Earnings Call: Q2 2021

Jul 27, 2021

Good afternoon, ladies and gentlemen, and welcome to Masimo's Second Quarter 2021 Earnings Conference Call. The company's press release is available at www.masimo.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 am pleased to introduce Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations. Thank you, and hello, everyone. Joining me today are Chairman and CEO, Joe Kiani and Executive Vice President and Chief Financial Officer, Micah Young. This call will contain forward looking statements, which reflect management's current judgment, including certain of our expectations regarding fiscal year 2021 financial 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 and our periodic filings with the SEC. You will find these in the Investor Relations section of our website. Also, this call will include a discussion of certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these as non GAAP financial measures. In addition to GAAP results, these non GAAP financial measures are intended to provide additional information to enable investors to assess the company's operating results In the same way, management assesses such results. Management uses non GAAP measures to budget, evaluate and measure These non GAAP financial measures increase transparency and better reflect the underlying financial performance of the business. Reconciliation of these measures to the most directly comparable GAAP financial measures are included within the earnings release and supplementary financial information on our website. Investors should consider all of our statements today together with our reports filed with the SEC, including our most recent Form 10 ks and 10 Q Relations section of our website to supplement the content we will be covering this afternoon. I'll now pass the call to Joe Kiani. Thanks, Eli. Good afternoon, everyone, and thank you for joining us for Masimo's Q2 2021 earnings call. We're happy to report strong second quarter results. While we expect the driver in capital orders in 2021 to be lower Then what we achieved in 2020 due to unprecedented high demand during the height of COVID And expect the sensor volumes to rebound as elective surgeries recover as COVID hospitalizations recede, We did not anticipate the very strong increase in single patient use sensors that we realized this quarter. This produced higher than expected revenues, leading to an 11% increase in our non GAAP EPS. Based on our observations and discussions in the field, Substantial increase in monitor installations during the quarter from record new hospital contracts in 2020 and record new hospital contracts in the first half of twenty twenty one. These installations strengthen our foundation for long term I'll discuss more later in the call. Now I'll ask Micah to review our 2nd quarter results in more detail and provide you with an update on our 2021 financial guidance. Thank you, Joe, and good afternoon, everyone. Our Q2 results came in above expectations as we saw a strong rebound in sensor sales. Further, Our shipments of technology boards and instruments are on track to exceed our original target for the year with 2nd quarter shipments above expectations. We are seeing a step function increase in hospital census and steady expansion of monitoring in hospitals leading to increased sensor cells. At the same time, a higher than usual number of monitor installations during the Q2 has expanded our installed base, which put pressure on our gross margins for the quarter due to the new accounting standard implemented back in 2019. From a long term perspective, We're glad to see this strength in installations because of its implications for higher sensor volumes and higher margins in the future. During the quarter, we shipped 72,500 technology boards and instruments, which exceeded our estimate of 60,000 for the quarter. In turn, we have shipped approximately 2,200,000 technology boards and instruments over the last 10 years. As of the end of the second quarter, we estimate that our installed base has grown approximately 11% over $305,000,000 compared to $301,000,000 in the prior year period. You may recall from our earnings call last July That we delivered 31% product revenue growth in the Q2 of 2020 due to higher than usual demand for our technology boards and instruments As hospitals addressed a potential shortage of monitor beds for COVID patients. Despite this very tough year over year comparison, We delivered strong revenue performance that exceeded expectations. For the Q2 2021, Our worldwide sales of technology boards and instruments were higher than in normal years, but down 41% compared to 2020 due to the tough year over year comparison associated with pandemic related strong demand last year for Masimo SET pulse oximeters and related equipment. Fortunately, this decline was more than offset by a strong rebound in sensor cells. In fact, our worldwide sales of single patient use adhesive sensors were up 35% versus The prior year period, most encouragingly, our sensor revenues rose by 5% sequentially versus the Q1 of 2021. In contrast to the historical average seasonal decline we've experienced for the same sequential periods in normal years, This represents another sign of a step function rebound in surgical volumes. Moving down to P and L. Our non GAAP gross margin for the 2nd quarter increased 80 basis points to 64.7% compared to 63.9% in the prior year period. The year over year improvement was primarily driven by more favorable