Masimo Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

Key Takeaways

  • Masimo reported Q2 revenue of $455 million and non-GAAP EPS of $0.62, missing expectations and cutting full-year revenue and earnings forecasts substantially.
  • Healthcare segment revenues fell 21% year-over-year due to flat inpatient volumes versus 2019, lower sensor orders and delays in large orders, prompting over $100 million in expense reductions.
  • Non-healthcare revenues declined 17% on a pro forma and constant currency basis amid weak premium audio demand and price competition, though hearables grew to over 7% of segment sales.
  • Masimo is set to launch new consumer health products, including the Denon Pearl hearables and Stork baby monitor at major retailers, with FDA 510(k) submissions pending for W1 and Stork.
  • Recent FDA clearances for the Radius VSM wearable vital-signs monitor and Opioid Halo overdose detector bolster Masimo’s U.S. product pipeline and market introductions.
AI Generated. May Contain Errors.
Earnings Conference Call
Masimo Q2 2023
00:00 / 00:00

There are 10 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to Masimo's Second Quarter 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 Kamerman, Masimo's Vice President of Business Development Investor Relations.

Speaker 1

Thank you. 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 2023 financial performance. However, they are subject to risks and uncertainties that could cause actual results to differ materially.

Speaker 1

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 Generally Accepted Accounting Principles or GAAP. We generally refer to these as non GAAP financial measures. In addition to GAAP results.

Speaker 1

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. Further, we will also be referencing pro form a financial measures, which include historical results for SoundUnited prior to the acquisition date of April 11, 2022.

Speaker 1

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 ks 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 section of our website to supplement the content we will be covering this afternoon. I'll now pass the call to Joe Kiani.

Speaker 2

Thank you, Eli. Good afternoon and thank you for joining us for Masimo's Q2 2023 earnings call. As we discussed 4 weeks ago, we are disappointed with the level of sales we achieved in the Q2 in both segments of our business and have reduced our revenue and earnings outlook for 2023. Micah will provide a detailed review of the quarter and our updated guidance shortly. But I want to share our view of prevailing trends in our key markets, how Massimo is doing in this environment and how we're responding to them.

Speaker 2

In healthcare, we believe inpatient volumes this year remain close to flat relative to 2019, while our original 2023 guidance contemplated a step up in inpatient volumes above those pre COVID levels. At the time we provided our guidance, we also had large new product orders in the pipeline that we hoped would help us exceed our guidance. And if patient census growth was lower than expected, these large orders would offset the lower than expected growth. Unfortunately, we did not see the inpatient census growth and those large orders have not come in yet. The forecast we are giving you today assumes we will not get most of the large orders and inpatient census growth will not return in the second half of twenty twenty three.

Speaker 2

If the rebound and inpatient census growth does not return, Then we have reset our baseline this year and we'll expect our normal growth to return in 2024, Given our strong hospital wins over the last 2 years. If inpatient census growth does return, then we could exceed our updated guidance this year. In the meantime, we're taking action to mitigate the impact of the shortfall in revenue. Notably, we will reduce our expenses by over $100,000,000 We're also refocused our field resources to speed up new customer conversions as customer scheduling and OEM equipment availability improves. On the consumer side, we are refocusing the team on hearables, wearables, stork and heels, While we continue to support the iconic Marantz, Denon, Paws and Wilkins and Polk brands and products.

Speaker 2

This focus should help us grow the business despite the challenges in the consumer audio markets. I'll provide you with updates on some of these new products, but now I will ask Micah to review our Q2 results in more detail and provide an update on our 2023 financial guidance.

Speaker 3

Thank you, Joe, and good afternoon, everyone. For the Q2, we achieved consolidated revenue of $455,000,000 and non GAAP earnings per share of $0.62 For our Healthcare segment, 2nd quarter revenues were $281,000,000 reflecting a 21% decline. Please recall that our Q2 2022 revenues benefited from the shift of approximately $25,000,000 to $30,000,000 of revenues from the Q1 2022 into the Q2 due to supply chain delays in the Q1 of 2022. Making the year over year comparison even more difficult. For the Q2 of 2023, we Missed expectations by approximately $66,000,000 Of this amount, approximately half was related to lower than expected sensor orders, roughly 40% of the shortfall is related to large orders that have been expected that have not closed yet.

