Masimo Corp Q2 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to Masimo's Second Quarter 2021 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. 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 2021 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.

Thanks Eli. Good afternoon everyone and thank you for joining us for Masimo's second quarter 2021 earnings call. We're happy to report strong second quarter results. While we expect the driver in capital orders in 2021 to be lower than what we achieved in 2020 due to unprecedented high demand during the height of COVID and expected sensor volumes to rebound as elective surgeries recover as COVID hospitalizations recede, we did not anticipate the very strong increase in single-patient use sensors that we realized this quarter. This produced higher than expected revenues, leading to an 11% increase in our non-GAAP EPS. Based on our observations and discussions in the field, we believe that not only our elective surgery volumes are steadily returning to pre-COVID levels, but more hospital beds are now monitored beds. As you'll hear soon from Micah, we realized a substantial increase in monitor installations during the quarter from record new hospital contracts in 2020 and record new hospital contracts in the first half of 2021. These installations strengthen our foundation for long-term sustainable growth for sales of our sensors and help hospitals take better care of their patients, I'll discuss more later in the call. Now I'll ask Micah to review our second quarter results in more detail and provide you with an update on our 2021 financial guidance.

Thank you, Joe, and good afternoon, everyone. Our second quarter results came in above expectations as we saw a strong rebound in sensor sales. Further, our shipments of technology boards and instruments are on track to exceed our original target for the year with second quarter shipments above expectations. We are seeing a step function increase in hospital census and steady expansion of monitoring in hospitals leading to increased sensor sales. At the same time, a higher than usual number of monitor installations during the second quarter has expanded our installed base, which put pressure on our gross margins for the quarter due to the new accounting standard implemented back in 2019. From a long-term perspective, we're glad to see the strength in installations because of its implications for higher sensor volumes and higher margins in the future. During the quarter, we shipped 72,500 technology boards and instruments, which exceeded our estimate of 60,000 for the quarter. In turn, we have shipped approximately 2.2 million technology boards and instruments over the last 10 years. As of the end of the second quarter, we estimate that our installed base has grown approximately 11% over our installed base at the end of the second quarter of 2020. For the second quarter of 2021, our product revenues increased to $305 million compared to $301 million in the prior year period. You may recall from our earnings call last July that we delivered 31% product revenue growth in the second quarter of 2020 due to higher-than-usual demand for our technology boards and instruments as hospitals address the potential shortage of monitored beds for COVID patients. Despite this very tough year-over-year comparison, we delivered strong revenue performance that exceeded expectations. For the second quarter 2021, our worldwide sales of technology boards and instruments were higher than in normal years, but down 41% compared to 2020 due to the tough year-over-year comparison associated with pandemic-related strong demand last year for Masimo SET, pulse oximeters, and related equipment. Fortunately, this decline was more than offset by a strong rebound in sensor sales. In fact, our worldwide sales of single-patient use adhesive sensors were up 35% versus the prior year period. Most encouragingly, our sensor revenues rose by 5% sequentially versus the first quarter of 2021, in contrast to the historical average seasonal decline we've experienced for the same sequential periods in normal years. This represents another sign of a step function rebound in surgical volumes. Moving down the P&L. Our non-GAAP gross margin for the second quarter increased by 80 basis points to 64.7% compared to 63.9% in the prior year period. The year-over-year improvement was primarily driven by a more favorable revenue mix as we delivered strong revenue performance from our higher-margin single-patient use sensors in combination with the revenue decline for our lower-margin technology boards and instruments. Despite the year-over-year improvement in our product revenue mix, our gross margins were below expectations due to a higher-than-usual number of monitor installations under contract during the second quarter. If you recall from the ASC 842 accounting standard we implemented back