MASI - NASDAQ

Ladies and gentlemen, good afternoon, and welcome to Masimo's Third Quarter 2024 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 I'm pleased to introduce Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations.

Hello, everyone. Joining me today are Interim CEO, Michelle Brennan; COO, Bilal Muhsin; 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 2024 and 2025 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. This call will also include a discussion of the potential separation of our consumer business and a preliminary estimate of the financial impact of a potential separation. However, the estimate is being provided solely for illustrative and informational purposes. The company is currently evaluating the structure of any potential separation of its consumer business and the method, structure, timing, and terms of any such potential separation are still under consideration and have not been determined, approved, or finalized. 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. Therefore, the financial measures we will be covering today will be primarily on a non-GAAP basis, unless noted otherwise. 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 Form 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 Michelle Brennan.

Thanks, Eli, and hello, everyone, and thank you for joining us today. I'm pleased to be with you for my first earnings call as Interim CEO of Masimo. I strongly believe in the company's long-term growth potential and the Board and management team are focused on executing our plan to achieve continued growth by capitalizing on the many opportunities we see ahead for this business. At the onset, I want to stress how impressed I have been by the team at Masimo. Over the past month, I have had many interactions with employees who are energized by our path forward, by our purpose of saving patients' lives, and by our innovation-focused culture. Notably, we have not seen any critical talent departure since the Annual Meeting and in fact, have seen attrition rates decline. With such a strong team, there is no limit to what we can accomplish today and in the future. We have a lot to cover today, so let's jump right in. I'm going to touch on a number of governance, strategic, and corporate updates. Then Micah will dive into the financials and cover some near-term plans and areas of priority, specifically around our margin improvement initiatives. We will then turn to Q&A and Bilal will join us to answer your questions. With all the significant items currently being considered by the Board, we ask that you limit your questions during this quarterly earnings call to those focused on business and financial performance during the quarter. First, let me provide an update on the strategic review of the consumer business. As we previously announced, the Board has engaged Centerview Partners and Morgan Stanley as our financial advisors and Sullivan & Cromwell as a legal advisor to evaluate strategic alternatives for our consumer business. We will provide updates to the market when appropriate, but we want to assure you that this process is fully underway and we are focused on delivering the best outcomes for our shareholders. Next, our review of the product portfolio and R&D projects is ongoing. But the headline is that we have excellent opportunities for growth and are laser-focused on ensuring we allocate resources to those areas that will drive the greatest return. At a high level, we will be focusing on fewer projects and therefore concentrating on those big market opportunities addressing clear unmet needs. As part of this effort of refocusing the organization, we have also found areas to reduce spending that are not contributing to our long-term growth objectives. However, let me be clear, as we refocus Masimo to capitalize on the long-term growth opportunities in front of us, improved margins will be the output of our efforts, not the input. We are not going to make short-term cuts at the expense of long-term growth. Finally, regarding leadership. In terms of the Board, as you recently saw, we have expanded to eight Directors and added Tim Scannell and Wendy Lane. Tim's background leading highly successful commercial organizations in Medtech and Wendy's vast experience overseeing corporate governance and changes and serving in Board leadership roles will both be highly additive as we refocus the organization. Tim and Wendy have hit the ground running and we are excited about what they bring to the boardroom. Let me also provide a brief update on the CEO succession process. As you know, Joe Kiani was not re-elected to the Board at the Annual meeting and is no longer CEO. Given the various related matters described in our 8-Ks and 10-Q, including litigation, we are not going to comment further on this matter. I've been very clear that my intention is to guide the company through this initial transition period until a permanent CEO is found and then continue to focus on contributing as a member of the Board for the long term. I'm not going to commit to the exact timing of the search process, but I can say that getting a permanent CEO in place is a top priority for the Board. We have Korn Ferry assisting us and the Board is already meeting with excellent candidates. We will do everything we can on our end to keep our foot on the gas during this process, while of course, ensuring that the candidate we ultimately select is the absolute best choice for the organization. And now, I'll turn the floor over to Micah to dive into the financials for the quarter.

