Masimo CEO: Our Business Is Back on Track

Masimo has had a lot of distractions in the past couple years, between its high-profile patent battle against Apple plus tensions between CEO Joe Kiani and the board.

In March, the company revealed plans to separate its controversial consumer business. The same week, Politan nominated two more candidates to Masimo’s board.

The company’s first-quarter sales beat and improved revenue outlook for the year could go a long way toward quieting the noise, though.

“Masimo is back on track,” Kiani said during the company’s first-quarter earnings call this week.

Marie Thibault, a medtech analyst at BTIG, noted in her report Tuesday night following Masimo’s earnings call that there was “a lot to like” even beyond the first-quarter beat. She pointed to an above-consensus Q2 guidance, the lift to the company’s full-year outlook, an accelerated shift in sensor volumes produced from Masimo’s Malaysia facility driving higher gross margins, high-level details on two potential options for the consumer business separation, and significantly higher estimates for the company’s healthcare operating margins (the business segments expected to remain with Masimo after the split).

Thibault wrote that Masimo’s healthcare sales outlook for 2024 looks achievable, and BTIG’s buy thesis on the company is focused on a return to consistent quarterly results, cash generation, and improving margins.

Related:Masimo Faces Second Proxy Fight in Wake of a Major Announcement

“This Q1 print checked all of those boxes for us,” Thibault wrote.

Masimo eyes two paths for consumer split

Masimo CFO Micah Young said the executive team is working to gather information and assess the advantages and disadvantages of potential pathways for a separation. The conclusions are expected to be presented to the board for its ultimate decision, he said.

Young noted that the company is considering options such as a spinoff of the consumer business in the form of new stock issued to existing shareholders as a dividend; or the sale of at least a majority stake in the consumer business to a third party.

“A key objective is that any separation would result in a full deconsolidation of the two businesses in our financial statements,” Young said. “Another key objective for the proposed structure is to give both businesses the appropriate capital structures and resources to achieve long-term success and maximize shareholder value.”

Assuming a separation is completed as outlined, Masimo estimates that healthcare non-GAAP operating margins would improve by 220 to 380 basis points to reach 23% to 25%. “This would be a big step towards reaching our long-term goal of 30% operating margins for the healthcare business,” Young said.

The CFO also noted that if the separation transaction results in cash proceeds to Masimo, the team expects to use those proceeds to pay down debt and reduce interest expenses, which currently sits at $47 million in the guidance.

The timetables for the two types of transactions on the table are quite different, Young said. A spin to shareholders is likely to be more time consuming and could take 12 months to complete. The sale of at least a majority stake in the consumer business could take 4 to 6 months following board approval, pending regulatory clearances.

“We're advancing the evaluation quickly but rigorously and expect to make significant progress over the next few months,” Young said.

The company expects to update investors after the board makes its decision on which path to take.

“While we believe the consumer health and professional healthcare have greater potential together, the board and management are confident we have come up with a way to enact our shareholders' wishes without materially sacrificing the vision we have for making lives better and building greater shareholder value,” Kiani said. “With the proposed separation, the consumer business will consist of consumer health products such as freedom and consumer audio products, including hearables, powered by Masimo technology on some Masimo team members, the consumer business will be appropriately resourced to continue to innovate and pursue this fast-growing and developing market.”

The remaining healthcare business will retain everything else, he said, including Masimo’s telehealth and remote patient monitoring products.

“As Micah shared earlier, we expect the concede separation will have an immediate positive impact on the profitability of our professional health care business. I'm incredibly excited about the future for both Masimo businesses and look toward sharing more details about a separation as we make further progress.”