Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Healthcare revenues grew 23% year-over-year, driven by strong hospital conversions and rising hospital admissions.
- Gross margins increased significantly, benefiting from cost reduction initiatives and the relocation of sensor manufacturing to Malaysia.
- Record level of new hospital conversion contracts amounting to $134 million, a 28% increase versus last year.
- Non-GAAP earnings per share grew 13% to $0.86 for the second quarter.
- Strong cash flow generation allowed the company to pay down $93 million of debt, reducing outstanding debt to $782 million.
Negative Points
- Non-healthcare revenues declined 11% year-over-year, affected by a weakening environment for luxury consumer purchases and a slow housing market.
- Rainbow consumable revenues declined 5% due to the timing of shipments outside the US.
- Non-GAAP operating margin for the consolidated business declined modestly versus last year due to the return of performance-based compensation to normalized levels.
- The potential separation of the consumer business is still under consideration, creating uncertainty about the future structure and financial impact.
- The company faces ongoing litigation with Apple, which could take another two to three years to resolve.
Q & A Highlights
Q: The core business performance appears to have improved significantly. Can you comment on what is different this time around and how you plan to sustain these improvements into the back half of the year?
A: (Joseph Kiani, CEO) The hospital census is very strong, with public hospitals reporting a 5% increase. Our business is driven by consumables, which are in turn driven by hospital admissions. We have a strong backlog going into Q3, and our successful hospital conversions have made us comfortable in updating our guidance.
Q: Can you provide an update on the JV partner situation and the August 15th exclusivity period?
A: (Joseph Kiani, CEO) We will not proceed with any JV unless the activist Board member agrees. The JV partner is working on getting one or two more partners, which is why they asked for an extension until August 15. Regardless of the JV outcome, we are committed to separating the consumer business to maximize shareholder value.
Q: The Q3 guidance midpoint is slightly below Q2. Can you explain the factors behind this?
A: (Micah Young, CFO) We are seeing strong contracting and installations, but we are also being cautious about hospital census. Historically, Q2 to Q3 has seen a slight step down in healthcare revenues, so we have factored that into our guidance.
Q: How is the Oxygen Reserve Index performing in the US, and are you seeing any revenue tailwinds from it?
A: (Joseph Kiani, CEO) The Oxygen Reserve Index is doing well in the US, with increased adoption of Rainbow sensors. The combination of Oxygen Reserve Index and cardiac output measurements is helping our Rainbow business, and we expect double-digit growth for the year.
Q: Can you expand on the progress of the Malaysia sensor manufacturing transition and other cost reduction initiatives?
A: (Micah Young, CFO) The transition to Malaysia is ahead of schedule, and we plan to complete it by Q4. We are already seeing efficiencies and expect gross margins to improve. Our engineering team is continuously working on cost reductions, which is helping to offset inflationary pressures.
Q: What gives you confidence in achieving the 30% operating margin goal?
A: (Micah Young, CFO) We believe we can get gross margins back to 66% through cost reductions and efficiencies from the Malaysia transition. Revenue leverage from our innovations and strong contracting will also help us achieve this goal.
Q: Can you provide an update on the Apple litigation?
A: (Joseph Kiani, CEO) We have two or three trials left, including a federal court case for patent and trade secret theft. We expect the Trade Secret trial in November and the patent trial later. We are also dealing with customs and border issues related to the ITC injunction.
Q: Given the strong Q2 results, what are the key factors that could impact your Q4 performance?
A: (Micah Young, CFO) We expect gross margins to improve in Q4 due to the Malaysia transition and cost reductions. The tax rate is also expected to be better, which will contribute to EPS growth. We have modeled in strong hospital conversions and census growth.
Q: What are the implications of the potential separation of the consumer business on your financials?
A: (Micah Young, CFO) Separating the consumer business could improve our non-GAAP operating margins by 610 basis points to 21% if we sell the audio business alone. If we divest both the audio and consumer health businesses, margins could improve by 260 basis points to 24%.
Q: Why do you prefer the JV option over just separating the audio business?
A: (Joseph Kiani, CEO) The JV option could provide more cash and retain upside potential for the consumer health business. It also allows us to leverage the consumer go-to-market team for our healthcare wearables and hearables, which would be challenging to do as a standalone healthcare company.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