Thank you, Michelle, and good afternoon, everyone. For the third quarter, our healthcare revenues were $343 million, which is near the top-end of our guidance range and represented 12% growth versus last year. We saw strong growth in our consumable and service revenues, partially offset by a decline in capital equipment and other related products. Driver shipments for the third quarter were approximately 61,000 and were in line with our expectations. Non-healthcare revenues were $161 million, which was near the low end of our guidance range and represented a 6% decline versus the prior year. This business continues to be affected by the weakening environment for luxury consumer purchases as well as slowness in the housing market, which affects product installations and upgrades. Now moving down the P&L. For the third quarter, our consolidated non-GAAP gross margin was 54%, which included gross margins of 62.9% for healthcare and 34.6% for non-healthcare. Healthcare gross margin improved 260 basis points year-over-year and rose 40 basis points sequentially as we continue to benefit from the relocation of our sensor manufacturing to Malaysia in combination with increased operational efficiencies and a favorable impact related to a higher proportion of our sales coming from consumables. For our consolidated business, non-GAAP operating profit was $81 million, representing 23% growth versus last year. Our operating margin of 16% improved 230 basis points year-over-year and rose 130 basis points sequentially from the second quarter. This represents a very strong result considering that we overcame 480 basis points of year-over-year expense headwinds due to the return of performance-based compensation to normal levels in 2024. We continue to make meaningful progress on our margin improvement initiatives, which I will discuss in more detail in a moment. Even with the return of performance-based compensation, we delivered 31% EPS growth to reach non-GAAP earnings per share of $0.98 for the third quarter, which was primarily driven by strong performance from our healthcare business and effective expense management across the organization. Now I'd like to provide an update on our 2024 financial guidance. For the fourth quarter of 2024, we are projecting consolidated revenue of $581 million to $611 million and non-GAAP earnings per share of $1.35 to $1.50. For the healthcare segment, we are projecting revenue of $363 million to $373 million, representing 7% to 10% revenue growth. For driver shipments, we expect to ship 60,000 to 65,000 drivers in the fourth quarter. For the non-healthcare segment, we are projecting revenues of $218 million to $238 million. Now turning to our full-year 2024 financial guidance. We are now projecting a consolidated revenue range of $2,075 million to $2,105 million. For our healthcare segment, we are now projecting revenues of $1,390 million to $1,400 million, representing 9% to 10% revenue growth for the year, in line with our prior guidance midpoint. For the non-healthcare segment, we are now projecting revenues of $685 million to $705 million, which represents a decrease of $20 million at the midpoint versus the prior guidance range. For the full year, we are projecting consolidated non-GAAP gross margin of 53%, which includes healthcare gross margins of 62.7% and non-healthcare gross margins of 33.7%. Further, we are projecting a consolidated non-GAAP operating margin range of 15.7% to 16%, which represents an increase of 50 basis points at the midpoint versus the prior guidance range. Finally, we are now projecting a consolidated non-GAAP EPS range of $3.95 to $4.10, which represents an increase of $0.13 at the midpoint versus the prior guidance range due to strong performance from our healthcare business and effective expense management across the organization, partially offset by the reduction in non-healthcare revenue. Now I'd like to expand on some of the important initiatives that Michelle had mentioned earlier, which we fully expect will strengthen Masimo's revenue growth and earnings power in 2025 and beyond. We are enthusiastic about the opportunities we see to enhance revenue growth while continuing to expand margins. The management team in partnership with the new business review committee of the Board is in the process of focusing our R&D resources on those projects that will enhance our long-term growth profile. And we are excited about the work we have done to date. While our foremost focus is on innovation-driven growth, we are also happy to see our margins expand as we rightsize corporate overhead costs, drive improved gross margin, reduce marketing expenses associated with products that do not show promise of generating meaningful revenue, and take other reasonable cost actions on items unrelated to our top-line growth, such as selling the corporate jet, among other things. It is still early and our work is ongoing. But as we look forward to 2025, we believe actions identified to date will deliver at least 200 basis points of additional operating margin, while we continue to deliver on our long-term revenue growth expectations. For context, on our August Q2 earnings call, we detailed for investors a 24% EBIT margin profile for our healthcare business. As we look forward to 2025 and take into consideration the actions identified to date, we expect this margin to be at least 26%. For those of you trying to estimate our earnings potential, please note that we currently have $38 million per year in net interest expense, an approximately 26% effective tax rate and roughly $55 million diluted shares outstanding. We will continue to update the market on the work of the management team in partnership with the Board's business review Committee. We expect to provide the next update in January 2025. With regard to our strategic review process, the Board has not made a final determination of the manner in which the consumer business will be separated. If among other things, the Board decides to no longer pursue a spin-off of this business into a publicly-traded company, we anticipate treating the consumer business as a discontinued operation upon those decisions being finalized. Further, we would exclude the results for this segment from our non-GAAP earnings and no longer provide guidance for this segment if it still remains with the company into the first quarter of 2025. In closing, our ongoing focus on expanding our footprint with existing customers and winning new customers has built a solid foundation for growth in 2025. As shown in our slides today, the incremental value of new contracts this year now totals $318 million through the third quarter and is continuing to track ahead of last year, which itself was a record for the company. This clearly demonstrates Masimo's strong market share gains through contracting with our hospital customers and has contributed to a 15% increase in our unrecognized contract revenues, which have reached $1.65 billion as of the end of the third quarter. I'm excited about the strength we are seeing in our core healthcare business and when you combine that with our ongoing initiatives to separate the consumer business and improve operating margins, we have tremendous opportunity in front of us to achieve our goal of more than doubling our earnings per share within five years, and most importantly, increasing shareholder value. With that, we'll open the call to questions. Operator?

