Masimo Corporation
Q4 2020 Earnings Call Transcript

Published: 23 Feb 2021

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to Masimo's Fourth Quarter and Fiscal Year 2020 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'll be a question-and-answer session. I am pleased to introduce Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations.

[Eli Kammerman:]

Thank you. Hello, everyone. Joining me today are Chairman and CEO, Joe Kiani; and Executive Vice President of Finance and Chief Financial Officer, Micah Young.

[Joe Kiani:]

Thank you, Eli. Good afternoon and thank you for joining us for Masimo's fourth quarter and 2020 year-end earnings call. Last year was full of challenges for our customers and for millions of patients around the world who struggled to overcome the burden and effects of the COVID pandemic. Throughout 2020 as our customers in the frontlines responded to this crisis and tried to save as many lives as possible under life-threatening conditions, we responded to their demands to rapidly secure and install new monitoring technologies, enabling them to accommodate more critically ill patients than ever before even at home.

[Micah Young:]

Thank you, Joe, and good afternoon, everyone. As a reminder, the financial measures I'll cover today will be primarily on a non-GAAP basis unless noted otherwise. Our GAAP results and reconciliations to the non-GAAP can be found in today's earnings release as well as the Investor Relations section of our website. At the start of 2020, no one could have predicted how a virus would drastically change the lives of so many people around the world. The unwavering commitment of our global workforce was on full display, delivering trusted technologies to our customers and their patients at a time when they needed it most. Although, 2020 was a year dominated by many uncertainties, Masimo has established an even stronger foundation for improving patient outcomes and reducing the cost of care for many years to come. During the quarter, we shipped 83,000 noninvasive technology boards and instruments. For the full year, we shipped 472,000 technology boards and monitors, which is nearly 2 times our normal run rate. And as a result, we have now shipped approximately 2.2 million technology boards and instruments over the last 10 years. At the end of the fourth quarter, we estimate that our installed base has grown approximately 17% over our installed base at the end of the fourth quarter of 2019. For the fourth quarter, our product revenues were $295 million reflecting growth of 19.2% or 18.1% growth on a constant currency basis. This included an extra week of revenue in the fourth quarter, adding approximately 3 percentage points to our growth for the period.

[Joe Kiani:]

Thank you, Micah. When we look back at 2020, we see an unusual mix of adversity and accomplishment. While we were all dealing with the threats and catastrophic effects of the global pandemic, we came together with our customers and suppliers to help patients. Our brand promise has been accurate monitoring when you need at the most. More than ever with the life-threatening pandemic, the value of our brand came to be fully appreciated. Not only did our existing customers turn to us for more support, new customers turn to us more than any other year. We shipped nearly 2 times the number of technology boards and instruments in 2020 than in any other year and establish relationships with more new customers and ever. Our SET pulse oximetry performance, innovation and commitment to serve our customers are greatly appreciated and led to another record year for Masimo in terms of winning new customers, and renewing and expanding our partnerships with existing customers. Some of the significant new customers, we can mention our LifePoint, which has 89 hospitals across the United States, and Appalachian Regional hospitals, which has 13 hospitals in Kentucky. Our sales of technology boards, monitors, reusable SET pulse oximetry sensors, MightySat fingertip pulse oximeters, and wearables were exceptionally strong last year. While single patient use sensors used for elective procedures were more subdued. As many surgical procedures were cancelled or postponed. We expect to realize a visible reacceleration in growth for our single use adhesive sensor business this year as a result of many factors including elective surgeries coming back, a 17% increase in sensor drivers from last year's record-breaking demand, and a record year where we had 4 new hospitals contracting with us. I know many of you are wondering about our hospital automation business and the impact of COVID-19 on this new developing opportunity for us. You'll be glad to know that we were able to expand our customer base for hospital automation in 2020 and believe that this business has very exciting prospects in 2021. We're now offering a broad portfolio of hardware and software to automate the capture transmission, display and analysis of all of the information coming from all of the devices surrounding a patient regardless of brand. In addition to our Root patient monitoring and connectivity platform, we recently introduced a lower profile connectivity hub that we call iSirona. This new hub contains an expanded set of device drivers to enable connectivity with more types and brands of devices than we have ever offered. With Adaptive Connectivity Engine, we always had the best ability to rapidly connect everything in the hospital. And now, we believe we also have the largest device driver library for connectivity within the med-tech industry. As I mentioned earlier, we realized good traction for our Patient SafetyNet solution during 2020. And this product will likely help us introduce many other hospital automation modules, such as UniView, UniView

[Operator:]

Please stand by while we compile the Q&A roster. Our first question comes from Lawrence Keusch with Raymond James. Your line is open.

