Good afternoon, everybody. Travis Steed, the B of A Medical Device Analyst, and next stop on the medical device track. We have Masimo, and so Micah Young, CFO, and Michael Dufrey, Head of FP&A. Is that right?
Yes.
Great. Welcome. Thank you. I guess, you know, just opening up kind of big picture, it's kind of a turning point right now for Masimo. Just got a new CEO change and some things, you know, selling the sound business. You know, what's kind of the vision kind of going forward here at this turning point for Masimo? Just kind of how you see the business shaping up going forward.
Yeah. Thanks, Travis. So, you know, in the fourth quarter last year, we did a lot of realignment of the business, really trying to realign, optimize the cost structure, but also really focus back on our core, kind of our core areas of growth. That is all within the four walls of the hospital, looking at, of course, SET pulse oximetry, our flagship that represents over 70% of our revenues, you know, getting more and more focus around Rainbow hemodynamics. That is another big area of growth for us, as well as brain monitoring, capnography, and gas monitoring, all the key monitoring platforms we have. Then automation. How do we continue to automate workflows in the hospital, manage data throughout the hospital? That is our core business. I mean, that is the focus we want to get back to.
We took a little detour into consumer health, and now we're refocusing back on the core. That's really what drives our growth algorithm. When we talk about our long-range plan, you know, we expect to grow 7%-10% top-line growth with good operating margin, high profitable growth. We're aspiring to reach 30% operating margins over our long-range plan. Just getting back to focus there, that's the biggest change. We've got new leadership with Katie coming on. She brings a wealth of experience with working with and leading the Edwards critical care business. You know, we're already seeing some of that with some of the focus she has on commercial excellence, how we're really focusing on launching products in a more meaningful way, and again, concentrating on those core areas of the business.
I know we kind of double-click on Katie joining. You know, how's it been working with her since she's joined and kind of the things she's focused on, and what do you think she's going to bring to the business, and, you know, when are investors going to get to spend more time with Katie?
Yeah, so Katie will be out with me on the road for the next, I mean, I think we're planning to go out all through May, June. We will be out there with road shows, visiting different conferences. That will be coming. A lot of her time right now is being spent with a lot of the sales teams, both in the U.S. as well as international. She's traveling, seeing a lot of different sites. The focus with her right now has been, again, it's on commercial excellence, launching products, focusing on, she brings a lot of experience in the area of AI and how we're, you know, we've been doing a lot of development around advanced algorithms for decision support in hospitals. That development's had, we've done that development over the last five, ten years.
It is really, she brings another view on how we can monetize that, how we can launch those products with AI capabilities. That is another area of focus for her.
Great. I wanted to touch on Q1, you know, revenue was, you know, more or less in line with expectations, but the composition was a little different. Just trying to clarify, you know, what happened versus the capital, you know, which was stronger this quarter.
Yeah.
I'll touch on consumables next.
Yeah. So our capital growth this quarter, I mean, we came into the year expecting capital growth of, you know, flat to mid-single-digit growth, modestly improving environment from what we experienced the last few years. And then consumable growth, you know, we always expect that to be kind of that high single-digit, low double-digit growth rate. And that's kind of been the guidance coming into the year. Q1, we saw, you know, capital growth of 32%. A lot of that was a contribution from just the configuration of a tender order that we had. It's the same customer. It's a customer we've had for many years. It's a large OUS public health system, but it's under tender contracts, and those can be very lumpy. We received an order for a large order of capital in the quarter.
The consumable orders have been, you know, are always lumpy from quarter to quarter. We did not receive a full order on that in Q1. If you adjust for that and look at kind of the underlying growth in the business, we saw double-digit consumables growth. It was a strong quarter. We expect the timing of that. We will see the delivery of the consumables in the next three quarters under that contract, and that is all intact for the full year. The capital is delivered upfront, which is not a bad thing because, you know, the more drivers we put out there, the more it is consuming sensors and driving utilization at those hospitals. It is more of a timing issue. We will see. That demand is pretty strong and pretty steady right now.
If you were, if you kind of pull out that, the large tender and the capital with that, we still had, you know, delivered drivers well above our range of 60-65,000 drivers that we place into the field each quarter. Very strong capital demand so far. We do not want to get ahead of ourselves, though, this early in the year. We are being cautious to raise that guidance on our drivers and our capital this early. So far, we are off to a good start.
Is the expectation that the, will the come out at Q2 at all on the capital side?
We don't expect that. I mean, we expect pretty steady demand throughout the year, kind of in that 60-65,000 range.