Revenue mix as we delivered strong revenue performance from our high margin higher margin single patient use sensors in combination with the Revenue decline for our lower margin technology boards and instruments. Despite the year over year improvement in our product revenue mix, Our gross margins were below expectations due to a higher than usual number of monitor installations under contract during the 2nd quarter. If you recall from the ASC 842 accounting standard we implemented back in 2019, During the quarter that we install equipment under a contract, we recognized an unfavorable margin impact upon installation in return for the higher sensor margins over the life of the contract. As a result of the record number of new customer wins last year and during the first This year, combined with increased access to hospitals, we experienced a significant increase in the number of monitor installations under contract this quarter. We believe that our investment in equipment under these new contracts will pay long term dividends in the form of higher sensor volumes and increased margins over time. Our non GAAP selling, general and administrative expenses as a percentage of revenue decreased 230 basis points to 30.2% compared to 32.5% in the prior year quarter. And our non GAAP Research and development expenses as a percentage of revenue increased 80 basis points to 11.1% compared to 10.3% in the same quarter last year. As a result of the year over year improvement in gross margin and operating expense leverage, our non GAAP operating margin increased 230 basis points to 23.4% compared to 21.1% in the prior year period. Moving further down the P and L, our non GAAP tax rate was 24.5 percent and our weighted average shares outstanding for the quarter was 57,400,000. For the Q2, our non GAAP net income was $54,000,000 or $0.94 per diluted share. In comparison, 2nd quarter 2020 non GAAP net income was $49,300,000 or $0.85 per diluted share. This reflects non GAAP EPS growth 2nd quarter of 2021 was $50,200,000 or $0.88 per diluted share. In comparison, Q2 2020 GAAP net income was $55,800,000 or $0.96 per diluted share. Included in our GAAP earnings for the quarter was $1,300,000 of excess tax benefits from stock based compensation compared to $7,500,000 in the prior year period. In addition, we incurred a Charge of $3,400,000 in the quarter related to assisting a long term OEM customer with their medical device correction in the field. To summarize the Q2, our revenue once again exceeded expectations and further our driver shipments were above our pre COVID run rate despite an unprecedented driver shipment year in 2020. Also, we delivered non GAAP operating margin expansion of 230 basis points And non GAAP EPS growth of 11%. Most importantly, we saw record single patient use sensor volume And a sequential improvement in our single patient use sensor volume when compared to our Q1 2021 results, providing evidence of the step function improvement in hospital patient volumes. Now I'd like to provide an update on Full year 2021 financial guidance. For 2021, we are increasing our product revenue guidance to $1,216,000,000 which reflects year over year growth of 6.3% on a reported basis or 5.4% on a constant currency basis. This represents an increase of $11,000,000 above our prior guidance. Furthermore, we are now projecting to ship at least 200 and 70,000 technology boards and instruments this year. This represents a notable increase from our prior estimate of 246,000 drivers. Our non GAAP gross margin guidance is now 66%, which represents a 90 basis point increase over 2020 results. Our updated guidance includes the incremental margin headwinds And our non GAAP Operating margin guidance is 23.8%, which reflects a 70 basis point improvement over the prior year. Moving further down the P and L, our non GAAP Non operating income is expected to be negligible, and we are projecting a non GAAP tax rate of 23.4%. And we are now estimating that our weighted average shares outstanding for 2021 will be 57,700,000. Based on all of these assumptions, we are increasing our non GAAP EPS guidance to 3 point $0.02 above our prior guidance. And from a GAAP perspective, we are projecting a GAAP tax rate of 18.2% and GAAP earnings per share of $3.83 for the year. Our GAAP EPS guidance includes seeking to exclude importation of the infringing Series 6 watch. For additional details On our full year 2021 financial guidance for GAAP and non GAAP earnings per share, please refer to today's earnings release and supplemental financial information within the Investor Relations section of our website atmasimo.com. In conclusion, We are seeing a return towards our traditional revenue mix, which should lead to increasing gross margins. In the face of challenging year over year comparisons, we are During the first half of twenty twenty one, we've seen an encouraging recovery in hospital census that gives us optimism that things should be returning to normal in most of the markets we are direct in by year end. This recovery has translated into a step function increase for our single patient use sensors used in the critical care area, including operating rooms and ICU settings. For the 2nd quarter, SET single patient use sensors and capnography cannulas had year over year volume growth of more than 25%. And our FTHBSED line and 03 single patient use sensors had year over year volume growth of more than 90%. Our discussions with hospital executives have revealed their intentions to broaden This is