in 2019, during the quarter that we install equipment under a contract, we recognize an unfavorable margin impact upon installation and return for the higher sensor margins over the life of the contract. As a result of the record number of new customer wins last year and during the first half of this year, combined with increased access to hospitals, we experienced a significant increase in the number of monitor installations under contract this quarter. We believe that our investment in equipment under these new contracts will pay long-term dividends in the form of higher sensor volumes and increased margins over time. Our non-GAAP selling, general, and administrative expenses as a percentage of revenue decreased 230 basis points to 30.2% compared to 32.5% in the prior year quarter. And our non-GAAP research and development expenses as a percentage of revenue increased 80 basis points to 11.1% compared to 10.3% in the same quarter last year. As a result of the year-over-year improvement in gross margin and operating expense leverage, our non-GAAP operating margin increased by 230 basis points to 23.4% compared to 21.1% in the prior year period. Moving further down the P&L. Our non-GAAP tax rate was 24.5%, and our weighted average shares outstanding for the quarter was 57.4 million. For the second quarter, our non-GAAP net income was $54 million or $0.94 per diluted share. In comparison, second quarter 2020 non-GAAP net income was $49.3 million, or $0.85 per diluted share. This reflects non-GAAP EPS growth of 11% over the prior year quarter. Turning to our GAAP results. GAAP net income for the second quarter of 2021 was $50.2 million, or $0.88 per diluted share. In comparison, second quarter 2020 GAAP net income was $55.8 million, or $0.96 per diluted share. Included in our GAAP earnings for the quarter was $1.3 million of excess tax benefits from stock-based compensation compared to $7.5 million in the prior year period. In addition, we incurred a charge of $3.4 million in the quarter related to assisting a long-term OEM customer with their medical device correction in the field. To summarize the second quarter, our revenue once again exceeded expectations, and further our driver shipments were above our pre-COVID run rate despite an unprecedented driver shipment year in 2020. Also, we delivered non-GAAP operating margin expansion of 230 basis points and non-GAAP EPS growth of 11%. Most importantly, we saw record single-patient use sensor volume and a sequential improvement in our single-patient use sensor volume when compared to our first quarter 2021 results, providing evidence of the step function improvement in hospital patient volumes. Now I'd like to provide an update on our full year 2021 financial guidance. For 2021, we are increasing our product revenue guidance to $1.216 billion, which reflects year-over-year growth of 6.3% on a reported basis, or 5.4% on a constant currency basis. This represents an increase of $11 million above our prior guidance. Furthermore, we are now projecting to ship at least 270,000 technology boards and instruments this year. This represents a notable increase from our prior estimate of 246,000 drivers. Our non-GAAP gross margin guidance is now 66%, which represents a 90 basis point increase over our 2020 results. Our updated guidance includes the incremental margin headwinds we are projecting for the year associated with the elevated number of monitor installations under long-term contracts. And our non-GAAP operating margin guidance is 23.8%, which reflects a 70 basis point improvement over the prior year. Moving further down the P&L. Our non-GAAP non-operating income is expected to be negligible, and we are projecting a non-GAAP tax rate of 23.4%. And we are now estimating that our weighted average shares outstanding for 2021 will be 57.7 million. Based on all of these assumptions, we are increasing our non-GAAP EPS guidance to $3.85, which represents an increase of $0.02 above our prior guidance. And from a GAAP perspective, we are projecting a GAAP tax rate of 18.2% and GAAP earnings per share of $3.83 for the year. Our GAAP EPS guidance includes projected legal expenses related to our recent complaint filed against Apple with the US International Trade Commission, seeking to exclude importation of the infringing Series 6 watch. For additional details on our full-year 2021 financial guidance for GAAP and non-GAAP earnings per share, please refer to today's earnings release and supplemental financial information within the Investor Relations section of our website at masimo.com. In conclusion, we are seeing a return toward our traditional revenue mix, which should lead to increasing gross margins. In the face of challenging year-over-year comparisons, we are still projecting mid-single-digit revenue growth and double-digit operating profit dollar growth this year. With that, I will turn the call back to Joe.

