Good afternoon, ladies and gentlemen, and welcome to Masimo's Second 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 speaker's remarks, there will be a question and answer session. I'm pleased to introduce Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations.

Thank you. 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 2024 and 2025 financial performance. However, these 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. Please refer to Slides 2 and 3 of our earnings presentation for additional factors to consider in evaluating and reviewing the information relating to the potential separation of our consumer business. 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 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, and thank you for joining us for Masimo's second quarter 2024 earnings call. I'm happy to report that our healthcare revenues rose sequentially and grew 23% versus last year. Our healthcare business is seeing increasing momentum driven by excellent execution by our healthcare team and a robust hospital census. We saw strong demand for Masimo sensors due to the combination of strong hospital conversions over the past few years, normalization of installations, and after a tumultuous post-COVID environment, rising hospital admissions. Our sales team once again secured a record level of new hospital conversion contracts amounting to $134 million in true incremental value for the quarter, representing a 28% increase versus last year. Not too long ago, we contracted $130 million in the entire year. We believe our exceptional hospital conversion contracts point to a very bright multi-year future. Another standout item for the quarter was a substantial increase in gross margins. We committed to investors that this would be a key area of focus for us, and the team is delivering. Our healthcare business continues to benefit from initiatives to reduce product costs, including the recent relocation of most of our sensor manufacturing to Malaysia, which continues to be executed extremely well and ahead of schedule. In addition, we have an engineering team that focuses each year on product updates that reduce our cost of goods and increase margins. We have filled this team with some highly skilled talent, and the benefits are currently flowing through the P&L. The combination of strong conversions, new equipment installations, and increasing hospital census gives us the confidence to significantly increase our full year guidance for healthcare revenues and earnings. I'm particularly proud of how well our global organization is performing. We remain committed to separating our consumer business. As previously announced on July 8, we received preliminary terms from a potential JV partner, and we have extended exclusivity until August 15 to accommodate their needs. We believe this option could offer shareholders the best outcome, but the completion of the transaction is not entirely in our control. In addition to the potential JV, we are considering all strategic options, including the sale of or spinoff of the audio business, either alone or together with the consumer health business. We will act decisively to execute on the option that best maximizes value for shareholders and puts us on the path to achieve our long-term goal of $8 earnings per share, which would effectively double our EPS in five years. With that, I'll pass it over to Micah to review our second quarter results in more detail and provide an update on our 2024 outlook.