Okay. Flu elevated in Q1, any kind of benefit on the flu side, I think?
Yeah, flu, I mean, flu started to really, I guess the respiratory season started to ramp up in December, stayed pretty strong through February. It was a solid flu season in terms of, you know, we saw elevated volumes there. Usually you don't get a full impact of flu in the first quarter. It's usually only a couple months' worth. Flu can contribute, a strong flu season can contribute a point of growth over a three-month period. If you look at Q1, probably anywhere between a half a point to maybe a point contribution.
Okay. The cyber incident that you called out this on the last call, you know, what's the latest there? You know, systems kind of back up and running at this point?
Yeah, so, you know, this is a day-by-day making good progress, bringing systems up. We're focused on prioritizing critical systems. As I mentioned on the earnings call, where we sit today, we don't see it impacting our guidance for the year. There's some near-term disruption, and we're trying to get back, you know, to the optimal levels. That's where we're working through right now with our teams, getting, like I said, critical systems up, making sure operations are up. We have been operating below optimal levels. We're going to, you know, we're going to be playing catch-up here as we bring those systems online.
Is the expectation that you might see Q2 impacting recovers in Q3, and that's why there's no full year impact?
It's still too early to tell, but, you know, we feel good about, you know, where orders are and where we are for the year, which is why we did not change anything with guidance or pull off of guidance. You know, we will know a lot more in the coming weeks in terms of, you know, can we catch up and try to minimize any impact for the quarter.
Anything to kind of help to assure us that, you know, there won't be an impact in the quarter? I think prior situations there have been some short-term impacts.
Yeah. I think, you know, looking with where we are with getting critical systems back up, I think we're, every day is getting better. We're getting a better line of sight into getting up and operational. You know, there's companies that have faced this where, you know, it's been weeks or months. I think it's a different situation based on what we're seeing so far. Again, I haven't been through this before. We're kind of navigating it day by day.
How do you think about the cost impact on the expense side?
On the cost impact, I mean, we're quantifying it as we go. We do have insurance that will cover a large portion of any impact. You know, we look at this as one-time in nature, so it wouldn't impact. It's more of, you know, it'd be removed, adjusted out of our earnings for the quarter. Again, we're trying to minimize that cost impact as much as we can.
Okay. When you think about Q2 and the full year guidance, anything else to call out on Q2, you know, normal seasonality, just think about sequencing throughout the year?
Yeah, we look at this year as normal seasonality. You know, the only thing different this year is we do have an extra week of revenue in the fourth quarter. Every, based on our financial close calendar, we have an extra week every five or six years. This year happens to be that year. If you back out, call it one point of revenue for the year out of the fourth quarter and kind of normalize seasonality, typically we have about 24.5% of our revenues in the first three quarters, give or take. And then we have 26.5% in Q4 because the seasonality of the business is stronger. You know, respiratory season, flu season usually impacts us more, as well as surgeries in the fourth quarter.
Okay. Capital, you know, for the remainder of the year, still strong. I know 2024 was a challenging year.
Yeah, I mean, we're still, you know, implying our guidance is that flat to mid-single digits. If we see capital continue the way it did in Q1, that could be a source of, or a tailwind for us this year.
Okay. And average revenue per board, you know, low single-digit growth in Q1. Is that kind of the fair way to think about it going forward?
Yeah. Our install base grew, it was up 3% in Q1. If you look at our consumable revenue per driver, I think it was up about five points in the quarter. Again, that was softer just because of the timing of that tender order. We look at the full year being kind of, you know, 3%, 2-3% install base growth with 5%-7% consumable growth per driver.
Okay. And then tariffs, you know, you call that $35 million in 2025. How do we think about the impact of the China deal over the weekend?
Yeah, so if you look at China, we source our patient cables from there, a lot of the raw materials, as well as the subcomponent assembly that comes through on those patient cables. About 5% of our cost of goods is basically the raw materials and cables out of China. So it's roughly $20 million or so a year. If you look at it, the rate, it looks like the tariff rate's coming down to 115%. You can kind of do the math on that and see that that's going to, it's half of the impact of our tariff exposure. If that sticks, that could be a meaningful reduction in what we guided to for the year.
Okay. How are you thinking about, like, reinvesting that versus letting it flow through?
We'd let it flow through.
Okay.
Yeah, we're continuing to drive margin expansion this year. We guided 28%-28.5% operating margins. And we look at this really, you know, trying to continue to drive that in the core business. And if tariffs start, the pressure starts to come off on the tariff and exposure starts to reduce, then we'll let that flow through.