Thank you, Micah. During the first half of 2021, we've seen an encouraging recovery in hospital sensors that gives us optimism that things should be returning to normal in most of the markets we address by year end. This recovery has translated into a significant increase for our single-patient use sensors used in critical care areas, including operating rooms and ICU settings. In the second quarter, SET single-patient use sensors and capnography cannulas experienced year-over-year volume growth of over 25%. Additionally, our SPHB SedLine and O3 single-patient use sensors had year-over-year volume growth exceeding 90%. Discussions with hospital executives indicate their intentions to broaden the practice of continuous monitoring to more patients at their institutions. After being prompted by the pandemic, the expansion in monitoring is continuing due to increased awareness of its value and its potential for improving outcomes and reducing the cost of care. A 10-year study of Masimo SET, pulse oximetry, and Patient SafetyNet in postsurgical wards has demonstrated that monitoring outside of the intensive care unit saves lives and reduces costs by millions of dollars annually. Following a record year of contracts in 2020, Masimo has also experienced a record-breaking first half of 2021 in terms of acquiring new customers and renewing contracts with existing clients. We have secured new contracts with large institutions such as the University of Utah, Grupo Angeles in Mexico, and Divontes, Netfork in Germany. Regarding Masimo SafetyNet for opioids, we currently do not have FDA clearance but plan to launch this solution in September in some of our larger European markets. We expect this system to save countless lives of individuals using prescription opioids at home. As mentioned in previous calls, we expect to announce exciting innovations over the next 12 months. We have been working diligently to develop remarkable solutions, and we hope our customers and stakeholders will be excited about them too when we reveal them. In closing, we have a positive outlook for the second half of 2021 and remain dedicated to our mission of improving outcomes and reducing the cost of care while expanding monitoring to new sites and applications. With that, we'll open the call to questions.

Your first question comes from the line of Rick Wise from Stifel. Your line is now open.

Good afternoon. Thank you, Joe, and it's great to see such a strong quarter. I'm sure that even with the impressive driver number, there will be questions regarding the gross margin pressures related to the adoption of the new accounting standard. I don't want to sound uninformed, but could you clarify the impact of that adoption on gross margins for the quarter? Was it a change of 10, 50, or 100 basis points? I'm trying to understand how that affects the overall business. Additionally, if I heard you correctly, you mentioned that the gross margins for sensor products are expected to improve. How should we consider the pace or extent of recapturing some of that gross margin and when that might happen? I apologize for the lengthy question.

Thank you for your question, Rick. To summarize for the quarter, we are facing headwinds of around 160 basis points, which is higher than we anticipated. Regarding your second question, when we record equipment under ASC 842, we initially recognize lower margins tied to that equipment, but this is in exchange for higher margins in the future. Looking ahead for the rest of the year, we expect gross margins to continue to increase, as indicated in our guidance. However, we also need to consider the headwinds since we are experiencing more installations this year and seeing stronger demand from customers. As we enter into more contracts, we will still encounter some challenges in the second half of the year. We believe this investment is worthwhile as it enhances our recurring revenue stream with single-patient use sensors. All of this is included in our guidance, and we have considered the headwinds based on our projections for installations in the latter half of the year, which relates to our 66% estimate for the full year.

Yes, Rick, I'd like to clarify this point. When we sell capital equipment such as a route, Radical 7, or an OEM Board to our OEMs, it generates a margin, which is the selling price minus the cost. The 842 issue arises when we provide the equipment free of charge as part of a five-year agreement. Previously, we did not account for that capital at installation, but under the 842 rules, we must. This creates a short-term margin impact when we secure new contracts because placing the equipment incurs an initial margin hit. However, the upside is that as we ship sensors into the account, we receive our normal margin without having to adjust it for the capital cost over the five-year contract. Currently, our projections for the rest of the year are based on a realistic and possibly conservative estimate of how many new contracts and installations we expect. The only way for our situation to worsen is if we unexpectedly gain more customers than anticipated for our five-year contracts, transitioning from competitors to Masimo. Despite the margin hit, this is positive news as it indicates we're attracting more customers than we had expected.