Thank you, Joe. Good afternoon, everyone. For the second quarter, our healthcare revenues were $344 million, which were above the top end of our guidance range and represented 23% growth versus last year. Our consumable and service revenues grew 29%, partially offset by an expected decline of 9% in capital and other revenues. Within consumable and service revenues, our set pulse oximetry consumables grew 35%, capnography consumables grew 35%, and brain monitoring consumables grew 19%. Partially offsetting this growth, rainbow consumable revenues declined 5% due to the timing of shipments outside the U.S. We expect rainbow consumable revenues to reach our double-digit growth target for the full year based on continued growth outside the U.S. and adoption of rainbow sensors in the U.S. following the FDA clearance of oxygen reserve index late last year. Our ongoing focus on expanding our footprint with existing customers and winning new customers has built a solid foundation for growth in the second half of 2024 and beyond. As shown in our slides today, the incremental value of new contracts was $134 million this quarter, increasing 28% versus last year and rising 34% sequentially. This clearly demonstrates Masimo's strong market share gains through contracting with our hospital customers and has contributed to a 16% increase in unrecognized contract revenues, which have reached $1.6 billion as of the end of the second quarter. You'll be able to see the benefits from these new contracts and our revenue growth as the equipment is installed over the next six to nine months. On a related note, driver shipments for the second quarter were 59,000 and were above our expectations. We believe that driver shipments will steadily rise over the remainder of the year and are being fueled by the excellent level of conversions that our team is achieving. Non-healthcare revenues were $152 million, which was at the low end of our guidance range and represented an 11% 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 second quarter, our consolidated non-GAAP gross margin was 54%, which included gross margins of 62.5% for healthcare and 35% for non-healthcare. Healthcare gross margins improved 240 basis points year over year and rose 20 basis points sequentially, which is attributable to the relocation of sensor manufacturing to Malaysia combined with increased operational efficiencies and a favorable mixed benefit from higher consumable sales. Our progress on this front gives us confidence in achieving our long-term goal of 30% operating margins for the healthcare business in five years. For our consolidated business, non-GAAP operating profit was $73 million. Our operating margin of 15% improved sequentially from the first quarter but declined modestly versus last year due to the return of performance-based compensation to normalized levels in 2024. Excluding the impact of performance-based compensation, our operating expenses decreased 4% versus the prior year period due to cost reduction initiatives. Even with the return of performance-based compensation, we delivered 13% earnings growth to achieve non-GAAP earnings per share of $0.86 for the second quarter. Moving to cash flow, we generated operating cash flow of $75 million due to strong earnings and working capital improvement. As a result, we were able to pay down $93 million of debt in the second quarter, bringing our outstanding debt to $782 million. Increasing cash flow and reducing debt are key priorities for the organization, and we're succeeding with both objectives. Now I'd like to provide an update on our 2024 financial guidance. For the third quarter 2024, we are projecting consolidated revenue of $495 million to $515 million, and non-GAAP earnings per share of $0.81 to $0.86, representing 8% to 15% earnings growth. For the healthcare segment, we are projecting revenue of $335 million to $345 million, representing 9% to 12% revenue growth. Robust hospital census, along with our record-breaking hospital conversions, new equipment installations, and strong sales order backlog increases our confidence in achieving a growth rate that exceeds the 9% revenue growth we saw in the first half of the year. For the non-healthcare segment, we are projecting revenues of $160 million to $170 million. Now turning to our full-year 2024 financial guidance. We are now projecting a consolidated revenue range of $2.85 billion to $2.135 million. For our healthcare segment, we are now projecting revenues of $1,385 million to $1,405 million, representing 9% to 10% revenue growth for the year and an increase of $25 million at the midpoint versus the prior guidance range. With regard to driver shipments, we expect to see shipments increase to more than 60,000 in both the third and fourth quarters, representing a sequential step up from the first half levels. For the non-healthcare segment, we are now projecting revenues of $700 million to $730 million, which represents a decrease of $25 million at the midpoint versus the prior guidance range. For the full year, we are now projecting consolidated non-GAAP gross margin of 53%, which includes healthcare gross margins of 62.5% and non-healthcare gross margins of 34%. Finally, we are now projecting non-GAAP EPS range of $3.80 to $4 per share, which represents an increase of $0.28 at the midpoint versus the prior guidance range. Demonstrating our year-to-date progress and our strong commitment to increasing operating leverage and driving sustainable earnings growth. In summary, our healthcare business is solidly back on its expected growth track, and we foresee the potential for even faster growth combined with expanding margins over the remainder of the year. Our hospital conversions have grown substantially over the past 12 months, and those contracts can drive higher sensor volumes for the next five years. Now I'd like to provide you with an update on the progress we are making on the separation of our consumer business from our healthcare business. While we continue to see long-term potential for the consumer business, we believe that separating into two standalone businesses will maximize returns for Masimo's shareholders and ensure the market can recognize the full value of our thriving healthcare business. As Joe mentioned, while the JV offers a uniquely attractive solution for separating the consumer businesses while retaining some upside, the Board is considering all options to separate the consumer audio business regardless of the outcome of the JV negotiations. We are committed to executing on a full deconsolidation of the consumer audio business from our financial statements. Our thriving healthcare business is being obscured by the weaker consumer market and increases our desire to separate the two businesses. We are committed to this goal whether it is through the JV, a sale, or a spinoff of audio alone or audio combined with consumer health. Our decisions on the structure of any separation will be predicated on providing maximum value to our shareholders. To that end, we've provided a preliminary estimate of the financial impact of two different alternatives for a separation on slide nine of our earnings presentation. Notably, assuming an outright sell of just the consumer audio business is completed as outlined, we estimate that Masimo's non-GAAP operating margins would improve by 610 basis points to reach 21%. Alternatively, if the audio business is divested in combination with the consumer health business as contemplated in the proposed JV, we estimate that Masimo's non-GAAP operating margins would further improve by 260 basis points to reach 24%. This structure would result in significant progress towards achieving our long-term goal of 30% operating margins for the healthcare business. If a transaction results in cash proceeds to Masimo, we plan to use those proceeds to pay down debt and reduce interest expense, which currently amounts to $40 million in our guidance this year. Either way, with our strong cash flow, we expect to retire our debt within three to four years. With that, I'll turn the call back to Joe.