[Operator Instructions] And your first question comes from the line of Jason Bednar with Piper Sandler. Your line is open.

Hi, good afternoon. Congrats on a nice quarter and great to hear about the stability in the business here. Michelle, I wanted to start with some of your comments, and Micah, feel free to weigh in as well. You have pretty direct comments in the press release regarding the actions that have already been taken to focus spending on just fewer projects and focus on those with the greatest return. I really appreciate the insight you also gave on '25 operating margin for healthcare. But just to clarify, the 26% floor that it seems like we now have in place. Does that reflect spending reductions that have taken place to date and -- like up to today or does it contemplate additional actions that you still plan to take between now and over the next few months or whatever? And then one other point on this, just can you clarify out of that 200 basis points that we're seeing is that mostly R&D or SG&A or do we have some gross margin lift in there as well? Because I believe that was part of the original plan.

Jayson, thank you very much for your question. The 26% contemplates the actions we're going to take between now and year-end. But I'm going to turn it over to Micah to answer the rest of your question.

Yes, Jayson. Thanks for the question. Yes, the actions we've taken to date and we're going to be working through the end of the year through some of these cost initiatives as well as operating margin improvement initiatives. Those we expect that's going to drive our healthcare margins for 25% to 26 -- at least 26%. And, that's just based on some of the actions we've taken to date. We are working through a lot of things to really refocus resources in the organization, reallocate those resources to drive our top-line growth and really focus on the projects that are going to deliver the best returns. So we feel good about the actions we've taken so far and we think that those actions will have minimal impact on the top-line. And I mentioned a lot of the things that are really contributing to that in terms of corporate overhead costs and rightsizing those, driving improved gross margins, reducing marketing expenses associated with products that just aren't driving meaningful revenue and meaningful returns. And then we have other cost actions that we mentioned as well. So those things are well-contained. We're being very deliberate and intentional about where we target those and just making sure that we preserve the top-line growth and set us up for profitable growth moving forward.

All right. Really helpful. Thanks for that. And then, maybe I'll just -- I'll ask one here on the CEO search process. Understand we're not necessarily talking about timing, but maybe help us out what -- what's being looked for at the Board level for that next CEO? Are we talking medtech industry veteran, a growth-focused individual, or an operations-focused individual? Just would love to hear what you're prioritizing in the search. This is understandably a very attractive seat and also an important one for the Board to fill.

So we are, first of all, looking at both internal and external candidates. We are looking for a medtech background. We would like to have a balance of operational as well as technical or experience in refreshing pipelines. We want to make sure that the fit is really good with the culture that is here at Masimo because we have a very strong culture of innovation-focused and a family-type of atmosphere. So we want to make sure that the new CEO will come in and hit the ground running and really is the right person for the long-term.

Okay. Thanks, Michelle.

You're welcome.

And your next question comes from the line of Marie Thibault with BTIG. Your line is open.

Hi, good evening. Thanks for taking the questions and nice quarter. Michelle, glad to be working with you, and hi to Micah and Bilal as well. Good to talk to you. I wanted to ask a question here on Malaysia and gross margin. Just sort of a status update on where we are in realizing some of those benefits. I know a lot of the volume has already flowed to the Malaysia facility. What portion of the gross margin uplift would you say we've seen and sort of the timing of how we might continue to see some of that benefit roll-out?