continuous monitoring to more patients and their institutions. After being catalyzed by the pandemic, The expansion in monitoring is continuing because of rising awareness of its value and improving outcomes and reducing cost of care. Dartmouth Hitchcock's 10 year study of Masimo SET, pulse oximetry and patient safety net in post surgical wards proved That monitoring outside of the intensive care unit saved lives and reduced their costs by 1,000,000 of dollars annually. Following a record year of contracts in 2020, Masimo has also experienced a record Breaking first half of twenty twenty one in terms of winning new customers and renewing contracts with existing customers. We've captured new contracts with sizable institutions such as the University of Utah, Grupo Angulis in Mexico and Vivantas, Netsberg, Gesundheit in Germany. As for Masimo safety nets for opioids, We still do not have FDA clearance, but plan to launch this solution in September in some of our larger European markets. We expect this system to save countless lives of prescription and illicit users of opioids at home. As I've mentioned on previous calls with Hugh, we expect to have exciting innovations to announce over the next 12 months. We've been working very hard to develop some truly remarkable solutions, and we hope our customers and you will be excited about them 2 when we introduce them. In closing, we have a positive outlook for the second half of twenty twenty one and remain committed to our mission of improving outcomes and reducing the cost of care and taking non invasive monitoring to new sites and applications. With that, we'll open the call to questions. Operator? Your first question comes from the line of Rick Wise from Stifel. Your line is now open. Good afternoon. Thank you, Joe. And great to see the strong quarter. I'm guessing that despite The incredible driver number that people are going to want to understand better the gross margin pressures due to the Accounting change, the accounting standard adoption. And I don't want to be dumber than usual, but maybe, Micah, you can just help us Better understand, what impact did that adoption have on gross margins in the quarter? Was it a 10, 50, 100 basis point headwind, what might it have been just to try to understand That impact relative to sort of the overall rest of the business. And if I heard you correctly, You're talking about now sensor volume, sensor gross margins will be better. How do we think about in a sense You the pace or the magnitude, if you thought the right word, but recapturing Some of that gross margin and the timing there. Sorry for the long question. Yes. Thanks, Rick. Great question. So The way that I'd size it up for the quarter is, we believe that the headwinds are coming in about 160 basis over 160 basis points As we place this equipment under ASC 842, we recognize upon equipment installation the lower margins associated with that equipment And in return for the higher margins in the future. So as you think about the rest of the year, we will see steadily increasing gross margins based That's implied in our guidance. However, we're also contemplating some of the headwinds we expect because we are seeing Higher installations this year, and we're seeing stronger drivers going out to customers. And as we place more of these under contract, We will still have some headwinds for the back half of the year. So, we're happy to make this investment because this strengthens our recurring revenue stream in the future in terms of Single patient use sensors. So that's all implied in our guidance. We've factored the headwinds based on our best And what the installations we expect right now for the back half of the year, and that's incorporated into our 66% for the full year. Yes. Thank you, Rick. If I could just add just to make sure there's clarity on this. When we sell a capital equipment like Root For Radical 7, for an OEM board to our OEMs, that comes with its margin, Whatever we sold it for minus our cost. And we don't have this 842 issue. The 842 issue happens when we placed the equipment free of charge for, let's say, a 5 year sensor agreement. And before A42, We would not take a charge for that capital when we installed it. Now based on the 842 rules we do, So the negative is when you have a strong set of new contracts like we've had recently, when you place that equipment, You get a hit with the margin at the beginning, but the benefit is unlike the 4842, now as we shift sensors into the account, We get our normal margin. We don't have to reduce that margin based on the cost of the capital over the 5 year period. So when we right now what we projected for you for the rest of the year is based on a, I think a realistic, maybe conservative estimate of how many new contracts and how many new drivers we're going to install. So the only way it could get worse We end up doing better and we get more customers than we anticipate to sign up for our 5 year contracts to convert From our competitor to Masimo for the next 5 years. So in a way, unfortunately, even though there's a margin hit, it's good news And that it tells you we're doing better than we expected in attracting new customers. Yes, I totally get it. And it does seem like a positive. It's just optically a little confusing. But having said all that, Joe and Micah, how do we think I'll invite you to help us think ahead 2020 2, 2023, just at the highest level, how do we think factoring all that in about gross margin, The ability of gross margins to