Thank you, Micah. Before we go to Q&A, I want to thank our team for their unrelenting effort and consistent focus through a disruptive time that is unprecedented. Our last few quarters clearly demonstrate that the post-COVID disruptions are behind us, and we are back on track to meet or exceed expectations. Our main objective continues to be driving our revenue growth towards double digits by providing our customers with clinically relevant innovations and achieving or exceeding 30% operating margins. We see a clear pathway to reach that margin target within the next five years and expect the planned business separation to have an immediate positive impact on the profitability of our professional healthcare business once finalized. Our future is brighter than ever as we execute our mission to improve lives, improve patient outcomes, and reduce costs of care and taking non-invasive monitoring to new sites and applications. With that, we'll open the call to questions. Operator?

Our first question comes from Jason.

Good afternoon, everyone. Thanks for taking the questions. It's a nice quarter here. Joe or Micah, feel free to respond here, but the core business performance appears to improve quite a bit. We're seeing the driver numbers, we're seeing the productivity and install base, seeing the gross margin in the healthcare franchise. So, look, there's understandably a little skepticism from investors out there regarding maybe a repeat of what we saw last year ahead of the shareholder vote. So, really just hoping you could comment on maybe what's different this time around. What kind of visibility are you going to offer to lend confidence to the investment community that the underlying improvements here are sustainable into the year and that there wasn't any pull forward of revenue or margin contributions?

Well, maybe I'll start off high level, Jason. First of all, as you've seen from some of the public hospitals that have reported, the census is very strong. I think HCA and Tenet reported a 5% increase. And our business is driven a lot by the consumables, which is driven by hospital admissions and hospital admissions. So, that's one. The second, to directly address what you're saying, we have not had this level of backlog for many, many quarters. The backlog going into Q3 is extremely strong. And that's one of the reasons besides the census and the successful conversions of hospitals to Masimo at a really rapid rate has made us so comfortable in updating our guidance and giving such strong guidance for the rest of the year.

All right. Very helpful. I just wanted to double check because I know there's already questions that are at the surface since the pre-announcement. But no, that's super helpful, Joe. And then I wanted to come back to some of the comments you made. And just maybe help us with the JV situation, the JV partner situation. You referenced the August 15th exclusivity period that you've extended to this partner. I think that was in the 8-K that you provided a month ago. But you also mentioned that things are outside your control. I'm not sure if you're suggesting it's in the control of the JV partner or if the agreement that you have is interrelated with the shareholder vote. I'm curious if other players may have entered the discussion with that original JV partner or if you've received other definitive inbound interest beyond what was originally outlined. So really just trying to get a sense of where things stand, if you can give us an update and whether or not we should expect anything ahead of BAGM or after EAGM?