Speaker 3

The remainder was attributable to lower We shipped over 64,000 drivers in the quarter, which is below our expectations for shipments of 75,000. We believe that orders for replacement monitors from hospitals to our OEMs have slowed as hospitals facing budget pressures delay purchases and our OEM partners manage their order backlog and inventories. As of the end of the second quarter, we estimate that our installed base grew 6% over our installed base at the end of the Q2 of 2022. However, we would like to point you to our record breaking level of new hospital contracts as those will bring new sensor cells and are better predictors of our future growth. Coming into this year, we felt good about our healthcare revenue outlook due to strong contracting with hospitals in the prior year in combination with some large new opportunities within patient monitoring and telehealth.

Speaker 3

Further, we expect to significantly reduce the equipment installation backlog associated with new hospital customer contracts at supply chain issues abated for Masimo and our OEM partners. We also projected sensor volumes to improve substantially with inpatient volumes pricing well above pre COVID 2019 levels. In fact, we saw data showing sequential improvements in inpatient admissions exiting last year, and we expected those trends to continue this year. Based on data we've seen and feedback from customers, we believe that inpatient admissions have remained roughly flat versus 2019 levels and inpatient surgeries are still down from 2019. To be clear, outpatient surgeries have increased versus 2019 levels, but even though we are in the vast majority of ambulatory surgery centers where the bulk of outpatient procedures occur, they predominantly use reusable sensors today.

Speaker 3

The procedure shift from hospital to ASCs, therefore, limits our consumable revenue growth, even though those patients are still being serviced with Masmo Technology. We do believe there are opportunities to move ASCs to single patient use sensors over time as we educate them on all the benefits of single patient use sensors. Sensor orders were lower than expected across most of our customers in the 2nd quarter. We have also seen extended lead times for equipment installations, which also affected sensor sales. Therefore, we are rebaselining our healthcare revenue level for 2023 and still see our long term growth rate targets as achievable, assuming that inpatient volumes grow annually at historical levels in the low single digits going forward.

Speaker 3

For our Non Healthcare segment, 2nd quarter revenues were $174,000,000 representing a decline of 17% on a pro form a and constant currency basis. This business is grappling with reduced discretionary spending on high end audio systems and a return of competitors who had previously been hampered by supply chain interruptions now being aggressive with price cuts as they get back into the market. Although we are unable to raise prices to the level we had plan coming into this year, we did not reduce our prices and have put discipline in place to sell based on our features and advantages. While non healthcare was hampered by the change in consumer behavior and competitive pressures, a bright spot in the segment was the hearables category, including headphones and earbuds, which we scaled up in the second half of twenty twenty two with the introduction of the Bowers and Wilkins PI7, PX7 and PX8 headphone models. The steady growth we are realizing was boosted by the June launch of Denim Pearl Earbuds with automatic customization of the sound spectrum for a personalized listening experience.

Speaker 3

Hearables revenues represented more than 7% of our non healthcare revenues this quarter compared to 3% last year. Now moving down the P and L. For the Q2 of 2023, We realized consolidated non GAAP gross margin of 50%. This includes gross margins of 60% for the healthcare business and 34% for our non healthcare business. Gross margins were negatively affected by the deleveraging impact of lower sales against our fixed overhead costs, a difficult pricing environment for consumer audio products as well as an unfavorable segment and product mix.

Speaker 3

For our consolidated business, our non GAAP operating profit was $59,000,000 versus $107,000,000 in the prior year due to the revenue shortfall and its deleveraging impact, partially offset by reduction in accrued expenses for performance based compensation. And our non GAAP earnings were $0.62 per diluted share, which included an increase of $7,000,000 in interest expense over the prior year period related to the debt incurred for the acquisition and share buyback in 2022. Again, we are disappointed in our 2nd quarter results, but encouraged by the strength in the underlying fundamentals of our business. We see good potential for a rebound in our healthcare and consumer businesses buoyed by hearables and the soon to be launched consumer health products with our consumer team. We are committed to preserving profitability by implementing a variety of expense control measures that should provide benefits beginning with our Q3 earnings.