[Frank Louthan:]

Hi, this is Frank on for Larry. Thanks for taking the questions. I guess, just first off, obviously, there is going to be some significant comps in 2021, given the benefits you guys have from the pandemic. So what can you do to help investors understand the underlying growth when going up against these challenging comps?

[Joe Kiani:]

Well, I think, first of all, we've done our best to give guidance in the midst of an unprecedented time, both in terms of a pandemic that we're not out of yet, although it looks promising that we will be with the vaccinations that are available. Secondly, like you said, with a very strong 2020 and what will that mean for 2021? First of all, as I mentioned in our prepared remarks, we saw a 17% increase in our drivers, meaning it was about 2x what normally the increase is on a year-to-year basis. And we contacted our customers that have taken those increased drivers, not every one of them, but the top 30. And what we're seeing is that they're utilizing them, which bodes well for increased utilization of our adhesive sensors. Secondly, while we had a strong year, because we were dealing with COVID, most procedures were not happening at least almost through - almost by Q3, Q4, where they began happening at 60% to 80% level. We expect that there's pent up demand for elective procedures as well as the normal and given our larger footprint now in the world, we expect that we'll see growth, significant growth in our adhesive sensors sales. And finally, we weren't sure that in the middle of this pandemic, hospitals would want to do anything but just deal with the crisis. But instead, we saw a record year of hospitals willing to sign up with us to convert their hospitals to Masimo. And that was no small feat. I think it was partially because of our team and what they did, but it was more about what Masimo meant to people, at a time when it really mattered to have the best product to be able to trust the measurement, when you can't even see the patient, sometimes because they were at home with Masimo SafetyNet and sometimes because they kept them in the ICU room by themselves and watch the measurements from outside the room. Those numbers mattered like never before. And I think it was a great year for us. So bottom line, we've done our best to forecast what the year is going to look like. We have a lot to be hopeful about. But we also have concerns that we can't control. So let's see what happens.

[Frank Louthan:]

All right, great, thanks. And then, just one quick follow-up. Obviously, the opioid SafetyNet, that sounds like an exciting opportunity. Are you guys assuming any revenues in guidance this year? And on the timeline with the FDA, when do you think that might be able to get cleared? Thanks so much.

[Micah Young:]

Yeah, I'll take the first part. We're not including any revenues in our guidance for the year. And I'll turn it back to Joe for some of the commentary around the status.

[Joe Kiani:]

We have for the most part of our history had a very collaborative relationship with the FDA. Probably the most collaborative time has been on this project, Masimo SafetyNet for opioids. Not only did FDA designate as a breakthrough technology, they chose it as one of 8 products that could help this epidemic. So bottom line is we're in lockstep with FDA. FDA is guiding us and letting us know what they need. We are delivering to them what they need. And while we were conservative, not forecasting any revenues for the year, we will be disappointed if we don't launch this product this year in the U.S. So keep your fingers crossed. We'll see what happens.

[Operator:]

Our next question comes from Matt Taylor with UBS. Your line is open.

[Matthew Taylor:]

Hi, thank you for taking the question. So the first thing I wanted to start with was, Joe, maybe just following up on your comments on the customer can continue to use the boards that were shipped last year. If you talk about whether you think that's going to be a long-term trend and any color on how things have started here early in the year? We've seen Medtronic talking about pretty strong trend continuing in terms of monitoring and ordering. Is that something that you can speak to as well?

[Joe Kiani:]

Okay, well, I think what I can tell you is we're seeing so far that those products are in use. What we think we're seeing is that those products, there are more monitored beds now in hospitals than ever before. So, one of the things that we had anticipated for a long time is for every bed to become a monitored bed that was the entire general floor effort with patient SafetyNet. The Dartmouth-Hitchcock study did a 10-year study showing patients that were monitored with our technology did not die of opioid overdose. But the patient group that wasn't monitored, unfortunately, they had several deaths in that group. And they also showed huge savings annually from the use of the product, because it reduced rapid response team activations by over 50% and ICU transfers by over 50%. So bottom line, I'm telling you all this is, because I believe, as they begin using us, maybe because of the pandemic and the post-surgical wards in the general floors, I think they're going to keep using it, because it works. It makes their work safer, their clinicians more effective and saves lives, especially with patients who are receiving drugs like opioids that could affect their respiration. As far as the Medtronic comment, I'm sure they've seen growth. But to say that their shares I think grew over us is a misstatement.