Yes, I understand. It seems positive, although it can be a bit confusing at first glance. That being said, Joe and Micah, let's consider the outlook for 2022 and 2023. At a high level, how do we anticipate gross margins will evolve following the recent adoption of the new standards? Should we still expect them to rise, assuming everything remains constant? Any additional insights on what that could potentially entail?

If we don’t acquire any new customers and focus solely on our existing ones, our margins could exceed 70%. However, if we gain new customers, which we anticipate, even at a conservative pace, our margins will align with what we’ve previously discussed. If our performance exceeds expectations, that will have a negative impact. Looking ahead three to five years, we expect our margins to improve significantly due to the new accounting method for capital installations compared to prior methods.

Great. I believe there will be other questions. I just wanted to mention that. If I could add just two more, if that’s okay. Given the strong recovery, and Joe, you pointed out the recovery in procedures, are you concerned at all about this recent wave of COVID? And maybe, Micah, can you help us understand the cadence for the third and fourth quarters, as we think about the second half in terms of quarterly mix and numbers? Thank you.

Sure. Let me answer the first part and then Micah will answer the second. So what we're seeing so far with the Delta variant, it isn't hospitalizing vaccinated people. And in most of the markets, we are addressing, the majority of people have been vaccinated. So while the Delta is increasing, you've seen, for example, the case in Iceland, it's not hospitalizing those people. It's not killing those people. So based on what we're seeing today, we don't think that hospitals will get full of COVID patients, and they'll have to cancel their elective surgeries. So we are anticipating that things are going to continue recovering.

Yes. And Rick, as part of the second question, I think you asked what are we assuming in our guidance and very consistent with last quarter, we're assuming that steady rebound back to pre-COVID levels by the end of the year. That's what's implied in the guidance. Plus, as you know, now we increased our driver shipments for the year to 270,000. So that's an increase of 24,000 above our prior estimate. So you'll see an elevated number of installations and steady rebound in sensor volumes.

Thank you very much.

Sure.

Now we do think Q3 sensor volumes will probably be lower than Q2 because of the summer vacations that happen normally. But we do think that's just seasonal things that are finally getting normalized.

Yes, Rick, I want to add one thing. Historically, in normal years, our revenue in Q3 accounts for about 24.3% of our total annual revenues. This trend has been consistent, except for last year.

Perfect. Very helpful. Thank you, Micah.

You're welcome.

Next question comes from the line of Matt Taylor from UBS. Your line is now open.

Hi guys. Thanks for taking my question. I just wanted to ask a follow-up to try to get more specificity on the gross margin dynamic. So obviously, it's good you're signing up all these new customers. I guess if that remains at elevated levels, when do we start to see that cycle through? You mentioned in three to five years it's obviously better. Do you start to see a pickup next year? Is it kind of gradual and asymptotes towards the 70? How do we think about modeling that phased out over the next couple of years?

Yes, Matt. I think we would be happy to see continued gains with new customers that this is the right investment to make, and we expect to get returns out of this over the long-term. And as Joe mentioned before, if we did no new customer installations, you'd see a significant leverage in our gross margins over time. If we continue to gain new customers at the pace we're gaining them, it will have some pressure, and it's already contemplated in our gross margin guidance. And then we should get kind of back on that steady increase in gross margins moving forward that we've laid out in our long-term plan.

You mentioned some positive trends in sensor utilization and new products. Could you provide insight into how much these new products contributed in the quarter, especially considering the upcoming launches in the second half of the year like LiDCO, Opioid SafetyNet, and expanded hospital automation? Additionally, how are you factoring these new products into your future guidance?

Yes. We have minimal revenues from our US launch of T&I this year, as we are just now starting that process, building the pipeline and rolling it out in the US. We will monitor how the contracting develops throughout the second half of the year and into next year. If we secure new accounts sooner, that could provide an upside to our guidance. Similarly, we are in the process of integrating Lidco technology into our devices, and we expect to officially launch that later this year in the US, which could also contribute positively as we progress into next year.

