Masimo Corporation (NASDAQ:MASI) Q4 2023 Earnings Call Transcript

Masimo Corporation (NASDAQ:MASI) Q4 2023 Earnings Call Transcript February 27, 2024

Masimo Corporation beats earnings expectations. Reported EPS is $1.25, expectations were $0.95. MASI isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen, and welcome to Masimo’s Fourth Quarter and Fiscal Year 2023 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’m pleased to introduce Eli Kammerman, Masimo’s Vice President of Business Development and Investor Relations.

Eli Kammerman: 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 2024 financial performance. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Risk factors that could cause our actual results to differ materially from our projections and forecasts are discussed in detail in our 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 the company’s performance and sees these results as an indicator of the company’s ongoing business performance. The company believes that these non-GAAP financial measures increase transparency and better reflect the underlying financial performance of the business. Therefore, the financial measures we will be covering today will be primarily on a non-GAAP basis unless noted otherwise. Please note we have updated our non-GAAP definitions to exclude all legal expenses associated with our ongoing litigation with Apple.

Further, we will also be referencing pro forma financial measures which include historical results for Sound United prior to the acquisition date of April 11, 2022. In our presentation today, we will once again be referring to this business as our non-healthcare segment. 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-K and 10-Q in order to make informed investment decisions. In addition to the earnings release issued today, we have posted a quarterly earnings presentation within the Investor Relations section of our website to supplement the content we will be covering this afternoon.

I’ll now pass the call to Joe Kiani.

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Q&A Session

Joe Kiani: Thank you, Eli. Good afternoon, and thank you for joining us for Masimo’s 2023 year-end earnings call. We exited 2023 with growing momentum driven by record contract wins for the year in our healthcare business, important FDA clearances for innovative new products and strong growth in our hearables business. With stabilization of hospital census and operations post-pandemic our healthy contract backlog and our cutting-edge innovations in growing markets Masimo is well positioned for 2024. In addition to sensor utilization having stabilized, our hospital contract wins have more than doubled from four years ago within our target markets, which has resulted in meaningful gains in market share. The engine of our growth continues to be innovation.

And in Q4, we received numerous FDA clearances for innovative products to improve outcomes and reduce the cost of care some of which I will discuss later. Outside of healthcare, we are investing in the Masimo consumer brand and intend to realize rapid growth for hearables and wearables, as we launch a steady stream of unique products containing our proprietary technologies, a few of which I’ll talk about later. In fact, starting this quarter we are providing visibility into our hearables and wearables revenue so that you can see how we are performing in these strategic growth categories. For our financial performance in fiscal year 2023 consolidated revenues exceeded $2 billion with healthcare revenues reaching $1.28 billion the non-healthcare segment exceeded $770 million in revenues for the year.

The challenges of 2023 have forged a stronger more resilient Masimo and we have a bright future ahead. We are making a positive impact for healthcare across the world and improving Masimo’s long-term position. In the past six months, I toured many parts of the world visiting our customers and meeting our team. I can tell you resoundingly that our customers love what we are doing and where we are taking non-invasive monitoring. Our team is proud and excited to contribute to these bold efforts. With that I’ll pass it to Micah to review our fourth quarter and full year results in more detail and provide an update on our 2024 financial guidance.

Micah Young: Thank you, Joe and good afternoon, everyone. For the fourth quarter, our consolidated revenue was $549 million. Our healthcare revenues were $340 million which was near the upper end of our guidance range and represent a 4% decline on a constant currency basis versus Q4 2022. Our consumable and service revenues grew 1% partially offset by a 24% reduction in capital equipment and other revenues versus the prior-year period. More importantly, our healthcare revenues increased 10% sequentially driven by expected seasonal increases and improved sensor volumes. Further our strong hospital conversions in 2023 have resulted in unrecognized contract revenue increasing 4% sequentially and 16% over the prior year to reach $1.5 billion.

This gives us confidence in our growth outlook for the healthcare business. For our non-healthcare segment fourth quarter revenues were $209 million down 23% on a constant currency basis versus prior year. This business segment increased sequentially due to the holiday season, but declined year-on-year due primarily to challenging macroeconomic conditions including high interest rates which weighed on consumer spending. Now moving down the P&L. For the fourth quarter of 2023 we reported consolidated non-GAAP gross margin of 50%. This included gross margins of 61% for our healthcare business and 32% for our non-healthcare business. For our consolidated business, our non-GAAP operating profit was $92 million and our non-GAAP earnings per share was $1.25 for the fourth quarter.

Finally through focused improvement in working capital and optimizing cash flow, we generated significant operating cash of $77 million, which allowed us to pay down a portion of our debt. Overall, 2023 was a year marked by uneven financial performance as we address shifting environments for both business segments. However, we made significant progress strengthening our market position which gives us confidence for 2024 and beyond. We also had significant new customer wins and a growing contract backlog in healthcare that positions us well for growth this year. Now I’d like to provide more detail on our full year 2024 financial guidance that we initially outlined in our pre-announcement in January. For the full year 2024, we are projecting a consolidated revenue range of $2.045 billion to $2.165 billion.

For our healthcare segment, we are projecting revenues of $1.345 billion to $1.385 billion representing 6% to 9% constant currency growth. For the non-healthcare segment, we are projecting revenues of $700 million to $780 million representing a 4% decline at the midpoint in constant currency. We believe gross margins will steadily improve throughout the year. For fiscal 2024 we are projecting consolidated non-GAAP gross margin of 52% comprised of 62% for our healthcare segment and 33% to 35% for our non-healthcare segment. We are intensely focused on improving our gross margin as the largest driver of earnings leverage for us. Our plan to transition a large portion of our sensor manufacturing to Malaysia is well underway and we expect to reap the benefits of increased efficiencies and lower production costs over the next few years.

We are also projecting consolidated non-GAAP operating profit of $307 million to $322 million. We expect to benefit from the improvements in gross margin and disciplined spending partially offset by the return of performance-based compensation to normalized levels. Moving further down the P&L we are now projecting non-operating expense of $51 million, a tax rate of 26% to 27% and weighted average shares outstanding of 55 million. Based on these assumptions, we are projecting a non-GAAP EPS range of $3.44 to $3.60. Turning briefly to our first quarter outlook. We are projecting consolidated revenue of $476 million to $501 million, non-GAAP operating profit of $63 million to $69 million and non-GAAP earnings per share of $0.67 to $0.74. Please reference the earnings presentation on our investor website for further details.

In summary, our outlook for 2024 assumes a rebound in revenue growth for our healthcare segment. There are many reasons to be positive about our prospects this year. Over the past– over the last two quarters, we have gained a better understanding of the shift in customer ordering patterns and have confidence that sensor volumes have stabilized. We have a strong contract backlog thanks to a record year for converting new customers and expanding our footprint with existing customers. With that, I’ll turn the call back to Joe.