MASI - NASDAQ

Good afternoon, ladies and gentlemen, and welcome to Masimo’s Third Quarter 2022 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. And now I am pleased to introduce Eli Kammerman, Masimo’s Vice President of Business Development and Investor Relations.

Thank you, and 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 2022 financial performance. However, they are subject to risks and uncertainties that could cause actual results to differ materially. 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 with generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. In addition to GAAP results, 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. 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-K 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 of our website to supplement the content we will be covering this afternoon. I’ll now pass the call to Joe Kiani.

Thank you, Eli. Thank you very much. Good afternoon, and thank you for joining us for Masimo’s third quarter 2022 earnings call. I’m happy to report that we achieved results above expectations for the quarter. Our pro forma consolidated revenues increased 8% versus last year on a constant currency basis with 10% growth from our Healthcare segment and 5% growth from our consumer segment. These figures reflect above-market growth for both business segments. Our Healthcare business has been seeing solid growth as we are realizing a steady stream of new customer wins globally, and we are on track to see our installed base grow by 7% this year. In our consumer business, sales growth exceeded expectations as demand for premium audio products was strong. Bowers & Wilkins and Marantz are holding up well in the face of a challenging economic environment due to their reputation for exceptional quality and design. Our consumer and healthcare teams are working independently and collaboratively on multiple projects to create exciting new consumer products and professional healthcare products as well as innovative consumer health products. These products will incorporate technology and design from both teams that will be highly differentiated in their target markets, and we expect they will be well received. Now, I’ll ask Micah to review our third quarter results in more detail and provide you with an update on our 2022 financial guidance.