move higher from this new post standard adoption level, I mean, are we talking I guess, one, we should still assume they can move can and will move higher, all things equal. But Any extra color about what that could look like? Yes. Well, I guess, okay, let's do A supposed situation. If we don't sign up any new customers and all we're doing is Serving the current customers we have, our margins will approach 70% plus. If we sign up more customers, which we hope we do, if it's at the conservative rate, it's the margins that we've been talking about And what we updated you on. If we do better than that, then it'll be hurting. So the way you have to think about it, let's say in 3 to 5 years from now, the margins are going to look a lot better because of 842 than they would have due to this new way we have to account for the capital Great. I'm sure there'll be other questions I just wanted to get back there. If I could squeeze in just 2 more, if you wouldn't mind. Just given the strong recovery and Joe you highlighted the recovery in procedures, are you seeing are you Concerned at all about this latest wave of COVID and maybe Micah just and I'll just add this now. Can you help us think about the 3rd quarter, 4th quarter cadence, the flow as we think about the second half in terms of quarterly Sure. Let me answer the first part and then Michael will answer the second. So what we're seeing so far with the Delta variant, it isn't hospitalizing vaccinated people. And in most of the markets we are addressing, majority of people have been vaccinated. So while the delta It's increasing. You've seen, for example, the case in Iceland. It's not hospitalizing those people. It's not killing those people. So based on what we're seeing today, we don't think that hospitals will get full of COVID patients And they'll have to cancel their elective surgery. So we are anticipating that things Yes. And Rick, as part of your second question, I think you What are we assuming in our guidance? And very consistent with last quarter, we're assuming that steady rebound Back to pre COVID levels by the end of the year, that's what's implied in the guidance. Plus, as you know now, we increased Our driver shipments for the year is 270,000. So that's an increase of 24,000 above our prior estimate. So You'll see an elevated number of installations and steady rebound in sensor volumes. Thank you very much. Sure. Now we do think Q3 sensor volumes will probably be lower than Q2 because of the summer vacations that happens normally. But we do think that's just seasonal things that are finally getting normalized. Yes, Rick, just one thing to add there. Historically, if you go back on kind of normal years, our revenue percentage in Q3 is about 24 point 3% of our full year revenues. So that's pretty consistent and outside of last year. Perfect. Really helpful. Thank you, Michael. You're welcome. Next question comes from the line of Matt Taylor from UBS. Your line is now open. Hi, guys. Thanks for taking the questions. I just wanted to ask a follow-up to try to get more specificity on the gross margin dynamic. So, obviously, it's good you're signing up all these new customers. I guess, if that remains at elevated levels, I guess, for the rest of this year, When do we start to see that cycle through? You mentioned in 3 to 5 years, it's obviously better. Do you start to see a pickup next year? Is it kind of gradual in asymptotes towards The $70,000,000 how do we think about modeling it phase out over the next couple of years? Yes, Matt. I think we would be happy to see continued gains of new customers that this is the right investment to make and We expect to get returns out of this over the long term. And as Joe mentioned before, if we did no New customer installations, you would see a significant leverage in our gross margins over time. If we continue to gain new customers at the pace we're gaining them, it will have some pressure and it's already contemplated in our gross margin guidance. And then we should get kind of back on that steady increase in gross margins moving forward that we've laid out in our long term plan. Okay. And you caught out some pretty positive trends in the sensor utilization and with the new products. And maybe you could just also give us a sense for you have a new a lot of new product flow coming up here in the second half of the year with WIDCO ramping, opioid safety nets, Hospital automation expanding. Could you just characterize how much those new things contributed in the quarter? And how much are you baking in your guidance for some of those other new products that could be material in the future. Yes. So Matt, we have negligible revenues from our U. S. Launch of T and I this year and that's We're just now launching that as we announced last quarter, building the pipeline and starting to roll that out in the So we'll see how that contracting goes and over the course of the back half of the year and on into next year. And if we gain some new accounts earlier, that could be upside to our guidance. Same thing with Litco as we're continuing to integrate that technology into our devices And then start to really launch that later in the year in the U. S. That could be also a source of upside Later this year or even as we move into next year. Okay. And then maybe just one last one. Any color on you mentioned some indicators that you're really seeing the broadening of monitoring throughout the hospital with the seasonality Not dipping this year and you talked about like