Okay. So if I adjust for China and kind of get a new, you know, 25 impact, and is taking that Q4 run rate and annualizing it kind of a good way to think about the gross impact in 2026?
I think on a gross impact, but of course, you know, as I mentioned on the call, I would not annualize. I think it is too early to annualize, especially with the rates moving around, with trade negotiations happening, as well as we have a lot of mitigation plans we are working through right now. Some are no regret actions that we are taking that we would do regardless of kind of where things shake out on the tariff side. That is stuff that will come more in focus over the next probably 90 days as far as those action plans. We will communicate that. We expect to communicate more of that on the next earnings call. It is too early to annualize into next year.
Okay. And the mitigation stuff, like, what are some of the strategies that, more like pricing or shifting manufacturing?
Yeah, I mean, we're looking at everything from, you know, pricing levers. We're, you know, of course, we're a heavy contracting business where we enter into five- to seven-year contracts with customers, give or take. Those contracting cycles take time to work through and they're long contracts. You may have 20% of your contracts come up in one year and we'll see what we can do to start to mitigate some through pricing. In terms of cost mitigation, we're working through last quarter, our exposure in Mexico was about 25% of our cost of goods were subject to tariffs. We've brought that down to 10% now. A lot of that work was just qualifying under USMCA exemption, doing all the paperwork, working with legal teams to try to get through that.
All of our sensors, consumables that are down at the manufacturer out of Mexico are now under USMCA exemption. The last piece is just the instruments. We are working through to see how those would potentially qualify. That will be some things we work on in the coming months. We are also evaluating, you know, sensor manufacturing, seeing what we can do there. We have got some mitigation plans we are working through there to see if we can impact that. The longest process that would take us is really around the patient cables out of China. That one is kind of longer term, call it 12months-24 months to try to move things out of there.
Okay. I know Malaysia's a, you know, kind of a big part of your gross margin expansion plans. Does the tariffs, you know, change your strategy there? Are you going to consider moving more back to Mexico or anything like that?
Yeah, I mean, we're looking at it on a, we're doing the math. I mean, on one hand, you've got Malaysia where you've got a 30%-35% lower labor cost component to manufacture there. But then on the other hand, you've got a tariff that could be, you know, if it goes reciprocal and moves back to that 24%, that's on the whole cost of the finished good versus just the labor component. So there's going to be some math we're going to do to evaluate if tariffs go back higher. You know, there could be potential where we may end up moving some back to Mexico. Again, we want to continue to benefit from, you know, the operations that we've seen in Malaysia. It's been, that was a great move for us as a company in terms of lowering costs, but also becoming more operationally efficient.
We're trying to do mitigation strategies that can hopefully avoid having to bring anything back. If those do not work out, we may have to consider some products.
That makes sense. You know, margins have, you know, been a bright spot for you guys, you know, beyond Malaysia. When you think about some of the gross margin drivers, kind of beyond Malaysia or whatever, how are you thinking about the progress on gross margin over the next few years?
Yeah. We still have, we have sensors that we sell, you know, we have a lower cost sensor and it's very high quality, but it's called an RD sensor. We manufacture what's called a Link sensor. We've been shifting more and more to RD, which has helped us to drive margin expansion. We took a lot of costs out of that. It was a project we worked on years ago. That's continuously giving us a benefit mix there. We also have engineering teams that are very focused on taking costs out of products each and every year. That's always been a good lever for us. We've seen good leverage out of leveraging our install base. We have over 2.6 million monitors and boards that are out in the field that are consuming sensors. That's a high cost of the install base to put out there.
Every year we're continuing to leverage that with more consumable revenue coming off those drivers. There are a lot of different levers we have in gross margins still. The goal is to get up, you know, long-range plans get up closer to 66%. We're not giving up on ultimately getting to 70%. I think, you know, COVID, going through that with the inflationary costs that we saw during COVID, set us back off that target a little bit.
The OpEx in Q1, is this kind of the new lowered baseline?
Yeah. So Q1, you know, we delivered operating margins of 28.8%. I think, like I said, we're guiding 28%-28.5%. We're trying to balance to where we've done a lot of optimizing of the cost structure in the fourth quarter of last year. You saw the benefits of that in Q1 and how we're guiding this year. I think over year over year, we're, you know, improving margins by over 400 basis points on the full year. So, but we're also trying to balance investment. We want to continue to invest for top-line double-digit growth and continue to deliver over the long term. So that's a balance for us. I would say that, you know, we've come down in Q1. There's some timing of investment we've made, you know, in terms of sales and marketing that's going to hit more in Q2 and through the rest of the year.