Okay. Could you provide any insights into the indicators you've observed regarding the expanding monitoring across hospitals, particularly with the seasonality remaining stable this year? You mentioned that replacements are performing well. Are there any additional trends or customer feedback suggesting that this momentum might be sustainable and even grow in the future?

Yes. As I mentioned earlier, in our conversations with customers, we are observing that the additional monitors purchased last year are actively being used. We conducted interviews with our top 30 customers, and they are still employing these monitors, not just in the OR and ICU, but also outside of the ICU. If you examine the growth of our adhesive sensors, we highlighted the difference between this year and last year. However, if you look back to 2019, which was a normal year unaffected by COVID, our sensor volumes were still over 20% higher compared to Q2 2019. We understand that census numbers aren't as high as they were in 2019, so this indicates that we are likely seeing a mix of new customers and the expansion of continuous monitoring in noncritical care beds throughout hospitals.

Great. Thanks, Joe.

You're welcome, Matt.

Next question comes from the line of Jason Bednar from Piper Sandler. Your line is now open.

Good afternoon. Thank you for the questions. I wanted to follow up regarding the gross margin. Micah, if this quarter experienced 160 basis points more headwind than you expected, was the impact due to installations happening more quickly than you anticipated? Also, if I'm remembering correctly, your new contracting was strong in the second half of last year. Is this the first significant impact from those contracts and equipment being installed, or has some of this impact been felt in previous periods as well?

No, Mike, to clarify, when I mentioned over 160 basis points of headwind, I meant that compared to our expectations for the quarter year-over-year. It was actually a larger headwind of over 200 basis points year-over-year. What is happening is that last year was a record year for acquiring new customers for Masimo technology and renewing existing contracts, and we also experienced a record first half. As a result, we are seeing a significant amount of equipment being installed under those contracts, which is creating pressure beyond what we anticipated for this quarter.

Yes. The reason we can't provide more precise guidance at this moment is due to the changes we've experienced. Last year, those changes stemmed from rising COVID cases, leading to hospitals purchasing equipment to convert many beds into monitoring beds. This impacted our margins since we sold more capital at a lower margin compared to our sensors, as sensor volumes decreased with fewer elective procedures. Patients who usually came in for procedures were replaced by COVID patients, shifting the patient flow and decreasing sensor activity. Consequently, we struggled to accurately predict margins last year. This year, we face a similar challenge in predicting outcomes, but for a positive reason; last year marked a significant turning point for many institutions that had been relying on outdated technology and realized they needed our solutions. Our development of innovative products that meet their needs has also attracted many new customers. We've achieved both record shipments of capital equipment and a record number of new hospital contracts that are contributing to our ongoing growth this year. While this situation is indeed fortuitous regarding margins, it complicates our ability to offer firmer predictions. We believe we're still benefiting from the positive recognition of our solutions and the realization of their value in patient care, especially as evidenced by studies like the one from Dartmouth-Hitchcock. This showed our effectiveness in the NICU and how we made a meaningful impact with COVID patients. We find ourselves ahead of schedule in ways we couldn’t have anticipated, which is why we're hesitant to forecast with certainty what will occur beyond this year. Even so, developments in new hospitals adopting our technology could enhance our growth and sensor volume, but due to ASC 842, we may temporarily see reduced margins.

Got it. That's helpful. It definitely seems like a high-class problem. Okay. So just for my follow-up here. I wanted to ask on the board number you posted here, which was quite good. I appreciate all the color you're providing here on the installations. Just conceptually, as we think beyond this year, which I think this year also would have been higher if not for some higher board inventories with OEMs to start the year. But is the exit rate here in 2021 the right way to think about modeling forward board shipments? Or do we think about maybe a bonus level of growth on top of the run rate here that's now seems to be taking a little bit higher?

Yes, Jason, if you look at our implied guidance, it's just over 65,000 a quarter, and I think that that's kind of the way that we look at it right now until we give further estimate seeing how the rest of the year goes. So, I think that, that's probably the way to look at it going forward, and we'll update you as we continue to see success in contracting.

Okay, all right. Thanks, Micah. I appreciate it.

