Joe Kiani: One point I just want to make sure the group gets, I’m sure Rick knows this but majority of our drivers come from OEMs. And during COVID, the OEMs ordered a lot. And post-COVID, it’s kind of come back down. I think they’re suffering mostly from dearth of capital dollars. We’re not tied to that. That’s why you’re seeing our true incremental hit a record $100 million because we are converting more and more hospitals. And a lot of that is driving up the drivers that we’re getting, not what they’re normally doing. So if we weren’t doing TIs [ph], is the way we’ve been doing TIs for a couple of years, you see even less driver because a lot of the OEMs are not doing that well.
Operator: The next question comes from the line of Marie Thibault from BTIG.
Marie Thibault: Congrats on a very nice Q1. Nice to see that guide moving higher for the year. I wanted to ask here about the operating margin that you laid out here in the slides for the remain co healthcare, the 23.2% to 24.8%, that was a bit higher than we expected. We were right there with you from that 600 bps of uplift from the consumer audio separation but I don’t think I was factoring in another 220 to 380 bps for additional separation adjustments. Can you help me understand what some of those adjustments are on sort of a practical level? And help us understand how you’re able to get that leverage despite gross margins not at where they were pre-COVID but even though they are improving, not at where they were pre-COVID. So I would love to understand that additional uplift.
Micah Young: Yes. Thank you, Marie. When you look at our health care business and kind of break that down, you mentioned the consumer audio. I’ll start there with consumer audio. Consumer Audio, we’re basically backing off $740 million [ph] of revenue and $29 million of operating profit in our guidance for the year, about 4% operating profit margin. And then, the 220 to 380 basis points is really the improvement from there, taking our healthcare segment margins, operating margins of 21% and moving those up to 23.2% to 24.8% range. What that is, is, if you recall, when we did the acquisition, we put in about a point of investment from selling and marketing expenses. But this also includes another carve-out of expenses for R&D expenses for the team that’s really focused on the wearable products for consumer health.
So when we look at the range, we’re estimating a range of $28 million to $51 million that would get carved out. Again, we’re going with a broad range because we still have a lot to work through internally before we can present to the Board what that — what the parameters look like. But that’s the range we expect. And that would land us at 23.2%, like I said, 24.8% and set us very well on that path to the 30% margin goal long term.
Marie Thibault: Okay. That’s really helpful to understand. And then I heard the commentary about cash flow from operations, generating some of that cash flow this quarter being able to pay down some debt. Pre-Sound United acquisition, one of the key strengths of Masimo was the free cash flow generation. Any way for us to think about with this preliminary estimate, what we could eventually see some of that free cash flow generation return to? Are there levels that we should think about or ways to back into some of those numbers?
Micah Young: Yes, absolutely. If you look at the carve-out costs and we laid those out in the slide, not only do you have on a non-GAAP basis, $28 million to $51 million. But we’re also assuming for now and we still got to work through a lot of this but we’re assuming 50% of the Apple litigation expenses get split. So that’s another, call it, $19 million for the year or $38 million in total but $19 million that we get carved out under that assumption. So what’s been weighing on cash flow has been the litigation expense and also just some of the expenses during the proxy season. And also, just last year, what’s been weighing on it is just we saw some increases in net working capital and now we’re starting to move that in the right direction with our accounts receivable and inventory management.
So I think we would expect to get our cash flow back on track for that long-term goal. Our long-term goal is to get that back up over time to $300 million plus. And it will take a little time to get back there. But I think long term, that’s where we expect to see that cash flow generation from the core health care business.
Operator: The next question comes from the line of Vik Chopra from Wells Fargo.
Vik Chopra: Two for me. So I’ll start with the first one. Really helpful that you put that slide out about the potential impact from the separation. But I was just wondering, when you expect to present the Board with a list of strategic options? Anything you could share about time lines? And then a follow-up, please.
Micah Young: Vik, it was very hard to understand that. What was that on the time line?
Vik Chopra: I’m sorry. I apologize. I was just wondering if you could share anything on the time line about when you can present the Board with a list of options?
Micah Young: We’ve got — we saw some work to do internally. We’re pacing as far as — right now, we’re working as fast as we can to follow the process. We’ve got some things we’re working through on both — on the various options we’ve laid out in the prepared remarks. And we can’t give a definitive time line at this point but we expect to make a lot of progress over the next 30 to 45 days.
Vik Chopra: Okay. Very helpful. And apologies if you already mentioned this before, I was jumping around on calls. But I think you initially assumed in your guidance, 0% to 1% in patient growth. I’m just wondering if you have an update to that and what impacts the higher rotation volumes or — that you’re seeing in the field out there and what impact that has to your guidance?
Micah Young: Yes. Yes. The strength of our quarter really came from sensor growth — sensor volumes that are both in the U.S. and Europe. That also based on what we’re hearing out there in the market is some have reported out early. Some have shown census as high as 3% right now. And we’re still waiting to see others report out but that’s definitely helping our growth. And if that continues, that could be upside for the year for us.
Operator: The next question comes from the line of Mike Polark from Wolfe Research.
Mike Polark: Question for Micah. Wondering if you can provide this disclosure the installed base or the driver base year-on-year in the first quarter, what was the growth rate?