Thank you, Joe, and good afternoon, everyone. Before I get started, I’d like to direct you to our earnings presentation on the Masimo website, which covers much of the details that we’ll be discussing today. The financial measures I will be covering will be primarily on a non-GAAP basis unless noted otherwise. Further, I will also be referencing pro forma financial measures, which include historical results for Sound United prior to the acquisition date of April 11, 2022. In our presentation today, we will once again be referring to this business as our non-healthcare segment. We delivered strong results in the third quarter with revenues, operating margins and earnings per share exceeding the high end of our guidance range. Our consolidated revenue was $549 million, representing 3% reported growth and 8% constant currency growth on a pro forma basis. During the quarter – the third quarter, our global sales and operations teams did an incredible job of navigating through a challenging macroeconomic environment, ongoing supply chain challenges, hospital staffing shortages and slowing hospital admissions. For our Healthcare segment, third quarter revenues were $327 million, representing 6% reported growth and 10% constant currency growth. Our driver shipments for the third quarter reached over 76,000, solidly on track for us to realize over 300,000 driver shipments this year. At the end of the third quarter, we estimate that our installed base has grown by 7% over our installed base at the end of the third quarter of 2021. For our consumer non-healthcare segment, third quarter revenues were $222 million, decreasing 2% on a pro forma reported basis but increasing 5% on a pro forma constant currency basis. As I mentioned on our last earnings call, this business faced its toughest year-over-year comparison due to an exceptionally strong third quarter of 2021, which was above trend line due to the fulfillment of backward products. Despite the difficult year-over-year comparison, this business delivered solid growth due to strong performance by our premium Bowers & Wilkins and Marantz brands. Moving down the P&L. For the third quarter of 2022, we reported consolidated non-GAAP gross margin of 52.6%. Our margins were adversely affected by the impact of segment mix, foreign currency headwinds and persistent supply chain inefficiencies, as I described last quarter. For our Healthcare business, third quarter non-GAAP gross margin decreased 190 basis points to 64.6% compared to 66.5% in the prior year period. The year-over-year decline was expected and resulted from the factors just mentioned. For our consumer non-healthcare segment, third quarter non-GAAP gross margin was 35%, which represents a modest sequential improvement. For our consolidated business, our non-GAAP operating profit increased 15% to $81 million and represented 14.8% of total revenue and our non-GAAP earnings per share increased to $1 per diluted share. Now, I’d like to provide you with an update on our 2022 consolidated financial guidance. For the fourth quarter of 2022, we are projecting a consolidated revenue range of $581 million to $611 million. On a pro forma basis, our guidance incorporates $45 million of year-over-year currency headwinds, implying a constant currency growth range of 6% to 11%. If foreign currency rates hold at current levels, we are estimating approximately $70 million of additional currency headwinds in 2023. These negative currency effects will flow through our income statement to negatively affect our margins and operating income. For our Healthcare segment, we are projecting fourth quarter revenues of $337 million to $352 million. Our guidance incorporates $14 million of year-over-year currency headwinds implying a constant currency growth range of 7% to 11%. We are also projecting shipments of at least 75,000 technology boards and instruments for the fourth quarter. For our non-healthcare segment, we are projecting fourth quarter revenues of $245 million to $260 million. On a pro forma basis, our guidance incorporates $32 million of year-over-year currency headwinds implying a constant currency growth range of 5% to 10%. For our consolidated business, we are projecting non-GAAP gross margin of 51%, which assumes healthcare gross margins of 63% and consumer non-health care gross margins of 34% to 35%. We continue to experience persistent pressures related to supply chain challenges, which in turn, create operational inefficiencies throughout our procurement, manufacturing and fulfillment processes. In addition, our gross margins are also being negatively impacted by worsening currency headwinds. If foreign exchange rates hold at current levels, we believe that our depressed gross margins of 51% in the fourth quarter will continue into next year with modest improvements in the second half of 2023. On a consolidated basis, we are projecting non-GAAP operating profit ranging from $91 million to $100 million and earnings per share ranging from $1.11 to $1.22 for the fourth quarter. Now turning to the full year guidance. For the full year, we are now projecting a consolidated revenue range of $2 billion to $2.3 billion. On a pro forma basis, our guidance implies consolidated revenues of $2.258 billion to $2.288 billion, representing 5% to 7% reported growth and 10% to 11% constant currency growth. For our Healthcare segment, we are projecting revenues of $1.325 billion to $1.340 billion, which now incorporates $35 million of year-over-year currency headwinds. Compared to our prior guidance, this represents an additional $5 million increase in currency headwinds. This update reflects 10% to 11% constant currency growth over the prior year, which is in line with our prior guidance range. Today, we are continuing to see lower-than-expected hospital census levels, particularly in community hospitals. Our guidance contemplates a normal seasonal increase in patient admissions, noting that the flu season this year is already running well above prior year levels and hospitals had surgery postponements in the third quarter that could be rescheduled into the fourth quarter. However, due to the challenging health care environment with softer hospital census levels and ongoing supply chain challenges, we are not raising our guidance range. Despite these challenges, we are continuing to build a strong foundation for future growth with a large and growing installed base, combined with new customer wins. I’m excited to report that for the first nine months of the year, we had record new contracting levels from hospitals converting to Masimo. For our non-health care segment, we are projecting reported revenues of $675 million to $690 million from April 11, 2022 through fiscal year-end. Compared to our prior guidance range, this represents an increase of $5 million at the midpoint of the range. While this business achieved better-than-expected results in the third quarter by navigating a difficult supply chain environment, we are being prudent in our fourth quarter outlook due to ongoing component shortages and a challenging economic conditions. On a pro forma basis for the full year, our guidance implies consumer non-health care revenues of $933 million to $948 million for fiscal year 2022, representing 3% to 4% reported growth and 10% to 12% constant currency growth. For our consolidated business, we are projecting non-GAAP gross margin of 55%, which assumes health care gross margins of 65% and consumer non-health care gross margins of 35%. We’re also projecting consolidated non-GAAP operating profit ranging from $349 million to $357 million. Compared to prior guidance, this represents a decrease of $2 million at the midpoint of the range due to additional currency headwinds. This update reflects consolidated non-GAAP operating margins ranging from 17.4% to 17.6% for our consolidated business. Moving further down the P&L. Consistent with our prior non-GAAP financial guidance, we are projecting non-operating expense of $23 million, a tax rate of 25.7% and weighted average shares outstanding of $55.3 million. Based on these assumptions, we are projecting a non-GAAP EPS range of $4.38 to $4.49. Compared to prior guidance, this represents a decrease of $0.02 at the midpoint of the range due to additional currency headwinds. Based on our year-to-date results, we are on pace to deliver a strong performance for 2022. On a pro forma basis, our consolidated revenue guidance implies 10% to 11% constant currency growth with both segments projecting to have double-digit growth for the full year. For additional details on our 2022 financial guidance, please refer to today’s earnings presentation within the Investor Relations of our website at masimo.com. With that, I’ll turn the call back to Joe.