Well, first of all, given some of the innuendos and comments that were thrown out, we made it clear that we will not do any JV unless the activist board member agreed to it. Secondly, when we mentioned it's not in our control, it's because unlike a sale or a spin, this requires a JV partner to also do what they say they're going to do. And as you know, they had, we reported this before, is they wanted to get one or two other more partners in the JV. So that's, I think, one of the reasons they asked us to give them to August 15th. That's what they're currently working on. And we should know soon what they're going to do, and we will report to you what they're going to do. But I think Micah and I wanted to reiterate, regardless of what the JV partner does or doesn't do, we still think the JV proposal was the best proposal compared to the other options. But if that option doesn't come true, we still will do a separation, and nothing's off the table, whether it's just separating the audio business or separating the audio and the consumer health business. We'll do whatever we believe is best for shareholders.

Okay. And maybe just a quick follow-up, Joe, should we expect something like a, I guess, a more definitive path forward then after we hear what that JV partner decides as of August 15th, or do we need to sit tight until after the shareholder vote to maybe have a better clarity on what that looks like?

As soon as we have something that we can do, we will take it to the Board, assuming we have that. If the Board approves it unanimously, then we can get it done. I don't think it needs to wait for the shareholder meeting, but clearly it has to be a unanimous vote by the Board, which hopefully should mean everyone's happy with it. But if we don't get a unanimous vote, then we're not going to do it, regardless of whether it's before or after the shareholder meeting.

All right. Very helpful. Thanks so much. Nice quarter.

Our next question comes from Marie, Stifel.

Hi, Joe. Hi, Micah. Thanks for taking the questions this evening. I wanted to ask a straightforward one here on the Q3 guide. If I think back to Masimo Healthcare pre-COVID, I'm very used to Q2 and Q3 revenue being very similar, the healthcare revenue being very similar and often quite flat sequentially between Q2 and Q3. Just curious if there's anything to think about when we look at the Q3 guide, the midpoints, just $5 million or so below what you achieved in Q2 and how to think about maybe the puts and takes on that guide.

Yes, thank you, Marie. We are observing strong contracting, and installation processes are starting to normalize. The delays we encountered previously are not as pronounced, which contributes positively as we approach Q3 and Q4. We anticipate that this strength will translate into revenues. We are also being cautious regarding census as we experienced significant growth in Q2, with a reported 5% inpatient growth, following a 4% increase in Q1. Therefore, we are considering that as well. Public hospitals are generally projecting a full-year growth of around 3% to 4%, indicating a cautiously optimistic outlook for the second half of the year. Overall, we see strength in contracting and installations. Historically, our healthcare revenues have shown a tendency to decline slightly from Q2 to Q3. Looking back at the three years leading up to 2019, we consistently experienced a small decrease in revenue during this transition. This is the reasoning behind our revenue guidance, which is set at a midpoint of $340 million and a high end of $345 million, maintaining flat revenue compared to Q2.

Okay. That's really helpful, Micah. Thank you. And then maybe my follow-up. I heard a quick mention of it. Oxygen Reserve Index. That's one of the newer products in healthcare that, you know, should come with a revenue uplift. And I know a standard of care in some countries where it's been available for a few years. So can you tell us how that's doing in the U.S., what the early feedback is on that? And are you indeed seeing any revenue tailwinds from that?

Thanks, Marie. Yes, that's gone really well. We are seeing an uptick in the U.S. with adoption of Rainbow, I think the combination of Oxygen Reserve Index, as well as now offering the cardiac output with Rainbow that gets us a measurement of oxygen delivery. I think it's helping our Rainbow business tremendously. We should see great results in the second half. And that's why I believe Micah mentioned we expect for the year to grow double digits in Rainbow, not just based on OUS, but U.S. conversions.

Very good. All right. I appreciate it. Thanks so much.

Our next question comes from Rick Wise.

Good afternoon, everybody. I was hoping maybe first you could talk a little bit more about the implied rest of your consumer outlook. Obviously, you're going through the separation, but just help me better understand, obviously, yesterday there was a lot of concern about a softening or more softening of the economic environment. I think if I'm doing it correctly, guidance is implying sequential consumer sales improvement in the second half. Help us understand your thoughts or your optimism or your confidence that consumer sales will, in fact, increase sequentially as the year unfolds.