[Matthew Taylor:]

Okay, all right. Thank you. I wanted to ask another one. You recently announced the U.S. release of the softFlow High-Flow Nasal Cannula. Again, I just wanted to ask how…

[Joe Kiani:]

Matt, could you speak…

[Micah Young:]

Matt, can you - yeah.

[Joe Kiani:]

Sorry, Matt, we can't hear you. Would you please speak closer to the microphone?

[Matthew Taylor:]

Is this better? Sorry.

[Joe Kiani:]

Oh, yes, much better. Thank you.

[Matthew Taylor:]

Okay, sorry about that. So, you recently announced the U.S. release of the softFlow High-Flow Nasal Cannula Therapy, which we've been thinking about for a while after the acquisition that you did. Do you think that could be something that's material this year? How should we think about the ramp of that product?

[Joe Kiani:]

Well, we wouldn't be marketing it if we didn't think it was the best product. We also think this category is an important category to help patients with their breathing. Yet, because we don't have experience in the U.S., we did not put any revenues for softFlow in the U.S. for 2021. So there's an upside to our numbers, obviously, softFlow takes off here.

[Matthew Taylor:]

Okay. And related, we saw recently you had some trademarks for products that look like they were consumer focused. And we've seen some other activity in the space in the public arena around baby monitoring. I was hoping, you could talk about anything that you are doing there in outside of the hospital? Or could do there in the future?

[Joe Kiani:]

Sure. Sure. When I started, Masimo, I named the project SET pulse oximeter, the codename was Stork, because we thought it would help deliver babies safely to home. At the time, there was concerned about sudden infant death syndrome, and this is going back to late 1980s, early 1990s. The research showed that most - unfortunately, most sudden infant death syndrome at home of babies was really due to parents killing their babies. So that kind of killed the whole SIDS monitoring world. However, we see an opportunity to help monitor babies at home. And we are working towards that. The company, I think, you're referring to that has recently gone public through a SPAC, their product was compared to our product at a children's hospital, Philadelphia, and was shown that they did not catch any desaturations of patients in their study. So unless they make significant improvements in our product, that product, unfortunately, is not going to do well, critically, at least in a relevant way. But bottom line, yeah, we are looking at not just monitoring adults, we're keen on monitoring babies. And you will see more things like that from us in the near future.

[Matthew Taylor:]

Great. Thank you very much.

[Joe Kiani:]

Thank you.

[Operator:]

Our next question comes from Mike Polark with Baird. Your line is open.

[Michael Polark:]

Hey, good evening. Thanks for taking the question. Joe, I appreciate the comments on hospital automation seems like the platform is coming together there. You mentioned promising. Curious - 2-parter. Curious, can you comment on how impactful financially hospital automation maybe in 2021? What is the number expectation built into the guidance? That's question 1. And then question 2 is, do you feel like you have a - nothing's ever complete. But do you feel like you have a full solution now? Or are there other components that you might look to faster organically or inorganically for hospital automation, as you think about the next 1, 2 or 3 years?

[Joe Kiani:]

Sure. Sure. Thank you. Thanks for the question. We are not disclosing unfortunately revenues from any particular product lines at this point. And Micah can go more into that for the ones that we are. As far as completed, no, it's not complete, although it's more complete than any other solution out there. We do intend to bring out more exciting features and products with this hospital automation platform. So - and hopefully some of them will come out the first half of this year, so stay tuned.

[Michael Polark:]

On the inventory, just as we move through 2021 knowing it's hard to frame, what's going to happen with the world, and - but is it reasonable to surmise that your days of inventory on the balance sheet will start to work down ratably as we progress through 2021? Obviously, the free cash flow number was limited in 2020 due to that build that you referenced.