That's kind of how we're balancing and trying to continuously deliver on margins as well.
Do tariffs change your kind of outlook from the 30% operating margin goal? You still get there with tariffs?
I feel good without tariffs. We're tracking very well without tariffs. The longer out with our long-range plan of trying to continue to drive margin expansion, I mean, it's going to give us time to get a lot of those mitigation actions in place. You know, we'll have time to respond over the longer term, but it's a challenge in the near term. I mean, it's just a very fluid dynamic environment. It's hard to speculate and tell you today that, you know, we can get to 30% by X date. We're feeling very confident in the core business when you kind of back out the tariffs and look at where we're tracking.
Okay. That's fair. And then on tax, your tax rate was, you know, a few hundred basis points lower before 79. Does the tax rate kind of go back to that point now?
Yeah, we've already, we've lowered it a little bit more this year. As we came into the year, I think we were guiding closer to 25%. We're getting down, I think our latest guidance has us around 24.5%. What's impacted us from where we were back in 2019, you know, if you go back five years ago and well before 2019, we were sitting probably around 22% for a few years. Pillar Two has been an impact on us because, you know, we've been setting in our OUS business. We've offshored IP to put us in the best, most tax advantageous structure outside the U.S. So we have a very low tax rate structure. You know, the Pillar Two, though, started to lift that above where we were and everything's minimum 15%. That had an impact on us in terms of our tax rate.
If you look over the long term, I mean, with where we're set up and with the tax structure we have in place today, the more profitable we become in terms of mix of profits that are outside the U.S., the lower the tax rate can go. So there's opportunity to leverage that as we become more profitable outside the U.S.
Makes sense. Capital deployment, you said share repurchases is kind of what you're going to be doing with the $79 proceeds. What about going forward? How are you thinking about capital deployment? Is it still buybacks at this point?
Yeah, I mean, we always evaluate kind of where share price is relative to where interest rates are. You know, if you kind of do that math in the near term, it's probably pretty close to neutral. You know, we believe in the business and we think that, you know, earnings power is going to be a lot greater in the next two to three years. You know, we probably lean more and prioritize share buybacks. We'll probably balance it. It'll be a combination of share buyback, debt pay down. We also want to improve our liquidity, continue to improve liquidity. That'll set us up in a good spot too as we start to look at, you know, tuck in technologies that we want for our core business going forward and how we deploy capital.
We're always doing the math, making sure that, you know, we're optimizing capital deployment. We're definitely leaning more in on share buybacks right now.
It sounds like, even with tariffs, like the plan is to grow earnings.
That's right. Yeah. Yeah, we want to continue to invest for that double-digit top-line growth and try to deliver strong earnings growth that outpaces that top line.
The plans for earnings growth next year. Sounds like.
That's the goal. Again, it's early to talk about next year just with all the environment with tariffs right now.
Yeah, that makes sense. Yeah. Any updates to, you know, provide on the Apple litigation, kind of next steps and milestones as you're looking for?
Yeah. So going back to kind of where it started with the ITC case, you know, we got an injunction on the Apple Watch with using our pulse oximetry. Apple's continued to appeal that and going through the appeal process. In terms of the trade secret theft case against Apple, that was tried last year. We still haven't heard a final decision. It was a bench trial with a judge. We're still waiting the decision on that. The last piece is really the two big cases for us, which is the patent infringement cases. One's going to be in Delaware, one's in California. The one in California will be in November. The Delaware case has not been scheduled yet. I think that's, you know, we're excited to move into this next phase in terms of the patent infringement cases. Those are going to be important to us.
Okay. Kind of similar question on the Joe litigation.
Yeah, I mean, I don't have a lot to comment on litigation, employment litigation there. Not really that involved with it.
Okay. Yeah, that's fair. I had to ask. All right. Anything else that, you know, you think is important to talk about at this point that I didn't ask?
No, I think we're excited to kick off the year. It was a very strong start to the year. I know there was a little noise with the tenders, but we feel that we're in very good position for this year to deliver on the plan or to the guidance as we came into the year. You know, fundamentally, we're as strong as ever. Margin expansion story is intact. A lot of the cost actions we took were really things that need to be done and to really optimize the business as we move forward and help us to continue to grow. We can, by optimizing margin, reinvest more back into the business to drive growth. I think we're set up very well as we move forward.
Great. Thank you. That's all the questions I had.
All right. Thank you, Travis.
Thank you.