The growth this year should come from our hearables. These are the over-the-ear headphones and in-ear earbuds, like the Bowers & Wilkins headphones and earbuds and the Denon Pearls. So we, as you remember, last year grew about 100% compared to the year before that business. We expect to see strong growth this year as well. But those products are typically shipped in Q4. It's a kind of a holiday gift, Christmas thing. So we expect a very strong Q4. And even though we think the high-end audio, both the speakers and the AVRs may be continuing to be muted because of economic pressures, we think the earbuds and headphone business will grow. And that's why we're optimistic about the second half of the year.

Got you. And Micah, maybe you could, or Joe, could expand on your comments about two things related to gross margins and therefore operating margins. You said that Malaysia is ahead of schedule, going well. And if I'm remembering correctly, last quarter you said it was two-thirds of the way through that sensor manufacturing transition. In those three months, where does it stand today? When's it going to be done? How are you thinking? What are you baking into the guidance? And maybe just separately but related, what's, you talked about some of the cost reduction initiatives. Maybe you can help us better understand what those are. And again, your confidence in the second half outlook based on the programs that are clearly helping out so far. Thank you.

Thank you, Rick. Well, just to kind of step back and provide some context, we came into the year, and I believe our guidance for healthcare was 61.9% gross margins. We took that up about, I believe, 50 to 60 basis points last guide, where we're taking up another 10 basis points for the year to get to 62.5% for the year. So we're seeing good traction so far. Last quarter, we were about two-thirds of the way there with Malaysian manufacturing. Keep in mind that a lot of that early on is more the high volume runners that were getting up and running first with sensors. The next phase that we're working through now between now and the end of the year is going to be some of the lower volume parts and more complex parts. So it'll take a little time, but we plan to be there by the fourth quarter as we exit this year. We're already seeing good efficiencies coming out of Malaysia and that workforce. They're doing an incredible job so far. That's starting to roll through the P&L. We should start to see an uptick in margins, gross margins, in Q4. We're expecting gross margins to be relatively flat to Q3 from the first half, but then stepping up closer to 63% in the fourth quarter. So progressing well there. We also have our team that's dedicated on cost reductions, to your second point of your question. The engineers continuously look to take costs out each and every year. It's where we've historically gained good margin expansion and trying to fight the offset of the inflationary costs that we've seen over the years. But I think we're seeing that progress very well. They're taking costs out of anything from our technology boards, our cables that bring the attachment to the sensors. Also, we're seeing mixed benefits from some of the prior cost reduction efforts that they did to reduce the cost of sensors from moving from Lynx to RD. And I think we're probably over 50% now with the lower cost sensor now with its higher margins. So that's progressing well, and we're continuously trying to take costs out of our Masimo branded equipment as well, and some of the advanced parameter lines like normal lines.

Great. And if I could ask a quick follow-up, I apologize. You expressed a lot of confidence in your 30% operating margin goal. Just in the simplest of terms, Micah, is this sales-driven, mix-driven? Why are you confident that that's the right goal and that you have the tools in hand to make it happen?