Thank you, Micah. Thanks very much. As you just heard, our third quarter results illustrate the durable strength of both business segments. In the third quarter, our Consumer business once again had strong quarterly performance with multiple new product launches. Bowers & Wilkins launched the 706 feature Series 3 speakers and expanded its headphone line with two award-winning products, the Px7 S2and the PX8 over-ear headphones. We then unveiled a new line of 8K receivers at Marantz introduced the new cinema series with award-winning performance and design. In our Healthcare business, I’m happy to report that we recently secured important new customers, including Denver Health, and Nationwide Children’s, one of the top 10 children’s hospital in the U.S. This has been the strongest nine months we have ever had in attaining new customers. A milestone for us in the third quarter was the launch of our W1 watch in August. The W1 has unparalleled accuracy for a risk worn wearable and is the only watch available that provides continuous clinical-grade monitoring of critical vital signs such as oxygen saturation, pulse rate and respiration rate. We also launched novel measurement hydration index under limited market release at the time of the launch of W1. Hydration Index, or HI as we like to call it, should be very useful for athletes and exercise enthusiasts, who need to calibrate their fluid intake for achieving peak performance as well as for patients whose fluid levels need to be properly titrated and are not ventilated where PVI has helped with hydration for 15 years. Also, we see even greater potential for W1 to be adopted by large hospital systems as a tool to effectively manage patients with chronic disease, such as CHF and COPD. There are multiple pilot programs underway with the W1 to assess such potential, both in the U.S. and in the Middle East. We’re looking forward to finishing the year with another quarter of solid performance, which will set the stage for next year. 2023 will be an important year for our consumer health care business and the year we expect our recently acquired consumer business to help us with our hospital-to-home strategy. We look forward to seeing you at our Investor Day on December 13 to give you a glimpse of what’s ahead. We hope you’ll be able to join us. With that, we’ll open the call for questions. Operator?

Thank you. [Operator Instructions] And we will take our first question from Matt Taylor with Jefferies. Your line is open.

Hi, thanks for taking the question. Can you hear me okay?

Yes. Thank you, Matt.

Hi, Matt.

Hey, Joe. Hey, Micah. So I wanted to ask you, just given the continued good performance of the sound portfolio. Could you talk about whether you think you can still grow that high-single-digits into next year in a recession? Do you have any visibility into that? Maybe just talk about any updated thoughts on the outlook for that?

Sure, sure. While we intend to continue growing it in high single digit, given the economic at least inflation, if not a recession and all that stuff that has come forward, it’s hard at this point to give you assurances that we will. But what we’ve noticed is Bowers & Wilkins, Marantz and even Denon, they seem to be products that are purchased by people who aren’t not as impacted as maybe most people are with the economic downturn. So as we’ve talked, there probably is iconic of brands and as solid that you can get in any consumer industry. So we’re hoping, but I can’t tell you for sure.

Yes, Matt, just to add to that, too. At our December 13 Investor Day, we’re working through building the plans for next year, hopefully be able to give you an update on kind of our outlook as we go into next year. We just want to get ahead of ourselves at this point until we work through those plans. But to Joe’s point, we’re seeing good durability with more premium brands. We’ve talked about this before, but there has been softness in some of the more mass consumer products like sound bars and those types of products. But over the past couple of quarters, even while we’ve seen that, we’ve seen good strength in those premium brands that have driven solid growth and performance. So we’ll provide you more of an update and hopefully, you’ll be able to join us here next month.

Great. Thanks. And I wanted to ask one on the Healthcare side. I was hoping you give some anecdotes on the call about the momentum and some new customers I think a lot of people like to hear about some of the sub-segments. I didn’t know if you could provide any color on things like hospital automation or some of the higher value parameters to help us understand how momentum in those different areas has been?