Speaker 3

Our expense control measures include reductions in payroll costs as we slow down our hiring activities as well as significant reductions in performance presentation and other measures. Further, we have reduced marketing and promotional expenses within our Consumer Audio business to help offset the shortfall in those revenues. Now I'd like to provide an update on our 2023 financial guidance. For the full year 2023, we are reducing our guidance range for consolidated revenue $2,100,000,000 to $2,200,000,000 down from our prior guidance range of $2,415,000,000 $2,460,100,000 This change includes reductions in expected revenues for our Healthcare segment and our Non Healthcare segment. For Healthcare segment, we are maintaining the low end of our guidance range of at $1,300,000,000 this year as stated in our press release last month introducing a new high end guidance range of $1,350,000,000 compared to our original 2023 guidance of $1,450,000,000 to 1,465,000,000 The lower end of our guidance range assumes inpatient admission levels and capital sales trends seen in the Q2 continue through the remainder of the year.

Speaker 3

For the higher end of our guidance, we are assuming that some of the large orders expected in the first half will be realized in the second half. Further, we are assuming the pace of equipment installations hospital conversion wins will steadily improve leading to increased sensor volumes from new customer conversions in the second half. For the Non Healthcare segment, we are maintaining our previously stated revenue guidance from our July preannouncement of $800,000,000 to 850,000,000 down from our previous guidance range of $965,000,000 to $995,000,000 Our new guidance range reflects continued weakness in the premium and luxury audio categories for the remainder of the year, partially offset by continued growth in the hearables category driven by our new product introductions. We are accordingly lowering our guidance for 2023 non GAAP operating profit to $296,000,000 to $312,000,000 compared to prior guidance of $400,000,000 to $405,000,000 We are lowering our operating profit guidance by roughly $98,000,000 This is comprised of a $168,000,000 impact from lower revenues, a $32,000,000 impact from lower gross margins and a $15,000,000 impact from increased litigation costs. We expect to partially offset these headwinds with $117,000,000 in expense reductions, which is comprised of $46,000,000 from expense control measures and $71,000,000 from performance based compensation.

Speaker 3

Lastly, we are now estimating 2023 non GAAP EPS to be $3.35 to $3.55 down from our prior guidance of $4.70 $4.80 Turning briefly to our Q3 outlook. We are projecting consolidated revenue of $475,000,000 to $525,000,000 with healthcare revenue of $305,000,000 to $335,000,000 and non healthcare revenue of 100 and $70,000,000 to $190,000,000 Further, we are projecting non GAAP operating profit of $50,000,000 to 60,000,000 a non GAAP EPS of $0.50 to $0.64 Please reference the earnings presentation on our investor website for further details. In closing, although we are rebalancing our healthcare revenues this year following the large expansion in our business since 2019, the fundamentals of our healthcare business remain strong. Notably, new hospital customers continue to switch to Masimo technology faster than ever, increasing our share of the hospital market And we achieved record contracting in the first half of the year, which has contributed to a 12% growth in our unrecognized contract revenue versus the end of the Q2 of 2022. With that, I'll turn the call back to Joe.

Speaker 3

Thank you, Micah.

Speaker 2

Masimo is an innovative, mission driven, adaptive and resilient company. In addition to the short term actions to adapt to changing market conditions that we've already discussed, innovation to drive profitable growth from products that improve lives across all our businesses remain a key focus and source of vitality. Our data informs us that our business remains very strong. Starting with consumer health and wellness, We launched the 1st new hearables product based on our adaptive acoustic technology during the Q2 and it has been very well received in the marketplace. These next generation earbuds are being marketed as the Denon Pearl and Pearl Pro to leverage Denon's heritage of world class acoustics.

Speaker 2

We've seen nearly 200 positive press reports on Pearl since the launch in June. Initial demand from existing retailers for denim Pearl has been very strong As sales for the products are likely to be above our initial forecast formulated earlier in 2023. In addition, we've received many inbound requests by new retailers to carry Pearl. We're nearing the launch of our Stork baby monitor with some very large well recognized mass market retailers. Stork should be on the shelves soon.

Speaker 2

The retailers that carry Stork will be displaying the product in prominent locations. In addition, Stork will be available from 1 of the largest online baby registries. Our expectations for Stork are based upon its superior feature set and value to new parents, as well as the high visibility the product will have in marquee stores and online stores. We are not changing our 2023 sales guidance for our consumer health and wellness products at this time, We want our W1 watch and the Stork baby monitor to have SBA clearance. A 510 clearance for Stork will open the door for promotion of the product for healthcare.

