, last year was great. By the end of the year, we got FDA approval for W1. We got FDA approval, I should say clearance for W1. We got FDA approval for Opioid Halo. We got FDA clearance for ORI, FDA approval for Stork. So we got a lot that was pent up that got through.
Right now, one of the key things we want to do, we have this very innovative cardiac output technology along with hemoglobin and ORI. We can give clinicians oxygen delivery. So we're seeking to clear for that indication, which I think will be a big deal. So yeah, so I think those things I think should be exciting. Halo, Opioid Halo and Bridge are doing really well. The opioid epidemic, 100,000 people died last year again from opioid overdose, 20,000 from prescription opioids. And there's only three solutions out there. It's Naloxone. It's now Opioid Halo, which helps detect when someone's about to die and either wake them or at the latest stage, send a notification to a nearest ambulance with their address to come rescue them. And I think Bridge, the only solution to help someone get rid of the withdrawal symptoms.
When we talk to people that have had addiction problems with opioid, they say the reason they first go to opioids is because they're that good feeling they get. The reason they don't stop is because it feels like they're going to die when they're trying to stop. So once they try, they don't try again. They keep doing it because they don't want that pain. They literally think they're going to die. So we have a solution called Bridge, which does nerve stimulation on the back of the ear for nerves, occipital, vagus. And for 80% of the population, within 20 minutes, their withdrawal symptoms are gone. We're going to see some incredible results from being used in prisons to being used at rehab centers to even being used in hospitals where they're trying to titrate opioid back before the patient goes home.
So a lot of cool stuff, a lot of good stuff coming that I think the second generation of these devices are coming that will really help push those forward.
Can you talk a little bit, I mean, it's such a good example of the type of innovation that you're going after, maybe a little bit of what was the background, the vision, the identification of this category, and what does it tell us about kind of the approach that you're going to be taking to innovation as an example, as an analogy for the type of approach that you'll be taking?
Well, when I started Masimo in 1989, literally the goal was to solve the motion artifact of false alarm problems with pulse oximetry. We knew the majority of pulse oximetry alarms were false due to people moving or having low blood flow. We literally, back in 1989, I should say we, me, I thought if we could solve that problem, we could help patients not die of opioid overdose in hospitals. Because even in hospitals, in the post-surgical wards where people are given pain medication, they weren't being continuously monitored. Every two to three hours, a nurse would come and check on them, roll in something to test them. And sometimes they would find them dead. It's called dead in bed phenomenon. So that was the goal back in 1989 to hopefully fix that.
Then I was actually sitting at a dinner conversation with President Clinton where he began talking about how he lost a few of his friends' kids to opioid overdose and how he said 40,000, 50,000 people at the time were dying from opioid overdose. And I didn't know about that problem. I literally did not know that problem. I went home that night and I said, how do we solve it? And I sketched out the plan for it. Next morning, I went to my team, told them about it. They got excited. We began developing. So how do we figure out? We try to go after problems that nobody else is going after. We try to figure out what is it that has not been done and try to fix it, things that we think we know how to fix.
That's really how we approach from solving the pulse oximetry motion problems to doing rainbow, doing hospital automation, telehealth, telemonitoring, and now this whole deal with dealing with opioid epidemic in our country.
Yeah, very helpful context in the background. Thank you for that, Joe.
Thanks for asking.
Maybe we can talk pivoting a little bit to everything that's going on with Politan as it relates to obviously some of the noise around governance and so on and so forth. Can you give maybe this audience a little bit of perspective as to what some of the takeaways from your perspective should be in terms of where things are now, where things are going, and how we should be thinking about that?
Well, first of all, I hope one day Koffey will serve on the board of everybody who put him on my board. Because we warned them that we didn't think he'd be helpful. He's been nothing but destructive. He's come on our board, has had no input, no suggestions. All he does is take, take, take, take, ask for gobs of data that has nothing to do with his board seat. Now it's clear why he wanted it for the next proxy. Even though he said he didn't want control, it's clear he always wanted control. Why he wants control, I don't know. I don't understand his motivation at all. You guys don't know what's in our product pipeline. He does. I sat down with him. He knows what's coming in the next five years.
He knows how revered I am and we are by our team, by the partners, by the customers. And the fact that he's now trying to get control, which in that process he has to get rid of me, just isn't what's right for the stock. And we never understood who his investors are. We tried to get him to tell us. He won't tell us who his investors are. There's got to be another motivation. It can't be the stock price because the best way to get to a good return is to not do what he's trying to do. So where are we with that? And he's fighting it. We tried. My board, God bless them. I can't believe they're still trying. They're still in here. I mean, we lost two great board members because of that toxicity and the threats and the problems that he brought in.
But thank God Craig Reynolds is hanging in there. Bob Chapek is hanging in there. And I think we're going to get through this. I feel like this time the calculus is different. People know it's not just what's it going to hurt to have two seats out of five or two seats out of seven. By the way, we want to get to seven, but he's threatening us that if we bring more board members, he'll sue us again. So we have to wait till the AGM before we, and I want to take it to nine or 10 just in case we lose anybody else. I don't want to get back down to five anymore. But hopefully this time shareholders will see what he didn't do and what he did do, and they will not do what he's asking for.
Because if they do, it is going to be really bad. I feel like I'm responsible to tell you this. He is a board member. As a board member, he has a duty of candor to the stockholders. I read his proxy, and almost every paragraph is either an outright lie or half truth. And that's not how you're supposed to behave with your stockholders. And I think people think if you're filing something with the SEC and you are a board member afraid of prison time, you're telling the truth. And it's just been a crazy period. Like I said, I wish upon all the people who voted him on my board that he will sit on their board one day and they can see what we went through the last year.
Thank you for the perspective, Joe. Very helpful and appreciate the candor. Maybe just finally in closing, as we think about the next 12, 24 months for Masimo, again, going back to that inflection point in multiple ways in terms of where you are, what are the two or three things you would say investors should be really looking out for that they should be tracking, being excited about, and kind of following as they view you over the next 12, 24 months?
Well, I think as Micah said, things have stabilized again. I think those in the room who are engineers, whenever you have a big impulse, there's going to be ringing. So the COVID is a hopefully every 100-year impulse. And it was fun at the beginning, not as humanity, but as people were saying, we're the only game in town. We were getting incredible demand. And then we saw the oscillation afterward. Well, I think we're done with that. I think we're back to the way we used to do things, which is what, I think 24 out of.
25 or 26.
25 quarters we met, beat, and raised. I think we're back in that world again. I think with the host of products that the FDA cleared last year, even if we didn't get anything else done, the next couple of years, it's going to be great. Everything's really humming.
Absolutely. Well, look, I just want to thank both of you for coming today. It's truly our privilege to host you. So great seeing you both. Thank you again.
Thank you. Thanks for having us.
Thank you, Joe.
Thank you. Thank you.
All right.