Sure, sure. As you know, we’ve had a few incredible years on top of very solid years before that in terms of our driver shipments and new customers coming to Masimo. I’m just really happy to see this incredible momentum that I think was caused by people understanding how important it is to have measurements that are accurate and reliable during COVID and how we came through with innovation at the beginning of COVID that saved many hospitals from turning away patients or putting their clinicians in danger. As for your second part of your question about some of the new technologies, hospital automation has been growing exceptionally well. Rainbow has been growing exceptionally well. Our capnography business, our SedLine, O3, have all been growing plus 20%. So we’re really expecting, after 15 years of showing people the value of Rainbow, 2023 and beyond will be kind of the 5, 10 years for Rainbow to take off and the others to follow it. So yes, we’re excited about the future. And as long as hospitals continue growing and thriving and getting back their patients, we should do really well.

Great. Thanks, Joe. Thanks for the color.

Thank you.

We will take our next question from Jason Wittes with Loop Capital. Your line is open.

Hi, thanks for taking the questions. Just first off, in terms of your ability to raise prices, in the face of inflation for health care and for Sound United, has that – have you begun to implement that? And do you have an indication of how well it’s sticking?

We have, as you know, in the last couple of years, we’ve resisted raising prices because we weren’t sure if the inflation was going to be permanent, but given that it looks like at least certain parts of inflation are permanent, such as labor rates, we have begun raising our prices, and maybe, Micah, I can give you more color if it’s appropriate.

Yes, absolutely. And I think, Jason, if you look at on the consumer – or the consumer side, the consumer audio side of the business, we’ve also been navigating through a lot of these inflationary challenges by raising prices on that end as well. So if we start to see some of the headwinds ease up that we should see some nice improvement moving forward. But we’re trying to be thoughtful and prudent about how we reflect that in our guidance at this point.

Okay. That’s very helpful. And if I could ask, I don’t know if you have any commentary about the recent announcement on Medtronic on their overlapping business spinning out. Has that had any impact on the marketplace at this point? Or is it just too early to see anything?

Well, I think the announcement came kind of towards the end of – I guess, this month – October, excuse me. And we’re already seeing customers take notice of that. But nobody spins off a winning team. So we’re – people are finally seeing what we’ve been seeing for a while.

Okay. And then maybe just one final and I’ll jump back in queue. I personally have some questions about there was a Philips settlement. Do you have a – can you give us an indication in terms of when that expires and what kind of impact that might have when it does expire, if any?

Well, as far as the Philips settlement, I think we entered into 8 or 10-year agreement. I think we’ve got two or three more years left on that agreement. So we expect we will enter into a new agreement, but I think both companies are benefiting from this relationship and so are our mutual customers.

Great. I’ll jump back in queue.

We will take our next question from Jason Bednar with Piper Sandler. Your line is open.

Hey, good afternoon, guys. Thanks for taking our questions. I wanted to start off here with the fourth quarter guide. I’ll tell you, it looks maybe a little lighter than The Street at the top and bottom lines and maybe unpack a few things here for us. I mean the revenue delta, maybe it’s timing related to sound. Maybe just wondering if there’s – if that’s how you’re thinking about it as well? Or if there’s something you’re contemplating with respect to some of the consumer challenges, spending challenges, that are out there given the macro environment. And then can you discuss what’s pressuring EPS here more in the fourth quarter? I mean, Micah, it sounds like inflationary pressures are pushing costs higher that’s probably extending into the first half of 2023. But can you talk – is there any early investment spend that you’re making ahead of the consumer launches that you’re planning for next year?

Yes. So that’s – there’s a lot of points on that question, but let me just try to take it one step at a time. So if you look at the fourth quarter, we had a strong result with our consumer audio business in Q3, we are basically only raising the midpoint of the range by $5 million. The reason for that is we’re also just being thoughtful, and it’s more around supply chain challenges. They did a great job of navigating Q3, but that continues to be something that’s been persistent as far as making sure we got product availability. So we’re just trying to navigate through that. We still – if you look at Q4 for both businesses, the fourth quarter implies very strong growth. At the midpoint of the range, our health care business, we’re implying 9% growth on a constant currency basis. In our non-healthcare, we’re about 7% to 7.5% growth. So we’re still contemplating good growth in the fourth quarter. We’re just being cautious about some of those challenges we’re facing on the supply chain side and procurement. As far as the earnings, it’s definitely being – continue to be negatively impacted by currency. Currency in the fourth quarter, we believe that the headwind has gotten worse by about 60 basis points from our implied prior guidance. We also think as that drops down through the income statement, we got about 6% of this incremental headwind on our EPS due to currency is what we’re estimating. So that’s really putting some pressure on the margins as well as our EPS, but underlying growth, and you can see it in the business operationally, we’re performing very well, and we’ve got very strong guidance implied for Q4. In terms of the investments we’re making, we’ve already incorporated those investments in earlier this year as we are starting to work through collaboration among our teams to codevelop products and start working on co-commercialization work. So that’s already been in the guidance. What I will, though, you mentioned the gross margins, that’s really what’s putting a lot of pressure in Q4 because we’ve got significant headwinds there due to FX and supply chain. I think the FX headwinds are roughly about 120 basis points from – when you look at it year-over-year. So that’s putting pressure as well as the supply chain challenges. What I mentioned in my prepared remarks is, we believe that we’re nearing the bottom there with 51% margin, and we are hopeful that even though those will continue in the first half of next year, we’ll start to – that will start to turn the corner and improve in the back half of 2023.