Speaker 2

A 510 clearance for W1 will allow us to execute on our hospital to home strategy in the U. S, including preoperative and postoperative monitoring at home, as well as monitoring patients with chronic diseases such as congestive heart failure and COPD, similar to our current efforts outside the U. S. In Q2, we received 2 long awaited and important FDA clearances for Radius GSM wearable vital signs monitor and opioid halo for detecting opioid overdose. We have finally launched these products in the U.

Speaker 2

S. We're seeing great customer excitement for these new products. Lastly, we recently secured a multimillion dollar contract for our centroid body position sensor with a large healthcare system that sees the high potential of Centroid to help reduce the incidence of caustic pressure ulcers with their patients. To conclude, while we regret disappointing our investors with a large revenue and earnings message in Q2, We are happy to report strong market share gains in our healthcare business and customer excitement around Pearl, Opioid Halo, Radius VSM and W1. We will soon launch Stork and begin to execute our Consumer Health Business Plan.

Speaker 2

Masimo has faced challenges in the past and has always overcome them to evolve into a stronger company. We are confident that we will move past the recent shortfall and achieve great results for patients, clinicians and our shareholders alike as we continue to pursue our mission to improve life. With that, we'll open the call to questions. Operator?

Operator

Thank you. Your first question comes from the line of Matt Taylor with Jefferies. Please go ahead.

Speaker 4

Hi, guys. Thanks for taking the question. So I wanted to ask Kind of a 2 part question is related, but basically wanted to understand from you how Transient UVE's issues are and you referenced in your prepared comments the ability to get back to kind of your normalized growth rate in healthcare in 24. I guess I'm wondering if these comps are easy and some of the sales are getting pushed, do you think 2024 could actually be a stronger The normal year or why would it just go back to a normalized growth rate?

Speaker 2

Well, 2024 Maybe even stronger than normal because of the availability of some of the new products And our push into telehealth and also the consumer health. We see that as a very promising business. On the census side, what we don't know whether the shift to outpatient surgeries at ambulatory surgery centers are an anomaly due to shortages of nurses and the pressures hospitals have for inpatient care or is that what surgeons and patients prefer? If it's an anomaly, that would be another reason next year will be a better growth year than normal for us. But assuming it is not, we believe this is our baseline.

Speaker 2

And at least if we get the normal couple of percentages increased consensus beginning 2024 compared to 2019, then we should do well. And the final point I want to make is we have the bulk of pulse oximetry monitoring into ambulatory surgery centers, But they use reusable sensors. And reusable sensors are unfortunately, even despite the best efforts to clean them in between surgeries carry bacterias that are dangerous to patients. So we plan to Make it more concerted effort in educating the ambulatory surgery centers on the advantages to patients and maybe their businesses By using single patient use

Speaker 5

sensors. Okay. Thanks. Thanks, Joe. Could I

Speaker 4

ask maybe just one follow-up? Yes. That's what you're scratching your head a little bit because normally your business is very stable and you have this volatility here. Could you help us you called out a number of factors that impacted the Q2 and the downward revision on the guidance. Maybe help us understand the bridge of the different components, if you can estimate how much was caused by sensors versus OEM delays and orders, just to give us a better picture of what's going on underneath the hood.

Speaker 2

Sure, sure. We'll try. I'll give you a high level, then maybe Micah can get More granular. We came into 2023 with incredible momentum in all of the over the normal new contracts that we had in 2022 2021. And we expected as we finish our installations of those, we will push our normal business up by several percentage points.

Speaker 2

Some of those got delayed despite our best efforts. Those installations did not occur. We're not going to even a higher gear, calling all of our clinical specialists to support the installation given at least at this point it looks like the hospitals Are ready to doom finally and the OEMs can deliver the monitors. So some of the revenue shortfall was because of that. But probably the biggest factor was lower purchase of sensor by our customers that we anticipated.