Next question comes from the line of Mike Polark from Baird. Your line is now open.

Good afternoon. I'm going to ask one more on this scintillating gross margin discussion.

You thought I was kidding?

Yes. So, as you evaluate the unexpected results compared to your previous expectations, how much of it can be attributed to replacing competitive products with your own? And how much is due to placing your products in locations that previously did not have them? Instead of looking year-over-year, what did you overlook? What aspect was better or is currently performing better than you anticipated three to six months ago?

That question may imply that we said we had record-breaking new customers and renewals, which you thought were aggregating it. No, we have record numbers of new customers and record number of renewals. And typically, with renewals, we don't place as much new equipment because they already have our equipment. So it's really the vast majority of business for new customers.

Okay. Helpful. Lidco, I heard the comment from Micah on the US launch maybe later this year, perhaps next that seems to be a great opportunity for you. But in the meantime, I'd just be curious, is that the ex-US piece contributing as expected. I think we were modeling about one point of revenue contribution in the quarter. Is that give or take where Lidco is?

Yes, that's correct.

Yes. And Lidco is going great. It's in many ways, doing better than what we expected.

I want to ask about Apple. I appreciate the $5 million carve-out for the quarter. Bigger picture, this seems like a new area in this matter. I'm curious to understand how you assess this internally, including the total expenses you are willing to invest, the potential returns, and the timing for visibility. I receive many inquiries about this, and while I know there is a lot of uncertainty and limited information right now, your latest insights would be helpful.

Yes. We have not previously gone through an ITC process, but we are familiar with patent disputes. In cases with Medtronic and Philips, the costs were between $15 million and $30 million each. However, in the Medtronic case, we successfully stopped the infringing product and it resulted in nearly $1 billion in royalties and damages. With Philips, we received $300 million in damages and established a beneficial partnership. Regarding Apple, the patent and trade secret infringement case likely won't go to trial until the end of 2022, and we expect the costs of patent litigation to be standard. Apple has made the process challenging, attempting to limit our discovery rights, but we believe we're making progress in court. If the case proceeds, it could lead to significant damages. In the ITC case, we are seeking an injunction rather than damages, which will take about 18 months and is estimated to cost around $1 million per month. We are pursuing an injunction against the Watch 6, which incorporates our patented technology. That's the summary I can provide on that.

Yes. No, that's really helpful color. And then last on that for Micah, are all expenses related to these three work streams going to be excluded now? Or is some of it in the adjusted numbers and some of it's out?

Yes, Mike, regarding our defense of our patents and the trademark case, as well as the trade secret and patent case, those costs are already included in our non-GAAP numbers. This is a very unique situation concerning the ITC, and the complaint we filed represents a significant expenditure over a relatively short period of time, up to 18 months. That’s why we are excluding that and providing visibility on the ITC-related spending.

Excellent. Thank you for taking my questions.

Thank you.

Next question comes from Ravi Misra from Berenberg. Your line is now open.

Hey, Joe, Micah, Devin here for Ravi. Thanks for taking our questions. I wanted to talk a bit about hospital automation a little bit more. We discussed it kind of in detail and it was a big Q last year or last quarter for it. In regards to the kind of the expansion and utilization of hospital automation and monitoring, how do you see the recovery and kind of the Delta variant there impacting any adoption versus kind of any change from last quarter? And then I have a follow-up to that, please.

Hospital automation is performing very well. People are recognizing its value, highlighted by a study we released that demonstrated a reduction in nursing time at the bedside, which is particularly beneficial for managing diseases, including infectious ones like COVID and the Delta variant. Business-wise, we are tracking this through shipment drivers and annual revenues. We experienced strong driver shipments recently, and this trend is ongoing. Additionally, our annual revenue growth has been robust, showing nearly 30% growth this quarter compared to the same quarter last year.