Okay. All right. Thanks for all that. I know there are a lot of questions in there. Maybe just a couple of follow-ups here on building up some of that commentary there, Micah. I know you mentioned things in the prepared remarks around hospital census, hospital staffing issues, maybe weighing a bit on the outlook, but the outlook is still pretty good in spite of those elements, and then the supply chain challenges on the consumer side? I guess for each of those, are you able to quantify what the overhang is from those elements? Or said another way, like how good might the guide be, if not for these issues that are holding back or acting as overhangs on the business right now? Thank you.

Yes, Jason, I don’t want to get into quantifying those numbers for you, but we feel good about the guidance for Q4 in terms of – we’re guiding to a very strong growth in both businesses.

Okay. Maybe I’ll sneak one other one and then is there – I guess anything contemplated in the guide? Or can you talk about what you’re seeing with respect to hospital CapEx budget? I mean the Board numbers still look pretty good. You sound confident on 75,000 plus going forward, but maybe comment on that, just given the mix feedback we’ve heard from others in the hospital CapEx landscape? Thank you.

Yes. I think just overall, we’re still feeling good about the foundation of our business in terms of the driver shipments. We believe we’re going to be above 75,000 again next quarter, continue to see 7% growth in our installed base. The challenges we’ve seen, though are some of our OEM partners have had some challenges as well, and it’s impacting our ability to install new equipment and recognize some of that revenue on that equipment as well as we – on our installations as well as theirs. So as we think about installations, those have been challenging this year just because of the availability of product from OEMs. And as you keep in mind, as we’re able to do those installs, we recognize revenue on the Masimo-branded equipment. So that’s been challenged a little bit this year and we’ve contemplated some of those challenges in the guidance.

Thank you.

We will take our next question from Marie Thibault with BTIG. Your line is open.

Hi. Thank you so much for taking the questions and congrats on a strong quarter. Wanted to ask a question here on W1 and the watch. Would look to hear a little bit more about the full launch, what retail channels that was being sold through? Any learning so far? And if we could hear maybe an update on the 510(k) process there with the FDA. Thank you.

Sure, sure. We have not launched W1 in the retail channel. We intend to do that with a product that we call Freedom next year. So W1 really is built for, what I would call kind of our healthcare industry from hospital-to-home and prosumer, these are professional athletes and those who really are looking for this type of data. And as far as 510(k), we submitted to FDA, the 510(k) application. We have not heard anything yet. So hopefully, by December 13, we’ll have more news on that for you.

Okay. Very good. Yes, we’ll look forward to that Investor Day. Maybe I can ask a question here for Micah. I appreciate that we should wait for Investor Day to get too much on 2023 guidance. But some of your comments here about investments that have been tucked in for the consumer healthcare products. Should we expect or would you like to sort of rightsize our expectations for spend next year on those sorts of products? Just want to be wary if there’s any step-up or anything like that, that might be expected? Thank you for taking the questions.

Yes. Thanks, Marie. So I’ll definitely address more of that at Investor Day. I think a few things – data points I can give you is whenever we completed the acquisition and announced that we were adding some co-investment for marketing and development, we said that was going to be roughly 1% of – about 1% on revenue for that – for the business. So that investment is likely to carry in and annualize out next year. So I think that’s something to contemplate. And another thing I mentioned in my prepared remarks was just as you think about your models for next year, keep in mind that a lot of the currency headwinds, if FX rates hold at current levels, we’re contemplating or estimating about $70 million of FX headwinds again next year from the strengthening of the dollar, so just a few things to model in there ahead of the Investor Day.