[Micah Young:]

Absolutely, Mike, as we look at inventory, this past year was very strong operating cash flow year, when you think about it, we had over $210 million of operating cash flow, despite about over $90 million of inventory headwinds. So, again, to Joe's point in his prepared remarks, we build inventory to make sure that we didn't run out of parts that were needed throughout the pandemic. So we think that that's going to improve now over time as we start to get back down to approaching more normalized levels, and as we sell through that inventory, so that should be somewhat of a tailwind as we move forward.

[Michael Polark:]

All right. Thank you.

[Joe Kiani:]

Thank you. We have time for a couple more questions.

[Operator:]

Our next question comes from Ravi Misra with Berenberg Capital Markets. Your line is open.

[Iris Long:]

Hi, guys, thanks for taking my question. This is Iris on for Ravi. So, first, I have a follow-up question on SafetyNet, the remote monitoring pulse oximetry. So can you talk about what the demand for that product was like in the last few quarters? So how many hospitals have purchased it so far? And then in 2021, it sounds like the next focus is really just expanding into the opioid use case. And then beyond these 2 indications for COVID and opioid, will you be looking into maybe expanding the label for other indications?

[Joe Kiani:]

Certainly, we saw a modest increase maybe about 20%, 30%, to Masimo SafetyNet usage in Q4 compared to Q3 and 2-in-1 when we launched it. I think, we've got nearly 200 hospitals who are using it around the world, and monitoring many, many patients with them. As far as our opioid SafetyNet solution, we do believe it will have application beyond opioid or drugs of abuse that could cause respiratory problems. There's a huge opportunity and using it for COPD patients, and others, we're working with many hospitals in transferring their high-risk patients' home with our solutions, including the Masimo SafetyNet, Radius PPG solution. And our solution that we call Doctella, which is a care pathway app that basically has a care pathway for over 150 types of procedures that get done in hospitals, and helps patients stay on the regimen they need to stay on to not have to relapse back to the hospital. So it's going well. And we see a great opportunity and going into home with our monitoring technologies.

[Iris Long:]

Okay, great. Appreciate that. And then I have another follow-up. I want to talk about the LiDCO acquisition a little bit. Can you comment on maybe how big the market is for the hemodynamic monitoring market? And then, also, if you can share any thoughts on the competitive dynamics there? Thanks.

[Micah Young:]

Yeah, I think, we look at this market, as you know, a market opportunity that could be approaching $1 billion market for us. When you look at the broad range of applications we can provide as far as with LiDCO, you're dealing with more of the patient population that that have has existing A lines or using arterial lines with PVi, it's - that's combining with our PVi technology that can reach those who are on mechanically ventilated patients as well. So, it gives us a broad - much broader solution for things like fluid responsiveness and goal-directed therapy as well. So we look at it as a market approaching about $1 billion.

[Joe Kiani:]

Yeah, and as far as competitive landscape, we looked at all the companies that were in the space, and we believe that LiDCO's technology has the best performance. The clinical evidence is plenty that it is the best performing product out there. And I feel that as a small company, they could only accomplish so much. Hopefully, with our - with a bigger footprint now that Masimo can give this product and this integration in our products, and how they'll all feed into each other to provide a clear image of what's going on with the patient's oxygen delivery, cardiac output, fluid levels, I think will enrich clinicians understanding of the patients. So we're anxious to have it all done. The team that came with acquisition is very strong. We're happy to have them and we hope to build something really good together with them.

[Iris Long:]

Great. Thanks, guys.

[Joe Kiani:]

Thank you.

[Operator:]

Our next question comes from Jason Bednar with Piper Sandler. Your line is open.

[Jason Bednar:]

Hey, good afternoon, everyone. I wanted to start on gross margins. Micah, I think you said something in your prepared remarks the effect of the mix shift gradually reversing course in 2021. I don't want to over read your comments. But are you suggesting that gross margins will gradually ramp back to a more normalized level? And maybe we'll exit 2021 at a rate that's nicely above what we'll start the year? Or is the ramp more modest as we move through the year? I'm just really wondering, what's the best way to think about the progression as here we update our models, again, in light of that comment you made.