replacements being really strong. Could you give us any sense or any other guideposts That you're looking at feedback from customers, pointing to that being durable and increasing in the future potentially? Yes. As I said earlier, when we've been talking to our customers, We're seeing that extra monitors that were bought last year being utilized. We once again interviewed our top 30 customers And they're still utilizing them, not in the OR and ICU only, but outside the ICU. So we are I mean, if you look at our adhesive sensor growth, we mentioned what it was between this year And last year, but if you go back to 2019 when it was a normal period, not a COVID period, Our sensor volumes were still up over 20% compared to Q2 2019. And we've been we know sensors isn't up And the continuous monitoring proliferating through the hospitals non critical care beds. Next question comes from the line of Jason Bednar from Piper Sandler. Your line is now open. Hey, good afternoon. Thanks for taking the questions. Just to maybe come back with another quick follow-up on the gross margin side. Mike, if this was 160 bps of a greater headwind this quarter What you were thinking, is the impact here just a surprise due to the pace of the installations being faster than what you anticipated? And then maybe correct me if I'm misremembering, but I think your new contracting was real strong in the second half of last year. So is this the first big impact from this contract and equipment being installed? Or was some of this weighing on past periods as well? No. Mike, just to clarify, when I said over 160 basis points of headwinds, that's against our expectations For the quarter year over year, it was a larger headwind, over 200 basis points Of headwinds year over year or more than 200 basis points. What's happening is and what we're seeing is, Last year was a record year in terms of winning over new customers to Masimo Technologies as well as renewing existing contracts, And we saw a record first half as well. So we're seeing an elevated number of amount of equipment that we're installing under those Contracts and that's what's putting the pressure above and beyond what we expected coming into this quarter. Yes. And maybe this is helpful. The reason we're not capable of giving you better guidance than we're giving you right now It's because we've been through a period where there's changes. Last year, the changes were due to COVID Rising and hospitals panicking and buying things to turn a lot of this into monitoring beds. And that Affected our margins because we sold not by contract, we sold a lot of capital that had a lower margin compared Sensors, because sensor volumes were down because there weren't as many elective procedures. So you have patients that would normally Come in 5 days for elective procedures. Now you have patients coming in for maybe a month or 2 for COVID. So you didn't see the same Rate of change with sensors. So that caused, as you know, us not being able to predict the margins properly last year. The good problem we're having again this year is it's hard for us to predict because last year was really an inflection point for many Institutions that have been sitting with old competitive technology, they realized at the moment of truth, They needed us. So that, plus our ability to come up with innovative products to help them, I I think it's won a lot of customers over. So we ended up with a record not only a record shipment of Capital and OEM boards that we sold, but in record set up new hospitals Contracting with us, which is seeping into this year. So it's really a problem of good fortune with the margins, but that's Also why we it's hard for us to predict better than we predicted because we think we're still beneficiaries of that goodwill and of that moment of truth where You know what, when you really come down to it, we're the best for patient care, we proved ourselves in the NICU In the pediatric and children area, but then when it came to adults, people used to say, Well, we're not sure you make a difference. Doctor. Hitchcock came up with that same year study, showed we made a difference. And last year, they saw that we made a difference with COVID patients. So I think that's why we're ahead of schedule in things that we hadn't we couldn't have predicted, Fortunately, but that's also why we can't tell you for sure what's going to happen beyond this year. And even then, They may go better than what Micah has baked in, in new hospitals converting to us, which could Improve our drivers, improve our sensor volume, but because of ASC 842, reduce our margins temporarily. Got it. That's helpful. It definitely seems like a high class problem. Okay. So just for my follow-up here. I wanted to ask on the Board number you posted here, which was quite good. I appreciate all the color you're providing here on the installations. Just conceptually, as we think beyond this year, which I think this year also would have been higher, if not Some higher board inventories with OEMs to start the year, but is the exit rate here in 'twenty one the right way to think about modeling forward board shipments? Or do we think about maybe a bonus level of growth on top of the run rate here that's now seem to be taking a little bit higher? Yes, Jason, if you look at our implied guidance, it's just over $65,000 a quarter. And I think that that's Kind of the way that we look at it right now until we give further estimates seeing how the rest of the year goes. So I think that's