Okay. Thanks. And then I just want to shift real quickly to Lidco and also NantHealth. With Lidco, I know you mentioned that that could be meaningful kind of toward the end of the year. I'm curious how that plays in with the cardiac monitoring and the oximetry to any pricing can the subscription with bed algorithms and then also kind of rolling out that package together. Is it already integrated with the Masimo dashboard? If you could just get some color into that, that would be helpful.

It seems like you have been speaking with some of our customers. We have a superior technology for measuring cardiac output through minimally invasive methods, which is part of why we acquired Lidco, the leading company in this area. Additionally, we offer a more attractive cost and ownership proposition for our clients, which has been very well received. Customers are pleased to see Masimo support Lidco because, historically, although Lidco excelled clinically, they were a smaller company that customers hesitated to take a risk on. As I mentioned, in terms of revenue, it is what it is, about a point. However, in many ways, customer excitement and acceptance have exceeded our expectations.

Guys, we have time for a couple more questions. Mike Matson? Operator?

Mike Matson, your line is now open.

Yes, thank you. I have one more question regarding gross margins. Aside from the mix and board issues, could you discuss other factors that might influence gross margins in the upcoming quarters? I recall that the RD sensor previously contributed positively to your gross margin, but I wonder if that impact has diminished. Additionally, what about the new products you've introduced and factors like inflation? What are the various influences on gross margins beyond the mix issue?

Yes, Mike, if you set aside the challenges related to the increased monitor installations for the remainder of the year, we continue to observe rebounds in elective procedures. Our products like SpHb, O3, and SedLine are increasingly tied to these recovering surgeries, which will provide a favorable mix benefit. Additionally, as we transition more to RD sensors, which are higher quality, we expect better margins from these sensors. This should contribute to improvements in gross margins. That’s part of our long-term goal to elevate our gross margins to 70% over time. These are some key factors driving that improvement.

Thank you. Regarding the launch of the Opioid SafetyNet in Europe, what is the initial plan for payment? Will it be an out-of-pocket expense, or do you intend to pursue reimbursement or have insurers cover the costs?

Yes. Initially, it's going to be out-of-pocket purchases, but we are working with reimbursement groups outside the U.S. to seek reimbursement for them as well.

Okay. Thank you.

Thank you. Okay. I think last question is from Marie Thibault.

Marie Thibault, your line is open.

All right. Thank you for squeezing me in this evening. I won't ask any more on gross margins, I think we've asked everything there is to ask there. But I did want to ask about sales guidance. You had a great quarter. All the indicators looked good, shipments, sensor volumes, really a lot of positive commentary and you beat consensus by about $10 million or so. So why not take guidance up a bit higher on the sales front? Just would love to hear a little bit more of the thinking around that.

Certainly. We are raising our guidance for the year by $11 million, which is more than we exceeded expectations in the second quarter. This adjustment reflects the increased level of driver shipments for the latter half of the year. We are being careful and prudent with our guidance, considering that we are still in the first half of the year and emerging from a pandemic. It can be seen as somewhat conservative, but it allows us to provide high confidence in our guidance. That's the perspective you should have on it.

Sure, sure. Yes. And I agree with that assessment of yourself, Micah, very good. And then I guess, I'll ask one on international. We used to hear from time to time that there'd be some big tenders coming in. So I would love to just hear kind of your expansion on the international front. Any new countries you've been able to get into, any new governments you've made relationships with that sort of issue? Like, we just haven't talked about international specifically in a while? Thanks.

Well, sure. We have not expanded much directly this year internationally, but we are making really good progress in the countries that we are direct in from major European countries to Asian countries. And we just recently got some really good reimbursement for our noninvasive hemoglobin in Korea, which we think is going to be good. And so, yes, things are going really well. I think this quarter, international was what, 34% of our total revenue? Was it some?

Yes, it’s around 30%.

Yes, about 30%. Yes, 30% of our revenues. So we expect international to do more and more as we continue growing.

All right. I appreciate it so much. Thank you.

Thank you so much. Everyone have a wonderful afternoon and look forward to our Q3 earnings call, where we can talk about margins. Thanks. Bye.

This concludes today's conference call. Thank you all for your participation. You may now disconnect.