Yes. Thank you, Marie. So right now, we're seeing very good improvement this year. I mean, if you look at coming into this year, I think our margins last year for healthcare were 60.9%. We've now ratcheted that up and stepped that up over -- I think, two or three guidance raises. So we're now up to 62.7% is what we're guiding to this year. So -- and I think we came into the year, we're up about 70 basis points to 80 basis points at least from where we came in guiding of the year. So we're seeing good traction in Malaysia. We are, of course, as you know, moving our high-volume manufacturing for sensors over to Malaysia and out of Mexico. That's giving us great savings in terms of the comparison of cost structure between those two locations. We are seeing very good manufacturing efficiencies that are starting to flow through inventory and into our margins. In fact, our Q4 margins are implied around 63%. So we delivered 62.9% this quarter and we're tracking very, very well as we move into 2025 and we expect those margins to continue to expand as we become more efficient with that workforce and continue to move some more production over into Malaysia.

Okay. That's really helpful, Micah. My follow-up here then, just sort of a headline overview of the healthcare environment in general. In the past, you've given us some color on hospital census, OEM activity, ordering activity. Maybe any early thoughts on flu season as well as we think about Q4-Q1? Thank you.

Yes. So in terms of census, I think we've talked about implied in our guidance last quarter was kind of that somewhere between 2.5% to 4% in terms of census contribution in terms of growth. That's -- we're still seeing it very stable and it's -- since it has been stable, we're probably now with what we saw the result in Q3 and what we're expecting for the year. We're still in that zone. So it's been very stable, very strong. Ordering patterns are much better than they had been in the past and the business is back to kind of where we can predict it much better than in the past few years. So we're happy with where things are, and it's giving us confidence in our guidance for the fourth quarter and as we move into next year.

And then, Marie, just this is Bilal. One thing to add. Related to flu season, it's probably too early to predict that at this point. But like Micah said, everything we've anticipated so far has held steady for us.

Okay. Very good. Thank you.

And your next question comes from the line of Michael Polark with Wolfe Research. Your line is open.

Hi, good afternoon. Thank you. I'm wondering if you might be willing to share a product or two or three that the organization is deemphasizing here. Just to put a little more meat on the bone around how you're perceiving these opportunities as you review the broader portfolio and look to drive efficiencies?

Yes. So there are a few products that we've deemphasized. One of them is Opioid Halo. If you guys remember, we made a push for monitoring patients on opioids at home, as well as Bridge, which was a therapeutic device for patients or people on opioids that wanted to reduce the pain of removing opioids, basically overcoming off opioids. So both of those products are examples that we've reduced from our current portfolio.

You know -- Michael, I would also add is we had some feasibility studies that were being done on non-invasive monitoring of cancer, bilirubin, and diabetes. And we really have felt like we had not made the progress we would expect to bring those products to market. So we have also discontinued those.

Okay. Thank you.

And Mike, can I just add to that too? In terms of opioid, I want to be clear, though, Opioid Halo, we are still -- we still have products that we're using in that area that are going to be focused in the hospital. So I want to make sure that's clear that those products will still be very, very important for the business as we're in the hospital. It's just as we think about the remote monitoring, especially of illicit users, those types of things, that's where we think it's a much more challenging pathway. It's a road to reimbursement. Some of those things that we're -- we really want to get more efficient on and not focus on in terms of the long term right now.

The direct-to-consumer market.

Yes, yes. Thank you.

Thank you. As a follow-up topic, I want to ask on Apple. My understanding is this trade secrets trial is starting here again or the retrial is this week, I believe. Maybe for Michelle, just curious kind of the -- how does the Board view this investment, this pursuit? Any comments on what you've learned about this opportunity as the team has dug in? Thank you.

You're welcome. Well, as an innovative -- innovation leader, we are going to definitely defend our patents. And I don't think that's new news to anyone. What I would like to do is turn it over to Bilal, who is very active with this litigation to really comment on where we are.

Thanks, Michelle. Yes, the California trial for theft and trade secret did start. It actually started today. It's a bench trial, so we're not going to be able to predict the timing of it and we don't have any further updates at this time.

And your next question comes from the line of Rick Wise with Stifel. Your line is open.