Okay. Well understood, Micah. Thank you.

We will take our next question from Jayson Bedford with Raymond James. Your line is open.

Good afternoon. One of Jason is in the queue. So just a few questions. In 3Q, was there any material contribution in sales from W1?

No. No. For third quarter, there was no material contribution from revenue from W1. As Joe mentioned, there’s a few things there is 510(k) is going to be important for us as this is going to be a device that we think is going to do very well and as we move from hospital to the home. And of course, we’re making it available to consumers, but that’s where this one is going to be focused. And then hopefully, you’ll hear more about our next phase of consumer as we move forward.

Okay. And it was mentioned earlier about pilot programs with W1. Maybe, Joe, I just wondering if you can kind of walk us through the logistics economics and how it’s being used in these pilot programs?

Yes. We are working with several really strong brand institutions in the U.S. that is subject to the pilot going well and FDA clearance. We expect a very strong uptick. And what they’re doing, they’re sending patients home and they’re monitoring them remotely with the W1, with also care pathways that they’ll follow. And the same goes in the Middle East or Middle East, we’re not waiting for FDA clearance. We’re working with some really large groups, ministers of health levels of growth where several hundred patients are being monitored at home. So far, the feedback we’re getting from all the pilots are very positive. The first one likely to pop will be in the Middle East because we’re not waiting for FDA clearance. And if it does, it will go from several hundred patients to tens of thousands of patients monitored annually, and it could be a significant revenue to us even before the consumer business begins with the launch of FREEDOM.

And just so I understand the revenue model, it’s a sale into the hospital and then a monthly service stream of revenue post that.

That’s correct. So there’s a hardware sale. There’s also a monthly service, and it depends on the amount of monitoring they need to some patients, we offer more than W1. For example, if they’re diabetic, they will offer glucose meters and scales and for others, blood pressure and thermometers or Radius T. So it really depends on the individual. But with the service model that we have with it, the service is kind of like the recurring revenue of our pulse oximetry and rainbow Pulse CO-Oximetry business, where we will become a significant part of our revenue.

Okay. Thank you. Micah, just a couple of quick ones for you. The 2023 gross margin commentary, is the first half pressure all FX related or is there something else in there?

No, it’s a combination of FX and also just some of the supply chain challenges. So I would say probably what we’re seeing in the fourth quarter is probably the best way to look at it. If you look at our fourth quarter, we’ve got about 300 basis points of year-over-year pressure in that 51% gross margin number. And that’s – and I’m focused more on the healthcare side here, and it’s actually looking at our 63% margins for healthcare. So when you look at it year-over-year, it’s about 300 basis points of total headwinds. About $120 million we’re estimating are from FX and about $180 million are operational. And the majority of those operational headwinds are tied to those supply chain inefficiencies like higher freight costs and some components of labor, increased labor costs.

Okay. Okay. That’s helpful. I’ll jump back in queue.

Thank you, Jayson.

[Operator Instructions] Our next question comes from Michael Polark with Wolfe Research. Your line is open.

Hey, good evening. Thank you for taking the questions. This was asked a different way. I’ll take another stab. A lot of irons in the fire, especially as you’re integrating consumer new products in the works likely to launch next year. Philosophically, what – and I understand 2023 is kind of artificially small short-term box, but there’s a lot to chew on this call. And I guess, philosophically, how do you balance kind of the supporting these launches with managing the business and kind of short-term operating profit and EPS? I mean, is it – is the guiding light to still grow earnings next year? Or is there a scenario where these new products are potentially so compelling over the long haul that you’d really kind of invest to support them next year such that enterprise EBIT and EPS might not be up all that much. I guess I’m not asking for guidance, but philosophically, kind of where you stand on this at appreciated update?