Yeah, I think what's given me a lot of confidence is we do believe that we can get back up. I mean, we're assuming just to get to 30% that gross margins get back to 66%. We've been as high as 67% and maybe even 68% before a lot of the inflationary costs that sprung from COVID, the COVID years. Over the past four or five years, we've had a lot of inflationary costs, increases in labor costs down in Mexico. And now that we're moving that manufacturing to Malaysia, that's going to give us good benefits not only on the labor cost production but also improving efficiencies as we're seeing a much more stable workforce and lower turnover. We've had a lot of currency headwinds with the peso, although it's heading the right direction again, finally. But much more stable currency situation there with Malaysia as well. So that's giving us more confidence on top of all the cost reduction initiatives we've laid out. And the team's aggressively pursuing those product cost reductions that I just mentioned. The other thing to your question on revenue, revenue leverage is very important. I mean, to gross, let's say 7% to 10% is what we're really going after to deliver that $8 EPS and doubling EPS in the next five years. Revenue leverage is important that the innovation of this company is critical to continue to drive revenue growth. And we also are set up well with the contracting we're doing over the next several years. So I think that's going to give us the leverage to leverage those fixed costs and gross margin, leverage our install base, and also leverage a lot of our fixed SG&A costs for the company as well in R&D. So when we look out five years at 30%, our performance this year, seeing the growth on the top line and where the strength of the business is, we're getting a lot more confident towards achieving that 30% margin goal on $8 earnings per share.

Thanks for the thorough answer.

Our next question comes from Mike Polar.

Good afternoon. Thank you so much. The healthcare driver base in the deck, I'm seeing the installed base is up 2% year on year. I'm also hearing about record contracting and a tick up in installation activity. Is it fair to say as new accounts get onboarded and you expect that 2% growth rate to reaccelerate here over the next year?

Yes, I think we're going to see continued step up in driver shipments throughout the rest of this year, especially as we exit going into next year. I'd expect next year is going to be a strong year for driver shipments as we step up on the exit. The other thing is, we're replacing a lot of the existing drivers in our install base today. We got about 2.6 million drivers that are out there. A lot of the shipments we're doing, half of those are replacing existing drivers, because we've gotten to a significant market share already within Pulse Oximetry. We really only need 50% of that 60,000 plus run rate to be new drivers going out in the field. That's what we're seeing. That's why we're starting to see it step back up because of the contracting we're doing. But our consumable revenue per driver is going to continue to expand. We're seeing this year, on a year-to-date basis, consumable revenue per driver is up 11% to 12%. Our install base is up 2%. We're delivering about 14% growth on consumable revenue in the first half of the year. That's coming off the strong contracting installations and just the momentum that we're seeing in the business.

If I can ask a follow-up on this. Let's say your goal, Core Healthcare, is to grow 10% round numbers at this level of scale and market share. What would you hope is the mix between growth in the driver base versus growth in revenue per driver to get to 10%, say, next year or beyond?

Yes, I think of it being somewhere around probably 4% to 5% maybe on driver or install base growth and the other, call it 3% to 5% coming from our consumable revenue per driver.

Yes. Okay. If I can ask then the last one on Apple. Can we just get an update on the Apple litigation, where it stands, what milestones might be upcoming? Thank you so much.

Certainly. We have probably two or three trials left. There's a litigation we brought against them in federal court for patent theft and trade secret theft, and those two, we were hoping to have them be in one, but it might get broken into two pieces. Right now, we're looking at a schedule in November to have the trade secret trial and then later the patent trial. I'm still hoping they'll get combined. We'll see. Then Apple brought a litigation against us in Delaware, and that first part of it should go to trial late October. Then our part where we brought patent and antitrust case against them, that should go to trial hopefully next year. If we win our trade secret and patent case that's remaining even in federal court here in California, we should be able to broaden our injunction, not just limited to SPO2, but to photoplethysmography, which will include pulse rate and other related parameters to photoplethysmography, as well as hopefully with the trade secret lawsuit, broaden the injunction beyond the U.S. That's where we are. I think we probably have another two to three years left, and we should be done.

Our next question comes from Mike Maxson.

First, just on the guidance, given what you did in the second quarter, where you're guiding for the third quarter, you can kind of back into what it means for the fourth quarter for revenue and EPS growth. It seems like that's really where the raise is effectively falling, both for revenue and for EPS, at least relative to where consensus was for the third quarter. The fourth quarter looks kind of aggressive to me, assuming the third quarter comes in line with the guidance. I don't know if you had any comments there. I know, Micah, you did say something about gross margins, maybe expecting them to be stronger in the fourth quarter, so maybe that explains part of it.