Speaker 2

We not only anticipated a return to normal growth off of 2019 due to the pent up surgeries, But we also thought they're not going to order less. They ended up not only returning to the increased demand because of the pent up procedures because They pushed those pent up procedures to outpatient setting, but they ordered less from us. Sensus and inpatient went down. So we could have anticipated that. And I think one of the things that I had hoped When you're doing these projections, you're always wondering, especially in a dynamic situation would come out of COVID.

Speaker 2

You wonder what do you have as a backup plan in case some of your assumptions don't pan out. And for our backup plan, we had several large Business that we anticipate at least one of them would close. And unfortunately, all of them got delayed. Most of them things out of our control. I think one of them due to fear of shake up at Massimo because of the proxy war.

Speaker 2

But nonetheless, all of these factors that we had hoped would either help us flow our numbers out of the water like we'd like to, But at minimum, save us from maybe bad assumptions we were making at the beginning did not materialize. And like I said in our prepared remarks, at this point, we're kind of tightening down expecting the words that not only census won't return, But those large orders won't happen this year. So I hope that helps. Michael, do you want to add anything to that?

Speaker 3

Yes. I think, Matt, in the prepared remarks that I mentioned, The large orders are about 40% of the miss, 50% was due to the lower than expected sensor orders And then the remainder is due to capital and installation impact. If you look at the your question was, can you break down the lower the expected sensor orders. It's very difficult from that standpoint. Just one, we number 1, we came in the year expecting much higher than expected inpatient volumes, stepping up well above pre COVID levels.

Speaker 3

So we had some assumptions that were incorrect, but also it's difficult to separate the census from how customers are ordering. We don't have good visibility into the inventory levels, how they're managing those inventory levels. And it's hard to break out the impact separately In those buckets.

Speaker 2

But Matt, one thing I just want to emphasize is that I've been around software companies. Sometimes software companies have great contracting, But the revenues that they can account for that quarter doesn't hit quite right. Obviously, that's not our situation. But what was kind of similar for me is here we had again another record quarter in contracting with new hospitals and lack of any loss to our competitor. So here we're growing, and yet unfortunately our revenues declined.

Speaker 2

Unfortunately, it was a perfect storm.

Speaker 3

Can I just add one thing, Joe? Matt, we are looking at monitoring closely the ordering pattern of the Over the 1st 4 weeks, we are seeing that improve. And that gives us more confidence in the new guidance range we have. We'd like to I'll see him improve even further, but give us confidence in that guidance range we just put out today.

Speaker 6

Great.

Speaker 5

Thank you, guys. Thank you.

Operator

Great. Your next question comes from Marie Thibault with BTIG. Please go ahead.

Speaker 7

Hi, good evening. Thanks for taking the questions. I'm going to continue along the guidance path Pier and see if I could try to understand a little bit more about your margin expectations and also the cadence throughout the year for revenue. It does look like we're expecting a bit of a step up in Q4 for both sales as well as operating margins and I'm assuming most of the OpEx cuts will be coming in Q4. But if you can help us kind of figure out that cadence a little bit more that would be helpful.

Speaker 5

Yes. Mike, if you want to take that?

Speaker 3

Yes, Marie. So I mentioned I walked through kind of how we're thinking about the guidance range and that lower the guidance We're assuming the inpatient admissions and capital sales trends kind of seen in the Q2 continue through the year with modest.

Speaker 7

Okay. And I think I was also asking about the expectations for those OpEx cuts, the $100,000,000 in expense reductions and how we should think about over Q3 and Q4.

Speaker 2

Yes. So you'll see some

Speaker 3

of those come through in the Q3. We're already taking action on those. And then you'll see a bigger impact as we move into Q4 with all the reductions we're making also some of the marketing and promotional investments that are tied to the consumer audio business, some of those are heavier in Q4 as well. So Those have been pulled out to offset the lower revenues. So we've given you guidance on the Q3 And then you have the full year, so you should be able to model right into the 4th what we're expecting for the 4th quarter.

Speaker 7

Yes, yes. Okay, understood. And those cuts, the expense reductions will stay in place, even if revenues rebound better than you're assuming at this point?

Speaker 2

Not all of them. A big portion of the cuts If we're taking away the bonuses for the executives and many of our people and the RSU grants, all that kind of stuff. So if for some reason We deliver what we had projected at the beginning of the year, those will come back. But assuming we don't, they will be gone.