Yes, absolutely. And Mike, we’ll definitely get more to that next month. But just as we think about it, just at a high level, we – one thing we don’t want to do is under-invest on being able to successfully launch what we believe our products are going to be very successful in some very large markets. And we’re going after some bigger markets and expanding into new, large and growing markets that’s going to really drive growth into the future – in the future years. So we don’t want to under-invest there. We are balanced – trying to take a balanced approach. We do want to deliver – and when you think about – this excludes the FX headwinds for a moment, because those are going to have significant pressures on our reported growth. But if you look at it more on an operational underlying growth, excluding FX, we still believe we can demonstrate good growth in the next year on a constant currency basis on both the top and bottom line. So that’s how we’re looking at it, and that’s what you’ll hear more about next month.

And then the follow-up is specifically on the core Sound United portfolio, just kind of bracing for recessionary impacts. What – in your six or so months of knowing the business, kind of what levers do you have to pull, to protect the profit contribution of that business in the event of kind of revenue softness, I guess, how much – yes, how much kind of fixed cost deleverage is there a variable cost to manage as kind of the revenue picture evolves.

Yes. I mean, we’re – we’ve got a pretty good track record of being able to manage through some very challenging environments. And I think that this would be no different. I don’t want to get ahead of ourselves, but we’re still working through the plans for next year and beyond. But we’re still excited about the outlook for the consumer audio business as far as for next year. I think the way I look at it is they’re doing a great job about performing the broader market. And we’re seeing that on both businesses, both the healthcare side as well as the consumer audience side. So relative to the market, we feel very good about our outlook, but we’ll get into more of that discussion next month.

We will take our next question from Mike Matson with Needham & Company. Your line is open.

Yes. Thanks. So I think there was an IT team hearing or something at the end of October. I don’t know if you’re able to share with us anything from that. But maybe you could just also give us an update on when we will actually hear something from the ITC.

Yes. I think we were first anticipating rolling in September and then that got pushed to end of October. And then recently, right before that due date, we were informed by our judge that NASH is going to rule by December 20, I think, or somewhere around that day, 19. So we’re hoping that date will stick. But more importantly, we hope that we’re going to win, and we just have to be patient.

So is that the date that will know something publicly? Or do you have to wait until the latter date, which in is some time pre-spring or something?

I think we should know something publicly, but there’s two other steps, assuming we win the next stage as it goes to the commission to see whether they believe the product should be enjoined that we have gone after, which is the pulse oximetry side of watch that Apple sells. And the third, at some point, it goes to President of the United States to whether he wants to let that happen or not. So those stages will probably take three months to six months post the December ruling.

Okay. Got it. And then…

Keep in mind that, our trade secret case against Apple is slated for end of March 2023.

Okay. Thanks. [Indiscernible]

I can’t hear you. I’m sorry.

Mike, can you speak into the mic?

Sorry. Maybe I was covering my microphone up on my phone there. I hear you make a lot of comments about inflation and the impact on your margins and whatnot. And I wanted to ask about your ability to raise prices to offset some of that, both in the medical and the consumer side. Are you – have you raised prices? Are you able to do so? How – if you have, how is that being received by the customers?

Yes, Mike, that was asked a little earlier in the call. And one of the things that Joe mentioned was, on the healthcare side, we’ve been reluctant over the past couple of years. We didn’t know how transitory some of those could be. And now it looks like they’re definitely here to stay, especially if you look at labor costs. So we are looking to pass through with some higher prices on where we can on the healthcare side. And then on the consumer audio side, we’re probably being a bit more aggressive to offset some of those challenges. So if things – if the environment starts to improve or stabilize those will – we should see some improvement from here, but we’re trying to be thoughtful about that with our guidance right now.

Okay. Thanks. And then the $70 million revenue impact that you’re expecting next year from currency, are you willing to put that in terms of EPS, like how much of an EPS headwind you’re expecting that to translate into?

Well, I think one thing I can point back to, if you look back at and we still got to work through the math on this, but if you look at last quarter’s investor presentation, I put out there. There’s about a 57% drop through to operating profit close to – maybe close to 60% drop-through on operating profit. And you could probably just model that in off those $70 million of top line revenue headwinds.

Okay. Got it. Thank you.

There are no further questions at this time. I will turn the call back to our presenters for any closing remarks.

Well, I really appreciate everyone joining us today. I hope you all can join us on December 13, and we get a chance to meet face-to-face after a few years of COVID keeping us all away. So thank you all for joining, and see you soon.