That's probably the way to look at it going forward and we'll update you as we continue to see success in contracting. Okay. All right. Thanks, Mike. Appreciate it, guys. You're welcome. Next question comes from the line of Mike Pollard from Baird. Your line is now open. Good afternoon. I'm going to ask one more on this scintillating gross margin discussion. Yes, no, here. So as you assess understanding it's imperfect, as you assess the surprise or the drivers of the surprise Versus your prior expectation, what portion of it is replacing competitive boxes With your boxes and what portion of it is putting boxes next to beds that didn't used to have boxes? Not year over year, but like what did you miss? What piece of that was better or is trending better than what you thought 3 to 6 months ago. That question may imply what we said we had record breaking new customers and renewals Then you thought we're aggregating it. No, we have record number of new customers and record number of renewals. And typically with renewals, we don't place as much new equipment because they already have our equipment. So it's really the vast majority of this is for new customers. Okay. Helpful. Lidko, I heard the comment from Micah on The U. S. Launch maybe later this year, perhaps next, that seems to be a great opportunity for you. But in the meantime, I'd just be curious is that The ex U. S. Piece contributing as expected. I think we were modeling about a point of revenue contribution in the quarter. Is that give or take Where Litco is? Yes. That's correct. Yes. And Litco is going great. It's in many ways doing better than what we expected. Okay. I want to ask about Apple. I mean, Appreciate the carve out of the new item, dollars 5,000,000 in the quarter. I guess bigger picture, this just seems like the 3rd Mike, real quick, just to be clear, dollars 5,000,000 for the year, majority of that in the back half of the year. Okay. Helpful. Zooming out on this, it seems to be the 3rd front in this matter. And I'm just curious for a little more color, How do you underwrite this internally, the total expense you're willing to the total investment you're willing to make, the potential payoffs here, the timing of Visibility, any I get a lot of questions on this. And I know there's a lot of fluidity and not a lot of good info at the moment, but your latest and greatest thinking on this, I Think would be helpful. Yes. Well, we've never done ITC before. We're familiar with patent litigation. And as you know, with Medtronic and with Philips, that ended up costing between $15,000,000 to $30,000,000 each. But ultimately, it was we not only were able to in the Medtronic case and join the Infringent product, But it led to Medtronic nearly $1,000,000,000 in royalties and damages and with Philips $300,000,000 in damages and a new partnership that I think has been really helpful to our company. With Apple, with the trade secret and patent infringement, that is not going to go to trial probably until end of 2020 And that will be the normal cost of patent litigation, Give or take some, I mean Apple has not been easy to do things with. They do everything they can to take away your rights Discovery, and we've been fighting that. And I think we're making some headways in the court on that. So with that And that could eventually, if we went, that could be significant damages and who knows what else. But On the ITC case, we don't get any damages. That is purely we're seeking an injunction, And that will take about 18 months probably and will probably cost $1,000,000 a month. And but we're seeking injunction of the Watch 6, which has our patented technology in it. And So that's probably the summary I can give you of that. Yes. No, it's really helpful color. And then last on that for Mike. Are all Expenses related to these 3 word streams going to be excluded now or is some of it in the adjusted numbers and some of it's out? Yes, Mike, as far as our traditional defense of our patents and the trademark Case as well or trade secret, I'm sorry, trade secret as well as a patent case. Those costs are already included in our non GAAP numbers. This is a very unique case in terms of the ITC, the complaint that we filed, which represents pretty significant Spend over a very pretty defined period of time. It's very short duration of time, call it up to 18 months. So that's why we're excluding that and giving you visibility to the spin related to the ITC. Excellent. Thank you for taking my questions. Thank you. Next Question comes from Ravi Misra from Berenberg. Devin here for Ravi. I wanted to talk a bit about home hospital automation a little bit more. We discussed it kind of in detail and it was a big Q last year or last quarter for you. In regards to the kind of expansion and utilization of Hospital Automation and Monitoring, how do you see the recovery on kind of the delta variant there Any adoption versus kind of any change from last quarter? And then I have a follow-up to that, Well, Hapo Automation is going very well. People are seeing the value. You saw the study maybe that we did a press release on that showed there's less nursing time At the best side, which of course helps with dealing with any disease, especially an infectious disease like COVID, Delta variant. And then as far as the business is going really well, our the way we kind of track this is the driver of shipment and then there's Annual revenues, I know we had some really good quarters in terms of driver shipments and that has continued. But