Speaker 3

Yes. But and to answer that question too Marie is, we've taken some cuts to really size our expense profile with our revenue profile this year as well. So we are still trying to make the investments we need to grow this business and balance that, but we're making the right taking the right actions to offset the lower revenues. Okay.

Speaker 7

That's well understood. One last question if I could. Just sort of high level now that we have the shareholder vote behind us, what can we expect on sort of next steps for corporate strategy? What might be next in terms of expanding the board to 7 members? Any clarity you can give us on what's next here.

Speaker 7

Thank you.

Speaker 2

Yes. The Chairman of our Nominating Committee is working on that. Unfortunately, due to the loss of our prior Chairman of Nominate Committee, we were kind of starting a little bit from scratch. But yes, we're eager to expand the Board and hopefully get more thoughtful people around the table.

Operator

All right. Thank you both.

Speaker 2

Thank you, Marie.

Operator

All right. Our next question comes from Rick Wise with Stifel. Please go ahead.

Speaker 8

Good afternoon, Joe. Hi, Micah. If I could start off, Joe, maybe you could just expand on your STIRK comments A little bit obviously very positive sounding exciting product as we all know. Maybe just Talked about the kind of incremental revenue potential, especially as we move into the 4th quarter, what you're assuming and maybe just remind us that you're thinking about the opportunity Even looking ahead to 2024 and beyond, what STORE could do if it all unfolds as you hope?

Speaker 2

Sure. Well, I think there are probably over 10,000,000 births in developed countries annually. And many people feel uncomfortable taking their baby home given the risk of SIDS and other issues. Stork not only To measure oxygen saturation and detect the breathing problem, but it's got a thermometer, a real time thermometer that continuously measures the baby's temperature for fever spikes and has an amazing camera technology with Lots of cool features are going to keep being added to it. So having shown that at one of the major baby conventions, many retailers and online retailers wanted it.

Speaker 2

And in fact, some of them have moved mountains to get them on their shelves Immediately, normally what would take a year, year and a half is happening in a matter of 2 to 3 months. One of our major retailers are very proud That we're going to bring on is Target. Target will be carrying Stork. So we are feeling that Stork could become a business that should be a couple of $100,000,000 a year. I know the potential might be $1,000,000,000 but Let's see if once we get the $200,000,000 we can now plan for the rest.

Speaker 2

So the demand has been strong and We're hoping once it gets in the hands of consumers, the way Pearl has gotten in the hands of consumers And has generated a lot of positive feedback from consumers as well as people who report on it. If those things happen historically, I think it will happen. But a huge element too for how we want to market it in the U. S. Because some of the things I just said to you, I can't say in the U.

Speaker 2

S. Is getting the FDA clearance. Right now in the U. S, we can't help parents. This can help detect SIDS Because of oxygen monitoring,

Speaker 8

we have

Speaker 2

to be careful how we phrase things. We can't be open about all its capability. But once we get the FDA clearance, we can really go to town and really take the covers off.

Speaker 8

Great. Mike, you talked about implementing expense control starting in the Q3 and You talked about some of the factors, but could you give us a little more in-depth perspective there, quantify a little bit what some of the biggest actions are and how quickly we're going to see it In the second half, how significantly and maybe the implications of some of these actions As a setup for 2024 and beyond for gross margin and operating margin.

Speaker 3

Yes, Rick. So Some things I've mentioned were to keep in mind our performance comp was about $71,000,000 out of the $117,000,000 For the reductions for this year, some of that is all tied into this year's performance comp. So as we perform that would Some of that would come back if we perform better and improve. And the other expense reductions, the $46,000,000 is through cash So those should carry into next year. And the majority of that is reduction in payroll costs.

Speaker 3

That's about $28,000,000 and then there's about $18,000,000 associated with the marketing and promotional spend for the consumer audio business.

Speaker 8

Okay. And just I'll sneak in one last one, if I could. Just maybe any update on the litigation with Apple and just any new perspectives or timelines you want to share at this point? Thank you.

Speaker 2

Yes, of course. We have 3 cases really. 1 is the ITC, which we should hopefully have the soonest Results. As you remember, we were supposed to get the commission to give us a decision on July 17. They pushed it out to October 10.