Thank you. Good afternoon, everybody. I guess, I observed that it's been four or five quarters now, a better-than-expected healthcare sales performance, driver shipments, backlog growth. The business does seem in strong shape as we move toward '25. You gave us a couple of hints about or thoughts -- early thoughts, Micah, about the potential for further operating margin expansion. Help us reflect on the sales outlook and some of the key drivers, some of the things that you're feeling positive about, maybe if there's something you're concerned about so that we can see the -- we can start to anticipate just early on as we build our models, how we should start to be thinking about the 25-year from a revenue point of view.

Yes. Thanks, Rick. So we did lay out this earlier this year, I think it was in June, kind of our long-range plan as far as the cadence of kind of revenue growth, as well as operating margin expansion, and we're already seeing some very good progress on the operating margin side. And I think if you really frame up revenue, the way I look at it is, number one, all of our product platforms we're very confident in starting with SET. And we've kind of given a long-term plan range of 7% to 10% growth. We've broadened it a little bit more just because we are growing off a much larger base, so high-single-digit to 10% growth. But if you look at SET, we expect SET to kind of perform -- continue to perform in that range of long-term, that kind of 6% to 8% rainbow double-digit growth somewhere between, call it 10% to 20% for brain monitoring, as well as Capnography. And then if you start to look at hospital automation, that growing 20% or more. So those are the key categories we've laid out. But some of the things that I'm really excited about and I know Bilal is as well and even as we talked with the Board, I mean, we're very excited about the opportunity with rainbow and Hemodynamics, combining the capabilities of total hemoglobin -- continuous hemoglobin measurements with cardiac output that we acquired from LiDCO or when we acquired LiDCO, bringing that platform together, that's another new product platform that we're very excited about that we're rolling out. The last one or another one -- another example is ORi as we start to launch that as well in the U.S. market now that we have 510(k) clearance. And we've always had that outside the U.S., but now we're really -- now that we have the de novo clearance, we're able to really launch that in the U.S. Anything else you want to add, Bilal?

Yes. I mean, we're going to continue to expand our platform. One of them that's exciting is also the Radius VSM That's our new wearable vital signs monitor designed for the general care floor. And this product, including the LiDCO product that Micah mentioned, our Hemodynamics platform, we're just starting the phases of launch throughout this year and next year. So it should be exciting for us.

That's great. And just as a follow-up, Micah, you've been kind enough in many calls past to talk about what might push numbers toward the lower or the higher end of the various ranges you've contemplated. Maybe talk specifically about, for example, drivers, it seems like a wide range for the fourth quarter. Is there something that would get you unique that would get you more toward that 65,000 range or -- and again, just talk us through the near-term outlook and some of the various moving pieces? Thank you for the responses.

Yes. Thank you, Rick. What we can control, Rick, is more the direct placement of our drivers in terms of Masimo branded drivers and that's -- that represents 20%, 25% of our total drivers that we ship around that zone. The rest is OEMs. So it's all really dependent on OEM ordering. But we feel good about that range for Q4 and we think that that's going to be kind of a steady quarterly range as we move into next year and hopefully, we'll continue to -- that will continue to climb, but we don't want to get ahead of ourselves there. We want to be thoughtful just because we don't control the other portion of that and a lot of that's dependent on how OEMs are managing their own inventory levels, those types of things. We've seen that as a challenge in the past and we want to be thoughtful of that as we move forward. But we feel very good about getting the new drivers we need to deliver the growth, which is really coming from all the record contracting we've seen over the past few years. And this year, as I mentioned in my prepared remarks, is we're already tracking at $318 million for this year and we're hoping to be north of that $400 million watermark, which is an important level for us to really drive that growth year in, year out. So I think feeling very good about that. Our unrecognized contract revenues are up 15% due to that strong contracting and we're set up very well as we move into 2025.

Thanks so much.

You're welcome.

And your next question comes from the line of Matt Taylor with Jefferies. Your line is open.

Hi, thank you for taking the question. I guess my first question on the margin progression. I know you talked about the 26% from the actions you've taken. And in the LRP update we had earlier this year. You talked about getting back to a cadence of about 100 basis points a year kind of over that plan. So I guess beyond the 26%, is that the right cadence to think about or do you think you could do better than that?

I think as you look at the 26% for next year and then move past that, I think we would expect to at least do 100 basis points, if not better. So, getting back into that type of cadence, but we're really taking a hard look at everything and making sure that we can optimize everywhere we can to not only -- this is not about just margin improvement, but it's really refocusing the organization to deliver the growth over the long-term and really focusing on those most important projects. And I think we'll continue to see benefits play out as we move forward that could put us above that cadence.

