Supply Chain Storm Slams Masimo in Q1

The COVID-19 pandemic brought on a global supply chain crises that manufacturers will likely have to navigate for the better part of this year, if not longer. While many medtech companies have struggled with supply chain issues throughout the pandemic, Masimo had been navigating those challenges rather well.

That tide apparently changed in the first quarter, however.

"In prior quarters, we were able to weather the storm of COVID-related supply chain issues," Masimo CEO Joe Kiani said in a preliminary first-quarter earnings announcement. "However, these issues impacted us in the first quarter. We have strong customer demand, and had we been able to ship what was ordered in the first quarter, our revenues would have exceeded expectations."

Citing shortages of critical components in combination with other supply chain issues, including freight carrier delays, the Irvine, CA-based medtech company said it now expects its product revenue for the first quarter to range from $285 million to $315 million. That is below analysts' consensus forecast of $330.1 million.

Marie Thibault, a medtech analyst at BTIG and a former MD+DI managing editor, pointed out in a report that the first quarter revenue range is rather wide ($30 million). She said this implies that there are still products in transit to customers in the last few days of the quarter that could impact exactly where revenue lands.

"The magnitude of the miss is a steep departure from what we viewed as relatively confident commentary on supply chain challenges during the mid-February Q4 earnings call, which points to supply disruptions and shipping delays that cropped up or were exacerbated in the last few weeks of the quarter," Thibault wrote. "While disappointing, we acknowledge the difficult, unpredictable nature of today's supply chain and logistics environment, and expect [Masimo] is reinforcing its supply chain and working to recover."

Kiani said the company expects to fulfill its elevated level of open orders through the remainder of the year, and Masimo therefore reiterated its full-year revenue guidance of $1.35 billion. Masimo plans to announce its complete first quarter financial results May 3.

Micah Young, the company's CFO, said during Masimo's fourth-quarter earnings call that some higher freight costs had already been baked into the full-year revenue guidance.

"And we're coming off another record-breaking fourth quarter in terms of winning new customers, which has really kind of fueled that confidence for us as we're thinking about the outlook going forward," Young said during that Feb. 15 earnings call, according to transcripts provided by The Motley Fool.

Supply chain news sinks shares

Masimo's announcement Thursday sank shares by 6.34% ($9.86), bringing the stock's closing price to $145.54.

While it's not surprising that investors would react negatively to the news, it's worth noting that the company has been performing quite well in recent quarters. Masimo, which develops a wide array of monitoring technologies as well as tools designed to enhance productivity in healthcare, has seen high demand for its products during the pandemic. The company's installed base grew by 7% last year, while revenues for fiscal year 2021 grew by 8% against 22% revenue growth in 2020.

Of course, this wouldn't be the first time Masimo investors may have jumped the gun on news they didn't like. The company is currently in the middle of a $1.025 billion acquisition of Sound United, a consumer tech company that makes headphones and speakers as well as a software platform to connect devices in the home to the cloud. The deal puzzled analysts in February and caused Masimo's stock price to nosedive nearly 39%.

As for the supply chain issues, Mike Matson, a medtech analyst at Needham & Co., said in a report Thursday that Masimo's management indicated to him that the issues were contained to the first quarter.

"They have already resolved the component shortages by identifying new vendors and have placed deposits for future orders," Matson wrote in the report. "The freight issues were with mostly one particular company, and they are switching to other companies. And these were compounded by an increased number of shipments late in the quarter due to the component shortages that left less room for error."

The analyst also noted that Masimo plans to produce more products to start to catch up, and the company does not expect any significant impact on its costs or margins from these supply chain issues.