Speaker 2

We think hopefully that will stick. And assuming they go with the ALJ's 300 plus page decision, we should get an injunction barring President Biden's ability to stop it, which he has 60 days to do so. They did not stop the Lifecore's injunction, so we don't expect they'll stop ARMs. On the trade secret and patent case in California, the as you remember, the trade secret case, we unfortunately had a Home jury, and we just met with the judge. It looks like we will not go to trial till next year on that again, hopefully February March timeframe.

Speaker 2

And then on the Delaware case that Apple brought against us, they brought a patent case against us, I think 10 patents and then we responded with patent case against them I think 10 patents, but we also added an antitrust complaint and an unfair competition false advertising claim. And DACH is going a lot faster than we expected. The judge has been incredible and has been really holding all of our feet And that might go to trial next year, which will be unheard of. So that's where we're at.

Speaker 8

Thank you so much.

Speaker 2

Thank you, Rick.

Operator

Okay. Our next question comes from Jayson Bedford with Raymond James. Please go ahead.

Speaker 6

Good afternoon. Maybe just a couple. Just getting back to the lower sensor sales, the $30 plus 1,000,000 in the quarter. You kind of alluded to it in answering a question, but I didn't hear much in the prepared Remarks around inventory dynamics. Can you just talk through what you've learned maybe in the last month around inventory levels at the customer level and We implemented any kind of better processes here to gauge inventory levels going forward?

Speaker 3

Yes. So, Jason, what I mentioned A little bit earlier I touched on it, but it's difficult to identify inventory levels with our customers just because we don't have that visibility. But what we are watching very closely is this customer order patterns. The 1st 4 weeks, so called July, those order patterns have improved substantially from Q2. So They're heading the right direction.

Speaker 3

They're not where we wanted to be completely yet, but they do support that new guidance range that I just that we just put out today. So That's how we're monitoring it closely. We're continuing to put some try to get more and more information as we can. At That's the focus right now, let's just continue to monitor those who are in patents.

Speaker 6

Okay. Maybe just on a semi related topic price. I think last month you mentioned discounting. Can you just talk about Why the discounting started and then kind of where we are from a pricing standpoint?

Speaker 2

Well, the discounting why it started that we're still trying to understand that. But what I can tell you is These were not discounting at the time of contract. These were discounting post contract. And we once I became aware of it, I stopped it. And the reason I stopped it is because The sensor revenue is part of our razor blades, it's part of the razor razor blades strategy.

Speaker 2

And while we have given a lot of freedom to the sales force to discounts our capital, even give away our capital. I never intended them to reduce our sensor pricing. So we need to be disciplined on that. So I've asked it to be stopped. I've asked from here on.

Speaker 2

If anyone ever wants a discount or sensors, They have to get my approval, so this hopefully won't ever happen again. But bottom line, it wasn't being done for a long time. It was done for a short time. They thought they were free to do it because they had been allowed to discount capital and sometimes cables. And So anyway, that's what happened.

Speaker 2

And what's I think positive is that going forward, It should help our gross margins too because we're not offering these discounts anymore.

Speaker 6

Okay. That's helpful. Maybe just last one here. Has your view of the market opportunity changed In any way, your meaning upon reflection after 2Q, is there a sense that, hey, maybe the market is more Penetrate than we thought or does the opportunity still exist that you outlined back in December? Thanks.

Speaker 2

No, no. Like I said, it's really in the press release. I think I put in there, it's a tale of 2 realities. One reality is that our Market penetration is increasing. Our market share is increasing.

Speaker 2

I think there's a slide in your PowerPoint presentation that was put out In time for their earnings call that shows that, but unfortunately, the revenues decreased. I'll tell you, If there's one thing it made me believe is we had the right strategy in getting into telehealth, telemonitoring Consumer Health because as unbelievably reliable as our SET Sensor business has been over the past a couple of decades. This quarter, it wasn't. And the patterns changed. They went from inpatient to outpatient.

Speaker 2

And I know when we first put out our pre announcement, people kind of disputed that. I know our competitor disputed that. But it's showing that we were right, outpatient census did increase and we said that, but inpatient reduced, went down, decreased and that hurt us. So no, I think What we thought about the overall market and the overall future of Masimo is intact. I apologize.

Speaker 2

I regret at We missed our numbers in Q2, but it is not indicative of the health of our business.