Yes. I think it's important to -- I'm sorry, I just want to add, Matt, but I think it's important that we are making sure that going after those big opportunities sitting in our pipeline, fully resourcing those opportunities so we drive really strong growth is just as important for our margin improvement as are some of the cost structure or cost initiatives we've talked about.

Thank you. And just a follow-up on the components revenue thinking about the go-forward here. You had really nice improvement in the revenue per driver this year. And the installed base is up 2%, but that really stands out to 13% growth in utilization. How would you think about those two pieces going forward?

Yes. I think we're -- we see revenue per driver. And if you really dig deeper, it's really revenue per bed and per patient. And that's something I know Bilal is laser-focused on is really driving that in terms of our -- how we think about the future. And if you look at it, we're continuously not only up-charging to more differentiated technologies that carry higher premiums, but we're also continuing to build out our connectivity platform and the way that we can monetize some advanced algorithms for decision support and those types of things as well as service revenues. So as we look forward into the future, that revenue per driver is going to be more meaningful than just an installed base growth. And I think that's going to be something that we'll talk more and more about as we move forward. Bilal, do you want to add anything there?

No, just like Micah said, the additional technologies we provide now, it's not just pulse oximetry, but you guys know it expands across our different platforms. So we're really looking at that closely to see from each bed how many of the platforms can apply on a per-patient basis as we expand or after we land in terms of expanding within our installed base.

Great. Thank you so much.

You're welcome.

And your next question comes from the line of Vik Chopra with Wells Fargo. Your line is open.

Hi, good afternoon, and thanks for taking the questions. Bouncing around. So apologize if this has already been asked. But maybe just on your updated guidance, just talk about what gives you confidence in this new guidance range and what gets you to the top-end versus the bottom-end of your guidance. And I had a follow-up.

Yes. Thanks, Vik. Yes, I'd say right now, I mean we're we have a lot of opportunities in front of us in terms of the healthcare business. We expect to see very good strength in, for example, rainbow platform in Q4 and also in brain monitoring, we're expecting some good growth there. In terms of what puts us at the higher low-end, I think it's all really just going to be dependent on census at this point. We feel good about the -- of course, the range and the midpoint of the range is really reflective of the historical seasonality of the business, which puts about 26.5% of revenues in the fourth quarter and that's kind of where our implied -- guided is at the midpoint. So it's really going to be dependent on the on the census how that moves in Q4, if it's a strong flu season, some of those things can contribute to the higher end of that range. But we're excited about finishing the year strong. We think that by the end of the year, we're going to see very strong performance across all platforms that are in line with our growth targets and that's going to set us up very well moving into next year. In terms of non-healthcare business, that's -- consumer is a very difficult business to predict, but we have lowered the range at the midpoint and now that range really reflects this -- the historical seasonality. We've derisked some of the headphone growth that we had in there and some of the core growth. And as we take a look at that, I mean, I think the midpoint of that guidance range is right there at 33%, which is our kind of the historical seasonality of that business. And if you look, I mean that -- the decline in that business that started last year has been moderating throughout this year and we expect to see growth in the fourth quarter there.

Got it. Thank you for that comprehensive answer. And just as we look at our models for next year, maybe just talk about how you're thinking about the outlook for your end markets in 2025 and any potential headwinds or tailwinds higher for next year? Thank you.

Yes. Thank you, Vik. I'd say in the end-markets, I mean, we have a very -- as you know, a very strong business that's really predicated around the in the installed base, the large installed base we have, but also our ability to generate revenue per driver. And a large amount of our revenue is being contracted this year that's setting us up very well for growth into next year. So with the strength we're seeing in contracting, we're feeling very good heading next year into that end-market for healthcare. And again, it's going to be dependent on how that fluctuates based on census but everything is pointing to a strong year moving into 2025. In terms of the consumer market, it's -- there's a lot going on there with elections and kind of how things will play out moving forward. A little bit more difficult to predict, but I think that business seems to be stabilizing more and we do have a lot of new product introductions that are going to be coming out in Q4 and Q1, that hopefully will return that business to growth.

And your next question comes from the line of Mike Matson with Needham. Your line is open.

Yes, thanks. So just want to ask one on the Malaysian sensor production. So as we get through the end of the year here, how much of that is completed? And to what degree is that going to continue to be a benefit to margins in 2025?