[Micah Young:]

Yeah, I think it's a - Jason, I think is a steady ramp with Q1 being the low point, of course, and Q4 being the high point. But if you think about it, it's going to - it's all going to be dependent too on underlying procedures, underlying volumes in terms of patient admissions into the hospital. So it's going to be very heavily dependent on that mix of sensors versus our instruments and boards. So we look at it more as probably more pressure in the first half, and some of those mix pressures are going to ease up more in the back half as things open back up, and maybe there's some backlogs of surgeries that happen that drives more sensor volumes in the back half of the year. So, I think, it's going to be a steady recovery from here through the end of next year. And hopefully, get back on track to where we were back in 2019 as we exit 2021.

[Jason Bednar:]

Okay, that's very helpful. Thanks, Micah. And then, Joe, I wanted to come back to something you said about your top-30 customers, because I think it's an important point for investors. And I know you said those customers are utilizing the drivers. But just wondering if you can offer any additional color on what the utilization looks like. Is it comparable to normalized driver utilization? Is it ramping towards normalized driver utilization? And if that's the case, when do you think you'll get back to more just normal utilization? Again, any extra color there would be great.

[Joe Kiani:]

Sure, sure. Well, as you know, our normal here, which we're very proud of, we do about 240,000 drivers per year. Last year, we did about 480,000, drivers. About 10% of those drivers were inside the ventilators of our OEMs. When we were wondering, just like you are, are all these devices going to get shelved as COVID drops? Or are they going to get used? Which, by the way, we still don't know, because COVID isn't done yet, it has dropped from the crazy highs that it was in January, and finally, below even the highs in June, July, but it hasn't gone away. So it's not like I'm telling you to draw a line. All I can tell you is that in Q1, when we interviewed our top-30 customers, they were using them. And their growth rate, we were very happy with, not just compared to the modest usages they were having in 2020, but the kind that we're having in 2019. So if that trend continues, my whole point was we should see 15%-plus growth in our sensor volumes this year. Now, whether or not we'll see them, I don't know, because it's just early in the quarter and not done with COVID. But that's all I could share with you, which I thought would be helpful.

[Jason Bednar:]

Okay, and very much super helpful. Thanks, Joe.

[Joe Kiani:]

Thank you so much, everyone, for joining us. I think there might be one more question. If there is, I'll be happy to take it, operator.

[Operator:]

Your next question comes from Mike Matson with Needham. Your line is open.

[Joseph Stringer:]

Hey, guys. Thanks for squeezing me in at the end. This is Joseph on for Mike. Just the first one, should be pretty quick. Just curious if there's any risk to your guys' ability to produce the boards and monitors, given the global chip shortage here in 2021.

[Joe Kiani:]

Clearly, we get impacted by shortages. In the past decade at least the shortages that came and left, we were able to manage those channels and get what we needed. Our suppliers are sensitive to us in that we are creating products that are needed for hospitals to do what they need to do for patients. So I know we typically get priority. I don't believe we're going to have a problem, but it's possible.

[Joseph Stringer:]

Okay, well, that's helpful. Thank you. And then, maybe just moving back to the softFlow High-Flow Therapy, is there any details you can give us about the market opportunity or the TAM there with that?

[Joe Kiani:]

Well, what I can tell you, while there were fears of using High-Flow Nasal Cannulas due to the fact that it did not seal entirely the airway of the patient, it was shown that it worked better for COVID patients. And I think a lot of people started seeing how High-Flow Nasal Cannula could be helpful to aide respiratory systems of patients. We believe this could become a more prevalently used product than the other means that are available out there. And that's why we decided to make the acquisition even before COVID. But I think COVID accelerated people's understanding of what this technology can do. So bottom line, if we were going to give you a number, we think that's going to develop to a $1 billion market. And we believe we have the best solution. Our solution doesn't require air to be connected to it. It creates its own air. It's a great German engineering. They've done it in a way that it doesn't make noise. The UI is good enough that could be used at home. Right now under emergency authorization, it can be used at home. And we will eventually hope to get the clearance for home usage in the U.S. But it has a lot of other benefits. Giving humid air right to the tip of the cannula in the nose is a unique thing here with this product. And we're really happy to be supporting it and making it available to our customers.

[Joseph Stringer:]

Awesome. Thank you very much.

[Joe Kiani:]

Thank you so much. Thank you all for joining us today. We look forward to our end of Q1 earnings call. And let's hope we'll be done with this pandemic and can restore some normalcy by summertime. Thank you so much. Have a great, great day.

[Operator:]

This concludes today's conference call. You may now disconnect.