I know from Annual revenue increase has been double digit, maybe close to 30% growth this quarter compared to the same quarter a year ago. Okay. Thanks. And then I just want to shift real quickly to Lidco and also NantHealth. With Midco, I know you mentioned that, that could be meaningful kind of toward the end of the year. I'm curious how that plays in with the cardiac And the oximetry to any pricing power on the subscription with better algorithms and then also kind of rolling out That package together, is it already integrated with the Masimo dashboard? If you could just get some color into that, It'd be helpful. Well, it sounds like you've been talking to some of our customers. We have not only A better technology for cardiac output minimally invasively done. That's when we bought Letco Then the leading company in the space, but we also have a better cost and cost of ownership proposition for our customers. And it's gone really well. Customers are happy to see Masimo backing Lithco because even though in the past Lithco always won Clinically, there was such a small company, customers were afraid of taking a chance on them. So like I said, in many ways, Revenue wise, it is what it is. We said it's about a point, but many ways it's been better than we expected as far as customer excitement and Guys, we have time for a couple more questions. Mike Mattson? Operator? Mike Matson, your line is now open. Yes, thanks. So I guess I have one yet one more on gross margin. But Putting aside this mix issue and the Board issue, I wanted to see if you could just comment on any other kind of drivers of gross margin over the next few quarters. I know the RD sensor, I think in the past that was helping your gross margin. I don't know if that's run its course. And What about the other new products you've launched and things like inflation, etcetera? Is any what are the kind of puts and takes that are for gross margin aside from this mix Yes, Mike, if you kind of strip out the headwinds from the higher monitor installations for the balance of the year, We continue as we see rebounds in elective procedures and how our SPHB 03 SedLine, those things are kind of Connected more to those rebounding surgeries, that will give us a nice mix benefit. And then if you think about The RD as we convert more to RD sensors, it's a higher quality Sensor, but we have some better margins on that sensor and that should continue to drive improvements in gross margins. And that's why we Have that long term plan as we try to drive our gross margins of 70% over time. Those are some of the key drivers to that improvement. Okay. Thanks. And then as far as the opioid safety net launch in Europe goes, What's the initial plan for who's going to be paying for that? Is it going to be an out of pocket purchase? Do you have any plans to seek reimbursement or have Yes. Initially, it's going to be out of pocket purchases, So we are working with reimbursement groups outside the U. S. To seek reimbursement for them as well. Okay. Thank you. Thank you. Okay. I think last question is from Marie Maritibo, your line is now open. All right. Thank you for squeezing me in this evening. I won't To ask any more on gross margins, I think we've asked everything there is to ask there. But I did want to ask about sales guidance. You had a great quarter, all the indicators looked Good shipments, sensor volumes, really a lot of positive commentary and you beat consensus by about $10,000,000 or so. So why not take guidance up a bit higher on the sales front? Just would love to hear a little bit more of the thinking around that. Yes. Marie, I'll comment first and Joe can add. If you look at our guidance for the year, we're raising it by 11,000,000 And that's in excess of how we exceeded expectations in the Q2 and it really reflects The additional level of driver shipments for the back half of the year. And of course, As you know, we're being thoughtful and prudent about our guidance. We're still in the first half of the year and coming out of a pandemic from We're just being thoughtful and you could say somewhat conservative and provide high confidence guidance. So that's how you should think about it. Sure, sure. Yes, and I agree with that assessment of yourself, Micah, very good. And then I guess I'll ask one on international. We used to hear from time to time that there'd be some big tenders coming in. So I would love to just hear kind of your expansion on the international front. Any new countries you've been able to get into, any new governments you've made relationships with, that sort of issue? We just haven't talked about international specifically in a while. Thanks. Sure. We have not expanded much directly this year internationally, But we are making really good progress in the countries that we are directing from major European countries to Asian countries and we just recently got some really good reimbursement And for non invasive hemoglobin in Korea, which we think is going to be good. And So yes, things are going really well. I think this quarter international was what 34% of our total revenue? Was it some Yes, around 30%. Yes, about 30%, yes, 30% of our revenues. So we Expect international to do more and more as we continue growing. All right. I appreciate so much. Thank you. Thank you so much. Everyone have a wonderful afternoon and look forward to our Q3 earnings call where we can talk about margins. This concludes today's conference call. Thank you all for your participation. You may now disconnect.