Yes. Thank you for that question, Mike. If you look at kind of where we are, especially as we exit this year, majority of our high-volume sensors will be manufactured in Malaysia as we exit. We made a lot of progress this year that's going to carry in some margin expansion into next year. If we look at what's next, it's going to be moving into other -- some other categories like disposables and if you think about capnography with our cannulas, that will be some other products that we're in the process of working and moving over there. So all those things are going to give us good momentum into next year. And it's still early. We have a lot of work to do to finalize the plans. But I would say, if you look at our long-term plan, as we were trying to march towards 66%, we've already raised up towards 62.7% this year for the full year. And that implied previously about 350 basis points of margin expansion over the course of five years. So if you average that out, you're looking at about 70 basis points per year. And I think we're feeling very good about the 70 basis points. And hopefully, we can maybe even improve that, but that's where we feel good about right now.

Okay, got it. And then just -- I think I know the answer to this, but I want to make sure I'm not assuming something incorrectly here. So for next year, you're talking about the 200 basis points of operating margin improvement and that -- it sounds like it's coming from these cost initiatives, but does that also include this kind of underlying improvement that you'd have in a normal year just from leverage and other efforts? So in other words, that 100 basis points a year you're talking about in kind of a normal year is included in that $200 million or would that be on top of that $200 million?

Yes, it's included. So we've incorporated the gross margin expansion, as well as some of the cost improvement initiatives we've put in place. And that's all incorporated into how we're thinking about the -- getting to at least 26% next year.

Okay, got it. And then finally, just on the consumer potential divestiture or separation. I know you had put some estimates out there previously. Are those still valid and putting aside the interest expense because that's obviously going to depend on how much you get for the business -- sorry, interest expense savings, would the divestiture be accretive or dilutive to Masimo's EPS?

Yes. I think, Mike, the reason we're kind of putting that out there is so you can really kind of model the healthcare business because depending on what the Board finalized in terms of the decision, we -- as I mentioned in prepared remarks, we would most likely move that into discontinued operations. So I'd say, really think about the 26% margins for the healthcare business, modeling the interest expense there, and as well as the tax rate and also the share count, it will give you a good estimate of what we're -- kind of how we're thinking about 2025.

Okay, got it. Thank you.

And your next question comes from the line of Jayson Bedford with Raymond James. Your line is open.

Thanks, and congrats on the progress here. I just have a few kind of follow-ups, a little random here. But just on the capital side, selling capital, it still seems a bit heavy from a growth perspective. Are you seeing any changes in the environment? And can I assume that most of this is still in the OEM side?

Yes. I believe most of that is on the OEM side. But when we were looking at our own capital, we're still seeing slowness in terms of capital purchases in hospitals, and we hope that starts to turn around for us next year.

And Jayson, we think that's been a headwind for us all this year, but we think it's stabilizing. We're past the point of where we saw kind of a pullback in drivers that we were shipping to OEMs earlier this year and that's been climbing sequentially as we move throughout this year, and it's going to set us up very well as we move into next year, so.

What do you think the issue is? Meaning hospitals seem flush with cash. I'm just kind of curious as to -- and I assume it's not competitive.

No, we don't believe it's competitive. We believe they've gone through a cycle with their -- with the way they manage capital. And as they come out of that right now, I think they're being very selective in terms of where they're using their capital. They probably put on hold a few of the larger projects, think imaging and everything around that. So I think they're prioritizing those before they come back and replenish or update their monitoring solutions. We should see that start coming back next year, but I think it's a prioritization based on where they were and where they are today.

Okay. That's helpful. Thank you. On revenue per driver, I think one of the components after utilization is price. And so if you could talk about just price, have you been able to take price over the last year?

Yes. I'd say, Jayson, price is stable to positive. So we continue to -- we have CPI clauses that are tied to the medical or the healthcare equipment index and those are part of our contracts. We do increase for that each year. And you do get some modest price out of that. Of course, we're also subject to where a lot of customers are under the GPO contracting. So that gives you somewhat of a ceiling there over time, but we do see some prices stable to modest improvement each year.

Okay. Okay. And then just last for me, I feel like I have to ask it, is there anything assumed in the fourth quarter guidance for disruption from hurricanes or IV solutions?

No, nothing is -- we're not -- we don't have anything in there in terms of -- we don't see any disruption in terms of with our business and revenue for the fourth quarter.

Fair enough. Thank you.

Thank you.