Yes, certainly. There are a few points to consider. Our current guidance shows an increase of $25 million for healthcare at the midpoint compared to our previous guidance. This increase is fairly evenly distributed between Q3 and Q4 in terms of percentage growth. For Q3, the midpoint growth is just over 10%, while Q4 is around 9%. I don’t see any additional risk with the Q4 guidance; I believe we've established a reasonable range for that quarter. Regarding our earnings per share, there’s an increase of about 20 cents at the midpoint, with some additional gains expected in the fourth quarter. This is partly due to an improved tax rate for both the fourth quarter and the full year. We've also seen gross margin improvements from the last guidance, with an increase of about 110 basis points for the consolidated business in Q3 and Q4, and 90 basis points specifically for Q4. Overall, when I review the guidance, there is a consistent increase for both Q3 and Q4, with the only difference being the anticipated tax rate benefit for the fourth quarter.

Okay, got it. And then looking into next year, and I know you're not getting guidance, but one of the things I think that has helped your gross margin this year in addition to Malaysia is this mixed shift where you've had more sensor growth and your boards and capital have been down. So I would imagine that that kind of reverses next year. So could that be sort of a material headwind to gross margin in 2025 if that does play out that way?

Yes, Mike, I don't expect that to be a big headwind. I think we do believe that the capital environment is going to stabilize rather than being down double digits like it was this year, especially with our drivers are starting to pick up, and they're stepping back up from the low point we saw in Q1. But we still expect very strong growth in consumable revenues. So and then any of the headwind that would be on mixed, we're trying to offset that with cost reduction projects that we're working on with taking costs out of products as well as the full year benefit of Malaysia transition. So there's going to be some puts and takes in there, but we still feel very good that we'll be on track to that cadence of margin expansion going into next year. We also we don't have the year-over-year headwinds of performance-based comp like we did this year. This year, if you look at our operating margins, we are actually flat year over year. We're 15.3% guidance this year versus last year, we landed at 15.3% operating margin despite about 400 basis points of headwinds and performance-based comp. So that headwind will no longer be there, and we should get back onto a good margin expansion cadence going into 2025.

Okay. Got it. Thank you.

Our next question comes from Jason Bedford.

Good afternoon. Thanks for taking the questions. Maybe just a couple. Micah, maybe just to an earlier line of questioning on drivers, and I may have misheard it, but of the 59,000 drivers you sold this quarter, are you implying that half of them were new, meaning not replacing legacy drivers?

Yes. So to grow our top line, half of those drivers are new incremental drivers, and that's what's required to grow that top line. Somewhere between 25,000 to 30,000 drivers is what we need to deliver the top line growth that we're seeing this year. So that's, the rest of it is literally replacing our existing installed base due to the size we are in the market today.

Okay. Have you seen any, on the capital side, any changes in ordering patterns from OEMs? I know that's been a little sluggish of late.

The question was ordering patterns from OEMs?

Correct.

Yes. So the OEMs last year, as we talked about before, they had excess inventory, and they've, we feel like they've burnt through a lot of that down in Q1, which was the trough of our driver shipments. Their Q2 is stepping up, and we believe that we'll be back up above the 60,000 a quarter in the back half of the year, and we think that we should see that back into normal ordering patterns either by Q4 or early, or Q1 of next year.

And just last one for me, just in terms of the potential separation and just disclosure around that August 15 date, should we expect a public announcement either way in and around that August 15 date?

Well, the August 15 is the time we've given them an exclusivity. Whether or not they will have something final that the board can approve or not could come before or after. So there's really no magic date about August 15, except that you would think if they want to do something, it would come before then, or they would ask for another extension. So I don't know if we'll have an announcement or not. We'll have to see.

Okay. Thank you.

The meeting is now concluded. You may now disconnect.