Operator

Okay. Your next question comes from Mike Matson with Needham and Company. Please go ahead.

Speaker 9

Thanks. So I just wanted to go back to the kind of quarterly sequencing implied by the guidance. I think if you take kind of the midpoint of the Q3 EPS range and the midpoint of the annual EPS range, It's implying something like $1.39 of EPS in the Q4, which is a pretty big sequential step up as well as It's up year over year versus last year. So, the 3rd quarter number seems believable, but that Seems like a pretty tough number of reach, I guess. So I don't know, maybe you can explain like how you're going to kind of make that ramp?

Speaker 3

Yes. So, Mike, if you look at the cost actions we're taking, It's going to be more of a step up in the Q4. Plus, we're expecting stronger revenues in Q4 based on how we planned out the year and rebaseline our forecast. So the combination of the strength in revenues that we expect in Q4, Some large some of those large orders coming in, in that guidance range, as well as the expense reductions taking hold. All right.

Speaker 3

And then just

Speaker 9

wondering if there's any kind of second thoughts on the SoundUnited deal here just given what's happened. Look, I understand the consumer health strategy, but the way you're talking about Stork, for example, it sounds like there's a tremendous amount of retailer interest there. I'm not really convinced that you need a $1,000,000,000 speaker company to get that product into this one of the shelves at these retailers. For example, your competitor outlet, I know Best Buy sold their products. They don't own a $1,000,000,000 speaker company.

Speaker 9

Just wondering if you'd consider maybe exiting that business and focusing back on the healthcare business?

Speaker 2

Well, look, reasonable minds disagree and Massimo has a lot of parents and I understand People have different views on things. When we bought Sound United, we said, hey, give us 3 years. If we haven't proven this thing is going to really do what we say it is, We'll get out of it. Not only that thought hasn't changed, everything today tells us it was the right move. And secondly, we have a thriving healthcare business that I did not want to take our eyes off of.

Speaker 2

I wanted to make sure the current management team runs that optimally. So we needed a new team To optimally run the consumer health. And the Sound United team has done a great job. All these contracts we have now for Stork, For parole, that's all done by them. And yes, well, maybe my team could have done that, but it may have distracted them from the healthcare business.

Speaker 2

And lastly, the fact that we got in and refocused Saum United On the hearables, which is about a $50,000,000,000 to $85,000,000,000 business depending how far you go into it, whether you're just doing streaming music and voice calls or you want to improve hearing for people that have lost hearing on a low level to moderate level. That's a huge opportunity and already it's working. So, no, I'm sorry you still feel like I should get rid of it, but we don't We still think it was the right decision and we're going to do our best to prove it, but we're not going to be foolish about it. If we were wrong, We'll back out, but we're not done yet.

Speaker 9

Okay, understand. Thank you.

Speaker 2

Thank you. We have time for one more question.

Operator

All right. Our final question for today comes from Vik Chopra with Wells Fargo. Please go ahead.

Speaker 1

Hey, good afternoon and thanks for squeezing me in. Just two questions for me. So I guess

Speaker 2

The W1 is pulse ox with ECG and it's going through the normal channel that these products go through. Stork is a pulse ox based product that's going through the normal channels with the FDA that look at oxygen desaturation like opioid halo or pulse oximetry in the healthcare side. We believe They're all under the 510 procedure, and we believe we're having great communication with the FDA about it. And hopefully, in the next 60 to 90 days, Both of them will get clear. But we've been we've worked with the FDA successfully over now 3 decades And sometimes some products get cleared in 30 days and some products get cleared in a decade.

Speaker 2

So let's hope those 2 are not going that direction.

Speaker 1

Thank you for the color. And then on my follow-up question, I heard your comments earlier about Expanding the Board from 5 to 7. But can you put a finer point around that sort of when do you expect to get the 2 additional Board members in? Is it by end of the year or Potentially earlier or later. Thanks for taking my questions.

Speaker 2

Sure, sure. We're going to try to get them in as soon as possible. Thank you so much everyone. Again, I hope from here on we don't have to have the best quarter to report and that fundamentals of the business match the revenues from the business. We appreciate your time, and we'll talk to you hopefully in the quarter.

Speaker 2

Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes today's call. Appreciate you all joining. You may now disconnect.

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